SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
29 High Street
Medford, Massachusetts 02155
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (781) 395-7700
-----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price on March 1, 2000, on the Nasdaq
National Market was $97,567,730. Although directors and executive officers of
the registrant were assumed to be "affiliates" of the registrant for the
purposes of this calculation, this classification is not to be interpreted as an
admission of such status.
As of March 1, 2000, there were 8,227,200 shares of the registrant's
common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Medford Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the Annual Meeting of Stockholders to be held on April
24, 2000 are incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Medford Bancorp Inc., (the "Company") was organized in 1997 as a Massachusetts
corporation to be the holding company for Medford Savings Bank (the "Bank").
Established as a Massachusetts savings bank in 1869, the Bank converted from
mutual to stock form on March 18, 1986 and issued 3,680,000 shares of common
stock. The Bank is principally engaged in the business of attracting deposits
from the general public, originating residential and commercial real estate
mortgages, consumer and commercial loans, and investing in securities on a
continuous basis. For a detailed description of the Company's business and
financial information, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this report. The Bank is
headquartered in Medford, Massachusetts, which is located approximately seven
miles north of downtown Boston. The Bank principally offers its products and
services through a network of seventeen banking offices located in Medford,
Malden, Arlington, Belmont, Burlington, North Reading, Tewksbury, Waltham, and
Wilmington. The Bank's primary market area includes these communities as well as
other cities and towns in Middlesex County and the surrounding area north of
Boston.
The Bank presently has one wholly-owned subsidiary, Medford Securities
Corporation ("MSC"), which became operational on March 1, 1995. MSC engages
exclusively in the buying, selling, dealing in, and holding of securities.
Supervision and Regulation
General. The Company is a Massachusetts corporation and a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and files with the Federal
Reserve Board an annual report and such additional reports as the Federal
Reserve Board may require. The Company is also subject to the jurisdiction of
the Massachusetts Commissioner of Banks. As a bank holding company, the
Company's activities are limited to the business of banking and activities
closely related or incidental to banking. Provided that it does not become a
"financial holding company" under the recently enacted Gramm-Leach-Bliley Act
(as discussed below), the Company may not directly or indirectly acquire the
ownership or control of more than 5 percent of any class of voting shares or
substantially all of the assets of any company that is not engaged in activities
determined by the Federal Reserve Board prior to November 12, 1999 by order or
regulation to be closely related to banking, and also generally must provide
notice to or obtain approval of the Federal Reserve Board in connection with any
such acquisition.
As a Massachusetts-chartered savings bank, the Bank is subject to comprehensive
regulation and examination by the Federal Deposit Insurance Corporation (the
"FDIC") which insures its deposits to the maximum extent permitted by law, and
by the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner"). The Bank is also subject to certain requirements established by
the Federal Reserve Board and is a member of the Federal Home Loan Bank of
Boston (the "FHLBB").
Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit
accounts to the $100,000 maximum per separately insured account. As a
state-chartered, FDIC-insured nonmember savings bank, the Bank is subject to
regulation, examination, and supervision by the FDIC, and to reporting
requirements of the FDIC. The FDIC has adopted requirements setting minimum
standards for capital adequacy. Pursuant to FDIC requirements, the Bank must
maintain a Tier 1 capital to risk-weighted assets ratio of 4.00% and a total
capital to risk-weighted assets ratio of 8.00%. The FDIC also imposes a leverage
capital ratio of at least 3.00% for the most highly rated banks and a leverage
capital ratio between 4.00% and 5.00% for other banks. The Bank exceeded all
applicable requirements at December 31, 1999. Furthermore, under the capital
standards established pursuant to the FDIC Improvement Act of 1991 ("FDICIA"),
the Bank is currently well-capitalized. International bank supervisory
organizations, principally the Basel Committee on Banking Supervision, currently
are considering changes to the risk-based capital adequacy framework, which
ultimately could affect the FDIC's guidelines.
Federal Home Loan Bank System. The Federal Home Loan Bank System functions as a
reserve credit source for its member financial institutions and is governed by
the Federal Housing Finance Board ("FHFB"). The Bank is a voluntary member of
the FHLBB. Members of the FHLBB are required to own capital stock that is
directly proportionate to the member's home mortgage loans and borrowings from
the FHLBB outstanding from time to time. FHLBB advances must be secured by
specific types of collateral and may be obtained principally for the purpose of
providing funds for residential housing finance.
1
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Federal Reserve Board Regulations. Regulation D promulgated by the Federal
Reserve Board requires all depository institutions, including the Bank, to
maintain reserves against its transaction accounts (generally, demand deposits,
NOW accounts and certain other types of accounts that permit payments or
transfer to third parties) or non-personal time deposits (generally, money
market deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the amount of the
institution's interest-bearing assets.
Massachusetts Commissioner of Banks and Board of Bank Incorporation. The Bank is
also subject to regulation, examination and supervision by the Commissioner and
to the reporting requirements promulgated by the Commissioner. Massachusetts
statutes and regulations govern, among other things, investment powers, lending
powers, deposit activities, maintenance of surplus and reserve accounts, the
distribution of earnings, the payment of dividends, issuance of capital stock,
branching, acquisitions and mergers and consolidation. Any Massachusetts bank
that does not operate in accordance with the regulations, policies and
directives of the Commissioner may be subject to sanctions for noncompliance.
The Commissioner may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Bank's business in a manner
which is unsafe, unsound or contrary to the depositor's interest, or been
negligent in the performance of their duties.
In response to a Massachusetts law enacted in 1996, the Commissioner finalized
rules in 1997 and 2000 that give Massachusetts banks, and their subsidiaries,
many powers equivalent to those of national banks. The Commissioner also has
adopted procedures expediting branching by strongly capitalized banks.
Depositors Insurance Fund. Massachusetts-chartered savings banks are required to
be members of the Depositors Insurance Fund ("DIF"), a corporation created by
the Commonwealth of Massachusetts for the purpose of insuring savings bank
deposits not covered by federal deposit insurance. To the extent the Bank's
deposit accounts are not insured by federal insurance, such deposits are insured
by the DIF.
Federal Deposit Insurance Corporation Improvement Act of 1991. FDICIA made
extensive changes to the federal banking laws. Among other things, FDICIA
requires federal bank regulatory agencies to take prompt corrective action to
address the problems of, and imposes significant restrictions on,
under-capitalized banks. With certain exceptions, FDICIA prohibits state banks
from making equity investments and engaging, as principals, in activities which
are not permissible for national banks, such as insurance underwriting. FDICIA
required banks to divest any impermissible equity investments by December 19,
1996. FDICIA also amends federal statutes governing extensions of credit to
directors, executive officers and principal shareholders of banks, savings
associations and their holding companies, limits the aggregate amount of
depository institutions' loans to insiders to the amount of the institution's
unimpaired capital and surplus, restricts depository institutions that are not
well-capitalized from accepting brokered deposits without an express waiver from
the FDIC, and imposes certain advance notice requirements before closing a
branch office. Pursuant to the FDICIA, the FDIC has adopted a framework of
risk-based deposit insurance assessments that take into account different
categories and concentrations of bank assets and liabilities. Effective January
1999, the FDIC revised its regulations relating to FDICIA to generally ease the
ability of state nonmember banks and their subsidiaries to engage in certain
activities not permissible for a national bank, such as real estate development.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities are
permitted. Interstate transactions and activities provided for under the law
include: (i) bank holding company acquisitions of separately held banks in a
state other than a bank holding company's home state; (ii) mergers between banks
with different home states, including consolidations of affiliated banks; (iii)
establishment of interstate branches either de novo or by branch acquisition;
and (iv) affiliate banks acting as agents for one another for certain banking
functions without being considered a "branch". In general, subject to certain
limitations, nationwide interstate acquisitions are now permissible,
irrespective of state law limitations other than limitations related to deposit
concentrations and bank age requirements. Interstate mergers also are
permissible. Affiliated banks may act as agents for one another. Each of the
transactions and activities must be approved by the appropriate federal bank
regulator, with separate and specific criteria established for each category.
In 1996, Massachusetts enacted interstate banking laws in response to
Riegle-Neal. The laws permit, subject to certain deposit and other limitations,
interstate acquisitions, mergers and branching on a reciprocal basis.
The Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act, which, in part, is intended to permit bank
holding companies that qualify and elect to be treated as a financial holding
company to engage in a significantly broader range of financial activities. At
this time, the Company has not determined whether it will become a financial
holding company.
2
<PAGE>
More specifically, the Gramm-Leach-Bliley Act repeals provisions of the
Glass-Steagall Act: Section 20, which restricted the affiliation of banks with
firms "engaged principally" in specified securities activities, and Section 32,
which restricts officer, director, or employee interlocks between a bank and any
company or person "primarily engaged" in specified securities activities.
Moreover, the general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHC Act framework to permit a holding company system, such as the
Company, to engage in a full range of financial activities through a new entity
known as a financial holding company. "Financial activities" is broadly defined
to include not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Generally, although significant implementing regulations have yet to be
published, the Gramm-Leach-Bliley Act:
o repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
o provides a uniform framework for the functional regulation of the activities
of banks, savings institutions, and their holding companies;
o broadens the activities that may be conducted by national banks (and,
derivatively, state banks), banking subsidiaries of bank holding companies,
and their financial subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the Federal
Home Loan Bank system;
o modifies the laws governing the implementation of the Community Reinvestment
Act of 1977; and
o addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
In order to elect to become a financial holding company and engage in the new
activities, a bank holding company, such as the Company, must meet certain tests
and file an election form with the Federal Reserve Board that generally is acted
on within thirty days. To qualify, all of a bank holding company's subsidiary
banks must be well-capitalized and well-managed, as measured by regulatory
guidelines. In addition, to engage in the new activities each of the bank
holding company's banks must have been rated "satisfactory" or better in its
most recent federal Community Reinvestment Act evaluation. Furthermore, a bank
holding company that elects to be treated as a financial holding company may
face significant consequences if its banks fail to maintain the required capital
and management ratings, including entering into an agreement with the Federal
Reserve Board that imposes limitations on its operations and may even require
divestitures. Such possible ramifications may limit the ability of a bank
subsidiary to significantly expand or acquire less than well-capitalized and
well-managed institutions.
Further, the Gramm-Leach-Bliley Act includes new sections of the National Bank
Act and the Federal Deposit Insurance Act governing the establishment and
operation of financial subsidiaries to permit national banks and state banks, to
the extent permitted under state law, to engage in certain new activities which
are permissible for subsidiaries of a financial holding company. In addition,
the Gramm-Leach-Bliley Act expressly preserves the ability of national banks and
state banks to retain all existing subsidiaries. In order to form a financial
subsidiary, a national bank or state bank must be well-capitalized, and such
banks would be subject to certain capital deduction, risk management and
affiliate transaction rules.
Federal Securities Laws. Pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company files annual, quarterly, and periodic reports with
the Securities and Exchange Commission (the "SEC"). The Company is also subject
to the insider trading requirements of Sections 16(a) and 16(b) of the Exchange
Act, as administered by the SEC.
The Gramm-Leach-Bliley Act also amended the federal securities laws to,
effective May, 2001, eliminate the blanket exceptions that banks traditionally
have had from the definition of broker-dealer and investment adviser.
Accordingly, banks not falling within the specific exemptions provided by the
new law may have to register with the SEC as a broker-dealer and/or investment
adviser, as appropriate, and become subject to SEC jurisdiction.
3
<PAGE>
Other Activities
The Bank owns stock in The Savings Bank Life Insurance Company of Massachusetts
("SBLI"). The Bank sells life insurance and tax-deferred annuities and sold over
$1.9 million in SBLI annuities in 1999, making it the top seller of this product
in Massachusetts.
The Bank provides safe deposit services at nine of its branches.
The Bank originates 30-year, fixed-rate, residential 1-4 family loans in
correspondent relationships with third parties such as Plymouth Mortgage Company
and Chase Manhattan Mortgage Corporation, whereby the Bank originates loans in
exchange for an origination fee. The Bank does not retain the servicing rights
for these loans.
Competition
The Company faces substantial competition for loan origination and for the
attraction and retention of deposits. Competition for loan origination arises
primarily from commercial banks, other thrift institutions, credit unions and
mortgage companies. The Company competes for loans on the basis of product
variety and flexibility, competitive interest rates and fees, service quality
and convenience.
Competition for the attraction and retention of deposits arises primarily from
commercial banks, other thrift institutions, and credit unions having a presence
within and around the market area served by the Bank's main office and its
community branch and ATM network. There are approximately 200 of these financial
institutions in the Bank's market area. In addition, the Company competes with
regional and national firms which offer stocks, bonds, mutual funds and other
investment alternatives to the general public. The Company competes on its
ability to satisfy such requirements of savers and investors as product
alternatives, competitive rates, liquidity, service quality, convenience, and
safety against loss of principal and earnings.
Moreover, under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms, insurance companies and other financial services providers that elect to
become financial holding companies may acquire banks and other financial
institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which the Company and its subsidiaries conduct
business. See "Supervision and Regulation--The Gramm-Leach-Bliley Act" above.
The financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial
services.
Management believes that the Company's emphasis on personal service and
convenience, coupled with active involvement within the communities it serves,
contributes to its ability to compete successfully.
Employees
As of December 31, 1999, the Bank employed 215 full-time staff, including 51
officers, and 78 part-time staff. None of the Bank's employees is represented by
a labor union. The Company has no officers or employees separate from the Bank.
Executive Officers of the Company and Bank
The executive officers of the Company and/or the Bank, their positions with the
Company and/or the Bank and their ages as of February 29, 2000 are as follows:
Name Age Position
Arthur H. Meehan 64 President and Chief Executive Officer of the
Company and the Bank; Chairman of the Board of
Directors of the Company and the Bank
Phillip W. Wong 50 Executive Vice President, Chief Financial Officer
and Treasurer of the Company; Executive Vice
President and Chief Financial Officer of the Bank
George A. Bargamian 51 Executive Vice President of the Bank (Retail)
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<PAGE>
Name Age Position
Eric B. Loth 57 Senior Vice President of the Bank (Lending)
William F. Rivers 44 Senior Vice President of the Bank (Administration)
Arthur H Meehan. Mr. Meehan commenced his employment with the Bank in February
1992. Prior to this date, Mr. Meehan served as Executive Vice President of the
Bank of New England Corporation.
Phillip W. Wong. Mr. Wong commenced his employment with the Bank as Senior Vice
President in December 1992 and was promoted to Executive Vice President in 1997.
Prior to this date, Mr. Wong served as Chief Financial Officer of Guaranty-First
Trust Co. in Waltham, Massachusetts.
George A. Bargamian. Mr. Bargamian was hired by the Bank as Director of
Marketing in 1988, and was promoted to Senior Vice President in 1988 and
Executive Vice President of the Bank during 1999. Mr. Bargamian formerly served
as Assistant Vice President of Marketing for First Mutual of Boston.
Eric B. Loth. Mr. Loth commenced his employment with the Bank as Senior Vice
President in August 1994. Prior to this date, Mr. Loth served as Vice President
of Lending at Sterling Bank in Waltham, Massachusetts.
William F. Rivers. Mr. Rivers commenced his employment with the Bank in January
1974, served as Assistant Treasurer from 1980-1985, Vice President from
1985-1988, and was promoted to Senior Vice President in 1988.
ITEM 2. PROPERTIES
All of the Bank's branches located in Medford (except for the West Medford
branch), the branch located in Arlington, and the Malden Center, Maplewood and
Oak Grove branches located in Malden, and the Tewksbury branch, located in
Tewksbury, are owned by the Bank. All other branches are leased from unrelated
third parties. The Company recently sold one of its buildings and consolidated
staff and resources into its main operations center. Additional space in this
operations center is leased to third parties. Subject to the foregoing, the
Company believes that its properties are adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or to
which any of its property is subject, although the Company is a party to
ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's (and, prior to the reorganization into a bank holding company
structure, the Bank's) common stock is quoted on the Nasdaq National Market
System under the symbol "MDBK." The following table sets forth cash dividends
declared on common stock and the high and low closing prices for the quarters
indicated. All prices set forth below are based on information provided by the
National Association of Securities Dealers, Inc.
Common Stock Sale Prices
------------------------ Dividends Declared
High Low Per Share
---- --- ---------
1999 1st quarter $18 13/16 $17 $0.11
2nd quarter 18 7/16 15 1/4 0.11
3rd quarter 19 1/4 15 0.11
4th quarter 17 5/8 15 3/4 0.18
1998 1st quarter $22 $17 3/4 $0.10
2nd quarter 22 1/8 20 1/4 0.10
3rd quarter 21 1/4 16 1/8 0.10
4th quarter 18 3/4 13 1/2 0.20
At March 1, 2000, according to the Company's transfer agent, the Company had
approximately 1,091 record holders of its common stock. The number of holders of
record does not reflect the number of persons or entities who or which held
their stock in nominee or "street" name through various brokerage firms or other
entities.
