1
EXHIBIT 99.4
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 June 30, 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 August 12, 1997 - 4,541,148
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TABLE OF CONTENTS
ITEM 1 - FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets............................................................1
Consolidated Statements of Income .................................................. 2-5
Consolidated Statements of Changes in Stockholders' Equity ........................... 6
Consolidated Statements of Cash Flows................................................7-8
Notes to Consolidated Financial Statements.............................................9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General Financial Condition........................................................10-18
Results of Operations..............................................................19-23
Liquidity and Capital Resources....................................................24-25
Asset and Liability Management........................................................26
Impact of Inflation...................................................................26
Other Events..........................................................................27
Signatures............................................................................28
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MEDFORD SAVINGS BANK
CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
1997 1996
---- ----
(In thousands)
ASSETS
Cash and due from banks $ 14,688 $ 11,900
Short-term investments 4,693 4,529
----------- -----------
Cash and cash equivalents 19,381 16,429
----------- -----------
Investment securities 451,731 424,966
Loans 572,304 568,086
Less allowance for loan losses (6,968) (7,231)
----------- -----------
Loans, net 565,336 560,855
----------- -----------
Foreclosed real estate, net 79 276
Banking premises and equipment, net 10,734 10,896
Accrued interest receivable 9,001 9,291
Other assets 16,295 16,385
----------- -----------
TOTAL ASSETS $ 1,072,557 $ 1,039,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 824,611 $ 792,141
Short-term borrowings 48,842 80,817
Long-term debt 97,439 67,647
Accrued taxes and expenses 3,449 3,701
Other liabilities 1,758 2,271
----------- -----------
Total liabilities 976,099 946,577
----------- -----------
Stockholders' equity:
Serial preferred stock, $.50 par value, 5,000,000 shares authorized;
none issued; -- --
Common stock, 15,000,000 shares authorized;
$.50 par value, 4,541,148 and 4,534,648 shares issued, respectively 2,271 2,267
Additional paid-in capital 28,924 28,848
Retained earnings 65,923 61,634
----------- -----------
97,118 92,749
Net unrealized loss on securities available for sale,
after tax effects (660) (228)
----------- -----------
Total stockholders' equity 96,458 92,521
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,072,557 $ 1,039,098
=========== ===========
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
1997 1996
---- ----
(Dollars in thousands,
except per share amounts)
Interest and dividend income:
Interest and fees on loans $11,512 $10,696
Interest on debt securities 6,850 6,010
Dividend income 165 146
Interest on short-term investments 59 140
------- -------
Total interest and dividend income 18,586 16,992
------- -------
Interest expense:
Interest on deposits 7,744 7,624
Interest on short-term borrowings 903 553
Interest on long-term debt 1,486 802
------- -------
Total interest expense 10,133 8,979
------- -------
Net interest income 8,453 8,013
Provision for loan losses 50 90
------- -------
Net interest income, after provision for loan losses 8,403 7,923
------- -------
Other income:
Customer service fees 487 559
Gain on sales of securities, net 408 12
Gain on sales of loans, net 306 --
Miscellaneous 87 188
------- -------
Total other income 1,288 759
------- -------
Operating expenses:
Salaries and employee benefits 2,529 2,430
Occupancy and equipment 549 475
Data Processing 369 436
Professional fees 153 138
Amortization of intangibles 302 312
Advertising and marketing 158 172
Other general and administrative 507 551
------- -------
Total operating expenses 4,567 4,514
------- -------
Income before income taxes 5,124 4,168
Provision for income taxes 2,032 1,632
------- -------
Net income $ 3,092 $ 2,536
======= =======
See accompanying notes to consolidated financial statements.
