1
EXHIBIT 99.6
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 September 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
November 7, 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
September 30, December 31,
1997 1996
------------------------------------
(In thousands)
ASSETS
Cash and due from banks $ 11,439 $ 11,900
Short-term investments 5,605 4,529
----------- -----------
Cash and cash equivalents 17,044 16,429
----------- -----------
Investment securities 472,606 424,966
Loans 586,784 568,086
Less allowance for loan losses (6,601) (7,231)
----------- -----------
Loans, net 580,183 560,855
----------- -----------
Foreclosed real estate, net 214 276
Banking premises and equipment, net 10,966 10,896
Accrued interest receivable 9,385 9,291
Other assets 15,947 16,385
----------- -----------
TOTAL ASSETS $ 1,106,345 $ 1,039,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 824,183 $ 792,141
Short-term borrowings 64,509 80,817
Long-term debt 112,439 67,647
Accrued taxes and expenses 3,710 3,701
Other liabilities 1,766 2,271
----------- -----------
Total liabilities 1,006,607 946,577
----------- -----------
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 67,815 61,634
----------- -----------
99,010 92,749
Net unrealized gain (loss) on securities available
for sale, after tax effects 728 (228)
----------- -----------
Total stockholders' equity 99,738 92,521
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,106,345 $ 1,039,098
=========== ===========
See accompanying notes to consolidated financial statements
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30,
1997 1996
------------------------
(Dollars in thousands,
except per share amounts)
Interest and dividend income:
Interest and fees on loans $11,638 $10,823
Interest on debt securities 7,221 6,067
Dividend income 204 186
Interest on short-term investments 51 63
------- -------
Total interest and dividend income 19,114 17,139
------- -------
Interest expense:
Interest on deposits 8,104 7,610
Interest on short-term borrowings 817 525
Interest on long-term debt 1,664 956
------- -------
Total interest expense 10,585 9,091
------- -------
Net interest income 8,529 8,048
Provision for loan losses -- 45
------- -------
Net interest income, after provision for loan losses 8,529 8,003
------- -------
Other income:
Customer service fees 504 536
Gain on sales of securities, net 119 85
Miscellaneous 140 121
------- -------
Total other income 763 742
------- -------
Operating expenses:
Salaries and employee benefits 2,589 2,467
Occupancy and equipment 571 498
Data processing 354 438
Professional fees 188 245
Amortization of intangibles 302 312
Advertising and marketing 156 177
Other general and administrative 636 458
------- -------
Total operating expenses 4,796 4,595
------- -------
Income before income taxes 4,496 4,150
Provision for income taxes 1,786 1,646
------- -------
Net income $ 2,710 $ 2,504
======= =======
(CONTINUED)
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
Three Months Ended
September 30,
1997 1996
--------------------------
Earnings per share:
Primary $0.57 $0.53
Fully diluted $0.57 $0.53
Cash dividends declared per share $0.18 $0.17
Weighted average shares outstanding
Primary 4,774,826 4,722,614
Fully diluted 4,789,064 4,727,521
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
September 30,
1997 1996
-------------------------
(Dollars in thousands,
except per share amounts)
Interest and dividend income:
Interest and fees on loans $34,439 $32,342
Interest on debt securities 20,749 17,719
Dividend income 524 494
Interest on short-term investments 157 392
------- -------
Total interest and dividend income 55,869 50,947
------- -------
Interest expense:
Interest on deposits 23,286 22,846
Interest on short-term borrowings 2,783 1,690
Interest on long-term debt 4,396 2,328
------- -------
Total interest expense 30,465 26,864
------- -------
Net interest income 25,404 24,083
Provision for loan losses 125 195
------- -------
Net interest income, after provision for loan losses 25,279 23,888
------- -------
Other income:
Customer service fees 1,491 1,643
Gain on sales of securities, net 792 280
Gain on sales of loans, net 306 --
Miscellaneous 463 472
------- -------
Total other income 3,052 2,395
------- -------
Operating expenses:
Salaries and employee benefits 7,683 7,303
Occupancy and equipment 1,726 1,482
Data Processing 1,053 1,233
Professional fees 451 519
Amortization of intangibles 908 944
Advertising and marketing 457 507
Other general and administrative 1,709 1,538
------- -------
Total operating expenses 13,987 13,526
------- -------
Income before income taxes 14,344 12,757
Provision for income taxes 5,711 5,020
------- -------
Net income $ 8,633 $ 7,737
======= =======
(CONTINUED)
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
(concluded)
Nine Months Ended
September 30,
1997 1996
-----------------------------
Earnings per share:
Primary $1.81 $1.64
Fully diluted $1.80 $1.64
Cash dividends declared per share $0.54 $0.51
