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Exhibit 99.2
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31, 1997
F.D.I.C. Insurance Certificate No.23290
MEDFORD SAVINGS BANK
(Exact name of bank as specified in its charter)
MASSACHUSETTS
(State or other jurisdiction of incorporation or organization)
04-1609330
(IRS Employer Identification Number)
29 HIGH STREET, MEDFORD, MASSACHUSETTS
(Address of principal executive office)
02155
(Zip Code)
(617) 395-7700
(Bank's telephone number, including area code)
N/A
(Former name, former address and former fiscal year if changed
since last report)
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the Bank was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
The number of shares outstanding of the Bank's common stock as of May
9, 1997 - 4,539,648
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TABLE OF CONTENTS
ITEM 1 - FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets............................................................1
Consolidated Statements of Income ...................................................2-3
Consolidated Statements of Changes in Stockholders' Equity ............................4
Consolidated Statements of Cash Flows................................................5-6
Notes to Consolidated Financial Statements.............................................7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General Financial Condition.........................................................8-15
Results of Operations..............................................................16-18
Liquidity and Capital Resources....................................................19-20
Asset and Liability Management........................................................21
Impact of Inflation...................................................................21
Signatures........................................................................... 22
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MEDFORD SAVINGS BANK
CONSOLIDATED BALANCE SHEETS
March 31, Dec. 31,
1997 1996
--------------------------------
(In thousands)
ASSETS
Cash and due from banks $ 10,015 $ 11,900
Short-term investments 2,616 4,529
----------- -----------
Cash and cash equivalents 12,631 16,429
----------- -----------
Investment securities 439,867 424,966
Loans 570,589 568,086
Less allowance for loan losses (6,942) (7,231)
----------- -----------
Loans, net 563,647 560,855
----------- -----------
Foreclosed real estate, net 356 276
Banking premises and equipment, net 10,829 10,896
Accrued interest receivable 9,485 9,291
Other assets 17,260 16,385
----------- -----------
TOTAL ASSETS $ 1,054,075 $ 1,039,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 798,815 $ 792,141
Short-term borrowings 63,760 80,817
Long-term debt 92,647 67,647
Accrued taxes and expenses 4,330 3,701
Other liabilities 1,783 2,271
----------- -----------
Total liabilities 961,335 964,577
----------- -----------
Stockholders' equity:
Serial preferred stock, $.10 par value, 5,000,000 shares authorized;
none issued; -- --
Common stock, 15,000,000 shares authorized;
$.50 par value, 4,539,648 and 4,534,648 shares issued, respectively 2,270 2,267
Additional paid-in capital 28,917 28,848
Retained earnings 63,648 61,634
----------- -----------
94,835 92,749
Net unrealized loss on securities available for sale,
after tax effects (2,095) (228)
----------- -----------
Total stockholders' equity 92,740 92,521
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,054,075 $ 1,039,098
=========== ===========
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1997 1996
-------------------------
(Dollars in thousands
except per share amounts)
Interest and dividend income:
Interest and fees on loans $ 11,289 $10,823
Interest on debt securities 6,678 5,642
Dividend income 155 162
Interest on short-term investments 47 189
-------- -------
Total interest and dividend income 18,169 16,816
-------- -------
Interest expense:
Interest on deposits 7,438 7,611
Interest on short-term borrowings 1,063 613
Interest on long-term debt 1,246 570
-------- -------
Total interest expense 9,747 8,794
-------- -------
Net interest income 8,422 8,022
Provision for loan losses 75 60
-------- -------
Net interest income, after provision for loan losses 8,347 7,962
-------- -------
Other income:
Customer service fees 500 549
Gain on sales of securities, net 265 183
Miscellaneous 236 162
-------- -------
Total other income 1,001 894
-------- -------
Operating expenses:
Salaries and employee benefits 2,565 2,406
Occupancy and equipment 607 509
Data Processing 330 359
Professional fees 109 136
Amortization of intangibles 304 320
Advertising and marketing 143 157
Other general and administrative 566 530
-------- -------
Total operating expenses 4,624 4,417
-------- -------
Income before income taxes 4,724 4,439
Provision for income taxes 1,893 1,742
-------- -------
Net income $ 2,831 $ 2,697
======== =======
See accompanying notes to consolidated financial statements.