(CONTINUED)
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
Three Months Ended
June 30,
1997 1996
---- ----
(Dollars in thousands,
except per share amounts)
Earnings per share:
Primary $0.65 $0.54
Fully Diluted $0.65 $0.54
Cash dividends declared per share $0.18 $0.17
Weighted average shares outstanding
Primary 4,752,688 4,716,570
Fully Diluted 4,764,222 4,727,419
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
June 30,
1997 1996
---- ----
(Dollars in thousands,
except per share amounts)
Interest and dividend income:
Interest and fees on loans $22,801 $21,519
Interest on debt securities 13,528 11,652
Dividend income 320 308
Interest on short-term investments 106 329
------- -------
Total interest and dividend income 36,755 33.808
------- -------
Interest expense:
Interest on deposits 15,182 15,236
Interest on short-term borrowings 1,966 1,165
Interest on long-term debt 2,732 1,372
------- -------
Total interest expense 19,880 17,773
------- -------
Net interest income 16,875 16,035
Provision for loan losses 125 150
------- -------
Net interest income, after provision for loan losses 16,750 15,885
------- -------
Other income:
Customer service fees 987 1,107
Gain on sales of securities, net 673 195
Gain on sales of loans, net 306 --
Miscellaneous 323 351
------- -------
Total other income 2,289 1,653
------- -------
Operating expenses:
Salaries and employee benefits 5,094 4,836
Occupancy and equipment 1,155 984
Data Processing 699 795
Professional fees 263 274
Amortization of intangibles 606 632
Advertising and marketing 301 330
Other general and administrative 1,073 1,080
------- -------
Total operating expenses 9,191 8,931
------- -------
Income before income taxes 9,848 8,607
Provision for income taxes 3,925 3,374
------- -------
Net income $ 5,923 $ 5,233
======= =======
See accompanying notes to consolidated financial statements.
(CONTINUED)
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
Six Months Ended
June 30,
1997 1996
---- ----
(Dollars in thousands,
except per share amounts)
Earnings per share:
Primary $1.25 $1.11
Fully Diluted $1.24 $1.11
Cash dividends declared per share $0.36 $0.34
Weighted average shares outstanding
Primary 4,754,384 4,713,499
Fully Diluted 4,763,757 4,722,536
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 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 -- -- 5,923 5,923
Issuance of common stock under
stock option plan and related income
tax benefits 4 76 -- -- 80
Cash dividends declared ($.36 per share) -- -- (1,634) -- (1,634)
Change in net unrealized gain (loss) on
securities available for sale, after
tax effects -- -- -- (432) (432)
------ ------- -------- ------- --------
Balance at June 30, 1997 $2,271 $28,924 $ 65,923 $ (660) $ 96,458
====== ======= ======== ======= ========
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 -- -- 5,233 -- 5,233
Issuance of common stock under
stock option plan and related
income tax benefits 54 1,129 -- -- 1,183
Cash dividends declared ($.34 per share) -- -- (1,540) -- (1,540)
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects -- -- -- (2,612) (2,612)
------ ------- -------- ------- --------
Balance at June 30, 1996 $2,266 $28,771 $ 58,659 $(1,356) $ 88,340
====== ======= ======== ======= ========
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1997 1996
---- ----
(In thousands)
Cash flows from operating activities: $ 5,923 $ 5,233
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for loan losses 125 150
Depreciation and amortization, net 1,216 1,120
Foreclosed real estate losses and provisions, net (22) 31
Gain on sales of securities, net (673) (195)
Gain on sales of loans, net (306) --
Loss on sale of fixed assets 53 9
Decrease (increase) in accrued interest receivable
and other assets 159 (109)
Decrease in accrued taxes and expenses
and other liabilities (179) (986)
--------- --------
Net cash provided by operating activities 6,296 5,253
--------- --------
Cash flows from investing activities:
Maturities of investment securities available for sale 33,685 14,450
Purchases of investment securities available for sale (111,837) (79,076)
Sales of investment securities available for sale 18,626 33,708
Maturities of investment securities held to maturity 30,034 24,778
Purchases of investment securities held to maturity
and FHLBB stock (250) (34,611)
Principal amortization of mortgage-backed investments 2,901 2,604
Proceeds from sale of loans, net 11,613 --
Loans originated and purchased, net of amortization and payoffs (16,187) (8,521)
Purchases of bank premises and equipment, net (407) (165)
Sales of, and principal payments received on,
foreclosed real estate 425 300
--------- --------
Net cash used in investing activities (31,397) (46,533)
--------- --------
(continued)
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See accompanying notes to consolidated financial statements.
MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
Six Months Ended
June 30,
1997 1996
---- ----
(In thousands)
Cash Flows from financing activities:
Net increase in deposits 32,470 13,317
Net decrease in borrowings with maturities of three
months or less (31,975) (7,162)
Proceeds from long-term debt 29,792 30,000
Issuance of common stock 34 659
Cash dividends paid (2,268) (1,964)
-------- --------
Net cash provided by financing activities 28,053 34,850
-------- --------
Net change in cash and cash equivalents 2,952 (6,430)
Cash and cash equivalents, beginning
of period 16,429 28,770
-------- --------
Cash and cash equivalents, end of period $ 19,381 $ 22,340
======== ========
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 1. BASIS OF PRESENTATION
Certain amounts have been reclassified in the June 30, 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 and six months
ended June 30, 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 June 30, 1997 the Bank had outstanding commitments to originate new
residential and commercial real estate mortgage loans of approximately $19.9
million, which are not reflected on the consolidated balance sheet. Unadvanced
funds on equity lines were $22.8 million, unadvanced construction loan funds
were $7.8 million, and unadvanced funds on commercial lines of credit were $7.6
million at June 30, 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 $3.1 million, or $.65 per share for the three months
ended June 30, 1997, a 22% increase when compared to $2.5 million or $.54 per
share for the same quarter in 1996. For the second quarter of 1997, the
annualized return on assets was 1.16% and the annualized return on equity was
13.17%, compared to 1.04% and 11.66% for the comparable periods in 1996.
Consolidated net income for the first six months of 1997 was $5.9 million or
$1.25 per share ($1.24 per share on a fully diluted basis) reflecting a 13%
increase when compared to $5.2 million or $1.11 per share for the comparable
period last year. The annualized return on assets was 1.13% and the annualized
return on equity was 12.73% for the six months ended June 30, 1997, compared to
1.08% and 12.07% for the comparable periods in 1996.
The convergence of one-time, special events and continuing management of
resources resulted in exceptional financial results for the quarter and
year-to-date. During the second quarter of 1997, the Bank sold a former branch
property resulting in a $53,000 loss and sold equity holdings in bank stocks
producing net gains of $287,000. The Bank began a program to liquidate lower
yielding U.S. Treasury securities, resulting in net gains of $121,000 and
reinvested those proceeds into higher yielding mortgage-backed securities to
improve net interest income The Bank also sold $11 million of education loans,
and recorded net gains of $306,000. These special events during the quarter
brought year-to-date net gains on the sale of assets to $926,000. The gains from
the sale of assets in addition to increased net interest income for the quarter
and year-to-date, more than offset the increase in operating expenses and income
taxes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The provision for loan losses was decreased to $50,000 for the quarter and
$125,000 for the six months ended June 30, 1997, compared to $90,000 and
$150,000 for the three and six months ended June 30, 1996. Other real estate
owned property decreased from $276,000 at December 31, 1996 to $79,000 at June
30, 1997. Total non-performing assets were $3.9 million at June 30, 1997 or .37%
of total assets, compared to $3.7 million or .36% at December 31, 1996. The
allowance for loans losses at June 30, 1997 was $7.0 representing 176% of
non-performing assets compared with $7.2 million representing 196% of
non-performing assets at December 31, 1996.