The declaration of future dividends to the Company's stockholders is subject to
future operating results, financial conditions, tax and legal considerations and
other factors, such as the Bank's ability to declare and pay dividends to the
Company. As the principal asset of the Company, the Bank currently provides the
only source of payment of dividends by the Company. FDICIA limits the ability of
undercapitalized insured banks to pay dividends. Moreover, under Massachusetts
law, a stock-form savings bank may pay dividends no more frequently than
quarterly only out of its net profits and only to the extent such dividends do
not impair the Bank's capital stock and surplus, as defined; and the
Commissioner's approval may be required under certain circumstances. Under
Federal Reserve Board and FDIC regulations, the Company and the Bank would be
prohibited from declaring dividends if, among other things, they were not in
compliance with applicable regulatory capital requirements. If there is no
surplus, dividends may be paid out of net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year. Funds held by the
Company are available for various corporate uses, including the payment of
future dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $1,224,912 $1,151,188 $1,135,572 $1,039,098 $ 955,933
Investment securities (includes
restricted equity securities) 535,858 512,648 513,418 424,966 363,599
Loans, net 626,751 580,665 570,844 560,855 529,424
Deposits 911,328 871,702 821,706 792,141 791,851
Borrowed funds 215,724 170,116 205,779 148,464 72,428
Stockholders' equity 90,870 102,267 101,510 92,521 86,076
Book value per share 10.84 11.74 11.18 10.20 9.73
Stockholders' equity to total assets 7.42% 8.88% 8.94% 8.90% 9.00%
Number of offices 17 17 16 16 16
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Interest and dividend income $77,849 $76,802 $75,332 $68,711 $64,405
Interest expense 43,109 42,613 41,349 36,462 32,724
------- ------- ------- ------- -------
Net interest income 34,740 34,189 33,983 32,249 31,681
------- ------- ------- ------- -------
Provision for loan losses -- 75 125 215 772
Other income:
Gain on investment securities, net 1,522 1,670 835 413 96
All other income 2,680 3,088 3,007 2,902 3,050
------- ------- ------- ------- -------
Total other income 4,202 4,758 3,842 3,315 3,146
------- ------- ------- ------- -------
Operating expenses 19,301 19,074 19,054 18,075 18,169
------- ------- ------- ------- -------
Income before income taxes 19,641 19,798 18,646 17,274 15,886
Provision for income taxes 6,990 7,546 7,256 6,845 6,463
------- ------- ------- ------- -------
Net income $12,651 $12,252 $11,390 $10,429 $ 9,423
======= ======= ======= ======= =======
Basic earnings per share $ 1.51 $ 1.38 $ 1.25 $ 1.15 $ 1.07
======= ======= ======= ======= =======
Diluted earnings per share $ 1.44 $ 1.31 $ 1.19 $ 1.10 $ 1.01
======= ======= ======= ======= =======
Cash dividends declared per share $ 0.51 $ 0.50 $ 0.45 $ 0.42 $ 0.36
======= ======= ======= ======= =======
SELECTED RATIOS
Return on average assets 1.07% 1.09% 1.05% 1.05% 1.01%
Return on average equity 13.52 11.99 11.81 11.72 11.52
Average equity to average assets 7.88 9.07 8.91 8.98 8.75
Weighted average rate spread 2.63 2.72 2.84 3.00 3.20
Net yield on average earning assets 3.03 3.16 3.26 3.39 3.54
Dividend payout ratio - basic earnings per share 33.77 36.23 36.00 36.52 33.64
- ------------------------------------------------------------------------------------------------------------
</TABLE>
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-K 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 Exchange Act. You can identify
forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume" and other similar expressions which
predict or indicate future events and trends and which do not relate to
historical matters. The Company's actual results could differ materially from
those projected in the forward-looking statements as a result, 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 laws and regulations, and changes in the assumptions
used in making such forward-looking statements. These forward-looking statements
were based on information, plans and estimates at the date of this report, and
we do not promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
The following discussion should be read in conjunction with the accompanying
consolidated financial statements and selected consolidated financial data
included within this report. Given that the Company's principal activity
currently is ownership of the Bank, for ease of reference, the term "Company" in
this Item generally will refer to the investments and activities of the Company
and the Bank, except where otherwise noted.
GENERAL
The Company's net income is primarily attributable to its level of net interest
income, which represents the difference between interest and dividend income
earned on earning assets and interest paid on deposits and other borrowed money.
The main components of the Company's earning assets are loans, investment
securities and short-term investments. Interest-bearing deposits include NOW,
savings, money market and term certificates of deposit. The net interest income
performance of the Company is significantly affected by general economic
conditions, by the Company's corporate strategies, its asset/liability
management, tactical programs and by the policies of regulatory authorities.
Sources of non-interest income such as loan servicing fees, gains on sales of
investment securities and other fees derived from various banking services
contribute positively to the Company's results. The principal operating expenses
of the Bank are salaries and employee benefits, occupancy and equipment
expenses, data processing expenses, amortization of intangibles, advertising and
marketing and other general and administrative expenses.
1999 marks the seventh consecutive year that the Company achieved record
earnings, with net income of $12.7 million, an increase of $399,000, or 3.3%,
compared to net income of $12.3 million for 1998. Earnings per share for 1999
were $1.51 ($1.44 on a diluted basis) compared with $1.38 ($1.31 on a diluted
basis) for 1998, an increase of 13 cents on a diluted basis or 9.9% compared to
the previous year.
At December 31, 1999, total assets were $1.22 billion, an increase of 6.4% from
the prior year. Total loans increased 7.8% to $633.5 million at December 31,
1999. Investment securities, including restricted equity securities, increased
4.5% to $535.9 million at December 31, 1999 while total deposits increased $39.6
million, or 4.6%, to $911.3 million, and borrowed funds increased 26.8% to
$215.7 million. Stockholders' equity totaled $90.9 million at December 31, 1999,
representing a book value of $10.84 per share, compared to $11.74 per share at
December 31, 1998. The capital to assets ratio was 7.42% at December 31, 1999,
exceeding all regulatory requirements.
FINANCIAL CONDITION
Investment Portfolio
The investment policy of the Company is structured to provide an adequate level
of liquidity in order to meet anticipated deposit outflows, normal working
capital needs and expansion of the loan portfolio within guidelines approved by
the Board of Directors, while earning market returns. Accordingly, the majority
of investments are in shorter-term government, agency, or high-quality (rated
"A" or better) corporate securities. Investment bonds purchased generally have
maturities or call dates within three years or less. Although the emphasis on
short-term and medium-term investments reduces the overall yield, this strategy
is in accordance with the Company's desire to minimize interest rate risk.
8
<PAGE>
Investment securities, including restricted equity securities, were higher than
1998 year-end levels, at $535.9 million at December 31, 1999 versus $512.6
million at December 31, 1998. During 1999, the Company continued to modify the
mix of the investment portfolio to generate higher levels of interest income.
The strategy included replacing U.S. Government and federal agencies as they
matured or were sold with mortgage-backed securities and corporate bonds.
Investments in corporate bonds consisted primarily of "A" rated or better bonds
with maturities of three years or less. At December 31, 1997, U.S. Government
and federal agencies represented 37% of total investment securities, and
mortgage-backed securities represented 24%. At December 31, 1998, U.S.
Government and federal agencies were reduced to 18% of total investment
securities while mortgage-backed securities were increased to 43%. At December
31, 1999, U.S. Government and federal agencies equaled 12% of total investment
securities while mortgage-backed securities and corporate bonds represented 40%
and 46%, respectively. The mortgage-backed securities pools added to this
portfolio throughout 1998 and 1999 consisted primarily of fixed-rate,
low-coupon, government-backed securities that have limited extension or
contraction risk. Consideration is given to the underlying collateral, the
impact of rising or falling rates on the average life of these securities and
other factors associated with the Bank's investment policies and strategies.
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. As of December 31, 1999 and 1998, the net unrealized gain on
investments classified as "held to maturity" was $6,000 and $286,000,
respectively. All other marketable investment securities are classified as
"available for sale" and reflected on the balance sheet at fair value, with
unrealized gains and losses excluded from earnings and reported, net of tax, in
other comprehensive income (loss) in stockholders' equity. The fair value of the
Company's marketable investment securities, principally fixed income securities,
classified as "available for sale" is influenced by the volatility and changes
in general market rates. In the rising rate environment of 1999, the fair value
of the "available for sale" portfolio has been negatively affected. As of
December 31, 1999, the net unrealized loss on investments classified as
"available for sale" was $15.4 million as compared to the net unrealized gain on
investments of $5.0 million as of December 31, 1998.
The Bank also holds limited amounts of equity securities subject to the
investment limitations imposed by FDICIA and the Commissioner.
The following table sets forth certain information concerning the investment
portfolio, including restricted equity securities, at carrying value:
At December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Investment securities:
Debt securities:
U.S. Government and federal agency $ 62,127 $ 93,735 $190,579
Mortgage-backed securities 214,456 218,197 122,447
Corporate bonds 246,767 190,019 185,859
Equity securities 12,508 10,697 14,533
-------- -------- --------
Total investment securities $535,858 $512,648 $513,418
======== ======== ========
9
<PAGE>
The following table sets forth the maturity distribution of debt securities
(excluding mortgage-backed securities) at carrying value, with related weighted
average yields:
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------------------------------
Weighted Weighted Weighted
Within Average Over 1 Year Average Over 5 Years Average
1 Year Yield to 5 Years Yield to 10 Years Yield
----------- ----------- ------------ ----------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency $ 5,000 5.87% $ 52,424 6.49% $ 4,703 6.56%
Corporate bonds 64,987 6.40 181,780 7.04 -- --
----------- ---------- ----------
$ 69,987 6.36% $ 234,204 6.92% $ 4,703 6.56%
=========== ========== ==========
</TABLE>
Loan Portfolio
The Company offers a variety of lending products, including fixed-rate and
adjustable-rate residential mortgages, equity lines of credit, fixed-rate and
adjustable-rate commercial mortgages, construction loans, consumer loans and
commercial business loans. As a portfolio lender, the Company generally retains
all newly originated loans. From time to time, the Company originates and
retains 30-year, fixed-rate residential loans. More frequently, however, the
30-year, fixed-rate residential loan product is generally offered whereby the
Bank originates these loans for correspondent banks and collects origination
fees therefrom.
Real estate and commercial loan originations are initiated by the Bank's
officers and lending personnel from a number of sources, including referrals
from realtors, builders, attorneys, and customers. Direct mail to existing and
potential customers is used to solicit other loan services. Advertising media is
also used to promote loans. The Bank employs on-the-road originators and pays
them commissions for loan originations. Applications for residential and
consumer loans are accepted at all of the Bank's locations and are referred to
the main office for processing.
The Company has lending policies in place which are intended to control credit
risk inherent in the origination and retention of loans in portfolio. Among
other considerations, these policies delineate the Bank's geographic market
region, and establish credit procedures and acceptable loan-to-value ratios for
all loans. Additional specific policies are in effect for commercial and
commercial real estate loans.
Total loans increased to $633.5 million at December 31, 1999 compared to $587.5
million at December 31, 1998. The increase in loans was primarily in residential
mortgages, with year-to-year growth of $44.0 million, or 10.4%. Commercial real
estate loans also increased $2.5 million, or 2.3%, to $112.1 million from $109.6
million in 1998. Construction loan commitments decreased to $25.2 million at
December 31, 1999, with commercial construction and residential construction
loan commitments totaling $20.3 million and $4.9 million, respectively, from
$28.6 million at December 31, 1998. All other loan categories remained
relatively stable from December 31, 1998. In addition, the Bank sold $11.0
million of education loans in 1998 thereby exiting this business due to
profitability concerns. The Company expects continued intense competition for
loans within its geographic region. Within this framework, management continues
intense marketing efforts for loans.
10
<PAGE>
The following table shows the composition of the loan portfolio by type of loan:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial loans $ 18,124 $ 17,358 $ 14,941 $ 11,014 $ 9,075
Loans secured by real estate:
Residential * 465,420 421,462 389,593 380,627 353,172
Construction loans, net of unadvanced
funds 13,504 13,073 11,278 8,719 8,591
Commercial 112,050 109,561 124,094 123,158 125,771
Second mortgages 774 1,111 1,539 1,928 2,175
Equity lines of credit 19,394 20,606 22,146 21,169 20,819
Consumer loans 2,912 3,145 12,931 20,548 16,710
--------- --------- --------- --------- ---------
632,178 586,316 576,522 567,163 536,313
Add: Net premium on loans acquired 198 223 270 354 504
Net deferred origination costs 1,154 1,002 785 569 73
Less: Allowance for loan losses (6,779) (6,876) (6,733) (7,231) (7,466)
--------- --------- --------- --------- ---------
Loans, net $ 626,751 $ 580,665 $ 570,844 $ 560,855 $ 529,424
========= ========= ========= ========= =========
</TABLE>
* Residential first mortgages represent qualified collateral under a blanket
lien securing FHLBB borrowings. See "Borrowed Funds".
The following table presents the maturity distribution of commercial and
construction loans at December 31, 1999:
Maturities
----------------------------------------------------------
1 Year Over 1 Year Over
or Less to 5 Years 5 Years Total
----------- -------------- ----------- ----------
(In thousands)
Commercial loans $ 11,205 $ 6,107 $ 812 $ 18,124
Construction loans 3,691 5,978 3,835 13,504
Generally, construction loans provide for payments of interest only during the
construction period, and then payments of principal and interest throughout the
remaining life of the loans. In all cases, these construction loans have
adjustable interest rates.
Commercial loans with maturities of over one year are subject to interest rate
adjustment or maturity according to the following schedule:
Scheduled Maturity or Rate Adjustment
----------------------------------------------
Over 1 Year Over
to 5 Years 5 Years Total
------------- ------------- -------------
(In thousands)
Predetermined rates $ 2,921 $ 42 $ 2,963
Adjustable rates 3,186 770 3,956
------------- ------------- -------------
$ 6,107 $ 812 $ 6,919
============= ============= =============
11
<PAGE>
Non-performing Assets
It is the Bank's policy to discontinue the accrual of interest on loans over 90
days past due. Interest accrual ceases, and all previously accrued but unpaid
interest is reversed, when a loan is placed on non-accrual status. At the option
of management, a loan may be placed on non-accrual status prior to being 90 days
past due if the collection of future interest and principal is, in the opinion
of management, doubtful. Non-accrual loans are generally classified as impaired
loans.
The Bank recognizes impaired loans based on Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan."
Under this Statement, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. All of the Bank's loans, which have
been identified as impaired, have been measured by the fair value of existing
collateral. When impaired loans become 90 days or more past due, they are
maintained on non-accrual status whereby interest income is recognized only when
received. The Bank does not apply SFAS No. 114 to individual consumer loans
which are collectively evaluated for impairment.
The following table sets forth information with respect to impaired and
non-accrual loans and foreclosed real estate, at the dates indicated. There were
no loans 90 days or more past due and still accruing at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Impaired loans accounted for on a non-accrual basis $2,482 $1,766 $1,726 $2,752 $4,239
Other loans accounted for on a non-accrual basis 18 47 -- 687 82
Foreclosed real estate -- 119 48 276 350
------ ------ ------ ------ ------
$2,500 $1,932 $1,774 $3,715 $4,671
====== ====== ====== ====== ======
</TABLE>
For non-accrual loans at December 31, 1999, gross interest income of $453,000
would have been recorded during the year had the loans remained current in
accordance with original terms. The amount of interest income on such loans that
was included in net income for the period was $280,000.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged through the statement of income. Assessing the adequacy of the allowance
for loan losses involves substantial uncertainties and is based on management's
evaluation of the amount required to absorb estimated losses inherent in the
loan portfolio after weighing various factors. Ultimate losses may vary
significantly from current estimates.
Quarterly reviews of the loan portfolio are performed to identify loans for
which specific allowance allocations are considered prudent. Specific
allocations include the results of measuring impaired loans under SFAS No. 114.
General risk allocations are determined by formula whereby the loan portfolio is
stratified by loan type and by risk rating category. Loss factors are then
applied to each category based on various considerations including historical
loss experience, delinquency trends, current economic conditions, industry
standards and regulatory guidelines. Any remaining unallocated portion is
reviewed for adequacy in relation to the overall loan portfolio and in
recognition of estimates inherent in the calculation methodology.
12
<PAGE>
An analysis of the allowance for loan losses is presented in the following
table:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year $6,876 $6,733 $7,231 $7,466 $7,539
-------- ------- ------- ------- -------
Loans charged-off --- Residential real estate (2) (24) (38) (64) (66)
--- Commercial real estate (16) -- (720) (656) (884)
--- Consumer (25) (33) (42) (89) (28)
--- Commercial (121) (108) (31) (21) (100)
Recoveries --- Residential real estate 11 20 26 7 104
--- Commercial real estate 24 204 147 348 102
--- Consumer 19 9 25 8 10
--- Commercial 13 -- 10 17 17
-------- ------- ------- ------- -------
Net recoveries (charge-offs) (97) 68 (623) (450) (845)
-------- ------- ------- ------- -------
Provision for loan losses, charged to operations -- 75 125 215 772
-------- ------- ------- ------- -------
Allowance for loan losses, end of year $6,779 $6,876 $6,733 $7,231 $7,466
======== ======= ======= ======= =======
Ratio of net charge-offs (recoveries) to average loans 0.02% (0.01)% 0.11% 0.08% 0.16%
======== ======= ======= ======= =======
</TABLE>
An analysis of the allocation of the allowance for loan losses is presented in
the following table:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------- ------------------ ----------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ ------- ------ --------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $1,858 76.86% $1,683 75.64% $1,067 71.73% $1,179 71.23% $1,036 70.17%
Commercial real estate 4,121 17.69 4,433 18.65 5,220 21.49 5,711 21.68 6,118 23.43
Construction 270 2.13 261 2.22 169 1.95 131 1.53 129 1.60
Consumer 41 0.46 42 0.54 48 2.24 44 3.62 47 3.11
Commercial 489 2.86 457 2.95 229 2.59 166 1.94 136 1.69
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total $6,779 100.00% $6,876 100.00% $6,733 100.00% $7,231 100.00% $7,466 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
While management considers the allowance for loan losses to be adequate at
December 31, 1999, there is no assurance that additional charge-offs and
provisions will not be necessary in 2000. The provision for loan losses during
2000 will depend primarily on market conditions and the Bank's actual
experience.