(continued)
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
Three Months Ended
March 31,
1997 1996
-------------------------------
(Dollars in thousands,
except per share amounts)
Earnings per share:
Primary $0.60 $0.57
Fully Diluted $0.60 $0.57
Cash dividends declared per share $0.18 $0.17
Weighted average shares outstanding
Primary 4,755,977 4,710,451
Fully Diluted 4,755,977 4,712,288
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Net Unrealized
Additional Gain (Loss)on
Common Paid-in Retained Securities
Stock Capital Earnings Available for Sale Total
----- ------- -------- ------------------ -----
(In thousands)
Balance at December 31, 1996 $ 2,267 $ 28,848 $ 61,634 $( 228) $ 92,521
Net income -- -- 2,831 2,831
Issuance of common stock under
stock option plan and related income
tax benefits 3 69 -- -- 72
Cash dividends declared ($.18 per share) -- -- (817) -- (817)
Change in net unrealized gain (loss) on
securities available for sale, after
tax effects -- -- -- (1,867) (1,867)
-------- -------- -------- -------- --------
Balance at March 31, 1997 $ 2,270 $ 28,917 $ 63,648 $ (2,095) $ 92,740
======== ======== ======== ======== ========
Net Unrealized
Additional Gain (Loss) on
Common Paid-in Retained Securities
Stock Capital Earnings Available for Sale Total
----- ------- -------- ------------------ -----
(In thousands)
Balance at December 31, 1995 $ 2,212 $ 27,642 $ 54,966 $ (1,256) $ 86,076
Net income -- -- 2,697 -- 2,697
Issuance of common stock under
stock option plan and related
income tax benefits 53 1,058 -- -- 1,111
Cash dividends declared ($.17 per share) -- -- (770) -- (770)
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects -- -- -- (1,945) (1,945)
-------- -------- -------- -------- --------
Balance at March 31, 1996 $ 2,265 $ 28,700 $ 56,893 $ (689) $ 87,169
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1997 1996
--------------------------------
(In thousands)
Cash flows from operating activities: $ 2,831 $ 2,697
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for loan losses 75 60
Depreciation and amortization, net 401 524
Foreclosed real estate losses and provisions, net (1) 15
Gain on sales of securities, net (265) (183)
Decrease (increase) in accrued interest receivable
and other assets (198) 310
(Decrease)increase in accrued taxes and expenses
and other liabilities 728 (527)
--------- ---------
Net cash provided by operating activities 3,571 2,896
--------- ---------
Cash flows from investing activities:
Maturities of investment securities available for sale 14,485 5,450
Purchases of investment securities available for sale (52,341) (68,456)
Sales of investment securities available for sale 7,891 21,718
Maturities of investment securities held to maturity 11,000 10,750
Purchases of investment securities held to maturity
and FHLBB stock (250) (144)
Principal amortization of mortgage-backed investments 1,445 1,201
Loans originated and purchased, net of amortization and payoffs (3,108) 4,855
Purchases of bank premises and equipment, net 189 (60)
Sales of, and principal payments received on,
foreclosed real estate 128 --
--------- ---------
Net cash used in investing activities (20,561) (24,686)
--------- ---------
(continued)
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
Three Months Ended
March 31,
1997 1996
---------------------------------
(In thousands)
Cash Flows from financing activities:
Net increase in deposits 6,674 (1,167)
Net increase (decrease) in borrowings with maturities of three
months or less (17,057) 8,206
Proceeds from short-term borrowings with maturities in
excess of three months -- --
Proceeds from long-term debt 25,000 15,000
Issuance of common stock 26 585
Cash dividends paid (1,451) (1,194)
-------- -------
Net cash provided by financing activities 13,192 23,764
-------- -------
Net change in cash and cash equivalents (3,798) 1,974
Cash and cash equivalents, beginning
of period 16,429 28,770
-------- -------
Cash and cash equivalents, end of period $ 12,631 $ 30,744
======== =======
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 1. BASIS OF PRESENTATION
Certain amounts have been reclassified in the March 31, 1996 financial
statements to conform to the 1997 presentation.