As of June 30, 1997, loans increased $4.2 million, investments increased $26.8
million, deposits increased $32.5 million, short-term borrowings decreased $32.0
million, and long-term borrowings increased $29.8 million from December 31,
1996. The Bank had total assets of $1.1 billion, and total deposits of $824.6
million at June 30, 1997. Stockholders equity was $96.5 million representing a
book value of $21.24 per share, and a capital to assets ratio of 8.99%,
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:
June 30, December 31,
1997 1996
---- ----
(In thousands)
Securities available for sale, at fair value $324,756 $268,379
Securities held to maturity, at amortized cost 120,729 150,591
Restricted equity securities:
Federal Home Loan Bank stock 5,132 4,882
Massachusetts Savings Bank Life Insurance stock 1,114 1,114
-------- --------
$451,731 $424,966
======== ========
The amortized cost and fair value of investment securities, excluding restricted
securities, at June 30, 1997, and December 31, 1996 with gross unrealized gains
and losses, follows:
June 30, 1997
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
State and municipal $ 52 $ 1 $ -- $ 53
Mortgage - backed 75,979 2 (330) 75,651
U.S. Government and
federal agency 82,338 122 (969) 81,491
Other 160,891 450 (412) 160,929
-------- ---- ------- --------
Total debt securities 319,260 575 (1,711) 318,124
Marketable equity
securities 6,646 90 (104) 6,632
-------- ---- ------- --------
Total securities
available for sale $325,906 $665 $(1,815) $324,756
======== ==== ======= ========
Securities Held to Maturity
U.S. Government
and federal agency $111,982 $273 $ (210) $112,045
Other 8,747 17 (1) 8,763
-------- ---- ------- --------
Total securities
held to maturity $120,729 $290 $ (211) $120,808
======== ==== ======= ========
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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
June 30, 1997 is as follows:
June 30, 1997
-------------------------------------------------------
Available for Sale Held to Maturity
----------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In thousands)
Within 1 year $ 44,615 $ 44,765 $ 62,923 $ 63,115
After 1 year through 5 years 198,666 197,708 57,806 57,693
-------- -------- -------- --------
243,281 242,473 120,729 120,808
Mortgage - backed securities 75,979 75,651 -- --
-------- -------- -------- --------
$319,260 $318,124 $120,729 $120,808
======== ======== ======== ========
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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 $26.8 million from $425.0 million at December
31, 1996 to $451.7 million at June 30, 1997. To improve the investment portfolio
yield, management implemented a program of replacing U.S. Treasury securities as
they matured or were sold, with mortgage-backed securities and corporate bonds.
In addition to the sale of $11 million in student loans, borrowings from various
sources were utilized to fund investment purchases. At June 30, 1997, the
securities portfolio classified as "available for sale" reflected a $1.2 million
depreciation in market value as a result of fluctuations in 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:
June 30, December 31,
1997 1996
---- ----
(In thousands)
Mortgage loans on real estate:
Residential 1-4 family $ 390,731 $ 380,627
Commercial 122,058 123,158
Construction 16,975 18,155
Second mortgages 1,707 1,928
Equity lines of credit 21,532 21,169
--------- ---------
553,003 545,037
Less: Unadvanced construction
loan funds (7,819) (9,436)
--------- ---------
545,184 535,601
--------- ---------
Other loans:
Commercial loans 15,734 11,014
Personal loans 2,423 2,219
Education and other 7,945 18,329
--------- ---------
26,102 31,562
--------- ---------
Add: Premium on loans acquired 301 354
Net deferred fees 717 569
--------- ---------
Total loans 572,304 568,086
Less: Allowance for loan losses (6,968) (7,231)
--------- ---------
Loans, net $ 565,336 $ 560,855
========= =========
Loans experienced a modest increase for the first six months of 1997,
principally in residential 1-4 family and commercial loans. The 42.9% increase
in commercial loans is the result of intensified marketing efforts for asset
based lending opportunities. The Bank sold $11 million of education loans in the
second quarter of 1997 and recorded a net gain on sale of $306,000. It is the
Bank's intention to sell education loans in the repayment stage as conditions
warrant. 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 despite improvement in the regional economy.
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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 $3.9 million at June 30, 1997,
compared with $3.7 million at December 31, 1996.
The principal balance of non-accrual loans was $3.9 million, or 0.36% of total
assets, at June 30, 1997, compared to $3.4 million or 0.33% of total assets at
December 31, 1996. Foreclosed real estate totaled $79,000 at June 30, 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. The principal balance of
impaired loans was $3.6 million all of which were included in the balance of
non-accrual loans at June 30, 1997. The loan loss reserve allocated to impaired
loans at June 30, 1997 was $762,000.