Weighted average shares outstanding
Primary 4,761,769 4,716,544
Fully diluted 4,788,089 4,725,277
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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 -- -- 8,633 8,633
Issuance of common stock under
stock option plan and related income
tax benefits 4 76 -- -- 80
Cash dividends declared ($.54 per share) -- -- (2,452) -- (2,452)
Change in net unrealized gain (loss) on
securities available for sale, after
tax effects -- -- -- 956 956
-------- -------- -------- -------- --------
Balance at September 30, 1997 $ 2,271 $ 28,924 $ 67,815 $ 728 $ 99,738
======== ======== ======== ======== ========
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 -- -- 7,737 -- 7,737
Issuance of common stock under
stock option plan and related
income tax benefits 55 1,143 -- -- 1,198
Cash dividends declared ($.51 per share) -- -- (2,310) -- (2,310)
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects -- -- -- (2,166) (2,166)
-------- -------- -------- -------- --------
Balance at September 30, 1996 $ 2,267 $ 28,785 $ 60,393 $ (910) $ 90,535
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1997 1996
------------------------------
(In thousands)
Cash flows from operating activities: $ 8,633 $ 7,737
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for loan losses 125 195
Depreciation and amortization, net 1,721 1,651
Foreclosed real estate (gains), losses and provisions, net (22) 31
Gain on sales of securities, net (792) (280)
Gain on sales of loans, net (306) --
Loss on sale of fixed assets 53 41
Decrease in accrued interest receivable and other assets (1,170) (448)
Increase (decrease) in accrued taxes and expenses
and other liabilities 90 (771)
--------- ---------
Net cash provided by operating activities 8,332 8,156
--------- ---------
Cash flows from investing activities:
Maturities of investment securities available for sale 43,685 19,020
Purchases of investment securities available for sale (147,094) (117,089)
Sales of investment securities available for sale 19,428 36,840
Maturities of investment securities held to maturity 34,034 40,786
Purchases of investment securities held to maturity
and FHLBB stock (740) (34,611)
Principal amortization of mortgage-backed investments 5,427 3,571
Proceeds from sale of loans 11,613 --
Loans originated and purchased, net of amortization and payoffs (31,127) (14,053)
Purchases of bank premises and equipment, net (842) (580)
Sales of, and principal payments received on,
foreclosed real estate 425 300
--------- ---------
Net cash used in investing activities (65,191) (65,816)
--------- ---------
(continued)
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONCLUDED)
Nine Months Ended
September 30,
1997 1996
---------------------------
(In thousands)
Cash Flows from financing activities:
Net increase (decrease) in deposits 32,042 (2,157)
Net increase (decrease) in borrowings with maturities
of three months or less (16,308) 20,136
Proceeds from long-term debt 44,792 30,500
Issuance of common stock 34 674
Cash dividends paid (3,086) (2,735)
-------- --------
Net cash provided by financing activities 57,474 46,418
-------- --------
Net change in cash and cash equivalents 615 (11,242)
Cash and cash equivalents, beginning of period 16,429 28,770
-------- --------
Cash and cash equivalents, end of period $ 17,044 $ 17,528
======== ========
See accompanying notes to consolidated financial statements.
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MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 1. BASIS OF PRESENTATION
Certain amounts have been reclassified in the September 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 nine months
ended September 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 September 30, 1997 the Bank had outstanding commitments to
originate new residential and commercial real estate mortgage loans of
approximately $20.2 million, which are not reflected on the consolidated balance
sheet. Unadvanced funds on equity lines were $24.3 million, unadvanced
construction loan funds were $8.0 million, and unadvanced funds on commercial
lines of credit were $8.8 million at September 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 $2.7 million, or $.57 per share for the three months
ended September 30, 1997, an 8% increase when compared to $2.5 million or $.53
per share for the same quarter in 1996. For the third quarter of 1997, the
annualized return on assets was 0.98% and the annualized return on equity was
10.98%, compared to 1.01% and 11.30% for the comparable period in 1996.
Consolidated net income for the nine months ended September 30, 1997 was $8.6
million or $1.81 per share ($1.80 per share on a fully diluted basis) reflecting
a 12% increase when compared to $7.7 million or $1.64 per share for the
comparable period last year. The annualized return on assets was 1.08% and the
annualized return on equity was 12.13% for the nine months ended September 30,
1997, compared to 1.06% and 11.76% for the comparable period in 1996.