The consolidated interim financial statements of Medford Savings Bank
(the "Bank") and subsidiary presented herein are intended to be read in
conjunction with the consolidated financial statements presented in its annual
report for the year ended December 31, 1996.
The consolidated financial information for the three months ended
March 31, 1997 and 1996 is unaudited; however, in the opinion of management, the
consolidated financial information reflects all adjustments (consisting solely
of normal recurring accruals) necessary for a fair presentation in accordance
with generally accepted accounting principles. Interim results are not
necessarily indicative of results to be expected for the entire year.
NOTE 2. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Primary earnings per share computations include common stock and
dilutive common stock equivalents attributable to outstanding stock options.
Fully diluted earnings per share computations reflect the higher market price of
the Bank's common stock at the end of the period, if applicable, and assume
further dilution applicable to outstanding stock options.
NOTE 3. COMMITMENTS
At March 31, 1997 the Bank had outstanding commitments to originate
residential and commercial real estate mortgage loans of approximately $12.6
million which are not reflected on the consolidated balance sheet. Unadvanced
construction and commercial loan funds not included in the above amount totaled
approximately $7.0 million at March 31, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
This Form F-4 contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The Bank'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,
and changes in the assumptions used in making such forward-looking statements.
Consolidated net income was $2.8 million, or $0.60 per share for the quarter
ended March 31, 1997, an increase of 5.0% on a per share basis from $2.7 million
or $0.57 per share for the same quarter in 1996. The annualized return on assets
was 1.09% and the annualized return on equity was 12.29% for the first three
months of 1997.
The improved earnings for the three months ended March 31, 1997 was attributable
in part to an increase of $400,000 in net interest income due to higher earning
asset levels and an increase in net gains on the sale of securities of $82,000.
Partially offsetting this improvement was a $207,000 increase in operating
expenses due in large part to increases in salary and benefit costs and
depreciation costs associated with the Bank's investment to upgrade technology
and systems which was completed in the fourth quarter of 1996. As a percentage
of average assets, operating expenses actually declined to 1.78% on an
annualized basis from 1.82% experienced in the prior year.
The Bank's provision for loan losses increased to $75,000 for the quarter ended
March 31, 1997 from $60,000 for the same prior year quarter. Non-performing
assets were $4,745,000 or 0.45% of total assets at March 31, 1997 compared to
$5,422,000 or 0.55% of total assets at March 31, 1996. At March 31, 1997, the
allowance for loan losses was $6,942,000 which represents approximately 158%
coverage of non-accrual loans and 1.22% of total loans.
The Bank had total assets of $1.1 billion, and total deposits of $798.8 million
at March 31, 1997 compared to total assets of $1.0 billion, and total deposits
of $792.1 million at December 31, 1996. Net loans of $563.6 million at March 31,
1997 increased from $560.9 million at December 31, 1996. Investment securities
increased $14.9 million during the period to $439.9 million at March 31, 1997.
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Stockholders' equity was $92.7 million at March 31, 1997, representing a book
value of $20.43 per share. The Bank's primary capital to assets ratio at March
31, 1997 was 8.80% exceeding all regulatory requirements.
A more detailed discussion and analysis of the Bank's financial condition and
results of operations follows.
