1
Exhibit 99.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20549
FORM F-2
ANNUAL REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended FDIC Certificate Number
December 31, 1996 23290
MEDFORD SAVINGS BANK
(Exact name of Bank as specified in its charter)
MASSACHUSETTS
(State or other jurisdiction of incorporation or organization)
04-1609330
(I.R.S. Employer
Identification No.)
29 HIGH STREET
MEDFORD, MASSACHUSETTS
(Address of principal office)
02155
(Zip Code)
(617) 395-7700
(Bank's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Title of Class
Common Stock, par value $0.50 per share
Indicate by check mark if disclosure of delinquent filers pursuant to
item 10 is not contained herein, and will not be contained, to the best of the
Bank's knowledge, in definitive proxy or information statements incorporated by
reference in part III of this Form F-2 or any amendment of this Form F-2. [X]
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 aggregate market value of the voting stock held by non-affiliates
of the Bank, based on the closing sale price for the Bank's Common Stock on
February 20, 1997, as reported by NASDAQ, was $114,827,126.
The number of shares outstanding of each of the Bank's classes of
Common Stock, as of the latest practicable date is:
CLASS: COMMON STOCK, PAR VALUE $0.50 PER SHARE
OUTSTANDING AS OF FEBRUARY 20, 1997: 4,539,648
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Medford Savings Bank Notice of Annual Meeting and Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1997
(Exhibit A) are incorporated by reference into Parts I and III of this Form F-2.
1
2
PART I
ITEM 1. BUSINESS
GENERAL
Medford Savings Bank, (the "Bank"), was chartered as a Massachusetts savings
bank in 1869. The Bank converted from mutual to stock form on March 18, 1986 and
issued 3,680,000 shares of common stock. The Bank is principally engaged in the
business of attracting deposits from the general public, originating residential
and commercial real estate mortgages, consumer and commercial loans, and
investing in securities on a continuous basis. The Bank is headquartered in
Medford, Massachusetts, which is located approximately seven miles north of
downtown Boston. The Bank principally offers its products and services through a
network of sixteen banking offices located in Medford, Malden, Arlington,
Belmont, Burlington, North Reading, Waltham, and Wilmington. The Bank's primary
market area includes these communities as well as other cities and towns in
Middlesex County and the surrounding area north of Boston.
The Bank presently has one wholly-owned subsidiary, Medford Securities
Corporation ("MSC"), which became operational on March 1, 1995. MSC engages
exclusively in the buying, selling, dealing in, or holding of securities.
SUPERVISION AND REGULATION
General. As a Massachusetts-chartered savings bank, the Bank is subject to
comprehensive regulation and examination by the Federal Deposit Insurance
Corporation (the "FDIC") which insures its deposits to the maximum extent
permitted by law, and by the Commissioner of Banks of the Commonwealth of
Massachusetts (the "Commissioner"). The Bank is also subject to certain
requirements established by the Federal Reserve Board and is a member of the
Federal Home Loan Bank of Boston.
Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit
accounts to the $100,000 maximum per separately insured account. As a
state-chartered, FDIC-insured savings bank, the Bank is subject to regulation,
examination, and supervision by the FDIC and to reporting requirements of the
FDIC. The FDIC has adopted requirements setting minimum standards for capital
adequacy. Pursuant to FDIC requirements, the Bank must maintain a Tier 1 capital
to risk-weighted assets ratio of 4.00% and a total capital to risk-weighted
assets ratio of 8.00%. The FDIC also imposes a leverage capital ratio of at
least 3.00% for the most highly rated banks and a leverage capital ratio between
4.00% and 5.00% for other banks. The Bank exceeded all applicable requirements
at December 31, 1996. Furthermore, under the capital standards established
pursuant to the FDIC Improvement Act of 1991 ("FDICIA"), the Bank is currently
well-capitalized.
Federal Home Loan Bank System. The Federal Home Loan Bank System functions as a
reserve credit source for its member financial institutions and is governed by
the Federal Housing Finance Board ("FHFB"). The Bank is a voluntary member of
the Federal Home Loan Bank of Boston ("FHLBB"). Members of the FHLBB are
required to own capital stock that is directly proportionate to the member's
home mortgage loans and borrowings from the FHLBB outstanding from time to time.
FHLBB advances must be secured by specific types of collateral and may be
obtained only for the purpose of providing funds for residential housing
finance.
Federal Reserve Board Regulations. Regulation D promulgated by the Federal
Reserve Board requires all depository institutions, including the Bank, to
maintain reserves against its transaction accounts (generally, demand deposits,
NOW accounts and certain other types of accounts that permit payments or
transfer to third parties) or non-personal time deposits (generally, money
market deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the amount of the
institution's interest-bearing assets.
2
3
Massachusetts Commissioner of Banks. The Bank is also subject to regulation,
examination and supervision by the Commissioner and to the reporting
requirements promulgated by the Commissioner. Massachusetts statutes and
regulations govern, among other things, investment powers, lending powers,
deposit activities, maintenance of surplus and reserve accounts, the
distribution of earnings, the payment of dividends, issuance of capital stock,
branching, acquisitions and mergers and consolidation. Any Massachusetts bank
that does not operate in accordance with the regulations, policies and
directives of the Commissioner may be subject to sanctions for noncompliance.
The Commissioner may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Bank's business in a manner
which is unsafe, unsound or contrary to the depositor's interest, or been
negligent in the performance of their duties.
In response to a Massachusetts law enacted in 1996, the Commissioner has
proposed rules that generally would give Massachusetts banks powers equivalent
to those of national banks. The Commissioner also has adopted procedures
expediting branching by strongly capitalized banks.
Depositors Insurance Fund. All Massachusetts-chartered savings banks are
required to be members of the Depositors Insurance Fund ("DIF"), a corporation
created by the Commonwealth of Massachusetts for the purpose of insuring savings
bank deposits not covered by federal deposit insurance. To the extent the Bank's
deposit accounts are not insured by federal insurance, such deposits are insured
by the DIF.
Federal Deposit Insurance Corporation Improvement Act of 1991. FDICIA made
extensive changes to the federal banking laws. Among other things, FDICIA
requires federal bank regulatory agencies to take prompt corrective action to
address the problems of, and imposes significant restrictions on,
under-capitalized banks. With certain exceptions, FDICIA prohibits state banks
from making equity investments and engaging, as principals, in activities which
are not permissible for national banks, such as insurance underwriting. FDICIA
required banks to divest any impermissible equity investments by December 19,
1996. FDICIA also amends federal statutes governing extensions of credit to
directors, executive officers and principal shareholders of banks, savings
association and their holding companies, limits the aggregate amount of
depository institutions' loans to insiders to the amount of the institution's
unimpaired capital and surplus, restricts depository institutions that are not
well capitalized from accepting brokered deposits without an express waiver from
the FDIC, and imposes certain advance notice requirements before closing a
branch office. Pursuant to the FDICIA, the FDIC has adopted a framework of
risk-based deposit insurance assessments that take into account different
categories and concentrations of bank assets and liabilities.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities will
be permitted, each with different effective dates. Interstate transactions and
activities provided for under the law include: (i) bank holding company
acquisitions of separately held banks in a state other than a bank holding
company's home state; (ii) mergers between banks with different home states,
including consolidations of affiliated banks; (iii) establishment of interstate
branches either de novo or by branch acquisition; and (iv) affiliate banks
acting as agents for one another for certain banking functions without being
considered a "branch". In general, subject to certain limitations, nationwide
interstate acquisitions are now permissible, irrespective of state law
limitations other than limitations related to deposit concentrations and bank
age requirements. Interstate mergers will be permissible on June 1, 1997, unless
a state either passes legislation either to prevent or to permit the earlier
occurrence of interstate mergers. States may at any time enact legislation
permitting interstate branching either de novo or through acquisition.
Affiliated banks may act as agents for one another beginning one year after
enactment. Each of the transactions and activities must be approved by the
appropriate federal bank regulator, with separate and specific criteria
established for each category.
In 1996, Massachusetts enacted interstate banking laws in response to
Riegle-Neal. The laws permit, subject to certain deposit and other limitations,
interstate acquisitions, mergers and branching on a reciprocal basis. The new
interstate banking law is likely to make it easier for out-of-state institutions
to attempt to purchase or otherwise acquire or to compete with the Bank in
Massachusetts, and similarly makes it easier for Massachusetts banks to compete
outside the state.
Community Reinvestment Act. The Community Reinvestment Act of 1974, as amended
(the "CRA"), was enacted to encourage every financial institution to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods, consistent with its safe and sound operation. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the purposes of the CRA. The federal banking agencies jointly
issued final CRA regulations. Under the regulations, the twelve-point system of
assessment factors is replaced by lending, service and investment
performance-based tests.
3
4
OTHER ACTIVITIES
The Bank owns stock in The Savings Bank Life Insurance Company of Massachusetts.
The Bank sells life insurance and tax-deferred annuities and sold over $1.7
million in SBLI annuities in 1996, making it the top seller of this product in
Massachusetts. In addition, the Bank makes available mutual funds and other
investment products through a third-party company.
The Bank provides safe deposit services at nine of its branches.
The Bank originates 30-year, fixed-rate, residential 1-4 family loans in a
correspondent relationship with Chase Manhattan Mortgage Corporation, whereby
the Bank originates the loans for Chase Manhattan Mortgage Corporation in
exchange for an origination fee.
COMPETITION
The Bank faces substantial competition for loan origination and for the
attraction and retention of deposits. Competition for loan origination arises
primarily from commercial banks, other thrift institutions, credit unions and
mortgage companies. The Bank competes for loans on the basis of product variety
and flexibility, competitive interest rates and fees, service quality and
convenience.
Competition for the attraction and retention of deposits arises primarily from
commercial banks, other thrift institutions, and credit unions having presence
within and around the market area served by the Bank's main office and its
community branch and ATM network. There are approximately 200 of these financial
institutions in the Bank's market area. In addition, the Bank competes with
regional and national firms which offer stocks, bonds, mutual funds and other
investment alternatives to the general public. The Bank competes on its ability
to satisfy such requirements of savers and investors as product alternatives,
competitive rates, liquidity, service quality, convenience, and safety against
loss of principal and earnings.
Management believes that the Bank's emphasis on personal service and
convenience, coupled with active involvement within the communities it serves,
contribute to its ability to compete successfully.
EMPLOYEES
As of December 31, 1996, the Bank employed 211 full time staff including 34
officers, and 91 part-time staff. None of the Bank's employees is represented by
a labor union.
ITEM 2. PROPERTIES
All of the Bank's branches located in Medford, (except for the West Medford
branch), the branch located in Arlington, and the Malden Center, Maplewood and
Oak Grove branches located in Malden are owned by the Bank. All other branches
are leased from unrelated third parties. The Bank also owns a building that
houses the Bank's finance department, an office building that formerly was a
Bank branch and is currently available for sale, and an office building
currently housing the Bank's lending and certain administrative offices.
Additional space in this building is leased to third parties, and the remainder
is available for the Bank's expansion needs. On January 13, 1997, the Bank
signed an agreement to purchase an office building in Medford. This building is
located between the main branch office in Medford and the lending and
administrative office building. The Bank also signed an agreement on January 21,
1997 to purchase a tract of land in the City of Tewksbury with plans to
construct a new branch office. Subject to the foregoing, the Bank believes that
its properties are adequate for its present needs.