Loan Concentrations
Other than the focus of the Bank's lending activities to its market area, the
Bank does not have a concentration of loans exceeding 10% of total loans at the
end of 1999.
13
<PAGE>
Deposits
Deposits historically have been the Bank's primary source of funds. The Bank
offers a wide variety of deposit products to attract both short-term and
long-term deposits from individuals, partnerships and corporations, non-profits
and municipalities. Deposit products include regular savings accounts, NOW
accounts, money market deposit accounts, individual retirement accounts, term
certificates, and retail and commercial demand deposit accounts. The Bank also
solicits corporate and municipal jumbo term deposits.
The Bank's Retail Banking Division places emphasis on sales of its products and
quality of service to attract and retain customers. Management measures the
sales performance of platform personnel in terms of cross-sales of additional
products above the primary product which the customer requests. Platform
personnel are evaluated, in part, based on a cross-sell ratio which is the total
number of these additional products sold to a customer divided by the number of
customers.
The Bank utilizes products and services such as its FREEDOM 55(TM) mature market
program targeted to particular market segments to attract depositors interested
in long-term savings and to create multiple account relationships with these
depositors. Management believes that customers attracted to these programs have
an increased sense of loyalty to the Bank, and, accordingly, the funds deposited
into these programs are less volatile than other deposits.
While deposit flows are by nature unpredictable, management controls the Bank's
deposit growth through selective pricing and sales oriented marketing programs.
Despite the $40 million, or 4.5%, deposit growth experienced during 1999, with
the continuing rising interest rate environment and with increases in stock
market and mutual fund values, the task of attracting and retaining deposits
remains a significant challenge to the Bank.
To maintain stable deposit rates and manage interest rate risk, the Bank's
strategy has been to attract deposits through selective promotions. To increase
core deposits, the Bank continues to promote its "ComboPlus" account which
combines a statement savings account and checking account into one convenient
account offered at a competitive rate which exceeds the regular statement and
passbook savings account rates. This account type has contributed significantly
to the increase in savings and demand deposits.
Total deposits increased $39.6 million, or 4.6%, to $911.3 million at December
31, 1999 from $871.7 million at December 31, 1998. When compared to the prior
year, demand deposits decreased 1.4% while NOW deposits decreased 6.3%. Savings
and money market deposits increased 9.1% and term certificates increased 3.1%.
The growth in both its savings and money market accounts and term certificates
are reflective of the Company's successful efforts in promotion of its Combo
Plus accounts and its solicitation of corporate and municipal jumbo term
deposits.
The following table indicates the balances in various deposit accounts at the
end of each reported period:
At December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
Demand accounts $ 51,202 $ 51,936 $ 44,196
NOW accounts 60,811 64,888 59,368
Savings and money market accounts 382,970 351,047 325,340
Term certificates 416,345 403,831 392,802
--------- --------- ---------
$ 911,328 $ 871,702 $ 821,706
========= ========= =========
14
<PAGE>
The following table sets forth the average deposits of the Bank with related
average rates paid during each reported period:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ---------------
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts $ 47,409 --% $ 41,272 --% $ 35,210 --%
NOW accounts 60,931 0.56 60,111 0.98 59,485 1.00
Savings and money market deposits 375,169 3.08 337,456 3.02 322,079 2.96
Term certificates 415,643 5.02 393,493 5.39 391,204 5.42
</TABLE>
Included in term certificates of deposit are certificates having balances of
$100,000 or more. At December 31, 1999, such term certificates had the following
maturities:
At December 31, 1999
--------------------------------------------------------------------
3 Months Over 3 Months Over 6 Months Over
or Less to 6 Months to 12 Months 12 Months Total
------------ ------------- ------------- ------------- --------
(In thousands)
$ 46,379 $ 7,973 $ 11,692 $ 23,154 $ 89,198
Borrowed Funds
The Bank is a voluntary member of the FHLBB. As such, the Bank may borrow up to
its qualified collateral, as defined by the FHLBB.
The Bank has selectively borrowed funds from the FHLBB to fund purchases of
loans or large loan originations in addition to purchases of mortgage-backed
securities. Short-term borrowings typically fund purchases or originations of
one-year adjustable-rate loans or are used to meet the Bank's daily liquidity
needs. Long-term debt typically funds purchases of three-year adjustable-rate
residential mortgage loans or the origination of certain commercial real estate
loans. The Bank also enters into repurchase or reverse repurchase agreements
with a number of authorized brokers as an alternative source of funds.
Securities sold under agreements to repurchase are borrowings that mature within
one year and are secured by U.S. government obligations. Total borrowed funds
increased to $215.7 million at December 31, 1999 from $170.1 million at December
31, 1998.
15
<PAGE>
The following table presents, by category, the borrowings of the Bank for the
reported periods:
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Short-term borrowings:
FHLBB advances $ 45,000 $ -- $ --
Federal Reserve Bank of Boston advances 844 114 2,059
Securities sold under agreements to repurchase 21,227 38,349 93,611
-------- -------- --------
Total short-term borrowings $ 67,071 $ 38,463 $ 95,670
======== ======== ========
Weighted average rate 5.35% 4.01% 5.72%
Average balance of short-term borrowings during
the year $ 48,265 $ 60,215 $ 70,417
Weighted average rate paid on short-term
borrowings during the year 5.07% 5.33% 5.53%
Maximum amount outstanding at any month-end
during the year $ 75,991 $ 82,514 $ 99,593
Long-term debt:
FHLBB advances $148,653 $131,653 $110,109
======== ======== ========
Weighted average rate 5.62% 5.74% 6.02%
Average balance of long-term debt during the year $139,034 $123,358 $ 98,972
Weighed average rate paid on long-term
debt during the year 5.69% 6.02% 6.19%
Maximum amount outstanding at any month-end
during the year $148,653 $136,653 $115,156
</TABLE>
Stockholders' Equity
The Bank's capital to assets ratio was 7.42% at December 31, 1999, compared to
8.88% at December 31, 1998. The Bank's capital ratios at December 31, 1999 and
1998 exceeded all regulatory requirements. Book value at December 31, 1999 was
$10.84 per share, compared with $11.74 per share at December 31, 1998. (See
"Liquidity and Capital Resources.")
16
<PAGE>
RESULTS OF OPERATIONS
General
In 1999, the Company reported consolidated net income of $12.7 million or $1.51
basic earnings per share, as compared to net income of $12.3 million or $1.38
per share in 1998 and net income of $11.4 million or $1.25 per share in 1997.
Diluted earnings per share were $1.44, $1.31 and $1.19 for 1999, 1998 and 1997,
respectively. Consolidated net income in 1999 increased 3.3% over 1998 and
consolidated net income in 1998 increased 7.6% over 1997. Diluted earnings per
share in 1999 increased 9.9% over 1998 and diluted earnings per share in 1998
increased 10.1% over 1997. The Company's return on assets was 1.07% for 1999, as
compared to 1.09% in 1998 and 1.05% in 1997. The return on equity increased to
13.52% in 1999 from 11.99% in 1998 and 11.81% in 1997.
The increased earnings for 1999 when compared to 1998 reflect a $551,000
increase in net interest income due to higher average earning assets partially
offset by interest rate margin compression, and a decrease in the provision for
loan losses of $75,000. This is partially offset by an increase in operating
expenses of $227,000. The increased earnings for 1998 when compared to 1997
reflect a $206,000 increase in net interest income due to higher average earning
assets, and an increase in net gains on the sales of securities and loans
amounting to $899,000. In 1998, salaries and employee benefits increased
$468,000 while all other categories were relatively flat or down compared to
1997. Included in 1997 expenses were one-time expenses of approximately $200,000
related to the formation of the holding company, and $260,000 applicable to tax
filing matters.
Net Interest Income
Net interest income was $34.7 million in 1999; an increase of $551,000 or 1.6%
from 1998. Average earning assets in 1999 increased $65.3 million as compared to
an increase of $64.4 million of increased interest-bearing liabilities. As a
result, the excess of earning assets over interest-bearing liabilities increased
0.83% to $108.8 million from $107.9 million in 1998.
Net interest income was $34.2 million in 1998; an increase of $206,000 or 0.6%
from $34.0 million in 1997. Average earning assets in 1998 increased $40.5
million as compared to an increase of $32.5 million of increased
interest-bearing liabilities; the difference resulting from higher demand
deposits and capital. As a result, the excess of earning assets over
interest-bearing liabilities increased 8.0% to $107.9 million from $99.9 million
in 1997. The earnings on this excess flow directly to net interest income.
The continued flatness of the yield curve in 1999, along with increases in the
prime rate, compressed the net interest margin and spread. As a result, lower
yields on earning assets, albeit somewhat offset by lower costs of funds,
reduced the net interest margin in 1999 to 3.03% from 3.16% in 1998 and 3.26% in
1997. The Company's most integral challenge is managing net interest income.
Management continues to focus on minimizing net interest margin compression by
closely monitoring the behavior of the loan portfolio under varying market rate
environments in order to maximize the yield on earning assets. During 1999,
average loan balances represented 52.5% of average earning assets. This compares
with 53.7% in 1998, and 55.3% in 1997. The average investment securities balance
was 47.5% of average earning assets in 1999 as compared to 46.3% in 1998 and
44.7% in 1997. As the percentage of loans to assets decreases, and the
percentage of investments to assets increases, the net interest margin generally
declines because loans are typically a higher yielding asset than the types of
securities in which the Bank generally invests.
Management also closely monitors funding costs, and utilizes borrowings as an
alternative to deposits when pricing or availability is more advantageous.
Average deposits represented 82.0%, and average borrowings represented 18.0%, of
total interest bearing liabilities in 1999, as compared to 81.2% and 18.8%,
respectively, in 1998, and 82.0% and 18.0%, respectively, in 1997.
17
<PAGE>
Interest and Dividend Income
Interest and dividend income totalled $77.8 million for 1999, an increase of
$1.0 million or 1.4% from 1998. Interest and dividend income totalled $76.8
million for 1998, an increase of $1.5 million or 2.0% from 1997. The weighted
average yield on earning assets was 6.78% in 1999, compared to 7.09% in 1998 and
7.23% in 1997.
Interest income on loans decreased 1.5% or $698,000 to $45.0 million in 1999
whereby increases in the average loans outstanding were more than offset by a
reduction in the average yield on loans to 7.48%. Increased residential 1-4
family loan volume contributed $999,000 of additional interest income. The
average yield on residential 1-4 family loans declined to 7.06% when compared
with the 7.36% earned in 1998, the result of lower origination rates and
significant refinancing. Interest income on commercial and industrial loans
increased $53,000 as a result of greater volume, offset by lower yields. The
yield on commercial and industrial loans declined to 8.51% when compared to
9.41% in 1998. Commercial real estate loans contributed $1.4 million less
interest income in 1999 as outstanding loans declined; the result of the Bank's
refusal to meet highly aggressive pricing on these loans by competitors in its
marketplace.
Interest income on loans was $45.7 million in 1998 compared with $46.2 million
in 1997. Increases in the average loans outstanding were more than offset by a
reduction in the average yield on loans to 7.87%. Interest income on residential
1-4 family loans increased $720,000 in 1998 compared to 1997 levels as loan
volume increased. Interest income on commercial loans increased $63,000 on a
$937,000 increase in volume. Interest income on consumer loans decreased by
$802,000, or 53.8%, from the prior year primarily due to the sale of all the
education loans in 1997 and 1998.
Interest income on investments increased $1.7 million to $32.8 million in 1999
compared with $31.1 million in 1998. The $44.0 million increase in the average
balance of investment securities contributed $2.7 million of interest income in
1999, offset by a $929,000 decrease as a result of the decline in the yield on
investment securities to 6.03% in 1999 from 6.20% in 1998.
Interest income on investments was $31.1 million in 1998 compared with $29.1
million in 1997. The increase of $35.6 million in the average balance of
investment securities in 1998, principally in higher yielding corporate bonds
and mortgage-backed securities, contributed $1.9 million of additional interest
income. The weighted average yield on investment securities, including
short-term investments, decreased from 6.27% in 1997 to 6.20% in 1998.
Interest Expense
Interest expense was $43.1 million in 1999, up $496,000 or 1.2% from 1998.
Interest expense was $42.6 million in 1998, an increase of $1.3 million or 3.1%
from 1997. The cost of funds decreased to 4.15% in 1999 from 4.37% in 1998 and
4.39% in 1997, principally as a result of declining rates paid on term
certificates and borrowings.
Interest expense on deposits was $32.8 million in 1999, compared with $32.0
million in 1998. Average interest-bearing deposits increased $60.7 million
resulting in an increase in interest expense of $776,000. The Company continues
to focus on increasing certain core deposit accounts. As a result, pricing
strategies were implemented raising certain deposit rates while lowering others.
The weighted average rate paid on savings and money market deposits increased to
3.08% in 1999 compared with 3.02% in 1998. This increased rate coupled with a
$37.7 million increase in the average balance added $1.3 million of interest
expense in 1999. The weighted average rate paid on term certificates decreased
to 5.02% in 1999 from 5.39% in 1998. Lower rates on term certificates more than
offset the increased interest expense resulting from a $22.2 million increase in
the average outstandings. The average balance of NOW deposits increased
$820,000. This volume increase was more than offset by the lowering of the rate
paid, thereby reducing interest expense by $244,000. The overall weighted
average rate paid on deposits decreased to 3.85% in 1999 from 4.04% in 1998. The
decrease is principally due to greater volume in the liquid savings and money
market deposit products at lower rates coupled with lower rates paid on term
certificates.
18
<PAGE>
Interest expense on borrowed funds was $10.4 million in 1999, compared with
$10.6 million in 1998. Longer-term FHLBB borrowings were acquired to fund and
manage the interest rate risk resulting from growth in the residential loan
portfolio. The decrease in interest expense is the result of a $3.7 million
increase in the average balance of borrowings being more than offset by a
weighted average rate that was 26 basis points lower than the prior year's rate.
Interest expense on deposits was $32.0 million and interest expense on borrowed
funds was $10.6 million in 1998, compared with $31.3 million and $10.0 million,
respectively, in 1997. While average interest-bearing deposit levels grew
modestly in 1998 as compared with 1997, the average rate paid on
interest-bearing deposits remained stable at 4.04% in 1998 versus 4.05% in 1997.
In addition, the Bank leveraged its capital position by increasing average
borrowed funds to $183.5 million at an average cost of 5.80% in 1998 from $169.4
million at an average cost of 5.92% in 1997.
Rate/Volume Analysis
The following table presents, for the periods indicated, changes in interest and
dividend income and changes in interest expense attributable to changes in
interest rates and volumes of interest-bearing assets and liabilities. Changes
attributable to both rate and volume have been allocated proportionally to the
two categories.
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Short-term investments $ 136 $ (10) $ 126 $ 5 $ (5) $ --
Mortgage-backed investments 3,867 (607) 3,260 6,460 (69) 6,391
Other investment securities (1,329) (312) (1,641) (4,000) (449) (4,449)
Loans 1,639 (2,337) (698) 390 (863) (473)
------- ------- ------- ------- ------- -------
Total interest and dividend income 4,313 (3,266) 1,047 2,855 (1,386) 1,469
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
NOW deposits 8 (252) (244) (3) (15) (18)
Savings deposits and MMDA 1,157 185 1,342 489 179 668
Term certificates 1,156 (1,478) (322) 124 (128) (4)
Short-term borrowings (611) (153) (764) (548) (137) (685)
Long-term debt 907 (423) 484 1,472 (170) 1,302
------- ------- ------- ------- ------- -------
Total interest expense 2,617 (2,121) 496 1,534 (271) 1,263
------- ------- ------- ------- ------- -------
Net interest income $ 1,696 $(1,145) $ 551 $ 1,321 $(1,115) $ 206
======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE>
Distribution of Assets and Liabilities; Interest Rates and Interest Differential
The following presents an analysis of average yields earned and rates paid for
the years indicated. Average balances are computed using daily averages except
for average stockholders' equity for which month-end balances are used.
<TABLE>
<CAPTION>
Years Ended December 31, 1999 December 31, 1998 December 31, 1997
- ------------------------------------------------------------------- ------------------------------ -----------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- -------- ------- ------- -------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Short-term investments $ 6,696 $ 331 4.94% $ 3,941 $ 205 5.20% $ 3,852 $ 205 5.32%
Mortgage-backed
investments 234,928 14,239 6.06 171,581 10,979 6.40 70,635 4,588 6.50
Other investment securities 303,784 18,237 6.00 325,852 19,878 6.10 391,312 24,326 6.22
Loans (a) 602,429 45,042 7.48 581,154 45,740 7.87 576,258 46,213 8.02
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,147,837 77,849 6.78 1,082,528 76,802 7.09 1,042,057 75,332 7.23
Other assets 39,696 -- -- 44,518 -- -- 41,288 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $1,187,533 -- -- $1,127,046 -- -- $1,083,345 -- --
=================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW deposits $ 60,931 $ 343 0.56% $ 60,111 $ 587 0.98% $ 59,485 $ 595 1.00%
Savings deposits and MMDA 375,169 11,540 3.08 337,456 10,198 3.02 322,079 9,540 2.96
Term certificates 415,643 20,868 5.02 393,493 21,190 5.39 391,204 21,193 5.42
Short-term borrowings 48,265 2,446 5.07 60,215 3,210 5.33 70,417 3,896 5.53
Long-term debt 139,034 7,912 5.69 123,358 7,428 6.02 98,972 6,125 6.19
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,039,042 43,109 4.15 974,633 42,613 4.37 942,157 41,349 4.39
Other liabilities 54,888 -- -- 50,194 -- -- 44,704 -- --
Stockholders' equity 93,603 -- -- 102,219 -- -- 96,484 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,187,533 -- -- $1,127,046 -- -- $1,083,345 -- --
=================================================================================================================================
Net interest income $34,740 $34,189 $33,983
Weighted average rate spread (b) 2.63% 2.72% 2.84%
Net yield on average earning assets (c) 3.03% 3.16% 3.26%
=================================================================================================================================
</TABLE>
(a) Includes non-accrual loans.