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INVESTMENT SECURITIES
Investment securities consist of the following:
March 31, December 31,
1997 1996
---- ----
(In thousands)
Securities available for sale, at fair value $293,952 $268,379
Securities held to maturity, at amortized cost 139,669 150,591
Restricted equity securities:
Federal Home Loan Bank stock 5,132 4,882
Massachusetts Savings Bank Life Insurance stock 1,114 1,114
-------- --------
$439,867 $424,966
======== ========
The amortized cost and fair value of investment securities at March 31, 1997,
and December 31, 1996 with gross unrealized gains and losses, follows:
March 31, 1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In thousands)
Securities Available for Sale
Debt securities:
State and municipal $ 67 $ 1 $ -- $ 68
Mortgage - backed 45,854 1 (1,004) 44,851
U.S. Government and
federal agency 82,358 1 (1,729) 80,630
Other 162,399 272 (1,163) 161,508
-------- -------- -------- --------
Total debt securities 290,678 275 (3,896) 287,057
Marketable equity
securities 6,799 376 (280) 6,895
-------- -------- -------- --------
Total securities
available for sale $297,477 $ 651 $ (4,176) $293,952
======== ======== ======== ========
Securities Held to Maturity
U.S. Government
and federal agency $130,934 $ 209 $ (645) $130,498
Other 8,735 10 (24) 8,721
-------- -------- -------- --------
Total securities
held to maturity $139,669 $ 219 $ (669) $139,219
======== ======== ======== ========
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December 31, 1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In thousands)
Securities Available for Sale
Debt securities:
State and municipal $ 88 $ 1 $ -- $ 89
Mortgage - backed 28,101 82 (369) 27,814
U.S. Government and
federal agency 83,301 280 (930) 82,651
Other 150,774 745 (350) 151,169
-------- -------- -------- --------
Total debt securities 262,264 1,108 (1,649) 261,723
Marketable equity securities 6,538 236 (118) 6,656
-------- -------- -------- --------
Total securities
available for sale $268,802 $ 1,344 $ (1,767) $268,379
======== ======== ======== ========
Securities Held to Maturity
U.S. Government
and federal agency $141,868 $ 522 $ (299) $142,091
Other 8,723 32 -- 8,755
-------- -------- -------- --------
Total securities
held to maturity $150,591 $ 554 $ (299) $150,846
======== ======== ======== ========
The amortized cost and fair value of debt securities by contractual maturity at
March 31, 1997 is as follows:
March 31, 1997
--------------------------------------------------------
Available for Sale Held to Maturity
------------------------ -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(In thousands)
Within 1 year $ 52,754 $ 52,968 $ 59,919 $ 60,087
After 1 year through 5 years 192,070 189,238 79,750 79,132
-------- -------- -------- --------
244,824 242,206 139,669 139,219
Mortgage - backed securities 45,854 44,851 -- --
-------- -------- -------- --------
$290,678 $287,057 $139,669 $139,219
======== ======== ======== ========
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The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1996 is as follows:
December 31, 1996
--------------------------------------------------------
Available for Sale Held to Maturity
------------------------ -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(In thousands)
Within 1 year $ 49,839 $ 50,084 $ 46,871 $ 47,068
After 1 year through 5 years 175,259 174,979 103,720 103,778
After 5 years through 10 years 9,065 8,846 -- --
-------- -------- -------- --------
234,163 233,909 150,591 150,846
Mortgage - backed securities 28,101 27,814 -- --
-------- -------- -------- --------
$262,264 $261,723 $150,591 $150,846
======== ======== ======== ========
Investment securities increased $14.9 million from $425.0 million at December
31, 1996 to $439.9 million at March 31, 1997. The increase was primarily in
mortgage-backed securities and corporate bonds designated as available for sale.
The investment in mortgage-backed securities was increased for the purpose of
generating a higher yield in the investment portfolio. Borrowings from various
sources are utilized to fund investment purchases. At March 31, 1997, the
securities portfolio classified as "available for sale" reflects a $3.5 million
depreciation in market value as a result of rising interest rates. In accordance
with the Bank's asset-liability management strategies, investment securities are
generally short-term with maturities of five years or less.