The Bank has also acquired properties through foreclosure which are presently
being marketed by local real estate brokers or the Bank's lending staff.
4
5
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Bank is a party or to which
any of its property is subject, although the Bank is a party to ordinary routine
litigation incidental to its business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
section captioned "Ownership by Management and Other Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1997
(the "Proxy Statement").
5
6
PART II
ITEM 5. MARKET FOR BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Bank's common stock is quoted on the NASDAQ National Market System under the
symbol "MDBK". The following table sets forth cash dividends declared on common
stock and the high and low closing prices for the quarters indicated. All prices
set forth below are based on information provided by the National Association of
Securities Dealers, Inc.
Common Stock Prices
------------------- Dividends Declared
High Low Per Share
---- --- ---------
1996 1st quarter $24 1/4 $20 $0.17
2nd quarter 23 1/4 19 3/4 0.17
3rd quarter 24 1/2 20 3/4 0.17
4th quarter 27 23 0.32
1995 1st quarter $17 1/2 $13 1/2 $0.14
2nd quarter 18 3/4 16 0.15
3rd quarter 23 18 3/4 0.15
4th quarter 22 1/2 20 1/2 0.27
At December 31, 1996, according to the Bank's transfer agent, the Bank had
approximately 1,221 record holders of its common stock.
The declaration of future dividends is subject to future operating results,
financial conditions, tax and legal considerations and other factors. FDICIA
limits the ability of undercapitalized insured banks to pay dividends. Moreover,
under Massachusetts law, a stock-form savings bank may pay dividends only out of
its net profits and only to the extent such dividends do not impair the bank's
capital and surplus accounts. Provided that the bank can meet these
requirements, Massachusetts law permits a bank to distribute net profits as a
dividend so long as, after such distribution, either (i) the bank's capital and
surplus accounts equal at least 10% of its deposit liabilities or (ii) the
bank's surplus account equals 100% of its capital account, subject to certain
exceptions. Under FDIC regulations, the Bank would be prohibited from declaring
dividends, if among other things, it was not in compliance with applicable
regulatory capital requirements. If there is no surplus, dividends may be paid
out of net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year. Funds held by the Bank are available for various
corporate uses, including the payment of future dividends.
(Remainder of page intentionally left blank)
6
7
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At December 31,
------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
BALANCE SHEET DATA
Total assets $1,039,098 $955,933 $915,055 $831,939 $831,440
Investment securities 424,966 363,599 332,248 294,390 280,859
Loans, net 560,855 529,424 523,125 478,632 483,614
Deposits 792,141 791,851 791,780 735,753 741,683
Stockholders' equity 92,521 86,076 76,363 71,352 67,964
Book value per share, excluding treasury shares 20.40 19.46 17.37 16.45 15.37
Stockholders' equity to total assets 8.90% 9.00% 8.35% 8.58% 8.17%
Number of offices 16 16 15 12 13
- - - --------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
------- ------- -------- ------- ----------
STATEMENT OF OPERATIONS DATA
Interest and dividend income $68,711 $64,405 $ 55,401 $55,868 $ 60,189
Interest expense 36,462 32,724 24,523 25,642 33,481
------- ------- -------- ------- ----------
Net interest income 32,249 31,681 30,878 30,226 26,708
------- ------- -------- ------- ----------
Provision for loan losses 215 772 583 2,110 4,157
Other income:
Gain (loss) on investment securities, net 413 96 (65) 753 1,720
All other income 2,902 3,050 2,960 2,383 2,551
------- ------- -------- ------- ----------
Total other income 3,315 3,146 2,895 3,136 4,271
------- ------- -------- ------- ----------
Operating expenses 18,075 18,169 19,645 19,418 19,270
------- ------- -------- ------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 17,274 15,886 13,545 11,834 7,552
Provision for income taxes 6,845 6,463 5,292 4,665 3,508
------- ------- -------- ------- ----------
Income before cumulative effect of change in
accounting principle 10,429 9,423 8,253 7,169 4,044
Cumulative effect of change in method of accounting
for income taxes -- -- -- -- 1,379
------- ------- -------- ------- ----------
Net income $10,429 $ 9,423 $ 8,253 $ 7,169 $ 5,423
======= ======= ======== ======= ==========
Primary earnings per share:
Income before cumulative effect of change in
accounting principle $ 2.21 $ 2.02 $ 1.78 $ 1.57 $ 0.87
Cumulative effect of change in method of
accounting for income taxes -- -- -- -- 0.30
------- ------- -------- ------- ----------
Net income $ 2.21 $ 2.02 $ 1.78 $ 1.57 $ 1.17
======= ======= ======== ======= ==========
Fully diluted earnings per share:
Income before cumulative effect of change in
accounting principle $ 2.20 $ 2.01 $ 1.78 $ 1.56 $ 0.86
Cumulative effect of change in method of
accounting for income taxes -- -- -- -- 0.29
------- ------- -------- ------- ----------
Net income $ 2.20 $ 2.01 $ 1.78 $ 1.56 $ 1.15
======= ======= ======== ======= ==========
Cash dividends declared per share $ 0.83 $ 0.71 $ 0.62 $ 0.50 $ 0.32
======= ======= ======== ======= ==========
SELECTED RATIOS
Return on average assets 1.05% 1.01% 0.95% 0.87% 0.65%
Return on average equity 11.72 11.52 11.14 10.21 8.03
Average equity to average assets 8.98 8.75 8.53 8.49 8.12
Weighted average rate spread 3.00 3.20 3.50 3.64 3.21
Net yield on average earning assets 3.39 3.54 3.74 3.86 3.48
Dividend payout ratio 37.56 35.15 34.83 31.85 27.35
- - - --------------------------------------------------------------------------------
On May 6, 1994, the Bank acquired certain assets and assumed certain liabilities
of the former Commercial Bank and Trust Company ("CBTC").
7
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form F-2 contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of changes in
general, national or regional economic conditions, changes in loan default and
charge-off rates, reductions in deposit levels necessitating increased borrowing
to fund loans and investments, changes in interest rates, and changes in the
assumptions used in making such forward-looking statements.
The following discussion should be read in conjunction with the accompanying
consolidated financial statements and selected consolidated financial data
included within this report.
GENERAL
The Bank's net income is primarily attributable to its level of net interest
income, which represents the difference between interest and dividend income
earned on earning assets and interest paid on deposits and other borrowed money.
The main components of the Bank's earning assets are loans, investment
securities and short-term investments. Interest-bearing deposits include NOW,
savings, money market and term certificates of deposit. The net interest income
performance of the Bank is significantly affected by general economic
conditions, by the Bank's corporate strategies, its asset/liability management,
tactical programs and by the policies of regulatory authorities. Sources of
non-interest income such as loan servicing fees, gains/losses on sales of
investment securities and other fees derived from various banking services
contribute positively to the Bank's results. The principal operating expenses of
the Bank are salaries and employee benefits, occupancy and equipment expenses,
data processing expenses, deposit insurance premiums, amortization of
intangibles, advertising and marketing and other general and administrative
expenses. In recent years, operating results have been significantly affected by
declining deposit insurance premiums. As the Bank continued to experience
positive trends in credit quality during 1996, the provision for loan losses was
reduced. In 1995, the Bank successfully disposed of certain foreclosed real
estate and recorded a net gain on sales. A net loss on foreclosed real estate
was recorded in 1996.
In 1996, the Bank invested approximately $1.7 million in the purchase and
installation of a new loan and deposit processing system. The one-time expenses
charged to operations in 1996 to convert to the new system were approximately
$378,000.
The Bank achieved record net income of $10,429,000, an increase of $1,006,000,
or 10.7% compared to net income of $9,423,000 for 1995. Earnings per share for
1996 were $2.21 ($2.20 on a fully-diluted basis) compared with $2.02 ($2.01 on a
fully diluted basis) for 1995, an increase of 19 cents or 9.4% compared to the
previous year.
Total assets increased 8.7% from $956.0 million at December 31, 1995 to $1.04
billion at December 31, 1996. Total deposits were $792.1 million at December 31,
1996, a slight increase from $791.9 million at December 31, 1995. Stockholders'
equity increased 7.5% to $92.5 million at December 31, 1996 representing a book
value of $20.40 per share, up from $19.46 at December 31, 1995. The Bank's
capital to assets ratio at December 31, 1996 was 8.90%, exceeding all regulatory
requirements.
FINANCIAL CONDITION
INVESTMENT PORTFOLIO
The investment policy of the Bank is structured to provide an adequate level of
liquidity in order to meet anticipated deposit outflows, normal working capital
needs and expansion of the loan portfolio with guidelines approved by the Board
of Directors while earning market returns. Accordingly, the majority of
investments are in shorter-term government, agency, or high-quality (rated "A"
or better) corporate securities. Investment bonds purchased generally have
maturities of three years or less. At December 31, 1996, 28.6% of the investment
portfolio will mature or reprice within one year, 85.8% within three years, and
97.3% within 5 years. Although the emphasis on short-term and medium-term
investments reduces the overall yield, this strategy is in accordance with the
Bank's desire to minimize interest rate risk.
Investment securities increased 16.9% from $363.6 million at December 31, 1995
to $425.0 million at December 31, 1996. The increase was primarily in U.S.
government and federal agency obligations, in addition to corporate bonds
designated as "available for sale". During 1996, the Bank implemented a strategy
using the investment portfolio to increase earning assets and generate higher
levels of interest income.
8
9
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. All other marketable investment securities are classified as
"available for sale" and reflected on the balance sheet at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. As of December 31, 1996, the net unrealized
loss on investments classified as "available for sale" was $423,000 and the net
unrealized gain on investments classified as "held to maturity" was $255,000.
In November 1995, the Financial Accounting Standards Board issued guidance
allowing a one-time reassessment of an entity's investment classifications
during the period November 15, 1995 to December 31, 1995. As a result, the
amortized cost of securities held to maturity that were transferred to available
for sale amounted to $26,987,000 and the related unrealized loss amounted to
$206,000.
In addition, the Bank also held limited amounts of equity securities subject to
the investment limitations imposed by FDICIA and the Commissioner.
The following table sets forth certain information concerning the investment
portfolio at carrying value:
At December 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Investment securities:
Debt securities:
U.S. Government and federal agency $224,519 $193,106 $210,787
Mortgage-backed securities 27,814 32,780 22,619
State and municipal 89 232 323
Corporate bonds 159,892 126,545 93,447
Equity securities 12,652 10,936 5,072
-------- -------- --------
Total investment securities $424,966 $363,599 $332,248
======== ======== ========
The following table sets forth the maturity distribution of debt securities
(excluding mortgage-backed securities) at carrying value, with related weighted
average yields:
At December 31, 1996
----------------------------------------------------------------------------------
Weighted Weighted Weighted
Within Average Over 1 Year Average Over 5 Years Average
1 Year Yield to 5 Years Yield to 10 Years Yield
------ ----- ---------- ----- ----------- -----
(Dollars in thousands)
U.S. Government and
federal agency $ 46,871 6.59% $168,802 6.01% $ 8,846 6.41%
State and municipal 89 6.75 -- -- -- --
Other 49,995 6.24 109,897 6.28 -- --
-------- -------- --------
$ 96,955 $278,699 $ 8,846
======== ======== =======
Tax-exempt obligations of states and municipalities are shown at their actual
yields rather than on a tax equivalent basis.