(b) Weighted average yield on earning assets less weighted average rate paid on
interest-bearing liabilities.
(c) Net interest income divided by average earning assets.
20
<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, the level of non-performing
loans, current economic conditions, trends in delinquency and charge-offs, and
collateral values of the underlying security. Ultimate losses may vary from
current estimates.
The Bank recorded no provision for loan losses in 1999. This compares with a
provision of $75,000 for the year ended December 31, 1998 and $125,000 for the
year ended December 31, 1997. Gross loans charged-off declined to $164,000 in
1999 versus $165,000 and $831,000 in 1998 and 1997, respectively. Net loans
charged-off totaled $97,000 and $623,000, respectively, for the years ended
December 31, 1999 and 1997 while in 1998, the Company experienced net loan
recoveries of $68,000.
The increase in the loan portfolio of $45.9 million during 1999 related
principally to residential real estate loans, which are assigned a relatively
low risk rating as compared to other categories in the Company's loan portfolio.
The impact of applying general risk allocations to this growth was effectively
offset by the net improvement in the general risk ratings applicable to certain
commercial lending relationships. While management considers the allowance for
loan losses to be adequate at December 31, 1999, there is no assurance that
additional charge-offs and provisions will not be necessary in 2000. The
provision for loan losses during 2000 will depend primarily on market conditions
and the Bank's actual experience.
Other Income
Total other income amounted to $4.2 million for the year ended December 31,
1999, as compared to $4.8 million for year ended December 31, 1998, and $3.8
million for the year ended December 31, 1997. In 1999, customer service fees
declined $27,000 from 1998 and an additional $95,000 from 1997, in part
reflecting lower revenues on deposit accounts as customers migrate to deposit
products with lower or no service fees. Net gains on the sale of securities were
$1.5 million in 1999, compared with of $1.7 million and $835,000 in 1998 and
1997, respectively. Management elects to sell securities when tactical and/or
market opportunities arise to do so and recognize a gain without impairing the
yield or liquidity of the investment portfolio. The net gain on the sale of
loans of $370,000 in 1998 and $306,000 in 1997 was related to the sale of
education loans.
Operating Expenses
Operating expenses were $19.3 million for 1999, up $227,000 or 1.2% over 1998
operating expenses of $19.1 million. Occupancy, equipment and data processing
rose $287,000 or 7.7% when compared to 1998 as a result of additional operating
expenses associated with the reopening and opening, respectively, of our North
Reading and Tewksbury branch sites. Professional fees increased $132,000 or 25%
over 1998 as a result of expenses applicable to shareholder matters. 1998
operating expenses were $20,000 or 0.10% greater when compared to 1997. The
Bank's expense ratio, which is the ratio of operating expenses to average
assets, was 1.63% in 1999 compared with 1.69% in 1998 and 1.76% in 1997.
Management 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 year ended December 31, 1999 was 35.6% as
compared with 38.1% and 38.9% for the years ended December 31, 1998 and 1997,
respectively. The effective tax rates exceeded the statutory federal tax rate of
35.0% (for taxable income exceeding $10.0 million) principally due to state
taxes. The impact of state taxation has been reduced as a result of investment
activity in the Bank's security corporation.
21
<PAGE>
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 Bank is reflected in
increased operating costs. Unlike most industrial companies, virtually all
assets of a financial institution are monetary in nature. As a result, interest
rates have a more significant effect on a financial institution's performance
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales or maturities of various investment
securities. The Bank is a voluntary member of the FHLBB and, as such, may take
advantage of the FHLBB's borrowing programs to enhance liquidity and leverage
its favorable capital position. The Bank also may draw on lines of credit at the
FHLBB and a large commercial bank or enter into repurchase or reverse repurchase
agreements with authorized brokers. These various sources of liquidity are used
to fund withdrawals, new loans, and investments.
Management seeks to promote deposit growth while controlling the Bank's cost of
funds. Sales-oriented programs to attract new depositors and the cross-selling
of various products to its existing customer base are currently in place.
Management reviews, on an ongoing basis, possible new products, with particular
attention to products and services which will aid in retaining the Bank's base
of lower-costing deposits.
Maturities and sales of investment securities provide significant liquidity to
the Bank. The Bank's policy of purchasing shorter-term debt securities reduces
market risk in the bond portfolio while providing significant cash flow. For the
year ended December 31, 1999, cash flow from maturities of securities was $66.3
million and proceeds from sales of securities totaled $105.4 million, compared
to maturities of securities of $127.0 million and proceeds from sales of
securities of $138.0 million for the year ended December 31, 1998. Principal
payments on mortgage-backed investments during the years ended December 31, 1999
and 1998 totaled $47.4 million and $39.1 million, respectively. Purchases of
securities during 1999 and 1998 totaled $261.7 million and $299.1 million,
respectively. These purchases consisted primarily of short-term debt
instruments. During periods of high interest rates or active mortgage
origination, maturities in the bond portfolio have provided significant
liquidity to the Bank, generally at a lower cost than borrowings.
Amortization and pay-offs of the loan portfolio contribute significant liquidity
to the Bank. Traditionally, amortization and pay-offs are reinvested into loans.
Excess liquidity is invested in short-term debt instruments.
The Bank has also used borrowed funds as a source of liquidity. At December 31,
1999, the Bank's outstanding borrowings from the FHLBB were $193.7 million. The
Bank also utilizes repurchase agreements to fund loan purchases or to leverage
the balance sheet. At December 31, 1999, securities sold under agreements to
repurchase totaled $21.2 million.
Residential and commercial mortgage loan originations for the years ended
December 31, 1999, 1998 and 1997 totaled $147.9 million, $159.5 million and
$124.2 million, respectively. Commitments to originate commercial and
residential real estate mortgages at December 31, 1999 were $15.3 million,
excluding unadvanced construction funds totaling $11.7 million. Unadvanced funds
on equity and commercial lines of credit aggregated $35.9 million at December
31, 1999. Management believes that adequate liquidity is available to fund loan
commitments utilizing deposits, loan amortization, maturities of securities, or
borrowings.
The Bank's capital position (total stockholders' equity) was $90.9 million, or
7.42% of total assets at December 31, 1999, compared with $102.3 million, or
8.88% of total assets at December 31, 1998. In 1999, the Company utilized the
holding company structure to exercise greater control in managing capital with
the announcement and completion of a 5% stock repurchase plan. A total of
425,796 shares of common stock were repurchased. In addition, the Company
recently announced another stock repurchase plan of up to 5% of outstanding
shares.
The FDIC imposes capital guidelines on the Bank. The guidelines define core or
"tier 1" capital and supplementary or "tier 2" capital and assign weights to
broad categories of assets and certain off-balance sheet items. Ratios of tier 1
and tier 1 plus tier 2 capital to assets are then calculated. Banks must
maintain a tier 1 capital to risk-weighted assets ratio of 4.00% and a total
capital to risk-weighted assets ratio of 8.00%. The consolidated Company and the
Bank's tier 1 risk-based capital ratios, as defined by the FDIC, at December 31,
1999 were 13.0% and 12.7%, respectively, which exceeds both risk-based capital
requirements.
Massachusetts-chartered savings banks insured by the FDIC are required to
maintain minimum leverage capital (tier 1 capital) of 3.0% to 5.0% of total
assets, as adjusted, depending on an individual bank's rating. The Bank's
leverage capital ratio at December 31, 1999, as defined by the FDIC, was 7.7%,
which exceeds the FDIC's requirements.
22
<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 existed because many computer systems and
applications used 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 could
have caused 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 was responsible for Y2K compliance. Diligent
efforts, with management's participation, were conducted by the Company to
address Y2K concerns that could affect its operations. The objective of the
Company's Y2K compliance efforts was to enable its internal systems to function
normally with dates prior to, during, or after the year 2000. Additionally,
compliance should also include out-sourced systems upon which the Company relied
for normal bank operations. The Company monitored compliance efforts of these
vendors to adequately assess readiness and received written assurances from
vendors of critical systems.
To become Y2K compliant, the Company followed the Federal Financial Institutions
Examination Council interagency statement of Year 2000 project management issued
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 Company
completed the five required phases: Awareness Phase, Assessment Phase,
Renovation Phase, Validation Phase and Implementation Phase.
Costs of Y2K compliance efforts during 1999 and 1998 totaled $98,900 and
$20,440, respectively, and were expensed as incurred. A substantial part of the
Y2K compliance effort was accomplished by reallocation of existing personnel and
resources. In addition, investments in new software and hardware planned by the
Company in 1998 fell within the 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.
The Company also established a Remediation Contingency Plan, Business Resumption
Plan and a Liquidity Contingency Plan to address problems that could have arisen
in the event of a Y2K problem. In addition, the Company's efforts to become Y2K
compliant were monitored by its federal banking regulators. Failure to be Y2K
compliant could have subjected the Company to formal supervisory enforcement
actions.
After several years of intensive planning and preparation, the Company
successfully made the Y2K transition without any disruptions to operating
systems and customer service.
23
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through the Bank's Asset-Liability Management Committee ("ALCO"), which is
comprised of certain senior and middle management personnel, the Bank closely
monitors the level and general mix of interest rate-sensitive assets and
liabilities. The primary objective of the Bank's ALCO program is to manage the
assets and liabilities of the Bank to enhance profitability and capital at
prudent levels of liquidity, interest rate, credit and market risk.
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Bank's market risk arises primarily from interest rate risk
inherent in lending, investing in marketable securities, deposit taking, and
borrowing activities. To that end, management actively monitors and manages its
interest rate risk exposure. In addition, the Bank is exposed to equity price
risk associated with investing in marketable equity securities, which is not
material.
The Bank's primary objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the Bank's net interest income
and capital, while adjusting the Bank's asset-liability mix to achieve the
maximum yield to cost spread from the mix. However, a sudden and substantial
increase or decrease in interest rates may adversely impact the Bank's earnings
to the extent that interest sensitive assets and liabilities do not change at
the same speed, to the same extent, or on the same basis. It is ALCO's general
policy to closely match the maturity or rate sensitivity of its assets and
liabilities. Strategies implemented to improve the match between interest-rate
sensitive assets and liabilities include, but are not limited to: daily
monitoring of the Bank's changing cash requirements, with particular
concentration on investment in shorter-term securities; a general policy of
originating adjustable-rate and fifteen-year, fixed-rate mortgage loans for the
Bank's own portfolio, monitoring the cost and composition of deposits; and
generally using matched borrowings to fund specified purchases of loan packages
and large loan originations. Occasionally, management may choose to deviate
somewhat from specific matching of maturities of assets and liabilities to take
advantage of an opportunity to enhance yields.
The Bank seeks to manage its liability portfolio in order to effectively plan
and manage growth and maturities of deposits. Plans designed to achieve growth
of different deposit types are reviewed regularly. Programs which are designed
to build multiple relationships with customers and to enhance the Bank's ability
to retain deposits at controlled rates of interest have been implemented.
Management has also adopted a policy of reviewing interest rates on an ongoing
basis on all deposit accounts in order to monitor deposit growth and interest
costs.
In addition to attracting deposits, the Bank has selectively borrowed funds
using advances from the FHLBB and reverse repurchase agreements.
24
<PAGE>
The following table presents, as of December 31, 1999, interest-rate sensitive
assets and liabilities categorized by expected maturity and weighted average
rate. Expected maturities are contractual maturities adjusted for amortization
and prepayments of principal. For adjustable-rate instruments, contractual
maturity is deemed to be the earliest possible interest rate adjustment date.
<TABLE>
<CAPTION>
(Dollars in thousands) Overnight 0-1 yr. 1-2 yrs. 2-3 yrs. 3-4 yrs. 4-5 yrs. 5+ yrs. Total
--------- ------- -------- -------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Short-term investments $ 3,867 $ -- $ -- $ -- $ -- $ -- $ -- $ 3,867
5.58%
Mortgage-backed investments -- 30,350 34,946 34,217 33,764 26,123 64,683 224,083
6.05% 6.05% 6.05% 6.05% 6.05% 6.05%
Other investment securities -- 72,994 110,328 90,871 14,829 19,823 5,377 314,222
6.42% 5.85% 6.13% 6.40% 5.01% 2.81%
Adjustable-rate mortgages 19,342 121,019 67,253 63,309 -- 104,467 22,793 398,183
8.78% 8.01% 7.61% 7.54% 7.15% 7.06%
Fixed-rate mortgages -- 20,777 21,896 23,344 -- 45,133 101,263 212,413
7.33% 7.29% 7.25% 7.15% 7.05%
All other loans 14,480 2,653 1,439 775 368 678 41 20,434
9.14% 9.61% 9.95% 10.05% 9.97% 7.97% 10.53%
- -------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 37,689 247,793 235,862 212,516 48,961 196,224 194,157 1,173,202
- -------------------------------------------------------------------------------------------------------------------------
Rate-sensitive liabilities:
NOW accounts 1,557 -- 29,627 29,627 -- -- -- 60,811
0.94% 0.55% 0.55%
Savings accounts 78,588 -- 78,588 78,588 78,589 -- -- 314,353
2.97% 2.97% 2.97% 2.97%
Money market accounts 17,154 -- 17,154 17,154 17,155 -- -- 68,617
3.59% 3.59% 3.59% 3.59%
Term certificates -- 251,711 140,306 14,231 3,746 6,248 103 416,345
4.85% 5.21% 5.53% 5.16% 4.85% 5.26%
Borrowings -- 135,324 65,000 5,000 10,000 -- 400 215,724
5.40% 5.57% 6.36% 6.18% 5.61%
- -------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 97,299 387,035 330,675 144,600 109,490 6,248 503 1,075,850
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prepayment experience reflected is based on the Bank's historical
experience. Based on the Bank's experience, partial or full payment prior to
contractual maturity can be expected and is reflected. Given the interest rate
environment at December 31, 1999, management applies the assumption that on
average, 7% of the outstanding loan and mortgage-backed securities balances will
prepay annually. When adjustable-rate loans reprice at the rate adjustment date,
they are generally indexed to the one-, three-, or five-year Treasury rate with
an average spread of 275 basis points, with average period caps of 2.0% and
life-time caps of 6.0%. The table does not include loans which have been placed
on non-accrual status.
Assets and liabilities that immediately reprice are placed in the overnight
column. These financial instruments do not have a contractual maturity date.