The increases in earnings for the three and nine months ended September 30, 1997
was the result, in large part, of improved net interest income due to an
increase in average earning assets, a reduction in the provision for loan losses
due to positive credit quality trends, and an increase in net gains on the sale
of securities and loans in the second quarter.
Net interest income totalled $8.5 million for the quarter ended September 30,
1997, with a net interest margin of 3.29%, compared to $8.0 million and a net
interest margin of 3.42% for the quarter ended September 30, 1996. Net interest
income for the nine months ended September 30, 1997 totalled $25.4 million with
a net interest margin of 3.29%, compared with $24.1 million and a net interest
margin of 3.42% for the same prior year period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Total operating expenses increased $201,000 or 4.4% when comparing the three
months ended September 30, 1997 to the same period in 1996. Included in this
increase was approximately $100,000 of expenses related to the formation of a
holding company for the Bank. Year-to-date operating expenses increased $461,000
or 3.4% when comparing the nine months ended September 30, 1997 to the same
prior year period.
The provision for loan losses for the nine months ended September 30, 1997 was
$125,000 compared with $195,000 for the nine months ended September 30, 1996.
Total non-performing assets were $3.0 million or 0.27% of total assets at
September 30, 1997, compared to $3.7 million or 0.36% of total assets at
December 31, 1996. The allowance for loan losses at September 30, 1997 was $6.6
million, representing 219% of non-performing assets and 1.12% of total loans. At
December 31, 1996, the allowance for loan losses was $7.2 million representing
196% of non-performing assets and 1.27% of total loans. Other real estate owned
decreased to $214,000 at September 30, 1997 from $276,000 at December 31, 1996.
The Bank had total assets of $1.1 billion and deposits of $824.2 million at
September 30, 1997, and the capital to assets ratio was 9.02%, exceeding all
regulatory requirements. When comparing balances from December 31, 1996,
investment securities increased $47.6 million or 11.2% to $472.6 million, total
loans increased $18.7 million or 3.3% to $586.8 million, and deposits and
borrowings increased $60.5 million, or 6.4% to $1.0 billion.
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:
September 30, December 31,
1997 1996
---- ----
(In thousands)
Securities available for sale, at fair value $349,084 $268,379
Securities held to maturity, at amortized cost 116,786 150,591
Restricted equity securities:
Federal Home Loan Bank stock 5,622 4,882
Massachusetts Savings Bank Life Insurance stock 1,114 1,114
-------- --------
$472,606 $424,966
======== ========
The amortized cost and fair value of investment securities, excluding restricted
securities, at September 30, 1997, and December 31, 1996 with gross unrealized
gains and losses, follows:
September 30, 1997
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Securities Available for Sale
Debt securities:
State and municipal $ 23 $ -- $ -- $ 23
Mortgage - backed 84,983 276 -- 85,259
U.S. Government and
federal agency 92,304 266 (471) 92,099
Other 164,607 995 (133) 165,469
-------- ------ ----- --------
Total debt securities 341,917 1,537 (604) 342,850
Marketable equity
securities 6,007 285 (58) 6,234
-------- ------ ----- --------
Total securities
available for sale $347,924 $1,822 $(662) $349,084
======== ====== ===== ========
Securities Held to Maturity
U.S. Government
and federal agency $108,027 $ 378 $ (79) $108,326
Other 8,759 26 -- 8,785
-------- ------ ----- --------
Total securities
held to maturity $116,786 $ 404 $ (79) $117,111
======== ====== ===== ========
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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
September 30, 1997 is as follows:
September 30, 1997
---------------------------------------------------------------------
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
------- -------- -------- --------
(In thousands)
Within 1 year $ 43,560 $ 43,687 $ 75,681 $ 75,796
After 1 year through 5 years 213,374 213,904 41,105 41,315
------- -------- -------- --------
256,934 257,591 116,786 117,111
Mortgage - backed securities 84,983 85,259 - -
-------- -------- -------- --------
$341,917 $342,850 $116,786 $117,111
======== ======== ======== ========
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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 $47.6 million from $425.0 million at December
31, 1996 to $472.6 million at September 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
September 30, 1997, the securities portfolio classified as "available for sale"
reflected a $1.2 million appreciation 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:
September 30, December 31,
1997 1996
--------- ---------
(In thousands)
Mortgage loans on real estate:
Residential 1-4 family $ 400,836 $ 380,627
Commercial 121,947 123,158
Construction 19,398 18,155
Second mortgages 1,642 1,928
Equity lines of credit 22,326 21,169
--------- ---------
566,149 545,037
Less: Unadvanced construction
loan funds (8,043) (9,436)
--------- ---------
558,106 535,601
--------- ---------
Other loans:
Commercial loans 15,921 11,014
Personal loans 2,296 2,219
Education and other 9,387 18,329
--------- ---------
27,604 31,562
--------- ---------
Add: Premium on loans acquired 285 354
Net deferred fees 789 569
--------- ---------
Total loans 586,784 568,086
Less: Allowance for loan losses (6,601) (7,231)
--------- ---------
Loans, net $ 580,183 $ 560,855
========= =========
Loans experienced a modest increase for the nine months ended September 30,
1997, principally in residential 1-4 family and commercial loans. Residential
1-4 family loans increased $20.2 million or 5.3%, with approximately 37% of the
increase in 15 year fixed rate, and 63% in adjustable rate mortgages. The
increase in commercial loans of 44.6% 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
Total non-performing assets were $3.0 million at September 30, 1997, compared
with $3.7 million at December 31, 1996.