ALLOWANCE FOR LOAN LOSSES
Six Months Ended
-------------------------
June 30, June 30,
1997 1996
---- ----
(In thousands)
Balance at the beginning
of the period $ 7,231 $ 7,466
Provisions 125 150
Recoveries 41 83
Less: Charge-offs (429) (329)
------- -------
Balance at the end of the period $ 6,968 $ 7,370
======= =======
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 $7.0 million at June 30, 1997, a reserve
coverage of 180.1% 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 June 30,
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 $32.5 million from December 31, 1996 levels to $824.6
million at June 30, 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
and demand deposits. The Bank put in place a special two-year term certificate
promotion during the first six months of 1997 intended to extend deposit
maturities and attract new customer accounts. As a result of this promotion,
term certificates of deposit increased $30.9 million. Money market deposits
increased from December 31, 1996 as the Bank continues to offer competitive
rates to attract new corporate accounts.
The following table indicates the balances in various deposit accounts at the
dates indicated.
June 30, December 31,
1997 1996
---- ----
(In thousands)
Demand accounts $ 42,495 $ 40,124
NOW accounts 57,489 60,839
Savings & money market accounts 318,288 315,771
Term certificates 406,339 375,407
-------- --------
$824,611 $792,141
======== ========
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BORROWED FUNDS
The Bank has selectively engaged in long-term borrowings to fund loans and has
entered into short-term repurchase agreements to fund investment securities
purchases. Total borrowed funds decreased to $146.3 million at June 30, 1997
from $148.5 million at December 31, 1996, reflecting management's decision to
utilize borrowings as a supplement to current deposit activity levels. The Bank
took advantage of relatively low interest rates to shift into 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 8.99% at June 30, 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 June 30, 1997, the
Bank's tier 1 capital to risk-weighted assets was 14.89% and the Bank's tier 1
plus tier 2 capital, or total to risk-weighted assets was 16.03%.
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 June
30, 1997, the Bank's leverage capital ratio was 8.54% 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 June 30, 1997 was $21.24 per share, compared with $20.40 per share
at December 31, 1996.
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21
RESULTS OF OPERATIONS
NET INTEREST INCOME
Interest and dividend income from loans and investments increased 9.4% or $1.6
million to $18.6 million for the second quarter in 1997 when compared to the
same quarter in 1996. Average earning assets increased $81.0 million, or 8.6%
when the prior periods are compared with $44.4 million coming from short and
long-term investment securities and $36.6 million coming from loans. The yield
on earning assets which increased to 7.24% for the second quarter in 1997, was
the result of higher yields on investment securities and loans. The yield on
investment securities increased to 6.25% from 6.18%, reflecting the purchase of
additional higher yielding investment securities and reinvestment of matured and
sold investment securities at higher yields. Investment securities contributed
$778,000 of additional interest and dividend income when comparing the second
quarter of 1997 to the second quarter in 1996. The increase in the average
balance on loans; coupled with an increase in the weighted average yield on
loans to 8.04% from 7.98%, contributed $816,000 of additional interest income on
loans. The principal increase in interest income was from residential 1-4 family
mortgage loans as loans repriced upward and new loans were originated at higher
rates. Increased levels of commercial and education loans also contributed to
the increase in interest income on loans.
Total interest expense for the three months ended June 30, 1997 was $10.1
million reflecting an increase of $1.1 million or 12.9% over the same period in
1996. This was principally due to an increase of $74.1 million in average
interest bearing liabilities over the comparable prior year period. This
increase can be attributed to the average balance in deposits increasing $9.3
million, and the average balance in borrowed funds increasing $64.8 million. The
Bank experienced a downward repricing on term certificates offsetting a modest
increase in the higher savings rate paid on "ComboPlus" statement savings
deposits, thus maintaining the overall cost of deposits at 4.04%; level with the
comparable prior year period. Overall, interest expense on deposits increased
$120,000. As short-term borrowings 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 borrowed funds increased $1.0 million
in the second quarter of 1997 when compared to the second quarter in 1996. The
overall cost of interest bearing liabilities increased to 4.36% from 4.21% when
comparing the two quarters.
Net interest income increased 5.5% or $440,000 to $8.5 million despite a decline
in the interest rate spread and net interest margin when comparing the second
quarter in 1997 to the same quarter in 1996. This is primarily due to increased
levels of earning assets. While the yield on earning assets increased 5 basis
points when comparing the second quarter in 1997 to the second quarter in 1996,
this increase was more than offset by a 15 basis point increase in the cost of
interest bearing liabilities. This resulted in a reduction of the net interest
margin and interest rate spread to 3.30% and 2.88% respectively for the three
months ended June 30, 1997, compared with 3.38% and 2.98% for the three months
ended June 30, 1996.