At December 31, 1996, there was one obligation of an issuer other than the U. S.
Government or its agencies for which the aggregate book values and market values
of $10.0 million, exceeded 10 percent of the Bank's total stockholders' equity.
9
10
LOAN PORTFOLIO
The Bank offers a variety of lending products, including fixed-rate and
adjustable-rate residential mortgages, equity lines of credit, fixed-rate and
adjustable-rate commercial mortgages, construction loans, consumer loans,
student loans, and commercial business loans. As a portfolio lender, the Bank
retains all newly originated loans except for 30-year, fixed-rate residential
loans. The 30-year, fixed-rate residential loan is offered whereby the Bank
originates the loan for a correspondent and collects an origination fee.
Real estate and commercial loan originations are initiated by the Bank's
officers and lending personnel from a number of sources including referrals from
realtors, builders, attorneys, and customers. Direct mail to existing and
potential customers is used to solicit other loan services. Advertising media is
also used to promote loans. The Bank employs on-the-road originators and pays
them commissions for loan originations. Applications for residential and
consumer loans are accepted at all of the Bank's locations and are referred to
the main office for processing.
The Bank has lending policies in place which are intended to control credit risk
inherent in the origination and retention of loans in portfolio. Among other
considerations, these policies delineate the Bank's geographic market region,
and establish credit procedures and acceptable loan-to-value ratios for all
loans. Additional specific policies are in effect for commercial and commercial
real estate loans.
Management expects continued intense competition for loans, especially given
moderate growth forecasts for the regional economy. Within this framework, the
Bank created the necessary infrastructure in 1995 and 1996 to facilitate
commercial and commercial real estate portfolio growth. Through an intensified
calling program, commercial lenders are now offering a range of loan products to
small-to-middle market companies in a variety of industries, and have initiated
new marketing efforts for asset-based lending opportunities.
Composition of portfolio. The following table shows the composition of the loan
portfolio by type of loan:
At December 31,
-------------------------------------------
1996 1995 1994
---------- --------- ---------
(In thousands)
Commercial loans $ 11,014 $ 9,075 $ 10,270
Construction loans, net of unadvanced funds 8,719 8,591 7,577
Loans secured by real estate:
Residential * 380,627 353,172 350,013
Commercial 123,158 125,771 125,190
Second mortgages 1,928 2,175 2,441
Equity lines of credit 21,169 20,819 20,080
Consumer loans 20,548 16,710 14,396
--------- --------- --------
567,163 536,313 529,967
Add: Net premium on loans acquired 354 504 648
Net deferred costs 569 73 49
Less: Allowance for loan losses (7,231) (7,466) (7,539)
--------- --------- --------
Loans, net $ 560,855 $ 529,424 $ 523,125
========= ========= ========
* Residential first mortgages represent qualified collateral under a blanket
lien securing FHLBB borrowings. See "Borrowings" for a more detailed
explanation of this lien.
10
11
The following table presents the maturity distribution of commercial and
construction loans at December 31, 1996:
Maturities
---------------------------------------------------------
1 Year Over 1 Year Over
or Less to 5 Years 5 Years Total
--------- ------------- --------- ---------
(In thousands)
Commercial loans $6,524 $3,445 $1,045 $11,014
Construction loans 8,719 -- -- 8,719
Generally, construction loans provide for payments of interest only during the
construction period, and then payments of principal and interest throughout the
life of the loans. In all cases, these loans have adjustable interest rates.
Commercial loans with maturities of over one year will be subject to interest
rate adjustment or maturity according to the following schedule:
Scheduled Maturity or Rate Adjustment
----------------------------------------
Over 1 Year Over
to 5 Years 5 Years Total
------------- --------- --------
(In thousands)
Predetermined rates $ 1,261 $ 39 $1,300
Adjustable rates 2,184 1,006 3,190
------- ------ ------
$ 3,445 $1,045 $4,490
======= ====== ======
NON-PERFORMING ASSETS
It is the Bank's general policy to discontinue the accrual of interest on loans
over 90 days past due. Interest accrual ceases, and all previously accrued but
unpaid interest is reversed, when a loan is placed on non-accrual status. At the
option of management, a loan may be placed on non-accrual status prior to being
90 days past due if the collection of future interest and principal is, in the
opinion of management, doubtful.
On January 1, 1995, the Bank adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." Under this
Statement, a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. All of the Bank's loans which have been identified as
impaired have been measured by the fair value of existing collateral. When
impaired loans become 90 days or more delinquent, they are maintained on
non-accrual status whereby interest income is recognized only when received. The
restatement of previously issued financial statements to conform with SFAS No.
114 is expressly prohibited. The Bank does not apply SFAS No. 114 to individual
consumer loans which are collectively evaluated for impairment.
11
12
The following table sets forth information with respect to non-accrual loans,
restructured loans and foreclosed real estate at the dates indicated. The Bank
did not have any loans 90 days or more past due and still accruing at the dates
indicated.
At December 31,
------------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Impaired loans accounted for on a non-accrual basis $2,752 $4,239 $ n/a
Other loans accounted for on a non-accrual basis 687 82 1,740
Troubled debt restructurings n/a n/a 829
Foreclosed real estate 276 350 1,444
------ ------ ------
$3,715 $4,671 $4,013
====== ====== ======
At December 31, 1996, $687,000 of loans were 90 days or more past due but were
not considered impaired. Management expects the two commercial real estate
borrowers involved to resume scheduled payments of principal and interest in
accordance with the contractual terms of the loan agreements.
The balance of in-substance foreclosures that would have been restated and
classified as impaired loans in accordance with SFAS No. 114 at December 31,
1994 was $302,000. The increase in non-accrual loans in 1995 was primarily
attributable to the death of a commercial real estate borrower. Subsequent to
the borrower's death, the debt was assumed by a new borrower and loan
performance resumed.
Loans accounted for on a non-accrual basis at December 31, 1996 had gross
interest income of $307,000 that would have been recorded during 1996 if the
loans had remained current in accordance with original terms. The amount of
interest income on such loans that was included in net income for the period was
$131,000.
The Bank's holdings of foreclosed real estate decreased from $350,000 at
December 31, 1995 to $276,000 at December 31, 1996 as the Bank continued to
dispose of such properties.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
charged through the statement of income. Assessing the adequacy of the allowance
for loan losses involves substantial uncertainties and is based on management's
evaluation of the amount required to absorb estimated losses inherent in the
loan portfolio after weighing various factors. Among the factors that management
considers are the quality of specific loans, risk characteristics of the loan
portfolio, level of non-performing loans, current economic conditions, trends in
delinquency and charge-offs and collateral value of the underlying security.
Ultimate losses may vary significantly from current estimates.
Quarterly reviews of the loan portfolio are performed to identify loans for
which specific allowance allocations are considered prudent. After specific
allocations are made, a review is made to determine whether the remaining
unallocated portion of the allowance is adequate to cover possible unidentified
loan losses.
The Bank recorded a provision for loan losses for the year ended December 31,
1996 of $215,000, compared with $772,000 for the year ended December 31, 1995.
At December 31, 1996, the allowance for loan losses totaled $7.2 million or
210.3% of non-accrual loans at that date, compared with $7.5 million or 172.8%
of non-accrual loans at December 31, 1995. Non-accrual loans at December 31,
1996 were $3.4 million or 0.61% of total net loans, compared with $4.3 million
or 0.82% of total net loans at December 31, 1995.
12
13
An analysis of the allowance for loan losses is presented in the following
table:
At December 31,
-------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
Allowance for loan losses, beginning of year $ 7,466 $ 7,539 $ 7,007
---------- ---------- ----------
Loans charged-off --- Residential real estate (64) (66) (267)
--- Commercial real estate (656) (884) --
--- Consumer (89) (28) (34)
--- Commercial (21) (100) (8)
Recoveries --- Residential real estate 7 104 218
--- Commercial real estate 348 102 35
--- Consumer 8 10 5
--- Commercial 17 17 --
---------- ---------- ----------
Net charge-offs (450) (845) (51)
---------- ---------- ----------
Provision for loan losses, charged to operations 215 772 583
---------- ---------- ----------
Allowance for loan losses, end of year $ 7,231 $ 7,466 $ 7,539
========== ========== ==========
Ratio of net charge-offs to average loans 0.08% 0.16% 0.01%
========== ========== ==========
An analysis of the allocation of the allowance for loan losses is presented in
the following table:
At December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------ --------------------------
Percent Percent Percent
of Loans of Loans of Loans
To Total To Total To Total
Amount Loans Amount Loans Amount Loans
---------- ----------- --------- ----------- ---------- ------------
(Dollars in thousands)
Residential real estate $ 1,179 71.23% $ 1,036 70.17% $ 2,669 70.29%
Commercial real estate 5,711 21.68 6,118 23.43 4,553 23.62
Construction 131 1.53 129 1.60 114 1.43
Consumer 44 3.62 47 3.11 49 2.72
Commercial 166 1.94 136 1.69 154 1.94
---------- ----------- --------- ----------- ---------- -----------
Total $ 7,231 100.00% $ 7,466 100.00% $ 7,539 100.00%
========== =========== ========= =========== ========== ===========
While management considers the allowance for loan losses to be adequate at
December 31, 1996, there is no assurance that additional charge-offs and
provisions will not be necessary in 1997. The provision for loan losses during
1997 will depend primarily on market conditions and the Bank's actual
experience.
LOAN CONCENTRATIONS
Other than the focus of the Bank's lending activities to its market area, the
Bank does not have a concentration of loans exceeding 10% of total loans at the
end of 1996.
13
14
DEPOSITS
Deposits historically have been the Bank's primary source of funds. The Bank
offers a wide variety of deposit programs to attract both short-term and
long-term deposits from individuals, partnerships and corporations, non-profits
and municipalities. Deposit products include regular savings accounts, NOW
accounts, money market deposit accounts, individual retirement accounts, term
certificates, and retail and commercial demand deposit accounts. The Bank also
solicits corporate and municipal jumbo term deposits.
The Bank's Retail Banking Division places emphasis on sales of its products and
quality of service to attract and retain customers. Management measures the
sales performance of platform personnel in terms of cross-sales of additional
products above the primary product which the customer requests. Platform
personnel are evaluated in part, based on a cross-sell ratio which is the total
number of these additional products sold to a customer divided by the number of
customers. For 1996 this cross-sell ratio was 2.03, meaning for each customer
"buying" one product, the customer was "sold" a total of 2.03 products, or
approximately two products per customer.
The Bank utilizes products and services such as its FREEDOM 55(TM) mature market
program targeted to particular market segments to attract depositors interested
in long-term savings and to create multiple account relationships with these
depositors. Management believes that the customers attracted to these programs
have an increased sense of loyalty to the Bank, and accordingly, the funds
deposited into these programs are less volatile than other deposits.
While deposit flows are by nature unpredictable, management controls the Bank's
deposit growth through selective pricing and sales oriented marketing programs.