The principal balance of non-accrual loans was $2.8 million, or 0.25% of total
assets, at September 30, 1997, compared to $3.4 million, or 0.33% of total
assets, at December 31, 1996. Foreclosed real estate totaled $214,000 at
September 30, 1997 compared to $276,000 at December 31, 1996. 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.
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 $2.2 million, all of which were included in the balance of
non-accrual loans at September 30, 1997. The allowance for loan losses allocated
to impaired loans at September 30, 1997 was $141,000.
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the periods indicated is as
follows:
Nine Months Ended
--------------------------------------------
September 30, September 30,
1997 1996
------ -----
(In thousands)
Balance at the beginning
of the period $ 7,231 $ 7,466
Provisions 125 195
Recoveries 59 106
Less: Charge-offs (814) ( 368)
-------- ----------
Balance at the end of the period $ 6,601 $ 7,399
======== ========
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 $6.6 million at September 30, 1997,
representing a 235.8% reserve coverage of non-accrual loans and 1.12% 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 September
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 $32.0 million from December 31, 1996 levels to $824.2
million at September 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 $23.9 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.
September 30, December 31,
1997 1996
------ -----
(In thousands)
Demand accounts $ 43,029 $ 40,124
NOW accounts 58,621 60,839
Savings & money market accounts 323,260 315,771
Term certificates 399,273 375,407
-------- --------
$824,183 $792,141
======== ========
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BORROWED FUNDS
The Bank has selectively engaged in long-term borrowings to fund loans and
mortgage-backed securities, and has entered into short-term repurchase
agreements to fund investment securities purchases. Total borrowed funds
increased to $176.9 million at September 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 from short-term 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 9.02% at September 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 September 30, 1997, the
Bank's tier 1 capital to risk-weighted assets was 14.85% and the Bank's tier 1
plus tier 2 capital, or total to risk-weighted assets was 15.90%.
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 examination
rating. At September 30, 1997, the Bank's leverage capital ratio was 8.53% 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 September 30, 1997 was $21.96 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 11.5%, or $2.0
million, to $19.1 million for the third quarter in 1997 when compared to the
same quarter in 1996. Average earning assets increased $100.7 million, or 10.6%,
when comparing the third quarter of 1997 to the third quarter of 1996, with
$69.2 million coming from short and long-term investment securities and $31.5
million coming from loans. The yield on earning assets increased to 7.27% from
7.21% and was the result of higher yields in all earning assets categories. The
yield on investment securities increased to 6.32% from 6.25%, reflecting the
purchase and reinvestment of additional higher yielding investment securities
such as mortgage-backed securities and corporate bonds. Investments contributed
$1.2 million of additional interest and dividend income when comparing the third
quarter of 1997 to the third quarter of 1996. The increase in the average
balance of loans, coupled with an increase in the weighted average yield on
loans to 8.06% from 7.93%, contributed $815,000 of additional interest. An
increase in 1-4 family mortgage loan volume contributed $595,000, commercial
real estate contributed $141,000, and commercial loans contributed $131,000,
respectively, to the increase in interest income on loans. Interest income on
consumer loans decreased $52,000 when compared to the prior year period as a
result of the sale of student loans.