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LOANS
A summary of the Bank's outstanding loan balances follows:
March 31, December 31,
1997 1996
--------- ---------
(In thousands)
Mortgage loans on real estate:
Residential 1-4 family $380,695 $380,627
Commercial 123,095 123,158
Construction 16,348 18,155
Second mortgages 1,738 1,928
Equity lines of credit 21,094 21,169
--------- ---------
542,970 545,037
Less: Unadvanced loan funds (7,001) (9,436)
--------- ---------
535,969 535,601
--------- ---------
Other loans:
Commercial loans 12,124 11,014
Personal loans 2,176 2,219
Education and other 19,327 18,329
--------- ---------
33,627 31,562
--------- ---------
Add: Premium on loans acquired 316 354
Net deferred fees 677 569
--------- ---------
Total loans 570,589 568,086
Less: Allowance for loan losses (6,942) (7,231)
--------- ---------
Loans, net $563,647 $560,855
========= =========
The Bank's loan portfolio experienced a modest increase during the first three
months of 1997 principally in the construction, commercial and education loans.
All other loan categories remained stable from December 31, 1996 as new loan
originations replaced amortization and payoffs for the period. The Bank
continues to experience intense competition for loans within its geographic
region.
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NON-PERFORMING ASSETS
It is the Bank's general policy to place on non-accrual status all loans when
they become 90 days contractually delinquent or the collectability of principal
or interest payments becomes doubtful. Interest accrual ceases, and all
previously accrued but unpaid interest is reversed when a loan is placed on
non-accrual status. Non-performing assets totaled $4.7 million at March 31,
1997, compared with $3.7 million at December 31, 1996.
The principal balance of non-accrual loans was $4.4 million, or 0.42% of total
assets, at March 31, 1997, compared to non-accrual loans of $3.4 million or
0.33% of total assets as December 31, 1996. The increase is the result of
placing one borrower on non-accrual status as of March 31, 1997. Foreclosed real
estate totaled $356,000 at March 31, 1997 compared to $276,000 at December 31,
1996.
In accordance with SFAS No. 114, a loan is considered impaired, when, based on
current information and events, it is probable that a borrower will be unable to
meet the scheduled payments of principal or interest when due according to the
original terms of the contractual loan agreement. It is the Bank's general
policy to place impaired loans on non-accrual status when they become 90 days
contractually delinquent. The principal balance of impaired loans was $3.6
million all of which were included in the balance of non-accrual loans at March
31, 1997. The loan loss reserve allocated to impaired loans at March 31, 1997
was $751,000.
ALLOWANCE FOR LOAN LOSSES
Three Months Ended
------------------------
March 31, March 31,
1997 1996
------- -------
(In thousands)
Balance at the beginning
of the period $ 7,231 $ 7,466
Provisions 75 60
Recoveries 28 68
Less: Charge-offs (392) (243)
------- -------
Balance at the end of the period $ 6,942 $ 7,351
======= =======
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. Among the factors that management
considers are the quality of specific loans, risk characteristics of the loan
portfolio generally, the level of non-performing loans, current economic
conditions, trends in delinquency, and charge-offs, and the value of the
underlying collateral. Ultimate loan losses may vary significantly from current
estimates.
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The allowance for loan losses was $6.9 million at March 31, 1997, a reserve
coverage of 158% of non-accrual loans and 1.22% of total loans. At December 31,
1996, the allowance for loan losses was $7.2 million representing a 210.3%
reserve coverage of non-accrual loans and 1.27% of total loans.
Management considers the allowance for loan losses to be adequate at March 31,
1997, although there can be no assurance that the allowance is adequate or that
additional provisions to the allowance for loan losses will not be necessary.
DEPOSITS
Total deposits increased $6.7 million from December 31, 1996 to $798.8 million
at March 31, 1997. The Bank's strategy has been to maintain stable deposit rates
and to grow deposit levels through selective core deposit and term deposit
promotions. To retain core deposits, the Bank has been promoting the "ComboPlus"
account which combines a statement savings and a demand account into one
convenient account. This account has contributed to an increase in savings
deposits by $5.0 million from December 31, 1996. The Bank put in place a special
two-year term certificate promotion during the first quarter of 1997 intended to
extend deposit maturities. As a result of this promotion, term certificates
increased $6.9 million. Corporate money market deposits increased $1.6 million
from December 31, 1996 as the Bank continues to offer competitive rates to
attract new corporate accounts. Offsetting the increases in savings, money
market and term certificate deposits was a decrease of $2.1 million in NOW
accounts and $4.4 million in demand deposit accounts.