19
22
RESULTS OF OPERATIONS
(continued)
NET INTEREST INCOME
Interest and dividend income from loans and investments for the first six months
of 1997 totalled $36.8 million, an increase of $2.9 million or 8.7% from the
same prior year period. The increase in average earning assets of $85.9 million,
or 9.2% can be attributed to a $49.9 million increase in short and long-term
investment securities, and a $36.0 million increase in loans. The yield on
earning assets declined from 7.24% for the six months ended June 30, 1996 to
7.21% for the six months ended June 30, 1997, principally due to a lower yield
on commercial real estate loans. Nevertheless, interest income on loans for the
six months ended June 30, 1997 increased $1.3 million over prior year. An
increase in the yield on investment securities from 6.19% to 6.24%, in addition
to higher balances, contributed $1.7 million of additional interest income over
the prior year period. Interest income for the six months ending June 30, 1996
also 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.
Total interest expense increased $2.1 million or 11.9% over the comparable
period in 1996 to $19.9 million for the six months ended June 30, 1997. The
increase is principally due to increased levels of borrowed funds. An increase
over the comparable period in 1996 of $71 million for the average balance in
borrowings, in addition to a 31 basis point increase in the rate paid, increased
interest expense on borrowed funds by $2.2 million. The weighted average rate
paid on deposits declined to 4.01% from 4.05% in the prior year. The lower rate
paid on deposits more than offset the increased average balance, thus decreasing
interest expense on deposits by $54,000 when comparing the six month periods
year to year. The Bank's overall cost of funds for the six months ended June 30,
1997 increased to 4.33% from 4.21%.
Net interest income increased 5.2% or $840,000 to $16.9 million despite a
decline in the interest rate spread and net interest margin when comparing the
six months ended June 30, 1997 to the six months ended June 30, 1996. This is
primarily due to increased levels of earning assets. The decrease in the yield
on earning assets of 3 basis points, in addition to a 12 basis point increase in
the cost of funds resulted in a decline in the net interest margin and interest
rate spread to 3.29% and 2.88%, respectively, for the first six months of 1997
compared to 3.42% and 3.03% for the prior year period.
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23
MEDFORD SAVINGS BANK
INTEREST RATE SPREAD
Three Months Ended
June 30,
-------------------
1997 1996
---- ----
Weighted average yield earned on:
Short-term investments 5.38% 5.15%
Investment securities 6.25 6.18
Loans 8.04 7.98
---- ----
All earning assets 7.24% 7.19%
---- ----
Weighted average rate paid on:
Deposits 4.04% 4.04%
Borrowed funds 5.88 5.49
---- ----
All interest-bearing liabilities 4.36% 4.21%
---- ----
Weighted average rate spread 2.88% 2.98%
---- ----
Net interest margin 3.30% 3.38%
==== ====
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24
MEDFORD SAVINGS BANK
INTEREST RATE SPREAD
Six Months Ended
June 30,
------------------
1997 1996
---- ----
Weighted average yield earned on:
Short-term investments 5.21% 5.26%
Investment securities 6.24 6.19
Loans 7.99 8.05
---- ----
All earning assets 7.21% 7.24%
---- ----
Weighted average rate paid on:
Deposits 4.01% 4.05%
Borrowed funds 5.84 5.53
---- ----
All interest-bearing liabilities 4.33% 4.21%
---- ----
Weighted average rate spread 2.88% 3.03%
---- ----
Net interest margin 3.29% 3.42%
==== ====
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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 June 30, 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 $50,000 and $125,000 in provisions for loan losses during the
three and six months ended June 30, 1997, down from $90,000 and $150,000 for the
comparable prior year periods. Net loan charge-offs for the three and six months
ended June 30, 1997 totalled $24,000 and $388,000, as compared to $72,000 and
$246,000 for the same periods in 1996.