Total interest expense for the three months ended September 30, 1997 was $10.6
million reflecting an increase of $1.5 million or 16.4% over the same period in
1996. This was principally due to an increase of $91.2 million in average
interest bearing liabilities over the comparable prior year period. This
increase can be attributed to the average balance in deposits increasing $25.7
million, and the average balance in borrowed funds increasing $65.5 million. The
Bank experienced migration from the lower rate passbook savings deposit into the
higher rate "ComboPlus" statement savings deposit. This coupled with an increase
in the rate paid on high balance money market accounts increased the overall
cost of deposits 11 basis points to 4.10%. To manage interest expense on
deposits, the Bank elected not to offer premium term deposit products during the
quarter. Interest expense on deposits increased $494,000 when comparing the
three months ended September 30, 1997 to the three months ended September 30,
1996. 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 third quarter of 1997 when compared to the third quarter in 1996. The
overall cost of interest bearing liabilities increased to 4.41% from 4.20% when
comparing the two quarters.
Net interest income increased $481,000 or 6.0% to $8.5 million when comparing
the third quarter in 1997 to the same quarter in 1996 despite a decline in the
interest rate spread and net interest margin. This is primarily due to increased
levels of earning assets. While the yield on earning assets increased 6 basis
points when comparing the third quarter in 1997 to the third quarter in 1996,
this increase was more than offset by a 21 basis point increase in the cost of
interest bearing liabilities. This resulted in a reduction
19
22
RESULTS OF OPERATIONS
(CONTINUED)
of the net interest margin and interest rate spread to 3.29% and 2.86%,
respectively, for the three months ended September 30, 1997, compared with 3.42%
and 3.01% for the three months ended September 30, 1996.
Interest and dividend income from loans and investments for the first nine
months of 1997 totalled $55.9 million, an increase of $4.9 million or 9.7% from
the same prior year period. The increase in average earning assets of $90.9
million, or 9.7%, can be attributed to a $56.4 million increase in short and
long-term investment securities, and a $34.5 million increase in loans. The
yield on earning assets remained unchanged at 7.23% for the nine months ended
September 30, 1997 and 1996. An increase in the yield on investment securities
from 6.21% to 6.26%, in addition to higher average balances, contributed $2.8
million of additional interest income over the prior year period. Interest
income on loans for the nine months ended September 30, 1997 increased $2.1
million over the same prior year period. Interest income for the nine months
ended September 30, 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.
Total interest expense increased $3.6 million or 13.4% over the comparable
period in 1996 to $30.5 million for the nine months ended September 30, 1997.
The increase is principally due to increased levels of borrowed funds. An
increase over the comparable period in 1996 of $69.3 million for the average
balance in borrowings, in addition to a 18 basis point increase in the rate
paid, increased interest expense on borrowed funds by $3.2 million. The weighted
average rate paid on deposits increased to 4.04% from 4.03% in the comparable
prior year period. The Bank continues to focus on increasing core deposit
accounts. As a result, pricing strategies were implemented increasing certain
core deposit product rates while lowering term certificate rates. The increase
in the weighted average rate paid on deposits is principally due to
disintermediation from the lower rate passbook savings into the higher rate
"ComboPlus" statement savings, an increase in the money market rates, and the 2
year certificate of deposit promotion during the first six months of the year.
Interest expense on deposits increased $440,000 when comparing the nine month
periods year to year. The Bank's overall cost of funds for the nine months ended
September 30, 1997 increased to 4.35% from 4.21%.
Net interest income increased $1.3 million or 5.5% to $25.4 million despite a
decline in the interest rate spread and net interest margin when comparing the
nine months ended September 30, 1997 to the nine months ended September 30,
1996. This is primarily due to increased levels of earning assets. The flat
yield on earning assets, and the 14 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 nine months of 1997 compared to
3.42% and 3.02% for the comparable prior year period.