Deposit levels and the mix of deposits have remained fairly stable from December
31, 1995 to December 31, 1996. The average deposit balances as shown in the
table below, however, are indicative of a shift in the deposit mix from 1994 to
1995, as the Bank experienced disintermediation from regular savings deposits
and money market deposits to certificates of deposits. The Bank's strategy was
to maintain stable deposit rates and to grow deposit levels through selective
promotions. To increase core deposits, the Bank has been promoting its
"ComboPlus" account which combines a statement savings and a demand account into
one convenient account. This account has contributed to an increase in statement
savings and checking deposits. The low interest rate environment, coupled with
continued strength in the stock market and mutual funds presented management
with the challenge of attracting and retaining deposits.
Total deposits were $792.1 million at December 31, 1996, a slight increase over
$791.9 at December 31, 1995 and $791.8 million at December 31, 1994.
The following table indicates the balances in various deposit accounts at the
end of each reported period:
At December 31,
----------------------------------------------
1996 1995 1994
------------- ------------- ------------
(In thousands)
Demand accounts $ 40,124 $ 36,427 $ 37,867
NOW accounts 60,839 63,248 64,243
Savings and money market accounts 315,771 314,813 371,630
Term certificates 375,407 377,363 318,040
------------- ------------- ------------
$ 792,141 $ 791,851 $ 791,780
============= ============= ============
The following table sets forth the average deposits of the Bank with related
average rates paid during each reported period:
1996 1995 1994
------------------------- ------------------------ -------------------------
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
--------- --------- --------- -------- --------- ---------
(Dollars in thousands)
Demand accounts $ 30,935 - % $ 25,752 - % $ 26,315 - %
NOW accounts 61,317 1.10 62,178 1.47 59,921 1.50
Savings and money market deposits 316,498 2.80 334,739 2.68 398,027 2.56
Term certificates 378,680 5.52 357,031 5.32 279,660 4.31
14
15
Included in term certificates of deposit are certificates having balances of
$100,000 or more. At December 31, 1996, such term certificates had the following
maturities:
At December 31, 1996
---------------------------------------------------------------------------------------
3 Months Over 3 Months Over 6 Months Over
or Less to 6 Months to 12 Months 12 Months Total
------------ ---------------- ------------------ ------------- -------------
(In thousands)
$ 15,565 $ 6,620 $ 12,499 $ 11,880 $ 46,564
BORROWED FUNDS
The Bank is a voluntary member of the FHLBB. As such, the Bank may borrow up to
its qualified collateral, as defined by the FHLBB.
The Bank has selectively borrowed funds from the FHLBB to fund purchases of
loans or large loan originations in addition to purchases of mortgage-backed
securities. Short-term borrowings typically fund purchases or originations of
one-year adjustable-rate loans, or are used to meet the Bank's daily liquidity
needs. Long-term debt typically funds purchases of three-year adjustable-rate
residential mortgage loans or the origination of certain commercial real estate
loans. The Bank also enters into repurchase or reverse repurchase agreements
with a number of authorized brokers as an alternative source of funds.
Securities sold under agreements to repurchase are borrowings that mature within
one year and are secured by U.S. government obligations. Total borrowed funds
increased to $148.5 million at December 31, 1996 from $72.4 million at December
31, 1995.
(Remainder of page intentionally left blank)
15
16
The following table presents, by category, the borrowings of the Bank for the
reported periods:
At December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(Dollars in thousands)
Short-term borrowings:
FHLBB advances $ 30,000 $ 20,000 $ 59
Federal Reserve Bank of Boston advances 1,233 -- --
Securities sold under agreements to repurchase 49,584 20,281 16,866
---------- ---------- ----------
Total short-term borrowings $ 80,817 $ 40,281 $ 16,925
========== ========== ==========
Weighted average rate 5.82% 5.92% 6.27%
Average balance of short-term borrowings during
the year $ 49,123 $ 34,594 $ 5,942
Weighted average rate paid on short-term
borrowings during the year 5.37% 6.17% 4.17%
Maximum amount outstanding at any month-end
during the year $ 80,817 $ 42,406 $ 16,925
Long-term debt:
FHLBB advances $ 67,647 $ 32,147 $ 25,247
========== ========== ==========
Weighted average rate 6.10% 6.19% 5.59%
Average balance of long-term debt during the year $ 55,276 $ 29,307 $ 20,972
Weighed average rate paid on long-term
debt during the year 6.14% 5.88% 5.29%
Maximum amount outstanding at any month-end
during the year $ 68,647 $ 32,147 $ 25,647
STOCKHOLDERS' EQUITY
The Bank's capital to assets ratio was 8.90% at December 31, 1996, compared to
9.00% at December 31, 1995. The Bank's capital ratios at December 31, 1996 and
1995 exceeded all regulatory requirements. Book value at December 31, 1996 was
$20.40 per share, compared with $19.46 per share at December 31, 1995. (See
"Liquidity and Capital Resources.")
16
17
RESULTS OF OPERATIONS
GENERAL
In 1996, the Bank reported consolidated net income of $10.4 million, or $2.21
per share, as compared to net income of $9.4 million, or $2.02 per share, in
1995 and net income of $8.3 million, or $ 1.78 per share, in 1994. Fully diluted
earnings per share were $2.20, $2.01, and $1.78 for 1996, 1995 and 1994,
respectively. 1996 consolidated net income increased 11% over 1995 and 26% over
1994 while return on assets was 1.05% in 1996 as compared to 1.01% in 1995 and
.95% in 1994. The Bank's return on equity was 11.72% in 1996 as compared to
11.52% in 1995 and 11.14% in 1994.
The increased earnings in 1996 when compared to 1995 reflect a slight increase
in net interest income, a reduction in the provision for loan losses as loan
quality improved and increased securities gains.
When determining "core" operating expenses, net gains and losses from foreclosed
real estate and one-time expenses are excluded. In 1996, the Bank incurred
$378,000 of one-time expenses concurrent with the purchase and installation of a
new loan and deposit processing system which is expected to enhance customer
service and improve management information. A total of $1.7 million was invested
in 1996 in this new system and is represented by hardware and software which was
capitalized. As shown in the following schedule, the exclusion of the
aforementioned gains and losses and these one-time expenses reveals a "core"
operating expense reduction of $806,000 between 1996 and 1995. This reduction
arises, in large part, from the virtual elimination in 1996 of deposit insurance
expense.
Years Ended December 31,
---------------------------
1996 1995 Change
--------- ----------- ----------
(Dollars in thousands)
Operating expenses as reported $ 18,075 $18,169 $ (94)
Less: Losses on foreclosed real estate, net (65) -- (65)
Plus: Gains on foreclosed real estate, net -- 269 (269)
Less: One-time expenses for systems conversion (378) -- (378)
-------- ------- -----
"Core" operating expenses $ 17,632 $18,438 $(806)
======== ======= =====
Deposit insurance $ 13 $ 927 $(914)
======== ======= =====
Ongoing control of 1995 operating expenses, aided by the FDIC insurance
assessment reduction, foreclosed real estate recoveries, and continued growth in
net interest income resulting from an increase in average earning assets, were
the primary factors contributing to the 14% improvement of 1995 earnings as
compared to those of 1994.
NET INTEREST INCOME
Net interest income was $32.2 million in 1996; an increase of $568,000 or 1.8%
from $31.7 million earned in 1995. Average earning assets in 1996 increased
$56.7 million as compared to $43.0 million of increased interest-bearing
liabilities; the difference resulting from higher demand deposits and capital.
As a result, the excess of earning assets to interest-bearing liabilities
increased 17.8% to $89.8 million from the $76.2 million in 1995. In addition,
the Bank maintained its earning assets to total assets ratio at 96.0%; up from
95.6% in the prior year. The earnings on this excess flows directly to interest
income.
Changes in the mix of earning assets and higher funding costs reduced the net
interest margin in 1996 to 3.39% from 3.54% in 1995 and 3.74% in 1994. During
1996, management continued to seek to maintain a stable net interest margin by
closely monitoring the behavior of the loan portfolio under varying market rate
environments in order to maximize the yield on earning assets. During 1996,
average loan balances represented 54.9% of average assets. This compares with
57.4% in 1995. The average investment securities balance was 41.1% of average
assets in 1996 as compared to 38.1% in 1995. As the percentage of loans to
assets decreases and the percentage of investments to assets increase the net
interest margin declines as loans are typically a higher yielding asset than the
types of securities in which the Bank mostly invests.
17
18
INTEREST AND DIVIDEND INCOME
Interest and dividend income totalled $68.7 million for 1996; an increase of
$4.3 million or 6.7% from 1995 and $13.3 million or 24.0% from 1994. The
weighted average yield on earning assets was 7.23% in 1996 compared to 7.20% and
6.71% for 1995 and 1994, respectively.
Interest income on loans was $43.5 million in 1996 compared with $42.7 million
in 1995, as modest increases in average loans outstanding and yield combined to
generate $774,000 in additional interest income on loans. Interest income on
residential 1-4 family loans increased $248,000 in 1996 compared to 1995 levels
as loan volume increased. The yield on residential loans remained stable from
year to year at approximately 7.50%. Interest income on commercial real estate
increased $393,000 from 1995 levels; $251,000 of which related to recoveries
that had been charged-off in a prior period. The remaining increase is
attributable to the upward repricing of adjustable rate loans. Interest income
on consumer loans increased $154,000 in 1996; primarily as a result of growth in
student loan volume. The increases were offset by a decrease in interest income
on commercial loans of $21,000 as the yield on loans declined. As in 1995, the
Bank elected not to price loan products aggressively, thereby generating only a
modest increase in volume. The overall yield on loans increased from 7.94% in
1995 to 7.99% in 1996.
Interest income on investments was $25.3 million in 1996 compared with $21.7
million in 1995. The increase of $49.4 million in the average balance on
investments in 1996 coupled with an increase in the yield on investments
contributed an additional $3.5 million in interest income. During 1996, the Bank
increased its investment in U.S. government and agency obligations, and
corporate bonds with the intent to generate additional interest income. The
weighted average yield on investment securities including short-term investments
increased to 6.20% in 1996 from 6.09% in 1995, reflecting the purchase of
additional investment securities and the reinvestment of matured and sold
investment securities at higher yields.
Interest and dividend income was $64.4 million for the year ended December 31,
1995, compared with $55.4 million for the year ended December 31, 1994. The
weighted average yield on earning assets was 7.20% for the year ended December
31, 1995 as compared to 6.71% for the year ended December 31, 1994. Interest on
loans of $42.7 million for the year ended December 31, 1995 was up from $38.3
million in 1994. The average loan volume increased $39.7 million primarily in
residential mortgages. In addition, the upward repricing of adjustable-rate real
estate loans, equity lines of credit, and commercial real estate loans increased
the average yield on loans by 24 basis points. In 1994, the Bank was more
aggressive in offering competitive introductory rates on residential adjustable
rate mortgages. Management's focus during the interest rate cycle in 1995 was to
maintain a stable net interest margin which resulted in less aggressive pricing
and more moderate residential loan growth. The increased loan volume and
increase in the yield on loans contributed $4.4 million in additional interest
income on loans when comparing 1995 to 1994. Interest income on investments
accounted for $21.7 million in 1995 as compared to $17.1 million in 1994. The
average balance of investments increased $28.5 million in 1995 over the prior
year, and the average yield on investments increased 89 basis points to 6.09%.