The following table indicates the balances in various deposit accounts at the
dates indicated.
March 31 December 31
1997 1996
-------- --------
(In thousands)
Demand accounts $ 35,679 $ 40,124
NOW accounts 58,695 60,839
Savings & money market accounts 322,090 315,771
Term certificates 382,351 375,407
-------- --------
$798,815 $792,141
======== ========
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BORROWED FUNDS
The Bank has selectively engaged in long-term borrowings from the FHLBB to fund
loans and has entered into short-term repurchase agreements to fund investment
securities purchases. Total borrowed funds increased to $156.4 million at March
31, 1997 from $148.5 million at December 31, 1996, reflecting management's
decision to utilize borrowings as a supplement to current deposit activity
levels and to increased net interest income. The Bank took advantage of
relatively low interest rates to increase long term borrowings which were
employed to fund the residential loan portfolio and purchases of mortgage-backed
securities.
STOCKHOLDERS' EQUITY
The Bank's capital to assets ratio was 8.80% at March 31, 1997 compared with
8.90% at December 31, 1996.
The FDIC imposes capital guidelines on the Bank. In addition to the capital
ratio described above, 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 risk-weighted assets are then calculated. To be considered
adequately capitalized, Banks must maintain a tier 1 risk-based capital ratio of
4.00% and a total risk-based capital ratio of 8.00%. At March 31, 1997, the
Bank's tier 1 capital to risk-weighted assets was 14.76% and the Bank's tier 1
plus tier 2 capital, or total to risk-weighted assets was 15.93%.
Massachusetts-chartered savings banks insured by the FDIC are required to
maintain a leverage capital (tier 1 capital) to assets ratio of 3.00% to 5.00%
of total assets, as adjusted, depending on the individual bank's rating. At
March 31, 1997, the Bank's leverage capital ratio was 8.41% as defined by the
FDIC. As a result of the foregoing leverage and risk-based capital ratios, the
Bank is considered "well capitalized" under the FDIC's prompt corrective action
guidelines.
Book value at March 31, 1997 was $20.43 per share, compared with $20.40 per
share at December 31, 1996.
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996
INTEREST AND DIVIDEND INCOME
Interest and dividend income from loans and investments for the first quarter in
1997 totaled $18.2 million, an increase of $1.4 million or 8.0% when compared to
the same prior year quarter. Interest income for the three months ended March
31, 1996 was positively impacted by a $171,000 recovery of commercial real
estate loan income on a loan that had been previously charged-off in a prior
period. Average earning assets increased $90.7 million when the periods are
compared, with $55.3 million of that amount from short and long term investment
securities, and $35.4 million in loans. The yield on earning assets decreased to
7.19% for the first quarter in 1997 compared with 7.30% for the same quarter in
1996. The yield on investment securities increased to 6.22% from 6.20%,
reflecting the purchase of additional investment securities and reinvestment
of matured and sold investment securities at higher yields. Investment
securities contributed $887,000 of additional interest and dividend income when
comparing the first quarter of 1997 to the same prior year quarter. The increase
in average balance on loans more than offset the decline in yield to 7.95%
compared with 8.12%, contributing $466,000 of additional interest income on
loans. The increase in interest income and average balance is primarily in
residential 1-4 family mortgage loans, with a modest increase in commercial and
education loans. Excluding the one-time commercial real estate interest income
recovery in the first quarter of 1996, interest income on commercial real estate
loans decreased $37,000, primarily as a result of a lower average balance.
Changes in the mix of earning assets and higher funding costs reduced the net
interest margin in the first quarter of 1997 to 3.29% from 3.47% in the same
period in 1996.