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23
MEDFORD SAVINGS BANK
INTEREST RATE SPREAD
Three Months Ended
September 30,
1997 1996
---- ----
Weighted average yield earned on:
Short-term investments 5.21% 5.12%
Investment securities 6.32 6.25
Loans 8.06 7.93
---- ----
All earning assets 7.27% 7.21%
----- -----
Weighted average rate paid on:
Deposits 4.10% 3.99%
Borrowed funds 5.88 5.80
---- ----
All interest-bearing liabilities 4.41% 4.20%
----- -----
Weighted average rate spread 2.86% 3.01%
----- -----
Net interest margin 3.29% 3.42%
===== =====
Nine Months Ended
September 30,
1997 1996
---- ----
Weighted average yield earned on:
Short-term investments 5.21% 5.24%
Investment securities 6.26 6.21
Loans 8.02 8.01
---- ----
All earning assets 7.23% 7.23%
----- -----
Weighted average rate paid on:
Deposits 4.04% 4.03%
Borrowed funds 5.85 5.67
---- ----
All interest-bearing liabilities 4.35% 4.21%
----- -----
Weighted average rate spread 2.88% 3.02%
----- -----
Net interest margin 3.29% 3.42%
===== =====
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24
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 September 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 did not record a provision for loan losses in the third quarter of
1997, while $45,000 was provided in the third quarter of 1996. The provision
for loan losses for the nine months ended September 30, 1997, was $125,000
compared with $195,000 for the comparable prior year period. Net loan
charge-offs for the three and nine months ended September 30, 1997 totalled
$367,000 and $755,000 as compared to $16,000 and $262,000 for the same periods
in 1996.
At September 30, 1997, the allowance for loan losses represented a 235.8%
reserve coverage of non-accrual loans and 1.12% of total loans compared to
210.3% and 1.27%, respectively at December 31, 1996.
OTHER INCOME
Other income increased $657,000 to $3.1 million for the nine months ended
September 30, 1997 when compared to the nine months ended September 30, 1996.
The increase is principally attributable to $512,000 of additional net gains on
the sale of securities and $306,000 in net gains on the sale of loans, offset by
a decrease of $161,000 in customer service fees and miscellaneous income as
customers migrate to deposit products with lower fees such as the "ComboPlus".
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25
OPERATING EXPENSES
Operating expenses were $4.8 million and $14.0 million for the three and nine
month periods ended September 30, 1997 compared to $4.6 million and $13.5
million for the same periods in 1996. Included in professional fees and other
general and administrative operating expenses for the third quarter of 1997 was
$100,000 associated with the formation of Medford Bancorp, as the holding
company of the Bank. The most significant increases were in salary and benefit
costs, which increased 4.9% and 5.2% respectively, when comparing the three and
nine months ended September 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 a result of the investment in new technology. The
Bank's annualized expense ratio which is the ratio of operating expenses as a
percentage of average assets was 1.75% for the nine months ended September 30,
1997 compared to 1.84% for the prior year period. The Bank continues to focus on
cost containment with the intent to be a low cost provider of high quality
banking products and services.
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26
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 nine months ended September 30, 1997, cash flow
from maturities and sales of securities was $97.1 million compared to cash flow
from maturities and sales of securities of $96.6 million for the nine months
ended September 30, 1996. Principal payments received on mortgage-backed
investments during the nine months ended September 30, 1997 and 1996 totalled
$5.4 million and $3.6 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
September 30, 1997 the Bank's outstanding borrowings from the FHLBB were $112.4
million, as compared to $87.6 million at September 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 September 30, 1997 was $62.8 million, as compared to $35.0 million
at September 30, 1996.
Commitments to originate residential and commercial real estate mortgage
loans at September 30, 1997, excluding unadvanced construction funds of $8.0
million, was $20.2 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 nine months ended September 30, 1997
totalled $147.8 million consisting of debt instruments maturing in less than
five years and equities. This compares with purchases of $151.7 million for the
nine months ended September 30, 1996.
Residential and commercial real estate mortgage loan originations for the
nine months ended September 30, 1997 totalled $80.5 million, compared with $68.4
million for the nine months ended September 30, 1996. The Bank also purchased
residential 1-4 family loans amounting to $1.3 million from a third party during
the first nine months of 1997.
The Bank's capital position (total stockholders' equity) was $99.7 million
or 9.02% of total assets at September 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.
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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
At a special meeting on September 16, 1997 the shareholders of the Bank approved
the establishment of a holding company to be named Medford Bancorp, Inc. The
reasons for the proposed establishment of the holding company were discussed in
detail in the proxy materials mailed out to all shareholders. More recently, the
Bank received all necessary regulatory approvals to consummate the
reorganization The transaction is anticipated to be completed 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: November 7, 1997
/s/ Arthur H. Meehan
------------------------------------------------
Arthur H. Meehan
Chairman/President/CEO
Date: November 7, 1997
/s/ Phillip W. Wong
-------------------------------------------------
Phillip W. Wong
Senior Vice President and Chief Financial Officer
28