The increased volume and increase in the yield on investments contributed $4.6
million in additional interest income from investments in 1995 when compared to
1994.
INTEREST EXPENSE
Interest expense was $36.5 million in 1996, up $3.7 million or 11.4% from 1995,
and $11.9 million or 48.7% from 1994. The cost of funds increased to 4.23% in
1996 compared with 4.00% and 3.21% in 1995 and 1994, respectively.
Interest expense on deposits was $30.4 million and interest expense on borrowed
funds was $6.0 million in 1996, compared with $28.9 million and $3.9 million,
respectively, in 1995. While interest-bearing deposit levels remained stable in
1996 as compared with 1995, a certain level of disintermediation from lower rate
passbook savings accounts to higher rate core deposits and term certificates
increased the average cost of interest-bearing deposits. In addition, the Bank
leveraged its strong capital position by increasing average borrowed funds to
$104.4 million at an average cost of 5.78% in 1996 from $63.9 million at an
average cost of 6.04% in 1995. This cost reduction was achieved by adjusting the
borrowed funds mix, in part towards greater short term secured borrowings, such
as repurchase agreements, at rates averaging 5.07% in 1996 versus 5.93% in 1995.
This rate decline more than offset the higher average rates paid for increased
average levels of long term FHLBB advances, at 6.14% in 1996 versus 5.88% in
1995.
Interest expense was $32.7 million for the year ended December 31, 1995 compared
to $24.5 million for the year ended December 31, 1994. The increase in interest
expense was primarily attributable to a shift from core deposits into
certificates of deposits paying a higher rate, in addition to an increased level
of borrowings used to fund asset growth. In an effort to control interest
expense while continuing to attract and retain deposits, the Bank implemented a
strategy of selectively promoting certificates of deposit throughout the year.
As a result, the cost of funds on interest-bearing deposits in 1995 increased 79
basis points to 4.00%. Average borrowings in 1995 with a cost of 6.09% increased
$37.0 million from 1994. Interest expense on borrowings was $3.9 million in
1995, compared with $1.4 million in 1994.
18
19
RATE/VOLUME ANALYSIS
The following table presents, for the periods indicated, changes in interest and
dividend income and changes in interest expense attributable to changes in
interest rates and volumes of interest-bearing assets and liabilities. Changes
attributable to both rate and volume have been allocated proportionally to the
two categories.
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
-------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
------- ------ -------- ------- ------- -------
(In thousands)
INTEREST AND DIVIDEND INCOME
Short-term investments $ 54 $ (50) $ 4 $ 7 $ 140 $ 147
Mortgage-backed investments 333 106 439 (502) 96 (406)
Other investment securities 2,727 362 3,089 2,081 2,817 4,898
Loans 505 269 774 3,126 1,239 4,365
------- ------ ------- ------- ------- -------
Total interest and dividend income 3,619 687 4,306 4,712 4,292 9,004
------- ------ ------- ------- ------- -------
INTEREST EXPENSE
NOW deposits (12) (226) (238) 33 (18) 15
Savings deposits and MMDA (500) 392 (108) (1,678) 432 (1,246)
Term certificates 1,179 736 1,915 3,758 3,172 6,930
Short-term borrowings 808 (307) 501 1,717 171 1,888
Long-term debt 1,590 78 1,668 480 134 614
------- ------ ------- ------- ------- -------
Total interest expense 3,065 673 3,738 4,310 3,891 8,201
------- ------ ------- ------- ------- -------
Net interest income $ 554 $ 14 $ 568 $ 402 $ 401 $ 803
======= ===== ======= ======= ======= =======
(Remainder of page intentionally left blank)
19
20
DISTRIBUTION OF ASSETS AND LIABILITIES; INTEREST RATES AND INTEREST DIFFERENTIAL
The following presents an analysis of average yields earned and rates paid for
the years indicated. Average balances are computed using daily averages except
for average stockholders' equity for which month-end balances are used.
Years Ended December 31, 1996 December 31, 1995 December 31, 1994
- - - ------------------------------------ ---------------------------- --------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
ASSETS
Earnings assets:
Short-term investments $ 8,257 $ 438 5.30% $ 7,289 $ 434 5.95% $ 7,118 $ 287 4.03%
Mortgage-backed
investments 29,506 1,833 6.21 24,059 1,394 5.79 32,795 1,800 5.49
Other investment securities 369,421 22,986 6.22 325,504 19,897 6.11 288,284 14,999 5.20
Loans (a) 543,547 43,454 7.99 537,226 42,680 7.94 497,527 38,315 7.70
- - - -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 950,731 68,711 7.23 894,078 64,405 7.20 825,724 55,401 6.71
Other assets 40,101 -- -- 41,457 -- -- 43,515 -- --
- - - -----------------------------------------------------------------------------------------------------------------------------------
Total assets $990,832 -- -- $935,535 -- -- $869,239 -- --
===================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW deposits $ 61,317 $ 676 1.10% $ 62,178 $ 914 1.47% $ 59,921 $ 899 1.50%
Savings deposits and MMDA 316,498 8,851 2.80 334,739 8,959 2.68 398,027 10,205 2.56
Term certificates 378,680 20,906 5.52 357,031 18,991 5.32 279,660 12,061 4.31
Short-term borrowings 49,123 2,637 5.37 34,594 2,136 6.17 5,942 248 4.17
Long-term debt 55,276 3,392 6.14 29,307 1,724 5.88 20,972 1,110 5.29
- - - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 860,894 36,462 4.23 817,849 32,724 4.00 764,522 24,523 3.21
Other liabilities 40,982 -- -- 35,868 -- -- 30,608 -- --
Stockholders' equity 88,956 -- -- 81,818 -- -- 74,109 -- --
- - - -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $990,832 -- -- $935,535 -- -- $869,239 -- --
===================================================================================================================================
Net interest income $32,249 $31,681 $30,878
Weighted average rate spread (b) 3.00% 3.20% 3.50%
Net yield on average earning assets (c) 3.39% 3.54% 3.74%
===================================================================================================================================
(a) Includes non-accrual loans.
(b) Weighted average yield on earning assets less weighted average rate
paid on interest-bearing liabilities.
(c) Net interest income divided by average earning assets.
20
21
PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision is determined by
management on the basis of many factors including the quality of specific loans,
risk characteristics of the loan portfolio, the level of non-performing loans,
current economic conditions, trends in delinquency and charge-offs, and
collateral values of the underlying security. Ultimate losses may vary from
current estimates.
The Bank recorded $215,000 in provisions for loan losses in 1996. This compares
with a provision of $772,000 for the year ended December 31, 1995 and $583,000
for the year ended December 31, 1994. In 1996, the Bank experienced positive
trends in credit quality. Net loans charged-off totaled $450,000, $845,000 and
$51,000, respectively, for the years ended December 31, 1996, 1995 and 1994.
Moreover, at December 31, 1996, the allowance for loan losses totaled $7.2
million or 210.3% of non-accrual loans at that date, compared with $7.5 million
or 172.8% of non-accrual loans at December 31, 1995, and $7.5 million or 433.3%
of non-accrual loans at December 31, 1994.
While management considers the allowance for loan losses to be adequate at
December 31, 1996, there is no assurance that additional charge-offs and
provisions will not be necessary in 1997. The provision for loan losses during
1997 will depend primarily on market conditions and the Bank's actual
experience.
OTHER INCOME
Total other income amounted to $3.3 million for the year ended December 31,
1996, as compared to $3.1 million for year ended December 31, 1995. Customer
service fees declined $189,000, in part reflecting lower revenues on NOW
accounts as lower balance accounts were replaced by demand deposits with reduced
service fee charges. Net gains on the sale of securities was $413,000 in 1996,
compared with net gains of $96,000 in 1995. As in prior years, management sold
securities when tactical opportunities arose to do so without impairing the
yield or liquidity of the investment portfolio.
Total other income amounted to $3.1 million for the year ended December 31,
1995, as compared to $2.9 million for the year ended December 31, 1994. The
acquisition of the CBTC deposit relationships and increases in the demand, NOW,
savings and other fee producing products were beneficial toward increasing the
customer service fees in 1995 when compared to 1994. A net gain on the sale of
investment securities of $96,000 was recorded in 1995, as compared to a net loss
of $65,000 in 1994. In 1995, the Bank sold debt securities as they neared
maturity in order to reinvest at higher yields in anticipation of a declining
rate environment. Since the debt securities were within three months of
maturity, the gains and losses on sales were insignificant.
OPERATING EXPENSES
Operating expenses were $18.1 million for 1996, down $94,000 or 0.5% from $18.2
million in 1995. As shown in the table below, "core" operating expenses,
excluding gains and losses on the sale of foreclosed real estate and $378,000 of
one-time expenses associated with the conversion to new operating systems, were
comparable to 1995 except for the virtual elimination of FDIC deposit insurance
assessments in 1996. The $378,000 one-time expenses are shown by category in the
table below:
"Core" Comparable
1996 Conversion- 1995
Operating Related Operating
Expenses, One-time Expenses,
as Reported Expenses Net as Reported Change
----------- ----------- ----------- ----------- ---------
(Dollars in thousands)
Salaries and employee benefits $ 9,778 $ 12 $ 9,766 $ 9,551 $ 215
Occupancy and equipment 1,998 10 1,988 1,910 78
Deposit insurance 13 -- 13 927 (914)
Data processing 1,606 179 1,427 1,452 (25)
Professional fees 517 19 498 577 (79)
Amortization of intangibles 1,248 -- 1,248 1,293 (45)
Advertising and marketing 722 28 694 692 2
Other general and administrative 2,128 130 1,998 2,036 (38)
------- ---- ------- ------- -----
Totals $18,010 $378 $17,632 $18,438 $(806)
======= ==== ======= ======= =====
21
22
Salaries and employee benefits increased 2.4% as a result of regular annual
merit increases. Occupancy and equipment expenses increased in 1996 over 1995 as
the Bank incurred a full year of operating expenses associated with the Waltham
branch which was opened in April 1995. Management continues to exercise diligent
expense control and measured growth, resulting in an improved efficiency ratio
of 48.1% as compared to the 49.3% for 1995.
PROVISION FOR INCOME TAXES
The Bank's effective tax rate for the year ended December 31, 1996 was 39.6% as
compared with 40.7% and 39.1% for the years ended December 31, 1995 and 1994.
The effective tax rates exceeded the statutory federal tax rates of 34.0% for
taxable income up to $10.0 million and 35.0% for taxable income exceeding $10.0
million principally due to state taxes. The passage of tax legislation in 1995
reduced the Bank's state tax rate. In the fourth quarter of 1994, the Bank
received $449,000 in prior years' state tax abatements reducing the effective
tax rate for the year.
(Remainder of page intentionally left blank)
22
23
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.