Although NOW, savings and money market deposit accounts are subject to immediate
repricing or withdrawal, based on the Bank's history, management considers these
liabilities to have longer lives and less interest rate sensitivity than term
certificates.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report.......................................................................................27
Consolidated Balance Sheets at December 31, 1999 and 1998..........................................................28
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.............................29
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997....30
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997......................31-32
Notes to Consolidated Financial Statements......................................................................33-58
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Medford Bancorp, Inc.:
We have audited the consolidated balance sheets of Medford Bancorp, Inc. and
subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medford Bancorp,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 20, 2000, except for Note 11 as to which
the date is January 25, 2000
27
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,043 $ 17,439
Interest-bearing deposits 3,867 4,563
----------- -----------
Cash and cash equivalents 20,910 22,002
Investment securities available for sale 520,030 475,169
Investment securities held to maturity 5,000 29,043
Restricted equity securities 10,828 8,436
Loans 633,530 587,541
Less allowance for loan losses (6,779) (6,876)
----------- -----------
Loans, net 626,751 580,665
----------- -----------
Banking premises and equipment, net 11,566 12,008
Accrued interest receivable 9,162 8,230
Goodwill and deposit-based intangibles 3,679 4,807
Other assets 16,986 10,828
----------- -----------
Total assets $ 1,224,912 $ 1,151,188
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 911,328 $ 871,702
Short-term borrowings 67,071 38,463
Long-term debt 148,653 131,653
Accrued taxes and expenses 3,920 4,078
Other liabilities 3,070 3,025
----------- -----------
Total liabilities 1,134,042 1,048,921
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Serial preferred stock, $.50 par value, 5,000,000 shares authorized;
none issued -- --
Common stock, 15,000,000 shares authorized; $.50 par value,
9,122,596 shares issued 4,561 4,561
Additional paid-in capital 24,839 26,389
Retained earnings 85,153 76,770
Treasury stock, at cost (739,344 and 412,768 shares, respectively) (14,278) (8,511)
Shares held in rabbi trust, at cost 930 857
Deferred compensation obligation (930) (857)
Accumulated other comprehensive income (loss) (9,405) 3,058
----------- -----------
Total stockholders' equity 90,870 102,267
----------- -----------
Total liabilities and stockholders' equity $ 1,224,912 $ 1,151,188
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $45,042 $45,740 $46,213
Interest on debt securities 31,827 30,331 28,210
Dividends on equity securities 649 526 704
Interest on short-term investments 331 205 205
------- ------- -------
Total interest and dividend income 77,849 76,802 75,332
------- ------- -------
Interest expense:
Interest on deposits 32,751 31,975 31,328
Interest on short-term borrowings 2,446 3,210 3,896
Interest on long-term debt 7,912 7,428 6,125
------- ------- -------
Total interest expense 43,109 42,613 41,349
------- ------- -------
Net interest income 34,740 34,189 33,983
Provision for loan losses -- 75 125
------- ------- -------
Net interest income, after provision for loan losses 34,740 34,114 33,858
------- ------- -------
Other income:
Customer service fees 1,851 1,878 1,973
Gain on sales of investment securities, net 1,522 1,670 835
Gain on sale of loans -- 370 306
Miscellaneous 829 840 728
------- ------- -------
Total other income 4,202 4,758 3,842
------- ------- -------
Operating expenses:
Salaries and employee benefits 10,673 10,788 10,320
Occupancy and equipment 2,488 2,296 2,289
Data processing 1,512 1,417 1,416
Professional fees 657 525 672
Amortization of intangibles 1,128 1,171 1,206
Advertising and marketing 654 545 614
Other general and administrative 2,189 2,332 2,537
------- ------- -------
Total operating expenses 19,301 19,074 19,054
------- ------- -------
Income before income taxes 19,641 19,798 18,646
Provision for income taxes 6,990 7,546 7,256
------- ------- -------
Net income $12,651 $12,252 $11,390
======= ======= =======
Weighted averages shares outstanding:
Basic 8,393 8,904 9,081
======= ======= =======
Diluted 8,775 9,377 9,541
======= ======= =======
Earnings per share:
Basic $ 1.51 $ 1.38 $ 1.25
======= ======= =======
Diluted $ 1.44 $ 1.31 $ 1.19
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Treasury Stock Other
-------------------- Paid-In Retained ----------------- Comprehensive
Shares Dollars Capital Earnings Shares Dollars Income (Loss) Total
------ ------- ------- -------- ------ ------- ------------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,535 $ 2,267 $ 28,848 $ 61,634 -- $ -- $ (228) $ 92,521
---------
Comprehensive income:
Net income -- -- -- 11,390 -- -- -- 11,390
Change in net unrealized gain (loss) on
securities available for sale, net
of reclassification adjustment and
tax effects -- -- -- -- -- -- 1,552 1,552
---------
Total comprehensive income 12,942
---------
Cash dividends declared ($.45 per share) -- -- -- (4,086) -- -- -- (4,086)
Issuance of common stock under stock
option plan and related income tax
benefits 7 4 129 -- -- -- -- 133
--------- --------- --------- --------- ------ --------- --------- ---------
Balance at December 31, 1997 4,542 2,271 28,977 68,938 -- -- 1,324 101,510
---------
Comprehensive income:
Net income -- -- -- 12,252 -- -- -- 12,252
Change in net unrealized gain (loss) on
securities available for sale, net
of reclassification adjustment and
tax effects -- -- -- -- -- -- 1,734 1,734
---------
Total comprehensive income 13,986
---------
Cash dividends declared ($.50 per share) -- -- -- (4,420) -- -- -- (4,420)
Stock split (2 for 1) 4,541 2,271 (2,271) -- -- -- -- --
Repurchase of treasury stock -- -- -- -- (454) (9,378) -- (9,378)
Issuance of common stock under stock
option plan and related income tax
benefits 40 19 (317) -- 41 867 -- 569
------- --------- --------- --------- ------ --------- --------- ---------
Balance at December 31, 1998 9,123 4,561 26,389 76,770 (413) (8,511) 3,058 102,267
---------
Comprehensive income:
Net income -- -- -- 12,651 -- -- -- 12,651
Change in net unrealized gain (loss) on
securities available for sale, net
of reclassification adjustment and
tax effects -- -- -- -- -- -- (12,463) (12,463)
---------
Total comprehensive income 188
---------
Cash dividends declared ($.51 per share) -- -- -- (4,268) -- -- -- (4,268)
Repurchase of treasury stock -- -- -- -- (425) (7,689) -- (7,689)
Issuance of common stock under stock
option plan -- -- (1,550) -- 99 1,922 -- 372
------- --------- --------- --------- ------ --------- --------- ---------
Balance at December 31, 1999 9,123 $ 4,561 $ 24,839 $ 85,153 (739) $ (14,278) $ (9,405) $ 90,870
======= ========= ========= ========= ====== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,651 $ 12,252 $ 11,390
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses -- 75 125
Depreciation and amortization, net 3,191 2,281 2,163
Net gain on sales of real estate (8) (6) (44)
Gain on sales of investment securities, net (1,522) (1,670) (835)
Gain on sale of loans -- (370) (306)
Deferred tax benefit (100) (344) (610)
Decrease (increase) in accrued interest receivable and other assets 549 (1,366) (291)
Increase in accrued taxes and expenses and other liabilities 398 629 521
--------- --------- ---------
Net cash provided by operating activities 15,159 11,481 12,113
--------- --------- ---------
Cashflows from investing activities:
Activity in investment securities available for sale:
Maturities 45,250 52,180 52,185
Sales 105,440 138,046 19,572
Purchases (259,337) (297,537) (211,653)
Principal amortization of mortgage-backed securities 47,360 39,077 8,701
Maturities of investment securities held to maturity 21,000 74,803 47,034
Purchases of restricted equity securities (2,392) (1,564) (876)
Loans originated and purchased, net of amortization and payoffs (46,460) (20,796) (42,032)
Proceeds from sale of loans 77 11,336 31,900
Proceeds from sales of foreclosed real estate 116 70 662
Proceeds from sale of banking premises 315 -- --
Purchases of banking premises and equipment, net (1,036) (2,275) (866)
--------- --------- ---------
Net cash used in investing activities (89,667) (6,660) (95,373)
--------- --------- ---------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
31
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 39,626 49,996 29,565
Net increase (decrease) in short-term borrowings with maturities
of three months or less (16,392) (57,207) 44,853
Proceeds from short-term borrowings with maturities in
excess of three months 55,000 10,000 --
Repayment of short-term borrowings with maturities in
excess of three months (10,000) (10,000) (30,000)
Proceeds from long-term debt 67,000 68,536 67,509
Repayment of long-term debt (50,000) (46,992) (25,047)
Issuance of common stock 372 359 34
Payments to acquire treasury stock (7,689) (9,378) --
Cash dividends paid (4,501) (4,313) (3,903)
-------- -------- --------
Net cash provided by financing activities 73,416 1,001 83,011
-------- -------- --------
Net change in cash and cash equivalents (1,092) 5,822 (249)
Cash and cash equivalents at beginning of year 22,002 16,180 16,429
-------- -------- --------
Cash and cash equivalents at end of year $ 20,910 $ 22,002 $ 16,180
======== ======== ========
Supplementary information:
Interest paid on deposit accounts $ 32,413 $ 31,835 $ 31,263
Interest paid on borrowed funds 10,115 10,681 9,942
Income taxes paid, net of refunds 7,285 7,626 7,455
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of Medford Bancorp,
Inc. (the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the
"Bank"). The Bank's wholly-owned subsidiary, Medford Securities Corporation,
engages in the buying, selling, dealing in, or holding of securities. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for losses on loans.
Business and Operating Segments
The Company is principally engaged in the business of attracting deposits from
the general public, originating residential and commercial real estate mortgages
and consumer and commercial loans, and investing in securities. The Company is
headquartered in Medford, Massachusetts. It has a network of seventeen banking
offices located in Medford, Malden, Arlington, Belmont, Burlington, North
Reading, Tewksbury, Waltham, and Wilmington. The Company's primary market area
includes these communities as well as other cities and towns in Middlesex County
and the surrounding area north of Boston.
Management evaluates the Company's performance and allocates resources based on
a single segment concept. Accordingly, there are no separately identified
operating segments for which discrete financial information is available. The
Company does not derive revenues from, or have assets located in, foreign
countries, nor does it derive revenues from any single customer that represents
10% or more of the Company's total revenues.
Cash and Cash Equivalents
Cash and cash equivalents include cash, amounts due from banks and
interest-bearing deposits that mature overnight or on demand.
Investment Securities
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. All other marketable investment securities are classified as
"available for sale" and reflected on the consolidated balance sheet at fair
value, with unrealized gains and losses excluded from earnings and reported in
other comprehensive income (loss), net of related tax effects, in stockholders'
equity. Purchase premiums and discounts on debt securities are amortized to
earnings by the interest method over the terms of the investments. Declines in
the value of investments that are deemed to be other than temporary are
reflected in earnings when identified. Gains and losses on disposition of
investments are recorded on the trade date and computed by the specific
identification method.
Restricted equity securities are carried at cost and include stock of the
Federal Home Loan Bank of Boston ( "FHLBB"), The Savings Bank Life Insurance
Company of Massachusetts and Northeast Retirement Services.
33
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans in
the eastern New England area. The ability of the Company's debtors to honor
their obligations is dependent upon the real estate, construction, and general
economic sectors of that region.
Loans, as reported, have been increased by the net premium on loans acquired and
net deferred loan origination costs, and reduced by unadvanced loan funds and
the allowance for loan losses.
Interest on loans is recognized on the interest method and is not accrued on
loans which are ninety days or more past due. Loans may be placed on non-accrual
status prior to becoming ninety days past due if the collection of principal and
interest is, in the opinion of management, doubtful. Loans which are identified
as impaired are generally placed on non-accrual status. Interest income
previously accrued on such loans is reversed against current period earnings.
Interest income on all non-accrual loans is recognized only to the extent of
interest payments received.
Premiums and discounts on loans acquired and net deferred loan origination costs
are amortized as an adjustment of the related loan yields by the interest method
over the contractual lives of the loans.
Allowance for Loan Losses
The allowance for loan losses is established, as losses are estimated to have
occurred, through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the collectibility of
the loan balance is unlikely. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, known inherent risks in the nature and volume of
the loan portfolio, levels of non-performing loans, adverse situations that may
affect the borrower's ability to repay, trends in delinquencies and charge-offs,
estimated value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available. Ultimate losses may vary from current estimates and future additions
to the allowance may be necessary.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled principal or
interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. An impaired loan
is required to be measured on a loan-by-loan basis by either the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. All of the Company's loans, which have been
identified as impaired, have been measured by the fair value of existing
collateral.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer loans for impairment disclosure.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair
value less estimated costs to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in other general and
administrative expenses.
34
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Banking Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost, less
accumulated depreciation computed on the straight-line method over the estimated
useful lives of the assets.
Intangible Assets
Intangible assets pertaining to core deposits acquired are amortized over 15
years on an accelerated basis, based on the expected run-off of the related
deposits. Goodwill is amortized by the straight-line method over periods ranging
from 10 to 15 years.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. The Company's base amount of its federal
income tax reserve for loan losses is a permanent difference for which there is
no recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if deemed realizable.
Pension Plan
The compensation cost of an employee's pension benefit is recognized on the net
periodic pension cost method over the employee's approximate service period. The
aggregate cost method is utilized for funding purposes.
Stock Compensation Plans
The Company measures compensation cost for its stock compensation plans using
the intrinsic value based method of accounting, whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock option plans have no
intrinsic value at the grant date and no compensation cost is recognized for
them. The Company is required to make pro forma disclosures of net income and
earnings per share as if compensation cost had been measured at the grant date
based on the fair value of the award and recognized over the service period,
which is usually the vesting period. The pro forma disclosures include the
effects of all awards granted on or after January 1, 1995. (See Note 12.)
Advertising Costs
Advertising costs are charged to expense as incurred.
35
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Earnings Per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive 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.
For the years ended December 31, 1999, 1998 and 1997, options applicable to
62,000 shares, 61,000 shares, and 1,000 shares, respectively, were anti-dilutive
and excluded from the diluted earnings per share computations.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on investment securities
available for sale, are reported as a separate component of the equity section
of the consolidated balance sheet, such items, along with net income, are
components of comprehensive income (loss).
The components of other comprehensive income (loss) and related tax effects are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Unrealized holding gains (losses) on securities available for sale $(18,877) $ 4,541 $ 3,414
Reclassification adjustment for gains realized in income (1,522) (1,670) (835)
-------- -------- --------
Net unrealized gains (losses) (20,399) 2,871 2,579
Tax effect 7,936 (1,137) (1,027)
-------- -------- --------
Net-of-tax amount $(12,463) $ 1,734 $ 1,552
======== ======== ========
</TABLE>
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative as follows:
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted transaction, or a net
investment in a foreign operation. The Statement generally provides for matching
the timing of the recognition of the gain or loss on derivatives designated as
hedging instruments with the recognition of the changes in the fair value of the
item being hedged. Depending on the type of hedge, such recognition will be in
either net income or other comprehensive income. For a derivative not designated
as a hedging instrument, changes in fair value will be recognized in net income
in the period of change. Management does not anticipate that the adoption of
this Statement will have a material impact on the Company's consolidated
financial statements.
36
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses at December 31, 1999 and 1998, follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- --------------------------------------------------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
- -----------------------------
Debt securities:
Corporate bonds $250,078 $ 42 $ (3,353) $246,767
Mortgage-backed securities 224,083 -- (9,627) 214,456
U.S. Government and federal agency obligations 59,144 -- (2,017) 57,127
-------- -------- -------- --------
Total debt securities 533,305 42 (14,997) 518,350
Marketable equity securities 2,097 6 (423) 1,680
-------- -------- -------- --------
Total securities available for sale $535,402 $ 48 $(15,420) $520,030
======== ======== ======== ========
Securities Held to Maturity
- ---------------------------
U.S. Government obligations $ 5,000 $ 6 $ -- $ 5,006
======== ======== ======== ========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- --------------------------------------------------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
- -----------------------------
Debt securities:
Corporate bonds $188,087 $ 1,966 $ (33) $190,020
Mortgage-backed securities 215,933 2,392 (129) 218,196
U.S. Government and federal agency obligations 63,591 1,190 (89) 64,692
-------- -------- -------- --------
Total debt securities 467,611 5,548 (251) 472,908
Marketable equity securities 2,531 46 (316) 2,261
-------- -------- -------- --------
Total securities available for sale $470,142 $ 5,594 $ (567) $475,169
======== ======== ======== ========
Securities Held to Maturity
- ---------------------------
U.S. Government and federal agency obligations $ 29,043 $ 286 $ -- $ 29,329
======== ======== ======== ========
</TABLE>
37
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT SECURITIES (concluded)
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1999 is as follows:
Available for Sale Held to Maturity
-------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(In thousands)
Within 1 year $ 64,996 $ 64,987 $ 5,000 $ 5,006
After 1 year through 5 years 238,848 234,204 -- --
After 5 years through 10 years 5,378 4,703 -- --
-------- -------- -------- --------
309,222 303,894 5,000 5,006
Mortgage-backed securities 224,083 214,456 -- --
-------- -------- -------- --------
$533,305 $518,350 $ 5,000 $ 5,006
======== ======== ======== ========
At December 31, 1999, U.S. Government obligations with an amortized cost of
$21,865,000 and a fair value of $20,965,000 have been pledged as collateral for
securities sold under agreements to repurchase. In addition, U.S. Government
obligations with an amortized cost of $22,265,000 and a fair value of
$21,022,000 have been pledged as collateral for a line of credit and to secure
public funds. Mortgage-backed securities with an amortized cost of $24,767,000
and a fair value of $23,344,000 have been pledged as collateral for a loan and
credit agreement. (See Note 6.)
For the years ended December 31, 1999, 1998 and 1997, proceeds from the sales of
securities available for sale amounted to $105,440,000, $138,046,000 and
$19,572,000, respectively. Gross realized gains amounted to $1,529,000,
$1,711,000 and $800,000, respectively. Gross realized losses amounted to $7,000
in 1999 and $52,000 in 1998. For the years ended December 31, 1998 and 1997,
proceeds from the sales of securities held to maturity that were sold within
three months of maturity amounted to $15,003,000 and $12,034,000, respectively.
These sales have been included in the Statement of Cash Flows as maturities.
Gross realized gains on these sales amounted to $11,000 and $35,000,
respectively.
Mortgage-backed investments consist of collateralized mortgage obligations and
participation certificates guaranteed by the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation or the Government
National Mortgage Association.
38
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS
A summary of the balances of loans follows:
December 31,
-----------------------
1999 1998
--------- ---------
(In thousands)
Mortgage loans on real estate:
Residential 1 - 4 family $ 465,420 $ 421,462
Commercial 112,050 109,561
Construction 25,239 28,647
Second mortgages 774 1,111
Equity lines of credit 19,394 20,606
--------- ---------
622,877 581,387
Less: Unadvanced loan funds (11,735) (15,574)
--------- ---------
611,142 565,813
--------- ---------
Other loans:
Commercial 18,124 17,358
Personal 2,071 2,076
Other 841 1,069
--------- ---------
21,036 20,503
--------- ---------
Add: Net premium on loans acquired 198 223
Net deferred loan origination costs 1,154 1,002
--------- ---------
Total loans 633,530 587,541
Less allowance for loan losses (6,779) (6,876)
--------- ---------
Loans, net $ 626,751 $ 580,665
========= =========
39
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS (concluded)
An analysis of the allowance for loan losses follows:
Years Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Balance at beginning of year $ 6,876 $ 6,733 $ 7,231
Provision for loan losses -- 75 125
Recoveries 67 233 208
Loans charged-off (164) (165) (831)
------- ------- -------
Balance at end of year $ 6,779 $ 6,876 $ 6,733
======= ======= =======
The following is a summary of the recorded investment in impaired loans:
December 31,
------------------
1999 1998
------ ------
(In thousands)
Impaired loans with no valuation allowance $2,482 $ 302
Impaired loans with a corresponding valuation allowance -- 1,464
------ ------
Total impaired loans $2,482 $1,766
====== ======
Corresponding valuation allowance $ -- $ 56
====== ======
No additional funds are committed to be advanced in connection with impaired
loans.