INTEREST EXPENSE
Total interest expense for the three months ended March 31, 1997 was $9.7
million representing an increase of $953,000 or 10.8% over the same period in
1996. This is principally due to an increase of $80.0 million in average
interest bearing liabilities. The average balance in deposits increased $2.6
million, and the average balance in borrowed funds increased $77.4 million. The
Bank experienced a downward repricing on term certificates lowering the overall
cost of deposits to 3.98% from 4.06% resulting in a savings of interest expense
of $173,000 when comparing the first quarter in 1997 to the first quarter in
1996. As short-term borrowings with the FHLBB matured, they were replaced with
longer term FHLBB borrowings to fund the growth in the residential loan
portfolio. Repurchase agreements at favorable rates were used to fund increases
in the investment portfolio. Interest expense on borrowings increased $1.1
million in the first quarter of 1997 when compared to the first quarter in 1996
due principally to the increase in average balance. The overall cost of interest
bearing liabilities increased to 4.29% from 4.21% when the periods are compared,
resulting in a reduction in the interest rate spread to 2.90% from 3.09%.
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MEDFORD SAVINGS BANK
INTEREST RATE SPREAD
Three Months Ended
March 31,
---------
1997 1996
------- -------
Weighted average yield earned on:
Short-term investments 5.01% 5.35%
Investment securities 6.22 6.20
Loans 7.95 8.12
------- -------
All earning assets 7.19% 7.30%
------- -------
Weighted average rate paid on:
Deposits 3.98% 4.06%
Borrowed funds 5.77 5.66
------- -------
All interest-bearing liabilities 4.29% 4.21%
------- -------
Weighted average rate spread 2.90% 3.09%
------- -------
Net interest margin 3.29% 3.47%
======= =======
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PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision is determined by
management on the basis of many factors including the quality of specific loans,
risk characteristics of the loan portfolio generally, the level of
non-performing loans, current economic conditions, trends in delinquency and
charge-offs, and collateral values of the underlying security. Management
considers the allowance for loan losses to be adequate at March 31, 1997,
although there can be no assurance that the allowance is adequate or that
additional provisions to the allowance for loan losses will not be necessary.
The Bank recorded $75,000 in provisions for loan losses during the three months
ended March 31, 1997, up from $60,000 for the comparable prior year period. Net
loan charge-offs for the three months ended March 31, 1997 totalled to $364,000
as compared to $175,000 for the same prior year period.
OTHER INCOME
Other income, such as customer service fees and gains and losses on the sale of
securities, increased 12.0% to $1.0 million in the first quarter of 1997 as
compared to the first quarter of 1996, principally due to an increase in net
gains on the sale of securities.
OPERATING EXPENSES
Operating expenses, including the net gain or loss from foreclosed real estate,
was $4.6 million for the first quarter of 1997 compared with $4.4 million for
the first quarter in 1996. Salary and benefit costs increased 6.6% from one year
ago. Other increases include equipment depreciation resulting from the Bank's
investment of $1.7 million in new technology in the third quarter of 1996.
Despite the increase in operating expenses when comparing the two quarters, the
efficiency ratio for the first quarter in 1997 was 47.5%, which is better than
the industry average.
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22
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 pledge U.S.
Government securities to borrow from certain investment firms and the Mutual
Savings Central Fund of Massachusetts. These various sources of liquidity are
used to fund withdrawals, new loans, and investments.
Management continually seeks to optimize deposit growth while controlling
the 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 debt instruments maturing
in five years or less reduces market risk in the bond portfolio while providing
significant cash flow. For the three months ended March 31, 1997 cash flow from
maturities and sales of securities was $33.4 million compared to cash flow from
maturities and sales of securities of $37.9 million for the three months ended
March 31, 1996. Principal payments on mortgage-backed investments during the
three months ended March 31, 1997 and 1996 totalled $1.4 million and $1.2
million, respectively. During periods of high interest rates or active mortgage
origination, maturities in the bond portfolio have provided significant
liquidity at a lower cost than borrowings.