ASSET-LIABILITY MANAGEMENT
Through the Bank's Asset-Liability Management Committee ("ALCO"), which is
comprised of certain senior and middle management personnel, the Bank closely
monitors the level and general mix of interest rate-sensitive assets and
liabilities. The primary objective of the Bank's ALCO program is to manage the
assets and liabilities of the Bank to enhance profitability and capital at
prudent levels of liquidity 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. Strategies implemented to improve the match between
interest-rate sensitive assets and liabilities include, but are not limited to:
daily monitoring of the Bank's changing cash requirements, with particular
concentration on investment in shorter-term securities; a general policy of
originating adjustable-rate and fifteen-year, fixed-rate mortgage loans for the
Bank's own portfolio, the cost and composition of deposits; and generally using
matched borrowings to fund specified purchases of loan packages and large loan
originations. Occasionally, management may choose to deviate somewhat from
specific matching of maturities of assets and liabilities to take advantage of
an opportunity to enhance yields.
The Bank seeks to manage its liability portfolio in order to effectively plan
and manage growth and maturities of deposits. Plans designed to achieve growth
of different deposit types are reviewed regularly. Programs which are designed
to build multiple relationships with customers and to enhance the Bank's ability
to retain deposits at controlled rates of interest have been implemented.
Management has also adopted a policy of reviewing interest rates on an ongoing
basis on all deposit accounts in order to monitor deposit growth and interest
costs.
In addition to attracting deposits, the Bank has selectively borrowed funds
using advances from the FHLBB and reverse repurchase agreements.
(Remainder of page intentionally left blank)
23
24
The following table presents, as of December 31, 1996, interest-rate sensitive
assets and liabilities. GAP is the difference between assets and liabilities
that will mature or become subject to repricing during a given interval of time.
Investments classified as "available for sale" are listed at their fair value in
the table below.
(Dollars in thousands) 0-6 mo. 6 mo.-1 yr. 1-2 yrs. 2-3 yrs. 3-5 yrs. 5-10 yrs. Total
---------- ----------- ---------- -------- -------- --------- --------
Rate-sensitive assets:
Short-term investments $ 4,529 $ -- $ -- $ -- $ -- $ -- $ 4,529
Mortgage-backed investments 6,769 2,488 8,024 2,914 6,043 1,576 27,814
Other securities 62,600 47,436 116,497 111,197 42,291 9,488 389,509
Adjustable-rate mortgages 131,057 83,839 76,892 89,365 28,276 -- 409,429
Fixed-rate mortgages 8,826 9,545 14,653 13,350 23,703 53,576 123,653
All other loans 28,490 1,064 1,131 594 158 128 31,565
- - - -------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 242,271 144,372 217,197 217,420 100,471 64,768 986,499
- - - -------------------------------------------------------------------------------------------------------------------------
Rate-sensitive liabilities:
NOW accounts 1,684 -- 29,578 29,577 -- -- 60,839
Regular savings -- 61,472 61,475 61,472 61,472 -- 245,891
Money market accounts 69,880 -- -- -- -- -- 69,880
Term certificates 130,958 116,641 88,729 24,491 14,579 9 375,407
Borrowings 85,817 20,047 32,200 5,000 5,000 400 148,464
- - - -------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 288,339 198,160 211,982 120,540 81,051 409 900,481
- - - -------------------------------------------------------------------------------------------------------------------------
GAP (46,068) (53,788) 5,215 96,880 19,420 64,359 --
- - - -------------------------------------------------------------------------------------------------------------------------
CUMULATIVE GAP (46,068) (99,856) (94,641) 2,239 21,659 86,018 --
- - - -------------------------------------------------------------------------------------------------------------------------
PERCENT TO TOTAL ASSETS -4.43% -9.61% -9.11% 0.22% 2.08% 8.28% --
- - - -------------------------------------------------------------------------------------------------------------------------
The deficiency gap is a reflection of the greater speed and magnitude of
interest rate changes of liabilities as compared with the Bank's ability to
adjust the rates of its earning assets in response to such changes. So long as
any excess or deficiency exists, the Bank's earnings are likely to be affected
by changes in prevailing interest rates.
The one-year gap is a common benchmark for comparison of a financial
institution's susceptibility to changes in interest rates. A negative one-year
gap, such as the Bank's, implies that an institution's liabilities reprice
faster than its assets. Accordingly, a decline in interest rates would be likely
to benefit the institution by improving its interest rate spread, and
accordingly, its net interest income. Conversely, a rising interest rate
environment would be likely to adversely affect such an institution's interest
rate spread.
In the above table, loans reflect regular amortization of principal and
prepayment estimates. In addition, fixed-rate loans are shown in the period
corresponding to contractual maturity, whereas adjustable-rate loans are shown
in the period corresponding to the earliest possible interest rate adjustment
date. Based on the Bank's experience with such loans, partial or full payment
prior to contractual maturity can be expected and is reflected in the table. The
table does not include loans which have been placed on non-accrual status.
Although savings and NOW deposit accounts are subject to immediate withdrawal,
based on the Bank's history, management considers these liabilities to have
longer effective lives as illustrated in the table above.
24
25
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales or maturities of various investment
securities. The Bank is a voluntary member of the FHLBB and as such, may take
advantage of the FHLBB's borrowing programs to enhance liquidity and leverage
its favorable capital position. The Bank also may draw on lines of credit at the
FHLBB and a large commercial bank or enter into repurchase or reverse repurchase
agreements with authorized brokers. These various sources of liquidity are used
to fund withdrawals, new loans, and investments.
Management seeks to promote deposit growth while controlling the Bank's cost of
funds. Sales-oriented programs to attract new depositors and the cross-selling
of various products to its existing customer base are currently in place.
Management reviews, on an ongoing basis, possible new products, with particular
attention to products and services which will aid in retaining the Bank's base
of lower-costing deposits.
Maturities and sales of investment securities provide significant liquidity to
the Bank. The Bank's policy of purchasing shorter-term debt securities reduces
market risk in the bond portfolio while providing significant cash flow. For the
year ended December 31, 1996, cash flow from maturities of securities was $87.9
million and proceeds from sales of securities totaled $32.6 million, compared to
maturities of securities of $124.0 million and proceeds from sales of securities
of $25.4 million for the year ended December 31, 1995. Principal payments on
mortgage-backed investments during the years ended December 31, 1996 and 1995
totaled $4.8 million for both years. Purchases of securities during 1996 and
1995 totaled $188.7 million and $179.7 million, respectively. These purchases
consisted primarily of short-term debt instruments. During periods of high
interest rates or active mortgage origination, maturities in the bond portfolio
have provided significant liquidity to the Bank, generally at a lower cost than
borrowings.
Amortization and pay-offs of the loan portfolio contribute significant liquidity
to the Bank. Traditionally, amortization and pay-offs are reinvested into loans.
Excess liquidity is invested in short-term debt instruments.
The Bank has also used borrowed funds as a source of liquidity. At December 31,
1996, the Bank's outstanding borrowings from the FHLBB were $97.6 million. The
Bank also utilizes repurchase agreements to fund loan purchases or to leverage
the balance sheet. At December 31, 1996, securities sold under agreements to
repurchase totaled $49.6 million.
Residential and commercial mortgage loan originations for the years ended
December 31, 1996, 1995 and 1994 totaled $96.4 million, $65.4 million and $95.1
million, respectively. In 1994, the Bank participated in a $26.1 million
purchased loan program. The Bank discontinued the program in 1995. Commitments
to originate mortgages at December 31, 1996 were $9.4 million, excluding
unadvanced construction funds totaling $9.4 million. Management believes that
adequate liquidity is available to fund loan commitments utilizing deposits,
loan amortization, maturities of securities, or borrowings.
The Bank's capital position (total stockholders' equity) was $92.5 million, or
8.90% of total assets at December 31, 1996, compared with $86.1 million, or
9.00% of total assets at December 31, 1995.
The FDIC imposes capital guidelines on the Bank. The guidelines define core or
"tier 1" capital and supplementary or "tier 2" capital and assign weights to
broad categories of assets and certain off-balance sheet items. Ratios of tier 1
and tier 1 plus tier 2 capital to assets are then calculated. Banks must
maintain a tier 1 capital to risk-weighted assets ratio of 4.00% and a total
capital to risk-weighted assets ratio of 8.00%. The Bank's tier 1 risk-based
capital ratio, as defined by the FDIC, at December 31, 1996 was 14.8%, which
exceeds both risk-based capital requirements.
Massachusetts-chartered savings banks insured by the FDIC are required to
maintain minimum leverage capital (tier 1 capital) of 3.0% to 5.0% of total
assets, as adjusted, depending on an individual bank's rating. The Bank's
capital ratio, as defined by the FDIC, was 8.4%, which exceeds the FDIC's
requirements.
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report............................................. 27
Consolidated Balance Sheets.............................................. 28
Consolidated Statements of Income........................................ 29
Consolidated Statements of Changes in Stockholders' Equity............... 30
Consolidated Statements of Cash Flows.................................... 31-32
Notes to Consolidated Financial Statements............................... 33-56
26
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Medford Savings Bank:
We have audited the consolidated balance sheets of Medford Savings Bank and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medford Savings Bank
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 24, 1997
27
28
MEDFORD SAVINGS BANK
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1996 1995
----------- ---------
(In thousands)
ASSETS
Cash and due from banks $ 11,900 $ 14,599
Short-term investments (Note 3) 4,529 14,171
----------- ---------
Cash and cash equivalents 16,429 28,770
Investment securities (Note 4) 424,966 363,599
Loans (Notes 5 and 8) 568,086 536,890
Less allowance for loan losses (7,231) (7,466)
----------- ---------
Loans, net 560,855 529,424
----------- ---------
Foreclosed real estate 276 350
Banking premises and equipment, net (Note 6) 10,896 9,650
Accrued interest receivable 9,291 7,877
Other assets (Notes 2 and 10) 16,385 16,263
----------- ---------
Total assets $ 1,039,098 $ 955,933
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7) $ 792,141 $ 791,851
Short-term borrowings (Note 8) 80,817 40,281
Long-term debt (Note 9) 67,647 32,147
Accrued taxes and expenses (Note 13) 3,701 3,285
Other liabilities 2,271 2,293
----------- ---------
Total liabilities 946,577 869,857
----------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 12 and 14):
Serial preferred stock, $.10 par value, 5,000,000 shares authorized;
none issued -- --
Common stock, 15,000,000 shares authorized; $.50 par value,
4,534,648 and 4,423,190 shares issued, respectively 2,267 2,212
Additional paid-in capital 28,848 27,642
Retained earnings 61,634 54,966
----------- ---------
92,749 84,820
Net unrealized gain (loss) on securities available for sale,
after tax effects (Notes 4 and 10) (228) 1,256
----------- ---------
Total stockholders' equity 92,521 86,076
----------- ---------
Total liabilities and stockholders' equity $ 1,039,098 $ 955,933
=========== =========
See accompanying notes to consolidated financial statements.