For the years ended December 31, 1999, 1998 and 1997, the average recorded
investment in impaired loans amounted to $2,888,000, $1,749,000 and $3,806,000,
respectively. Impaired loans are generally placed on non-accrual status. The
Bank recognized interest income on impaired loans, on a cash basis, of $52,000
in 1999, $39,000 in 1998 and $74,000 in 1997 during the periods that they were
impaired.
40
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment follows:
December 31,
---------------------
1999 1998
-------- --------
(In thousands)
Banking Premises:
Land $ 2,068 $ 1,957
Buildings 10,235 10,291
Equipment 6,305 6,283
-------- --------
18,608 18,531
Less accumulated depreciation (7,042) (6,523)
-------- --------
$ 11,566 $ 12,008
======== ========
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
amounted to $1,174,000, $1,005,000 and $1,024,000, respectively.
5. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31,
--------------------
1999 1998
-------- --------
(In thousands)
Demand $ 51,202 $ 51,936
NOW 60,811 64,888
Regular savings 314,353 279,191
Money market deposits 68,617 71,856
-------- --------
Total non-certificate accounts 494,983 467,871
-------- --------
Term certificates ($100,000 or more) 89,198 71,403
Other term certificates 327,147 332,428
-------- --------
Total term certificates 416,345 403,831
-------- --------
Total deposits $911,328 $871,702
======== ========
41
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEPOSITS (concluded)
A summary of term certificate accounts, by maturity, is as follows:
December 31, 1999 December 31, 1998
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- --------- --------- ---------
(Dollars in thousands)
Within 1 year $ 251,711 4.85% $ 313,434 5.23%
Over 1 year to 3 years 154,537 5.24 79,183 5.31
Over 3 years to 5 years 9,994 4.97 11,152 5.71
Over 5 years 103 5.26 62 4.55
--------- ---------
$ 416,345 5.00% $ 403,831 5.26%
========= =========
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase $ 21,227 5.11% $ 38,349 4.01%
Federal Reserve Bank of Boston advances 844 4.55 114 4.55
Federal Home Loan Bank of Boston advances 45,000 5.48 -- --
------- --------
$ 67,071 5.35% $ 38,463 4.01%
====== ========
</TABLE>
Securities sold under agreements to repurchase are borrowings that mature within
one month and are secured by U.S. Government obligations. (See Note 2.) The
amount of securities collateralizing the agreements to repurchase remains in
investment securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets.
The Company had a $1,925,000 line of credit (treasury, tax and loan) with the
Federal Reserve Bank of Boston ("FRB") at December 31, 1999 and 1998, of which
$844,000 and $114,000, respectively, was advanced. The interest rate adjusts
weekly and certain U.S. Government obligations have been pledged as collateral
for the line of credit. At December 31, 1999, the Company also had a loan and
credit agreement with the FRB at an interest rate which adjusts daily.
Borrowings under the agreement are limited to 95% of the fair value of pledged
collateral. Certain mortgage-backed securities have been pledged as collateral
for the loan and credit agreement. (See Note 2.)
The FHLBB advances mature within five months. The Company also has an available
line of credit with the FHLBB at an interest rate that adjusts daily. Borrowings
under the line are limited to 2% of the Bank's total assets. All borrowings from
the FHLBB are secured by a blanket lien on qualified collateral, defined
principally as 75% of the carrying value of first mortgage loans on
owner-occupied residential property and 90% of the market value of U.S.
Government and federal agency securities.
42
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Long-term debt consists of FHLBB advances secured by a blanket lien on qualified
collateral (see Note 6), as follows:
December 31, 1999 December 31, 1998
------------------- -------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
- --------------- -------- -------- -------- -------
(Dollars in thousands)
1999 $ -- --% $ 50,000 6.02%
2000 58,253 5.58 48,253 5.61
2001 65,000 5.57 28,000 5.45
2002 5,000 6.36 -- --
2003 10,000 6.18 5,000 5.87
2004 10,000 5.29 -- --
2005 400 5.61 400 5.61
-------- --------
$148,653 5.62% $131,653 5.74%
======== ========
The advance maturing in 2005 is callable on a quarterly basis by the FHLBB. The
advance maturing in 2004 is callable on a quarterly basis beginning in 2000.
8. INCOME TAXES
Allocation of the provision for federal and state income taxes between current
and deferred portions is as follows:
Years Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Current tax provision:
Federal $ 6,702 $ 7,051 $ 6,672
State 388 839 1,194
------- ------- -------
7,090 7,890 7,866
------- ------- -------
Deferred tax benefit:
Federal (99) (296) (525)
State (1) (48) (85)
------- ------- -------
(100) (344) (610)
------- ------- -------
$ 6,990 $ 7,546 $ 7,256
======= ======= =======
43
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows:
Years Ended December 31,
----------------------------
1999 1998 1997
----- ----- -----
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 1.3 2.6 3.9
Other, net (.7) .5 --
----- ----- -----
Effective tax rates 35.6% 38.1% 38.9%
===== ===== =====
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31,
-----------------------
1999 1998
-------- --------
(In thousands)
Deferred tax assets:
Federal $ 9,397 $ 4,413
State 2,450 1,530
-------- --------
11,847 5,943
-------- --------
Deferred tax liabilities:
Federal (1,203) (2,902)
State (389) (822)
-------- --------
(1,592) (3,724)
-------- --------
Net deferred tax asset $ 10,255 $ 2,219
======== ========
44
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (concluded)
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Cash basis of accounting $ 384 $ 205
Investments:
Net unrealized (gain) loss on securities available for sale 5,967 (1,969)
Other (288) (290)
Depreciation (1,100) (1,055)
Allowance for loan losses 2,649 2,613
Employee benefit plans 1,356 1,693
Other 1,287 1,022
-------- --------
Net deferred tax asset $ 10,255 $ 2,219
======== ========
</TABLE>
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,219 $ 3,012 $ 3,429
Deferred tax effect of the change in net unrealized
gains and losses on securities available for sale 7,936 (1,137) (1,027)
Deferred tax benefit for the year 100 344 610
------- ------- -------
Balance at end of year $10,255 $ 2,219 $ 3,012
======= ======= =======
</TABLE>
The federal income tax reserve for loan losses at the Company's base year is
$8,265,000. If any portion of the reserve is used for purposes other than to
absorb the losses for which it was established, approximately 150% of the amount
actually used (limited to the amount of the reserve) would be subject to
taxation in the year in which used. As the Company intends to use the reserve
only to absorb loan losses, a deferred income tax liability of $3,389,000 has
not been provided.
45
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial statements.
Employment and Special Termination Agreements
The Company has entered into an employment agreement with the President and
Chief Executive Officer that provides for a specified minimum annual
compensation and the continuation of benefits currently received. However, such
employment may be terminated for cause, as defined, without incurring any
continuing obligations. The Company and/or the Bank have also entered into
special termination agreements with the President and Chief Executive Officer
and certain senior executives. The agreements generally provide for certain
lump-sum severance payments within a three-year period following a "change in
control," as defined in the agreements.
Loan Commitments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized on the consolidated balance sheet. The
Company's exposure to credit loss is represented by the contractual amount of
these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contract amounts
represent credit risk:
Contract Amount
at December 31,
---------------------
1999 1998
-------- --------
(In thousands)
Commitments to grant loans $ 15,314 $ 13,096
Unadvanced funds on equity lines of credit 25,182 24,246
Unadvanced funds on commercial lines of credit 10,734 7,386
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for lines of credit may expire without
being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. Funds disbursed under these financial
instruments are generally collateralized by real estate, except for the
commercial lines of credit which are generally secured by the business assets of
the borrower.
46
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (concluded)
Operating Lease Commitments
Pursuant to the terms of noncancelable lease agreements in effect at December
31, 1999, pertaining to banking premises and equipment, future minimum rent
commitments aggregate $718,000 through the year 2008. In addition, the leases
contain options to extend for periods up to fifteen years. Total rent expense
for the years ended December 31, 1999, 1998 and 1997 amounted to $332,000,
$285,000 and $290,000, respectively.
Other Commitments and Contingencies
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will not have a material effect on
the Company's consolidated financial statements.
10. STOCKHOLDERS' EQUITY
Minimum Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Holding companies are not subject to prompt corrective action
provisions. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined) to
risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999 and 1998, that
the Company and the Bank met all capital adequacy requirements to which they are
subject.
47
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (continued)
Minimum Regulatory Capital Requirements (continued)
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables. As a
well capitalized entity, the Bank is entitled to engage in specified activities
on a more expedited basis than entities that are not well capitalized. There are
no conditions or events that management believes have changed the Bank's
category. The Company's and the Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998, are also presented in the tables.
<TABLE>
<CAPTION>
Minimum
Minimum To Be Categorized
Capital as Well
Actual Requirement Capitalized
------------------------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total Capital to Risk-Weighted Assets:
Consolidated $103,131 13.9% $ 59,429 8.0% $ -- --%
Bank 100,346 13.6 59,429 8.0 74,286 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 96,352 13.0 29,714 4.0 -- --
Bank 93,567 12.7 29,714 4.0 44,572 6.0
Tier 1 Capital to Average Assets:
Consolidated 96,352 8.0 36,461 3.0 -- --
Bank 93,567 7.7 36,461 3.0 60,768 5.0
December 31, 1998:
Total Capital to Risk-Weighted Assets:
Consolidated $101,007 15.2% $ 53,039 8.0% $ -- --%
Bank 97,658 14.7 53,039 8.0 66,299 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 94,131 14.2 26,519 4.0 -- --
Bank 90,782 13.7 26,519 4.0 39,779 6.0
Tier 1 Capital to Average Assets:
Consolidated 94,131 8.3 34,179 3.0 -- --
Bank 90,782 8.0 34,179 3.0 56,965 5.0
</TABLE>
48
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (concluded)
Restrictions on Dividends, Loans and Advances
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. Under Massachusetts
law, stock savings banks such as the Bank, like national banks, may pay
dividends no more often than quarterly, and only out of net profits and to the
extent that such payments will not impair the Bank's capital stock and surplus,
as defined. Moreover, prior Commissioner approval is required if the total
dividends for a calendar year would exceed net profits for that year combined
with retained net profits for the previous two years. These restrictions on the
ability of the Bank to pay dividends to the Company may restrict the ability of
the Company to pay dividends to its stockholders. Loans or advances are limited
to 10% of the Bank's capital stock and surplus, as defined, (which for this
purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based
capital guidelines, plus the balance of the allowance for loan losses excluded
from Tier 2 capital) on a secured basis.
In addition, dividends paid by the Bank to the Company would be prohibited if
the effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
At December 31, 1999, $59,429,000 of the Company's equity in the Bank was
restricted and funds available for loans or advances amounted to $10,035,000.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan under which one preferred stock
purchase right was distributed for each outstanding share of common stock. Such
rights only become exercisable, or transferable apart from the common stock, ten
business days after a person or group acquires beneficial ownership of, or
commences a tender or exchange offer for, 15% or more of the Company's common
stock, or the declaration by the Board of Directors that any person is an
Adverse Person. Each right may then be exercised to acquire one one-hundredth of
a share of Series A Junior Participating Cumulative Preferred Stock at an
exercise price specified in the Company's Amended and Restated Shareholder
Rights Agreement (the "Rights Agreement") subject to adjustment. If the Company
is acquired in a merger or other business combination transaction, or 50% of the
Company's assets or earning power is sold, the rights entitle holders to acquire
common stock of the Acquiring Person (as defined in the Rights Agreement) having
a value twice the exercise price of the rights. The rights may be redeemed in
whole by the Company at $.01 per right at any time until the earliest of (i) the
declaration of a person as an Adverse Person (as defined in the Rights
Agreement), (ii) the tenth day following public announcement that a 15% position
has been acquired, or (iii) the expiration date of the Rights Agreement. The
rights will expire on September 22, 2003.
Director Deferred Compensation Plan
The Company has deferred compensation arrangements with certain members of the
Board of Directors, whereby directors' fees earned are paid to a "Rabbi Trust"
and used to purchase shares of the Company's common stock in the open market.
The plan does not permit diversification of assets held, and the plan's
obligation to each director must be settled by the delivery of the fixed number
of shares of the Company's common stock purchased on the director's behalf. The
Company has adopted Emerging Issues Task Force 97-14, "Accounting for Deferred
Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and
Invested." Accordingly, the cost of the Company's common stock held by the rabbi
trust, and the related deferred compensation obligation offset, are reflected in
stockholders' equity.
49
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS
Pension Plan
The Bank provides basic and supplemental pension benefits for eligible employees
through the Savings Banks Employees Retirement Association Pension Plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in one twelve-month period beginning with such employee's date of
employment, or any anniversary thereof, automatically becomes a participant in
the pension plan. Participants are fully vested after three years of such
service. Information pertaining to activity in the plan is as follows:
Years Ended October 31,
-----------------------
1999 1998
------- -------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,472 $ 4,965
Service cost 642 591
Interest cost 369 360
Actuarial gain (1,010) (151)
Benefits paid (367) (293)
------- -------
Benefit obligation at end of year 5,106 5,472
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 5,464 4,830
Actual return on plan assets 1,076 395
Employer contribution 706 532
Benefits paid (367) (293)
------- -------
Fair value of plan assets at end of year 6,879 5,464
------- -------
Funded status 1,773 (8)
Unrecognized net actuarial gain (3,242) (1,668)
Transition asset (227) (247)
------- -------
Accrued pension cost $(1,696) $(1,923)
======= =======
Net periodic pension expense for the plan years ended October 31, 1999, 1998 and
1997 consisted of the following:
1999 1998 1997
------- ------ -------
(In thousands)
Service cost $ 642 $ 591 $ 511
Interest cost 369 360 313
Expected return on plan assets (437) (386) (603)
Net amortization and deferral (20) (19) (19)
Net (gain) loss (75) (69) 224
------- ------ -------
Net periodic pension expense $ 479 $ 477 $ 426
======= ====== =======
Total pension expense for the years ended December 31, 1999, 1998 and 1997
amounted to $418,000, $486,000 and $426,000, respectively.
For the plan years ended October 31, 1999, 1998 and 1997, actuarial assumptions
include an assumed discount rate on benefit obligations of 6.75%, 7.50% and
7.25%, respectively, and an expected long-term rate of return on plan assets of
8.00% for all years. An annual salary increase of 4.50%, 5.00% and 5.00% was
used for the years ended October 31, 1999, 1998 and 1997, respectively.
50
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS (concluded)
Pension Plan (concluded)
On January 25, 2000, the Board of Directors of the Bank voted to cease defined
benefit pension plan accruals effective February 29, 2000 in conjunction with
its termination of the plan to be effective March 31, 2000. As a result, the
Company expects to recognize settlement and curtailment gains, net of income
taxes, of approximately $1,861,000 during the year 2000. Termination of the plan
is subject to approval by the Internal Revenue Service.
401(k) Plan
The Bank maintains a 401(k) plan that provides for voluntary contributions by
participating employees ranging from 1 percent to 15 percent of their
compensation, subject to certain limits based on federal tax laws. Each employee
reaching the age of 21 and having completed at least 1,000 hours of service in
one twelve-month period beginning with such employee's date of employment, or
any anniversary thereof, becomes eligible to participate in the plan. The Bank
may choose to match a portion of the employees' contributions. During the years
ended December 31, 1999, 1998 and 1997, the Bank made matching contributions
equal to twenty-five percent (25%) of the first six percent (6%) of annual
compensation contributed to the plan. For the years ended December 31, 1999,
1998 and 1997, expense attributable to the Plan amounted to $76,000, $83,000 and
$77,000, respectively.
In conjunction with the aforementioned termination of the defined benefit
pension plan, the Bank amended its 401(k) plan for year 2000. Employees will be
eligible to participate in the plan upon hire and will receive matching
contributions after three months of service. The Bank's matching contribution
will be increased to seventy-five percent (75%) of the first six percent (6%) of
annual compensation contributed to the plan.
Incentive Plan
Short-term incentives can be earned through a discretionary bonus plan,
administered by the Compensation and Options Committee of the Board of
Directors. Senior executive officers as well as other officers are eligible to
receive a bonus payable prior to the end of the first quarter of the following
year if the Company or the Bank meets or exceed certain base standards and
individual performance warrants consideration. Incentive compensation expense
amounted to $136,000, $195,000 and $166,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Executive Supplemental Benefit Agreement
The Company has entered into supplemental executive retirement agreements with
its President that are designed to provide benefits lost under defined benefit
plans and to increase overall retirement benefits. The present value of future
benefits is being accrued over the term of employment. Supplemental compensation
expense for the years ended December 31, 1999, 1998 and 1997 amounted to
$240,000, $239,000 and $99,000, respectively.
51
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS
The Company has stock option plans, for the benefit of directors, officers and
full-time employees, covering 1,472,000 shares of common stock under the Medford
Savings Bank 1986 Stock Option Plan (the options under which have all been
granted) and 400,000 shares of common stock under the Medford Bancorp, Inc.
Stock Option Plan. Both "Incentive Stock Options" and "Non-qualified Stock
Options" may be granted under the plans, with a maximum option term of ten
years. Under the terms of the plans, stock options may be granted as determined
appropriate by the Compensation and Options Committee of the Board of Directors,
and will have an exercise price equal to, or in excess of, the fair market value
of a share of common stock of the Company on the date the option is granted. The
plans also permit the inclusion of stock appreciation rights ("SARs") in any
option granted which would permit the optionee to surrender an option (or
portion thereof) for cancellation and to receive cash or common stock equal to
the excess, if any, of the then fair market value of the common stock subject to
such option or portion thereof over the option exercise price. No SARs have been
granted to date.