Amortization and pay-offs of the loan portfolio contribute significant
liquidity to the Bank. Traditionally, the amortization and payoffs have been
reinvested into loans. When payoff rates exceed origination rates, excess
liquidity from loan payoffs is shifted into the investment portfolio.
The Bank also uses borrowed funds as a source of liquidity. These
borrowings generally contribute toward funding over-all loan growth. At March
31, 1997 the Bank's outstanding borrowings from the FHLBB were $97.6 million, as
compared to $67.1 million at March 31, 1996. The Bank also utilizes repurchase
agreements as a source of funding when management deems market conditions to be
conducive to such activities. The balance in repurchase agreements at March 31,
1997 was $57.2 million, as compared to $28.5 million at March 31, 1996.
Commitments to originate residential and commercial real estate mortgage
loans at March 31, 1997 excluding unadvanced construction funds of $7.0 million,
was $12.6 million. Management believes that adequate liquidity is available to
fund loan commitments utilizing deposits, loan amortization, maturities of
securities, or borrowings.
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23
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
Purchases of securities during the three months ended March 31, 1997
totalled $52.6 million consisting of debt instruments maturing in less than
five years and equities. This compares with purchases of $68.6 million for the
three months ended March 31, 1996.
Residential and commercial real estate mortgage loan origination for the
three months ended March 31, 1997 totalled $13.5 million, compared with $11.6
million for the three months ended March 31, 1996.
The Bank's capital position (total stockholders' equity) was $92.7 million
or 8.80% of total assets at March 31, 1997 compared with $92.5 million or 8.90%
of total assets at December 31, 1996. The Bank's capital position exceeds all
regulatory requirements.
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ASSET-LIABILITY MANAGEMENT
Through the Bank's Asset-Liability Management Committee ("ALCO"), which is
comprised of certain senior and middle management personnel, the Bank monitors
the level and general mix of interest rate-sensitive assets and liabilities. The
primary objective of the Bank's ALCO program is to manage the assets and
liabilities of the Bank to provide for optimum profitability and capital at
prudent levels of liquidity and interest rate, credit, and market risk.
It is ALCO's general policy to closely match the maturity or rate
sensitivity of its assets and liabilities. In accordance with this policy,
certain strategies have been implemented to improve the match between interest
rate sensitive assets and liabilities. These strategies include, but are not
limited to: daily monitoring of the Bank's changing cash requirements, with
particular concentration on investment in short term securities; originating
adjustable and fixed rate mortgage loans for the Bank's own portfolio; managing
the cost and structure of deposits; and generally using matched borrowings to
fund specific purchases of loan packages and large loan origination.
Occasionally, management may choose to deviate from specific matching of
maturities of assets and liabilities, if an attractive opportunity to enhance
yields becomes available.
The Bank actively manages its liability portfolio in order to effectively
plan and manage growth and maturities of deposits. Management recognizes the
need for strict attention to all deposits. Accordingly, plans for growth of all
deposit types are reviewed regularly. Programs are in place which are designed
to build multiple relationships with customers and to enhance the Bank's ability
to retain deposits at controlled rates of interest, and management has adopted a
policy of reviewing interest rates on an ongoing basis on all deposit accounts,
in order to control deposit growth and interest costs.
In addition to attracting deposits, the Bank has selectively borrowed
funds using advances from the FHLBB and upon occasion, reverse repurchase
agreements. These funds have generally been used to purchase loans typically
having a matched repricing date.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary effect of inflation on the operations of the 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.
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SIGNATURES
Under to the requirements of the Securities Exchange Act of 1934, the Bank
has duly caused this report to be on its behalf signed by the undersigned
thereunto duly authorized.
MEDFORD SAVINGS BANK
Date: May 9, 1997
/s/ Arthur H. Meehan
------------------------------------------------
Arthur H. Meehan
Chairman/President/CEO
Date: May 9, 1997
/s/ Phillip W. Wong
-------------------------------------------------
Phillip W. Wong
Senior Vice President and Chief Financial Officer
23