28
29
MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------------------
1996 1995 1994
---------- ------------ ------------
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 43,454 $ 42,680 $ 38,315
Interest on debt securities 24,167 20,864 16,330
Dividends on equity securities 652 427 469
Interest on short-term investments 438 434 287
---------- ----------- -----------
Total interest and dividend income 68,711 64,405 55,401
---------- ----------- -----------
Interest expense:
Interest on deposits 30,433 28,864 23,165
Interest on short-term borrowings 2,637 2,136 248
Interest on long-term debt 3,392 1,724 1,110
---------- ----------- -----------
Total interest expense 36,462 32,724 24,523
---------- ----------- -----------
Net interest income 32,249 31,681 30,878
Provision for loan losses (Note 5) 215 772 583
---------- ----------- -----------
Net interest income, after provision for loan losses 32,034 30,909 30,295
---------- ----------- -----------
Other income:
Customer service fees 2,158 2,347 2,194
Gain (loss) on sales of investment securities, net (Note 4) 413 96 (65)
Miscellaneous 744 703 766
---------- ----------- -----------
Total other income 3,315 3,146 2,895
---------- ----------- -----------
Operating expenses:
Salaries and employee benefits (Notes 13 and 15) 9,778 9,551 9,608
Occupancy and equipment (Notes 6 and 11) 1,998 1,910 1,842
Deposit insurance 13 927 1,718
Data processing 1,606 1,452 1,308
Professional fees 517 577 767
Amortization of intangibles (Note 2) 1,248 1,293 1,249
Foreclosed real estate, net 65 (269) 346
Advertising and marketing 722 692 704
Other general and administrative 2,128 2,036 2,103
---------- ----------- -----------
Total operating expenses 18,075 18,169 19,645
---------- ----------- -----------
Income before income taxes 17,274 15,886 13,545
Provision for income taxes (Note 10) 6,845 6,463 5,292
---------- ----------- -----------
Net income $ 10,429 $ 9,423 $ 8,253
========== =========== ===========
Weighted averages shares outstanding:
Primary 4,723,649 4,659,059 4,628,793
========== =========== ===========
Fully diluted 4,741,542 4,685,693 4,628,793
========== =========== ===========
Earnings per share:
Primary $ 2.21 $ 2.02 $ 1.78
========== =========== ===========
Fully diluted $ 2.20 $ 2.01 $ 1.78
========== =========== ===========
See accompanying notes to consolidated financial statements.
29
30
MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
Net
Unrealized
Gain (Loss) on
Common Stock Additional Securities
----------------------- Paid-In Retained Available
Shares Dollars Capital Earnings for Sale
--------- ------- ---------- -------- --------------
(In thousands, except number of shares)
Balance at December 31, 1993 2,168,595 $1,084 $ 27,563 $ 43,136 $ --
Net income -- -- -- 8,253 --
Cash dividends declared ($.62 per share) -- -- -- (2,712) --
Issuance of common stock under stock
option plan and related income tax benefits 42,500 22 919 -- --
Stock split (2 for 1) 2,184,695 1,092 (1,092) -- --
Change in method of accounting for investment
securities, after tax effects -- -- -- -- 572
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- (2,474)
Decrease in unearned compensation -- ESOP -- -- -- -- --
--------- ------ -------- -------- -------
Balance at December 31, 1994 4,395,790 2,198 27,390 48,677 (1,902)
Net income -- -- -- 9,423 --
Cash dividends declared ($.71 per share) -- -- -- (3,134) --
Issuance of common stock under stock
option plan and related income tax benefits 27,400 14 252 -- --
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- 3,158
--------- ------ -------- -------- -------
Balance at December 31, 1995 4,423,190 2,212 27,642 54,966 1,256
Net income -- -- -- 10,429 --
Cash dividends declared ($.83 per share) -- -- -- (3,761) --
Issuance of common stock under stock
option plan and related income tax benefits 111,458 55 1,206 -- --
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- (1,484)
--------- ------ -------- -------- -------
Balance at December 31, 1996 4,534,648 $2,267 $ 28,848 $ 61,634 $ (228)
========= ====== ======== ======== =======
Unearned
Compensation
ESOP Total
------------ ---------
Balance at December 31, 1993 $(431) $ 71,352
Net income -- 8,253
Cash dividends declared ($.62 per share) -- (2,712)
Issuance of common stock under stock
option plan and related income tax benefits -- 941
Stock split (2 for 1) -- --
Change in method of accounting for investment
securities, after tax effects -- 572
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- (2,474)
Decrease in unearned compensation -- ESOP 431 431
----- --------
Balance at December 31, 1994 -- 76,363
Net income -- 9,423
Cash dividends declared ($.71 per share) -- (3,134)
Issuance of common stock under stock
option plan and related income tax benefits -- 266
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- 3,158
----- --------
Balance at December 31, 1995 -- 86,076
Net income -- 10,429
Cash dividends declared ($.83 per share) -- (3,761)
Issuance of common stock under stock
option plan and related income tax benefits -- 1,261
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- (1,484)
----- --------
Balance at December 31, 1996 $ -- $ 92,521
===== ========
See accompanying notes to consolidated financial statements.
30
31
MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ -----------
(In thousands)
Cash flows from operating activities:
Net income $ 10,429 $ 9,423 $ 8,253
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and foreclosed real estate losses 265 611 750
Depreciation and amortization, net 2,205 1,640 3,268
Net (gain) loss on sales of foreclosed real estate (15) (299) 4
(Gains) losses on sales of investment securities, net (413) (96) 65
Increase in accrued interest receivable and other assets (2,294) (1,341) (646)
Deferred tax benefit (295) (402) (385)
Increase in accrued taxes and expenses
and other liabilities 1,576 727 656
--------- --------- ---------
Net cash provided by operating activities 11,458 10,263 11,965
--------- --------- ---------
Cash flows from investing activities:
Proceeds received in connection with acquisition of failed
institution -- -- 27,012
Maturities of investment securities available for sale 38,168 26,210 35,490
Sales of investment securities available for sale 32,602 25,363 10,678
Purchases of investment securities available for sale (153,844) (103,142) (54,487)
Maturities of investment securities held to maturity 49,780 97,782 73,000
Purchases of investment securities held to maturity and FHLBB stock (34,886) (76,519) (116,212)
Principal amortization of mortgage-backed investments
available for sale 4,746 4,796 9,076
Loans originated and purchased, net of amortization and payoffs (32,163) (8,492) (45,432)
Sales of foreclosed real estate 384 2,920 1,781
Purchases of bank premises and equipment, net (2,018) (755) (436)
--------- --------- ---------
Net cash used in investing activities (97,231) (31,837) (59,530)
--------- --------- ---------
(continued)
See accompanying notes to consolidated financial statements.
31
32
MEDFORD SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Years Ended December 31,
----------------------------------------------
1996 1995 1994
------------- ------------ -------------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 290 71 27,522
Net increase in borrowings with maturities of three months
or less 35,536 23,356 16,925
Proceeds of short-term borrowings with maturities in
excess of three months 25,000 25,000 --
Repayment of short-term borrowings with maturities in
excess of three months (20,000) (25,000) (5,000)
Proceeds from long-term debt 39,000 16,400 13,247
Repayment of long-term debt (3,500) (9,500) (3,600)
Issuance of common stock 610 150 307
Cash dividends paid (3,504) (2,907) (2,547)
-------- -------- --------
Net cash provided by financing activities 73,432 27,570 46,854
-------- -------- --------
Net change in cash and cash equivalents (12,341) 5,996 (711)
Cash and cash equivalents at beginning of year 28,770 22,774 23,485
-------- -------- --------
Cash and cash equivalents at end of year $ 16,429 $ 28,770 $ 22,774
======== ======== ========
Supplementary information:
Interest paid on deposit accounts $ 30,474 $ 28,773 $ 23,125
Interest paid on borrowed funds 5,640 3,662 1,296
Income taxes paid, net of refunds 6,671 6,234 5,547
Non-cash investing activity:
Assets acquired from failed institution, excluding
cash and equivalents -- -- 1,609
Liabilities assumed from failed institution -- -- 28,621
See accompanying notes to consolidated financial statements.
32
33
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Medford Savings
Bank (the "Bank") and its wholly-owned subsidiaries, Medford Securities
Corporation which engages in the buying, selling, dealing in, or holding of
securities, and in 1995 and 1994, Medco Realty, Inc. which engaged in property
rental and development. The Bank elected to dissolve Medco Realty, Inc. in
January 1996, and to acquire all of its assets and liabilities. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for losses on loans.
BUSINESS
The Bank is principally engaged in the business of attracting deposits from the
general public, originating residential and commercial real estate mortgages and
consumer and commercial loans, and investing in securities. The Bank is
headquartered in Medford, Massachusetts, which is located approximately seven
miles north of downtown Boston. It has a network of sixteen banking offices
located in Medford, Malden, Arlington, Belmont, Burlington, North Reading,
Waltham, and Wilmington. The Bank's primary market area includes these
communities as well as other cities and towns in Middlesex County and the
surrounding area north of Boston.
RECLASSIFICATION
Certain amounts have been reclassified in the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, amounts due from banks and short-term
investments.
SHORT-TERM INVESTMENTS
Short-term investments mature within one year and are carried at cost.
33
34
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
INVESTMENT SECURITIES
Effective January 1, 1994, the Bank adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, investments in debt
securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and reflected at amortized cost.
All other marketable investment securities are classified as "available for
sale" and reflected on the balance sheet at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity. The cumulative effect of the change in accounting
principle at January 1, 1994, net of tax effects, was to increase stockholders'
equity by $572,000. There was no effect on net income in 1994.
Restricted equity securities are reflected at cost. Purchase premiums and
discounts on debt securities are amortized to earnings by a method which
approximates the interest method over the terms of the investments. Declines in
the value of investments that are deemed to be other than temporary are
reflected in earnings when identified. Gains and losses on disposition of
investments are recorded on the trade date and computed by the specific
identification method.
LOANS
The Bank grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans in
the eastern New England area. The ability of the Bank's debtors to honor their
obligations is dependent upon the real estate, construction, and general
economic sectors of that region.
Loans, as reported, have been increased by the net premium on loans acquired and
net deferred loan costs, and reduced by unadvanced loan funds and the allowance
for loan losses.
Interest on loans is recognized on a simple interest basis and is not accrued on
loans which are ninety days or more past due. Loans may be placed on non-accrual
status prior to becoming ninety days past due if the collection of principal and
interest is, in the opinion of management, doubtful. Generally, loans which are
identified as impaired are placed on non-accrual status. Interest income
previously accrued on such loans is reversed against current period earnings.
Interest income on all non-accrual loans is recognized only to the extent of
interest payments received.
Premiums and discounts on loans acquired and net deferred loan costs are
amortized as an adjustment of the related loan yields by the interest method
over the contractual lives of the loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
charged to operations and is maintained at a level considered adequate to
provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular basis by
management and are based upon management's periodic review of the collectibility
of the loans in light of historical experience, known inherent risks in the
nature and volume of the loan portfolio, levels of non-performing loans, adverse
situations that may affect the borrower's ability to repay, trends in
delinquencies and charge-offs, estimated value of any underlying collateral, and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant change. Ultimate losses
may vary from current estimates and future additions to the allowance may be
necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
34
35
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
On January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118. Under this Statement, a loan
is considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect the scheduled principal or
interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. An impaired loan
is required to be measured on a loan-by-loan basis by either the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. All of the Bank's loans which have been identified
as impaired have been measured by the fair value of existing collateral.
The Statement is not applicable to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. Accordingly, the Bank has
not applied SFAS No. 114 to its consumer loan portfolio.