The Company measures compensation cost for its stock option plans using the
intrinsic value based method of accounting. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
Years Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(In thousands, except per share data)
Net income:
As reported $ 12,651 $ 12,252 $ 11,390
Pro forma 12,459 12,023 11,044
Basic earnings per share:
As reported $ 1.51 $ 1.38 $ 1.25
Pro forma 1.48 1.35 1.22
Diluted earnings per share:
As reported $ 1.44 $ 1.31 $ 1.19
Pro forma 1.42 1.28 1.16
In determining the pro forma amounts, the fair value of each option grant was
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Years Ended December 31,
----------------------------
1999 1998 1997
------- -------- --------
Dividend yield 3.1% 3.5% 3.7%
Expected life 10 years 10 years 10 years
Expected volatility 50% 52% 59%
Risk-free interest rate 6.4% 5.3% 5.7%
52
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS (concluded)
Stock option activity under the plans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Amount Price Amount Price Amount Price
--------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at beginning of year 725,852 $ 7.37 761,352 $ 6.41 708,352 $ 5.21
Granted 54,000 16.36 49,500 18.40 66,000 18.38
Cancelled (6,000) 20.25 (4,000) 19.75 - -
Exercised (99,220) 3.75 (81,000) 4.43 (13,000) 2.60
-------- -------- -------
Outstanding at end of year 674,632 8.50 725,852 7.37 761,352 6.41
======== ======== =======
Exercisable at end of year 589,732 7.27 646,952 6.04 688,152 4.89
======== ======== =======
Weighted average fair value of
options granted during the year $ 8.07 $ 7.98 $ 8.74
======== ======== =======
</TABLE>
Information pertaining to options outstanding at December 31, 1999 is as
follows:
<TABLE>
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$2.59 - $3.06 182,580 1.0 years $ 2.63 182,580 $ 2.63
$3.81 - $5.44 143,772 2.8 4.77 143,772 4.77
$6.12 - $7.22 26,000 4.1 6.95 26,000 6.95
$8.63 - $9.72 139,780 4.6 9.49 139,780 9.49
$10.38 - $10.88 18,000 6.1 10.54 18,000 10.54
$12.44 - $12.88 17,000 7.2 12.57 17,000 12.57
$16.00 - $16.81 85,500 9.6 16.52 15,600 16.81
$19.75 - $21.63 62,000 8.1 20.11 47,000 20.23
---------- ----------
Outstanding at end of year 674,632 4.3 years $ 8.50 589,732 $ 7.27
========== ==========
</TABLE>
13. EMPLOYEES' STOCK OWNERSHIP PLAN
The Company has an Employees' Stock Ownership Plan ("ESOP") for the benefit of
each employee that has reached the age of 21 and has completed at least 500
hours of service with the Company in the previous twelve-month period. The
Company may contribute to the ESOP cash or shares of common stock as voted by
the Board of Directors, not to exceed the maximum amount deductible for federal
income tax purposes. At December 31, 1999, the ESOP held 402,673 shares, all of
which have been allocated to participants and included in outstanding shares for
earnings per share calculations. Dividends on all shares held by the ESOP are
allocated to participants on a pro rata basis. There were no contributions to
the ESOP for the years ended December 31, 1999, 1998 or 1997.
53
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosures of estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Investment securities: Fair values for investment securities are based on quoted
market prices.
Restricted equity securities: The carrying value of FHLBB stock approximates
fair value based on stock redemption provisions. The carrying value of SBLI and
Northeast Retirement stock is deemed to approximate fair value.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values for
other loans (e.g., commercial real estate and investment property mortgage
loans, commercial and industrial loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for non-performing
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposits: The fair values disclosed for non-certificate accounts are, by
definition, equal to the amount payable on demand at the reporting date which is
the carrying amount. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Borrowings: The carrying amounts of short-term borrowings maturing within ninety
days approximate their fair values. Fair values of other borrowings are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate fair
value.
Off-balance sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing, and are not material.
54
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 20,910 $ 20,910 $ 22,002 $ 22,002
Investment securities available for sale 520,030 520,030 475,169 475,169
Investment securities held to maturity 5,000 5,006 29,043 29,329
Restricted equity securities 10,828 10,828 8,436 8,436
Loans, net 626,751 621,849 580,665 585,457
Accrued interest receivable 9,162 9,162 8,230 8,230
Financial liabilities:
Deposits 911,328 911,051 871,702 873,949
Short-term borrowings 67,071 67,071 38,463 38,463
Long-term debt 148,653 147,525 131,653 131,770
Accrued interest payable 1,673 1,673 1,092 1,092
</TABLE>
55
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Medford Bancorp, Inc. is as follows:
BALANCE SHEETS
December 31,
---------------------
1999 1998
-------- --------
(In thousands)
Assets
- ------
Short-term investments with Medford Savings Bank $ 468 $ 3,221
Investment in common stock of Medford Savings Bank 88,085 98,918
Restricted equity securities 31 --
Due from Medford Savings Bank 3,500 1,775
Other assets 309 104
-------- --------
Total assets $ 92,393 $104,018
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Accrued expenses $ 2 $ 9
Other liabilities 1,521 1,742
-------- --------
Total liabilities 1,523 1,751
Stockholders' equity 90,870 102,267
-------- --------
Total liabilities and stockholders' equity $ 92,393 $104,018
======== ========
56
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Interest on short-term investments with Medford Savings Bank $ 40 $ 142 $ 30
Dividends from Medford Savings Bank 11,200 9,600 7,000
-------- -------- --------
11,240 9,742 7,030
Operating expenses 199 147 6
-------- -------- --------
Income before income taxes and equity in
undistributed net income of Medford Savings Bank 11,041 9,595 7,024
Applicable income tax provision (benefit) (55) (3) 10
-------- -------- --------
11,096 9,598 7,014
Equity in undistributed net income of Medford Savings Bank 1,555 2,654 4,376
-------- -------- --------
Net income $ 12,651 $ 12,252 $ 11,390
======== ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,651 $ 12,252 $ 11,390
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Medford Savings Bank (1,555) (2,654) (4,376)
Increase in due from Medford Savings Bank (1,725) (125) --
Other, net (275) 52 14
-------- -------- --------
Net cash provided by operating activities 9,096 9,525 7,028
-------- -------- --------
Cash flows from investing activities:
Purchase of restricted equity securities (31) -- --
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 372 359 --
Payments to acquire treasury stock (7,689) (9,378) --
Cash dividends paid (4,501) (4,313) --
-------- -------- --------
Net cash used by financing activities (11,818) (13,332) --
-------- -------- --------
Net change in cash and cash equivalents (2,753) (3,807) 7,028
Cash and cash equivalents at beginning of year 3,221 7,028 --
-------- -------- --------
Cash and cash equivalents at end of year $ 468 $ 3,221 $ 7,028
======== ======== ========
</TABLE>
57
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
16. QUARTERLY DATA (UNAUDITED)
A summary of consolidated operating results on a quarterly basis is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $ 19,982 $ 19,665 $ 19,250 $ 18,952
Interest expense (11,141) (10,881) (10,758) (10,329)
-------- -------- -------- --------
Net interest income 8,841 8,784 8,492 8,623
Other income 675 647 990 1,890
Operating expenses (5,109) (4,777) (4,752) (4,663)
-------- -------- -------- --------
Income before income taxes 4,407 4,654 4,730 5,850
Provision for income taxes (1,484) (1,626) (1,728) (2,152)
-------- -------- -------- --------
Net income $ 2,923 $ 3,028 $ 3,002 $ 3,698
======== ======== ======== ========
Earnings per share:
Basic $ 0.35 $ 0.36 $ 0.36 $ 0.44
======== ======== ======== ========
Diluted $ 0.33 $ 0.35 $ 0.34 $ 0.41
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $ 19,042 $ 19,198 $ 19,172 $ 19,390
Interest expense (10,624) (10,876) (10,528) (10,585)
-------- -------- -------- --------
Net interest income 8,418 8,322 8,644 8,805
Provision for loan losses -- -- -- (75)
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,418 8,322 8,644 8,730
Other income 1,287 918 1,227 1,326
Operating expenses (5,000) (4,783) (4,606) (4,685)
-------- -------- -------- --------
Income before income taxes 4,705 4,457 5,265 5,371
Provision for income taxes (1,771) (1,625) (2,027) (2,123)
-------- -------- -------- --------
Net income $ 2,934 $ 2,832 $ 3,238 $ 3,248
======== ======== ======== ========
Earnings per share:
Basic $ 0.34 $ 0.32 $ 0.36 $ 0.36
======== ======== ======== ========
Diluted $ 0.32 $ 0.31 $ 0.34 $ 0.34
======== ======== ======== ========
</TABLE>
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
With the exception of certain information regarding the executive officers of
the Company and the Bank, the response to this item is incorporated by reference
from the discussion under the captions "Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on April 24, 2000 (the "Proxy
Statement"), to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act Rules.
Information regarding the executive officers of the Company and the Bank is
contained in Item I of Part I to this Report under the caption "Executive
Officers of the Company and Bank."
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion under
the captions "Executive Compensation" and "The Board of Directors, its
Committees and Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion under
the caption "Ownership by Management and Other Stockholders" in the Company's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion under
the caption "Relationships and Transactions with the Company" in the Company's
Proxy Statement.
59
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Contents:
(1) Financial Statements: All financial statements are included in Item
8 of Part II to this Report.
(2) Financial Statement Schedules: All financial statement schedules
have been omitted because they are not required, not applicable or
are included in the consolidated financial statements or related
notes.
(3) Exhibits:
EXHIBIT INDEX
Exhibit Description
- ------- -----------
2.1 Plan of Reorganization and Acquisition dated as of July 29, 1997
between the Company and the Bank (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the SEC on November
26, 1997, and incorporated herein by reference)
3.1 Amended Articles of Organization of the Company (filed as Exhibit
3.1 to the Company's Current Report on Form 8-K filed with the SEC
on May 15, 1998, and incorporated herein by reference)
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to
the Company's Annual Report on Form 10-K filed with the SEC on March
23, 1998, and incorporated herein by reference)
4.1 Specimen certificate for shares of Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K
filed with the SEC on November 26, 1997, and incorporated herein by
reference)
4.2 Articles IV, VI(A), VI(C), VI(I)-(J) of the Amended Articles of
Organization of the Company (see Exhibit 3.1)
4.3 Articles II and V of the Amended and Restated By-laws of the Company
(see Exhibit 3.2)
4.4 Amended and Restated Shareholder Rights Agreement, dated November
26, 1997, between Medford Bancorp, Inc. and State Street Bank and
Trust Company, as Rights Agent (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the SEC on November
26, 1997, and incorporated herein by reference)
10.1 Amended and Restated Employment Agreement with Arthur H. Meehan
(filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K
filed with the SEC on March 23, 1998, and incorporated herein by
reference)
10.2 Amended and Restated Special Termination Agreement with Arthur H.
Meehan (filed as Exhibit 10.2 to the Company's Annual Report on Form
10-K filed with the SEC on March 23, 1998, and incorporated herein
by reference)
10.3 Amended and Restated Special Termination Agreement with Phillip W.
Wong (filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K filed with the SEC on March 23, 1998, and incorporated herein
by reference)
10.4 Amended and Restated Special Termination Agreement with George A.
Bargamian (filed as Exhibit 10.4 to the Company's Annual Report on
Form 10-K filed with the SEC on March 23, 1998, and incorporated
herein by reference)
10.5 Amended and Restated Special Termination Agreement with Eric B. Loth
(filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K
filed with the SEC on March 23, 1998, and incorporated herein by
reference)
10.6 Amended and Restated Special Termination Agreement with William F.
Rivers (filed as Exhibit 10.6 to the Company's Annual Report on Form
10-K filed with the SEC on March 23, 1998, and incorporated herein
by reference)
60
<PAGE>
10.7 Supplemental Executive Retirement Plan and Corresponding Adoption
Agreement with Arthur H. Meehan (filed as Exhibit 10.7 to the
Company's Annual Report on Form 10-K filed with the SEC on March 23,
1998, and incorporated herein by reference)
10.8 Executive Supplemental Benefit Agreement with Arthur H. Meehan
(filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K
filed with the SEC on March 23, 1998, and incorporated herein by
reference)
10.9 Deferred Investment Plan for Outside Directors (filed as Exhibit 4.4
to the Company's Registration Statement on Form S-8 filed with the
SEC on December 24, 1997, and incorporated herein by reference)
10.10 First Amendment to Deferred Investment Plan for Outside Directors
(filed as Exhibit 4.5 to the Company's Registration Statement on
Form S-8 filed with the SEC on December 24, 1997, and incorporated
herein by reference)
10.11 Medford Savings Bank 1986 Stock Option Plan (filed as Exhibit 4.4 to
the Company's Registration Statement on Form S-8 filed with the SEC
on November 26, 1997, and incorporated herein by reference)
10.12 Medford Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-8 filed with the SEC on
November 26, 1997, and incorporated herein by reference)
10.13 Discretionary Bonus Plan (not set forth in a formal document -- a
description of the plan is contained in both the Proxy Statement to
be filed with the SEC, and incorporated herein by reference, under
the caption "Compensation Committee Report on Executive
Compensation" and in the "Notes to Consolidated Financial
Statements" under the caption "Employee Benefit Plans -- Incentive
Plan" in Item 8 to this Report)
11 Statement Regarding Computation of Per Share Earnings -- Such
computation can be clearly determined from the material contained in
this Report.
12 Statement Regarding Computation of Ratios -- As the Company does not
have any debt securities registered under Section 12 of the
Securities and Exchange Act of 1934, no ratio of earnings to fixed
charges appears in this Report.
13 Medford Bancorp, Inc. 1999 Annual Report, which, except for those
portions expressly incorporated herein by reference, is furnished
only for the information of the SEC and is not deemed to be filed.
21 Subsidiaries of the Company -- The Company has one direct
subsidiary: Medford Savings Bank, a Massachusetts-chartered savings
bank in stock form. Medford Savings Bank has one subsidiary: Medford
Securities Corporation, a Massachusetts corporation.
23 Consent of Wolf & Company, P.C. as independent certified public
accountants
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
61
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDFORD BANCORP, INC.
By: /s/ Arthur H. Meehan
---------------------
Arthur H. Meehan
Chairman, President, Chief Executive Officer
and Director
Date: March 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Arthur H. Meehan Chairman, President, Chief Executive Officer
- ---------------------------- and Director March 1, 2000
Arthur H. Meehan
/s/ Phillip W. Wong Executive Vice President,
- ---------------------------- Chief Financial Officer and Treasurer March 1, 2000
Phillip W. Wong
/s/ Edward D. Brickley Director March 1, 2000
- ---------------------------
Edward D. Brickley
/s/ David L. Burke Director March 1, 2000
- ----------------------------
David L. Burke
/s/ Deborah A. Burke-Santoro Director March 1, 2000
- ----------------------------
Deborah A. Burke-Santoro
- ---------------------------- Director March 1, 2000
Paul J. Crowley
/s/ Mary L. Doherty Director March 1, 2000
- --------------------------
Mary L. Doherty
/s/ Edward J. Gaffey Director March 1, 2000
- --------------------------
Edward J. Gaffey
/s/ Andrew D. Guthrie, Jr. Director March 1, 2000
- ----------------------------
Andrew D. Guthrie, Jr.
- --------------------------- Director March 1, 2000
Robert A. Havern, III
/s/ Eugene R. Murray Clerk and Director March 1, 2000
- ----------------------------
Eugene R. Murray
/s/ Francis D. Pizzella Director March 1, 2000
- ----------------------------
Francis D. Pizzella
</TABLE>
62
[LOGO]
Medford Bancorp, Inc.
1999 Annual Report
[GRAPHIC: Cover Photo]
<PAGE>
[LOGO]
Medford Bancorp, Inc.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998
Total Assets $ 1,224,912 $ 1,151,188
Investment Securities 535,858 512,648
Net Loans 626,751 580,665
Deposits 911,328 871,702
Total Borrowings 215,724 170,116
Net Income 12,651 12,252
Stockholders' Equity 90,870 102,267
Shares Outstanding 8,383,252 8,709,828
Per Common Share:
Basic Earnings $ 1.51 $ 1.38
Diluted Earnings 1.44 1.31
Book Value 10.84 11.74
Cash Dividends Declared 0.51 0.50
Financial Ratios:
Return on Average Assets 1.07% 1.09%
Return on Average Equity 13.52 11.99
Stockholders' Equity to Assets 7.42 8.88
Net Interest Rate Spread 2.63 2.72
Net Yield on Average Earning Assets 3.03 3.16
Employees (at year end), Full-Time Equivalent 254 252
Shareholders of Record 1,126 1,158
- --------------------------------------------------------------------------------
Annual Meeting
The Annual Meeting of Shareholders will be held April 24, 2000 at 9 a.m. at
Anthony's of Malden, 105 Canal Street, Malden, Massachusetts.
Corporate Information
Medford Bancorp, Inc.
Medford Bank
29 High Street
Medford, MA 02155
781.395.7700
www.medfordbank.com
Accessing Information
Additional copies of this Annual Report and Form 10-K may be obtained without
charge by writing to the Company's Shareholder Relations Department. These
reports are also available to the public on request as required by the
Securities and Exchange Commission (SEC). These statements have not been
reviewed or confirmed for accuracy or relevance by the SEC.
Featured on the cover is a collection of coins dating back to 1869, the year
Medford Bank was established. Rare coin collection courtesy of Gerard A.J.
Stodolski, Inc. Twenty dollar gold coin, dated 1869, provided by Rare Coins of
New Hampshire, Inc.
<PAGE>
During 1999, Medford Bancorp, Inc. celebrated 130 years of community banking.
Founded in 1869, Medford Bank continues to meet the financial needs of area
families and businesses. Today we look not only to provide a range of banking
services, but to create value for customers and shareholders alike.