OTHER INCOME
Other income, such as customer service fees and gains and losses on the sale of
assets, increased $529,000 to $1.3 million in the second quarter of 1997 as
compared to the second quarter of 1996. The increase was principally due to
$396,000 in additional net gains on the sale of securities, and $306,000 in net
gains on the sale of loans over the comparable period in 1996, partially offset
by a $53,000 net loss on the sale of a former branch property, and a $72,000
reduction in customer service fees.
Other income increased $636,000 to $2.3 million for the first six months of 1997
when compared to the first six months of 1996. The increase is principally
attributable to $478,000 of additional net gains on the sale of securities and
$306,000 in net gains on the sale of loans over the comparable period in 1996,
offset by $44,000 increases in losses on the sale of fixed assets and a $120,000
reduction in customer service fees.
OPERATING EXPENSES
Operating expenses were $4.6 million and $9.2 million for the three and six
months ended June 30, 1997 compared to $4.5 million and $8.9 million for the
same periods in 1996. The most significant increases were in salary and benefit
costs, which increased 4.1%, and 5.3%, respectively, when comparing the three
and six month periods ended June 30, 1997 and 1996. Other increases within these
periods include equipment depreciation resulting from the Bank's investment of
$1.7 million in new technology in the third quarter of 1996 and an additional
$175,000 in the second quarter of 1997 for a telephone banking center. The
increased occupancy and equipment costs are for the most part offset by lower
data processing costs as the Bank improves operating efficiencies. The Bank's
annualized expense ratio which is the ratio of non-interest expense as a
percentage of average assets was 1.73% for the six months ended June 30, 1997.
The Bank continues to focus on cost containment with the intent to be a low cost
provider
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26
of high quality banking products 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 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 first six months of 1997, cash flow from
maturities and sales of securities was $82.3 million compared to cash flow from
maturities and sales of securities of $72.9 million for the first six months of
1996. Principal payments received on mortgage-backed investments during the six
months ended June 30, 1997 and 1996 totalled $2.9 million and $2.6 million,
respectively. During periods of high interest rates maturities in the bond
portfolio have provided significant liquidity at a lower cost than borrowings.
Amortization and pay-offs of the loan portfolio 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 June 30,
1997 the Bank's outstanding borrowings from the FHLBB were $97.4 million, as
compared to $87.1 million at June 30, 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 June 30,
1997 was $47.6 million, as compared to $6.7 million at June 30, 1996.
Commitments to originate residential and commercial real estate mortgage
loans at June 30, 1997 excluding unadvanced construction funds of $7.8 million,
was $19.9 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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27
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
Purchases of securities during the six months ended June 30, 1997 totalled
$112.1 million consisting of debt instruments maturing in less than five years
and equities. This compares with purchases of $113.7 million for the six months
ended June 30, 1996.
Residential and commercial real estate mortgage loan origination for the
six months ended June 30, 1997 totalled $46.9 million, compared with $44.7
million for the six months ended June 30, 1996. The Bank also purchased
residential 1-4 family loans amounting to $1.2 million from a third party during
the first six months of 1997.
The Bank's capital position (total stockholders' equity) was $96.5 million
or 8.99% of total assets at June 30, 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.
(The remainder of this page intentionally left blank.)
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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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29
OTHER EVENTS
The Board of Directors of the Bank has approved the establishment of a holding
company for the Bank currently expected to be named Medford Bancorp, Inc. Proxy
materials to obtain shareholder approval of the holding company formation were
first mailed on August 4, 1997 to shareholders of record as of July 31, 1997.
The reasons for the proposed establishment of the holding company were discussed
in detail in the proxy materials. If the required shareholder and regulator
approvals are obtained, the transaction is anticipated to be consummated in the
fourth quarter of 1997.
As is also detailed in the proxy materials pursuant to the reorganization,
shares of Bank common stock (together with associated stock purchase rights)
would be converted automatically into shares of holding company common stock
(together with associated preferred stock purchase rights).
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30
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: August 12, 1997
/s/ Arthur H. Meehan
------------------------------------------------
Arthur H. Meehan
Chairman/President/CEO
Date: August 12, 1997
/s/ Phillip W. Wong
-------------------------------------------------
Phillip W. Wong
Senior Vice President and Chief Financial Officer
28