[PHOTO]
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
I am pleased to report that we continued to increase earnings per share during
1999. During the last two years, basic earnings per share grew at a compound
average growth rate of 10%, increasing from $1.25 in 1997 to $1.51 in 1999. Our
success was achieved through sound management of capital resources, firm control
of operating expenses and focused growth in the balance sheet.
Noteworthy for 1999, we increased dividends 10% from the prior year's level of
$.40 per share to $.44 per share and declared our seventh consecutive special
dividend in December 1999. We also successfully completed a 5% stock repurchase
program, acquiring 425,796 shares. We recently announced an additional stock
repurchase program of up to 5% of outstanding shares for year 2000. This
represents our third repurchase program in as many years.
We continue to explore opportunities to enhance the franchise. We were
disappointed that the divested branches from the FleetBoston transaction were
not allocated to community banks in this area. We submitted a bid on several of
these branches which, if successful, would have expanded our branch network.
With our Tewksbury office celebrating its first anniversary and contributing to
our balance sheet growth, we have filed an application to open a new branch
office on Massachusetts Avenue in Arlington. Construction is planned for later
this year and we anticipate opening the branch by early 2001. Our strategic plan
for profitable expansion remains in the forefront as customers look more toward
community banks to fill their financial needs. We plan to identify and evaluate
potential branch sites in the coming year.
As an independent community bank, we rely heavily on the branch network for our
delivery system. The heart of community banking is the branch office and the
connection to the customer. Our voice response system, Call Center, and web site
are growing in popularity and complement the branch delivery system well.
Medford Bank has consistently earned a Five-Star rating from Bauer Financial
Reports, Inc. and Blue Ribbon status from VERIBANC, Inc. in recognition of
financial strength and performance. We are proud that our reputation as a
leading community bank is enhanced with these ratings. Moreover, our product
offerings, such as our combined checking and savings account, ComboPlus, enabled
us to effectively gather deposits. ComboPlus deposits grew by $46 million during
1999. In addition, our municipal calling program generated $15 million in
deposits for the year.
Asset generation has been given renewed emphasis. Residential lending remains a
strength of the Company. The active sales efforts of the loan originators
generated $134.5 million in residential first mortgages during 1999. A portion
of this volume, $7.18 million, was committed to low cost,
<PAGE>
affordable housing mortgages. By hiring William Marshall as Director of
Commercial Real Estate, along with an additional lender, the commercial real
estate lending team is focused on growth. Bill's energy and expertise in
developing new business is showing early signs of success. Our commercial
lending division is also actively developing new business, specializing in
serving small to mid-size companies, with commercial and industrial and
asset-based loans.
It is my honor to welcome Deborah A. Burke-Santoro who joined the Board of
Directors in May. Ms. Burke-Santoro is the Marketing and Communications Director
for the Office of the Mayor in Malden. She has been professionally dedicated to
the betterment of Malden and its residents for more than two decades. She brings
a fresh perspective to our Board. I also congratulate George A. Bargamian who
was promoted to executive vice president in 1999.
During 1999 many employees were actively involved in the preparation of our
successful Y2K transition while simultaneously handling normal operations. I
thank each and every employee for their dedication and hard work over the past
year. It is through their collective efforts that Medford Bank retains its rich
heritage and is a leading community bank today.
Sincerely,
/s/ Arthur H. Meehan
Arthur H. Meehan
Chairman of the Board,
President and Chief Executive Officer
[The following information was depicted as bar charts in the printed material.]
Basic Earnings Per Share
1997 ....... $1.25
1998 ....... $1.38
1999 ....... $1.51
Return on Equity
1997 ....... 11.81%
1998 ....... 11.99%
1999 ....... 13.52%
Return on Assets
1997 ....... 1.05%
1998 ....... 1.09%
1999 ....... 1.07%
Regular Cash Dividends
1997 ....... $0.36
1998 ....... $0.40
1999 ....... $0.44
2.
<PAGE>
COMMERCIAL
LENDING
- --------------------------------------------------------------------------------
We offer a range of commercial services and are well positioned to meet the
needs of the small and medium size businesses. We concentrate on businesses with
annual sales up to $10 million, as this market can often be under-served by the
Boston-based banks. Our strength in this market resides in providing high level
service to the business owner or manager. Our lenders have extensive knowledge
of the local market and try to be very responsive in addressing customer needs.
With Commercial Real Estate, Commercial and Industrial and Asset-based loans, we
support many businesses with lines of credit, construction loans, equipment
loans, funding for expansion, and more. We are also an approved SBA lender.
Through our lending activities, we are investing in the local economy and
helping our customers build their businesses and operate more effectively.
[PHOTO]
Keith Ohmart, President, and Helen Chen, majority owner, of the successful
cookware distribution business Joyce Chen, Inc., look to Medford Bank for their
commercial banking needs. Helen Chen is the daughter of the late Joyce Chen and
she and her husband work together selling several specialty cookware brands
through the company's two divisions. The company's China Village, Italian Villa,
Mexican Fiesta and Taco Bell Kitchen originals brand cookware and accessories
are sold directly to major retailers nationwide such as Target, Wal-Mart and
other discount retailers. Through the Joyce Chen products division, the company
markets its authentic, high-end Asian cookware at fine retailers such as Macy's.
In recent years, the Joyce Chen company has enjoyed tremendous growth and
success. Kim Foster, Vice President, Asset-based Lending, has been instrumental
in helping the company manage its cash flow through accounts receivable and
inventory financing. This is just one example of how Medford Bank is a financial
partner committed to helping local businesses succeed.
[PHOTO]
Our team of commercial lenders from left to right:
Mary Ann Devlin, Vice President, Commercial Real Estate;
Laurence J. Packenham, Vice President, Commercial Real Estate;
William L. Marshall, Director, Commercial Real Estate;
Kim S. Foster, Vice President, Asset-based Lending;
Eric B. Loth, Senior Vice President, Lending Division;
Richard P. Lane, Vice President, Commercial Loan Officer;
Michael D. MacDonald, Vice President, Commercial Loan Officer.
3.
<PAGE>
CUSTOMER
SERVICE
- --------------------------------------------------------------------------------
With the customer as our top priority, we continually strive to provide the best
in service and product offerings. We look to build long-term relationships with
customers by meeting their financial needs throughout life. Starting with a
child's first bank account as a member of our Club For Kids to our range of
retirement services, we are there every step of the way. In addition, our
convenient banking options, such as our debit card, web site, automated
telephone banking system, and Call Center give customers choices and make
banking easier while saving time. And for those customers who prefer traditional
in-branch banking, we constantly look for ways to make improvements. With the
addition of new parking lots, our Main Office, Malden Center and South Medford
branch offices allow easier access. To help ensure that we provide a high level
of service to all customers, employees receive service quality training and we
have an outside firm monitor and rate service throughout the year. Our customer
service representatives and Call Center specialists advise customers about all
their options and help them select the best accounts and services for their
needs.
[GRPAHIC: ATM Card]
Medford Bank's MasterMoney(TM) and ATM Card, also known as a debit card, is a
convenient way for customers to make purchases with direct access to their
checking accounts. It's faster than writing a check. Our debit card enables
customers to take advantage of checking account conveniences around town or
around the world, wherever the Mastercard(R) symbol is displayed. With a 72%
activation rate, our card base continues to grow.
[PHOTO]
Tess Cunha, Call Center Officer
Our Customer Call Center routinely opens accounts, explains services and
provides other assistance for customers who prefer the convenience of a
telephone call instead of making a trip to a branch office. Call volumes into
our Call Center continue to increase as more people dial 1-888-medford for their
banking needs. Tess Cunha, a valued employee since 1987, has managed the Call
Center since it was introduced in 1997. She has been recognized for providing
excellent service and is responsible for training other Call Center specialists
to the same high standard.
4.
<PAGE>
OFFICE
LOCATIONS
- --------------------------------------------------------------------------------
[GRAPHIC: Office Locations Map]
Arlington
Route 60 & Mystic
Valley Parkway
781.393.6355
Belmont
4 Hill Road, Corner
of Brighton St.
781.393.6320
Burlington
258 Cambridge St.
781.272.5700
Malden
Malden Center
399 Main St.
781.393.6386
Broadway
44 Broadway
781.393.6334
Maplewood
28 Lebanon St.
781.393.6329
Oak Grove
876 Main St.
781.393.6326
West Side
443 Charles St.
781.393.6337
Medford
Main Office
29 High St.
781.395.7700
Loan Center
5 High St.
781.395.7700
Haines Square
257 Spring St.
781.393.6380
South Medford
448 Main St.
781.393.6340
Wellington
499 Riverside Ave.
781.393.6350
West Medford
501 High St.
781.393.6344
North Reading
80 Main St.
978.664.5581
Tewksbury
295 Main St.
978.851.0841
Waltham
695 Main St.
781.647.4848
Wilmington
240 Main St.
978.658.9134
[The following information was depicted as a pie chart in the printed material.]
Deposit Mix as of December 31, 1999
(in thousands)
- --------------------------------------------------------------------------------
Term CDs 45.69%
$416,345
Demand &
Official Checks 12.29%
$112,013
Savings 34.49%
$314,353
Money Market 7.53%
$68,617
[The following information was depicted as a pie chart in the printed material.]
Loan Mix as of December 31, 1999
(in thousands)
- --------------------------------------------------------------------------------
Residential Mortgages 73.68%
$466,740
Commercial Mortgages 17.69%
$112,050
Second Mortgages/
Equity Lines 3.18%
$20,175
Consumer Loans 0.46%
$2,912
Commercial Loans 2.86%
$18,149
Construction Mortgages 2.13%
$13,504
5.
<PAGE>
RESIDENTIAL
LENDING
- --------------------------------------------------------------------------------
A top mortgage provider, we originated $134.5 million in one to four family
mortgage loans in 1999. With a net gain of $44 million to the portfolio after
adjusting for amortizations, sales and prepayments, our residential loan
portfolio has grown to $466.7 million. Our experienced team of mortgage
originators was very active reaching out to home buyers. Our 1999 series of home
buying seminars, held in the spring and fall, helped many families with the
purchase of their first home and provided assistance for those ready to trade up
to their next home. The success of our pre-approval program contributes to our
overall success in closing loans. Pre-approval allows the home buyer to obtain a
mortgage commitment before finding a home and allows the option to lock in an
interest rate at application or closing, depending upon the mortgage selected.
Whether taking advantage of our pre-approval or affordable housing program, or
choosing one of our fixed or adjustable rate mortgage options, many families now
enjoy the rewards of home ownership through a Medford Bank mortgage.
[PHOTO]
Eagles Landing is an age 55 and older community with 176 residential units and a
club house in Tewksbury. Through our Commercial Real Estate division, Medford
Bank provided construction financing to the developers of this project in 1998.
The successful development also included the construction of Tewksbury Country
Club, a nine-hole golf course. In 1999, nearly all residential units were sold.
In addition, Medford Bank provided residential mortgage loans to many of the
owners.
[PHOTO]
Left to right: Anne Barry, John and Cheryl Trainor with their children.
John and Cheryl Trainor and children, John and Nicole, are longtime Medford Bank
customers. As owner of Accurate Paving, John Trainor has found Medford Bank's
commercial lending team extremely helpful in providing assistance and the
financing needed for his business. The family banking needs of the Trainors are
also expertly handled. Anne Barry, assistant vice president and mortgage
representative, meets with the Trainor family at their home. The Trainors are
contemplating home ownership and are learning how Medford Bank's pre-approval
program will be advantageous while house-hunting.
6.
<PAGE>
Directors
Arthur H. Meehan*
Chairman of the Board, President and Chief Executive Officer Medford Bank
Edward D. Brickley
Manager of Corporate International
Accounting at Polaroid Corporation
Cambridge, MA (Retired)
David L. Burke
President and Treasurer, Boston Steel
& Manufacturing Co.
Malden, MA
Deborah A. Burke-Santoro
Marketing and Communications Director
Office of the Mayor
City of Malden
Paul J. Crowley*
President, CSC Consulting Group
Cambridge, MA (Retired)
Mary Lou Doherty
Assistant Principal, Medford School System (Retired)
Edward J. Gaffey*
President, Country Way Trust
Belmont, MA
Andrew D. Guthrie, Jr., M.D.
Physician, President of Mistick Pediatrics Associates (Retired)
Robert A. Havern, III
Attorney, Arlington, MA
Member of State Legislature
of Commonwealth of Massachusetts
Eugene R. Murray*
Underwriting Manager of the
Boston Office of Cigna
Special Risk Facility (Retired)
Francis D. Pizzella*
Attorney and President of The
Savings Bank Life Insurance
Company of Massachusetts,
President of The Savings Bank
Employees Retirement Association (Retired)
Officers of Medford Bank
Arthur H. Meehan**
Chairman, President and Chief Executive Officer
Vincent Gargano
Senior Vice President, Strategic Planning
and Risk Management
Paula M. McNabb
Vice President, CRA/Compliance Officer
Administration
William F. Rivers
Senior Vice President
David L. Korp
Senior Vice President,
Operations Officer
Joan P. Cronholm
Vice President,
Loan Operations Officer
Jane M. Griffin
Vice President,
Director of Human Resources
Charles E. Samour
Assistant Vice President,
Security Officer
Lorraine Lucia
EFT Services Officer
Joanne Teixeira
Deposit Operations Officer
Alan Collopy
Systems Officer
Finance
Phillip W. Wong**
Executive Vice President,
Chief Financial Officer
Mary E. Auterio
Vice President,
Controller
Jane E. Cybulski
Vice President,
Investment/ALCO Officer
Martin J. Heneghan
Assistant Vice President,
Senior Audit Officer
Christine Panno-West
Assistant Vice President,
Assistant Controller
Lending
Eric B. Loth
Senior Vice President
Anthony R. Visco
Senior Vice President,
Residential Lending
William L. Marshall, III
Director of Commercial
Real Estate
Donald L. Cullen
Vice President,
Collections Officer
Mary Ann Devlin
Vice President, Commercial Real Estate
Kim S. Foster
Vice President, Commercial Loan Officer
Joanne M. Franco
Vice President, Senior Credit Officer
Richard P. Lane
Vice President, Commercial Loan Officer
Laurence J. Packenham
Vice President, Commercial Real Estate
Michael D. MacDonald
Vice President, Commercial Loan Officer
Anne M. Barry
Assistant VicePresident, Mortgage Representative
Harold L. Goldsmith
Assistant Vice President, Mortgage Representative
Deborah Sousa
Assistant Vice President, Mortgage and Loan
Origination Manager
Charles M. Byron
Mortgage Loan Officer
Retail
George A. Bargamian
Executive Vice President
Anna Beaudoin
Vice President,
Retail Systems Administrator
Kenneth E. Peterson
Vice President,
Branch Administrator
Elizabeth J. Stodolski
Vice President, Marketing Director
Theresa Barile
Assistant Vice President, Pension Officer
Kathleen M. Beasley
Assistant Vice President, Regional Manager
Cheryl A. Cannon
Assistant Vice President, Regional Manager
Linda A. Iacono
Assistant Vice President, Regional Manager
Dana Mann
Assistant Vice President, Municipal Officer
Rosanna Natola
Assistant Vice President, Retail Training/Support
Andree Brulhart
Branch Officer
Teresa Cunha
Branch Officer
Judith A. Gilligan
Branch Officer
Lea Hamel
Branch Officer
Kelly A. Hannify
Branch Officer
Kathleen Pasquale
Branch Officer
Barbara Purcell
Branch Officer
Christine Santapaola
Branch Officer
Stephanie M. Tiernan
Branch Officer
*Member of Executive Committee
**Officer of Medford Bancorp, Inc.
<PAGE>
Celebrating
a 130 year history
1869-1999
People you know.
Experience you trust.
781-395-7700
www.medfordbank.com
Shareholder Information
The Company's common stock trades on the Nasdaq Stock Market under the symbol
MDBK. The stock is listed under various abbreviations in the Wall Street Journal
and other newspapers. There were 1,126 shareholders of record as of December 31,
1999.
Quarterly Stock Performance
The following tabulation shows the range of price quotations per share as
reported by Nasdaq for the periods indicated: (Adjusted for stock split).
1999 High Low
- ------------------------------------------
First Quarter $ 18.81 $ 17.00
Second Quarter $ 18.44 $ 15.25
Third Quarter $ 19.25 $ 15.00
Fourth Quarter $ 17.63 $ 15.75
Dividend Reinvestment And Stock Purchase Plan
Stockholders may obtain a detailed brochure of the plan by writing to the
Company's Shareholder Relations Department.
Transfer Agent
Contact our stock transfer agent directly for assistance regarding: change of
address; transfer of stock certificates; replacement of lost, stolen, or
destroyed certificates or dividend checks; elimination of duplicate mailing.
Boston EquiServe
P.O. Box 8200
Boston, MA 02266-8200
800.426.5523
Legal Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
617.570.1000
Independent Certified
Public Accountant
Wolf & Company, P.C.
One International Place
Boston, MA 02110
617.439.9700
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Number 333-41161 (dated November 26, 1997, on Form S-8), Registration Statement
Number 333-43271 (dated December 24, 1997, on Form S-8), Registration Statement
Number 333-43273 (dated December 24, 1997, on Form S-8), and Registration
Statement Number 333-62555 (dated August 31, 1998, on Form S-8) of our report
dated January 20, 2000, except for Note 11 as to which the date is January 25,
2000, on the consolidated financial statements of Medford Bancorp, Inc. and
subsidiaries, appearing in the Annual Report on Form 10-K of Medford Bancorp
Inc. for the year ended December 31, 1999.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 20, 2000
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