The adoption of SFAS No. 114 had no effect on the Bank's assessment of the
overall adequacy of the allowance for loan losses. The restatement of previously
issued financial statements to conform with SFAS No. 114 was expressly
prohibited.
FORECLOSED REAL ESTATE
Foreclosed real estate includes both formally foreclosed properties and
in-substance foreclosed properties, whereby the Bank has taken physical
possession of the property without formal foreclosure proceedings. Real estate
properties acquired through foreclosure are initially recorded at the lower of
cost or fair value at the date of foreclosure. Costs relating to development and
improvement of property are capitalized, whereas costs relating to holding
property are expensed. Valuations are periodically performed by management, and
an allowance for losses is established through a charge to operations if the
carrying value of a property exceeds its fair value less estimated costs to
sell.
BANKING PREMISES AND EQUIPMENT AND REAL ESTATE HELD FOR INVESTMENT
Land is carried at cost. Buildings and equipment are carried at cost, less
accumulated depreciation computed on the straight-line method over the estimated
useful lives of the assets. It is the Bank's general practice to charge the cost
of maintenance and repairs to earnings when incurred; major expenditures for
betterments are capitalized and depreciated.
INTANGIBLE ASSETS
Intangible assets pertaining to core deposits acquired are amortized over 15
years on an accelerated basis, based on the expected run-off of the related
deposits. Goodwill is amortized by the straight-line method over periods ranging
from 10 to 15 years.
35
36
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. The Bank's base amount of its federal
income tax reserve for loan losses is a permanent difference for which there is
no recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if deemed realizable.
PENSION PLAN
The compensation cost of an employee's pension benefit is recognized on the net
periodic pension cost method over the employee's approximate service period. The
aggregate cost method is utilized for funding purposes.
STOCK COMPENSATION PLANS
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation." This Statement encourages
all entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Bank's stock option plans have no intrinsic value at the grant date, and under
Option No. 25 no compensation cost is recognized for them. The Bank has elected
to remain with the accounting in Opinion No. 25. The pro forma impact of
accounting for stock options granted during 1996 and 1995 in accordance with
SFAS No. 123 was not material to net income and earnings per share for the years
ended December 31, 1996 and 1995.
EMPLOYEES' STOCK OWNERSHIP PLAN ("ESOP")
Compensation expense is recognized based on cash contributions paid or committed
to be paid to the ESOP. All shares held by the ESOP are deemed outstanding for
purposes of earnings per share calculations. Dividends declared on all shares
held by the ESOP are charged to retained earnings.
STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
On August 30, 1994, the Board of Directors approved a two-for-one stock split of
the Bank's common stock. The stock split was effective on October 15, 1994 to
shareholders of record as of September 15, 1994. Par value remained at $0.50 per
share. The stock split resulted in the issuance of 2,184,695 additional shares
of common stock from authorized but unissued shares.
The primary earnings per share computation includes 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 and assume further dilution
applicable to outstanding stock options.
36
37
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
accounting and reporting standards of this Statement are based on a financial
components approach that focuses on control, whereby after a transfer of
financial assets, an entity recognizes only financial and servicing assets it
controls and liabilities it has incurred. Liabilities incurred will be initially
recognized at fair value, if practicable. Financial assets will be derecognized
when control has been surrendered, and liabilities will be derecognized when
extinguished. The determination of whether control over a financial asset has
been surrendered is based on meeting specific criteria as defined in the
Statement.
The Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings, and impacts
the accounting for various transactions including the servicing of financial
assets, securitizations, securities lending transactions, repurchase agreements
including "dollar rolls," "wash sales," loan syndications and participations,
and transfers of receivables with recourse.
The Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied on a prospective basis. In December 1996, the FASB voted to defer for
one year the provisions of the Statement that relate to secured borrowings and
collateral.
Management is currently evaluating the impacts of the Statement on its secured
borrowings such as repurchase agreements but does not expect , based on the
general terms of its current agreements, that the Statement will significantly
change its accounting for similar transactions in the future. Other provisions
of the Statement will not, in management's opinion, have a significant impact on
the consolidated financial statements, except that certain loan participations
that the Bank will service for other investors may be reflected on the balance
sheet at their gross amount with a related liability to the participant for the
participant's portion. Such transactions are currently reflected on a net basis
in the Bank's loan portfolio.
2. ACQUISITIONS
On May 6, 1994, the Bank acquired certain assets and assumed certain liabilities
of the former Commercial Bank and Trust Company ("CBTC") located in Lowell,
Massachusetts from the Federal Deposit Insurance Corporation (the "FDIC"),
pursuant to a Purchase and Assumption Agreement (the "CBTC Agreement") among the
FDIC, as Receiver of CBTC, the FDIC and Medford Savings Bank. Pursuant to the
CBTC Agreement, the Bank paid a premium of $1,225,000 to the FDIC and the fair
values of assets and liabilities assumed amounted to $7,472,000 and $28,621,000,
respectively. The CBTC acquisition has been accounted for using the purchase
method of accounting. At December 31, 1996 and 1995, the goodwill applicable to
the CBTC transaction amounted to $1,001,000 and $1,085,000, respectively.
In 1992, the Bank acquired certain assets and assumed the insured deposits and
related liabilities of the former Bank for Savings, in Malden, Massachusetts.
The acquisition was accounted for using the purchase method of accounting. At
December 31, 1996 and 1995, intangible assets applicable to the Bank for Savings
transaction, including goodwill and core deposit intangible, amounted to
$5,895,000 and $7,002,000, respectively.
37
38
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
December 31,
---------------------------
1996 1995
----------- -----------
(In thousands)
Federal funds sold $4,500 $ 9,171
Other interest-bearing deposits 29 5,000
------ -------
Total short-term investments $4,529 $14,171
====== =======
4. INVESTMENT SECURITIES
Investment securities consist of the following:
December 31,
---------------------------------
1996 1995
-------------- ---------------
(In thousands)
Securities available for sale, at fair value $268,379 $192,585
Securities held to maturity, at amortized cost 150,591 165,671
Restricted equity securities:
Federal Home Loan Bank stock 4,882 4,229
Massachusetts Savings Bank Life Insurance stock 1,114 1,114
-------- --------
$424,966 $363,599
======== ========
38
39
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES (continued)
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses at December 31, 1996 and 1995, follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- - - ------------------------------------------------------ --------------- ------------- -------------- -----------
(In thousands)
Securities Available for Sale
Debt securities:
State and municipal $ 88 $ 1 $ - $ 89
Corporate bonds 150,774 745 (350) 151,169
Mortgage-backed 28,101 82 (369) 27,814
U.S. Government and federal agency 83,301 280 (930) 82,651
-------- ------ ------- --------
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
Corporate bonds 8,723 32 - 8,755
-------- ------ ------- --------
Total securities held to maturity $150,591 $ 554 $ (299) $150,846
======== ====== ======= ========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- - - ------------------------------------------------------ --------------- ------------- -------------- -----------
(In thousands)
Securities Available for Sale
Debt securities:
State and municipal $ 236 $ - $ (4) $ 232
Corporate bonds 114,166 1,763 (62) 115,867
Mortgage-backed 32,423 417 (60) 32,780
U.S. Government and federal agency 38,083 127 (97) 38,113
-------- ------ ----- --------
Total debt securities 184,908 2,307 (223) 186,992
Marketable equity securities 5,633 14 (54) 5,593
-------- ------ ----- --------
Total securities available
for sale $190,541 $2,321 $(277) $192,585
======== ====== ===== ========
Securities Held to Maturity
U.S. Government and federal agency $154,993 $2,317 $(210) $157,100
Corporate 10,678 159 - 10,837
-------- ------ ----- --------
Total securities held to maturity $165,671 $2,476 $(210) $167,937
======== ====== ===== ========
39
40
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES (concluded)
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1996 is as follows:
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 28,101 27,814 - -
-------- -------- -------- --------
$262,264 $261,723 $150,591 $150,846
======== ======== ======== ========
At December 31, 1996, U.S. Government obligations with an amortized cost of
$49,340,000, a fair value of $48,930,000 and accrued interest receivable of
$440,000 have been pledged as collateral for securities sold under agreements to
repurchase. In addition, U.S. Government obligations with an amortized cost of
$8,047,000 and a fair value of $8,088,000 have been pledged as collateral for a
line of credit and to secure public funds. (See Note 8.)
For the years ended December 31, 1996, 1995 and 1994, proceeds from the sales of
securities available for sale amounted to $32,602,000, $25,363,000 and
$10,678,000, respectively. Gross realized gains amounted to $412,000, $211,000
and $51,000, respectively. Gross realized losses amounted to $56,000, $26,000
and $116,000, respectively. For the years ended December 31, 1996 and 1995,
proceeds from the sales of securities held to maturity that were sold within
three months of maturity amounted to $29,973,000 and $59,782,000, respectively.
These sales have been included in the Statement of Cash Flows as maturities.
Gross realized gains on these sales amounted to $61,000 and $4,000,
respectively, and gross realized losses amounted to $4,000 and $93,000,
respectively.
Mortgage-backed investments consist of adjustable-rate collateralized mortgage
obligations and fixed-rate participation certificates guaranteed by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation or the
Government National Mortgage Association.
In November 1995, the FASB issued guidance allowing a one-time reassessment of
an entity's investment classifications during the period November 15, 1995 to
December 31, 1995. As a result, the amortized cost of securities held to
maturity that were transferred to available for sale amounted to $26,987,000 and
the related unrealized loss amounted to $206,000.
40
41
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS
A summary of the balances of loans follows:
December 31,
-------------------------------------
1996 1995
---------------- ----------------
(In thousands)
Mortgage loans on real estate:
Residential 1 - 4 family $ 380,627 $ 353,172
Commercial 123,158 125,771
Construction 18,155 15,341
Second mortgages 1,928 2,175
Equity lines of credit 21,169 20,819
--------- ---------
545,037 517,278
Less: Unadvanced loan funds (9,436) (6,750)
--------- ---------
535,601 510,528
--------- ---------
Other loans:
Commercial 11,014 9,075
Personal 2,219 2,193
Education and other 18,329 14,517
--------- ---------
31,562 25,785
--------- ---------
Add Net premium on loans acquired 354 504
Net deferred loan costs 569 73
--------- ---------
Total loans 568,086 536,890
Less allowance for loan losses (7,231) (7,466)
--------- ---------
Loans, net $ 560,855 $ 529,424
========= =========
41
42
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS (concluded)
An analysis of the allowance for loan losses follows:
Years Ended December 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
(In thousands)
Balance at beginning of year $ 7,466 $ 7,539 $ 7,007
Provision for loan losses 215 772 583
------- ------- -------
7,681 8,311 7,590
Recoveries 380 233 258
Loans charged-off (830) (1,078) (309)
------- ------- -------
Balance at end of year $ 7,231 $ 7,466 $ 7,539
======= ======= =======
At December 31, 1996 and 1995, the Bank had loans amounting to $3,439,000 and
$4,321,000, respectively, which had been placed on non-accrual status. Interest
not accrued on such loans at December 31, 1996 and 1995 amounted to $451,000 and
$558,000, respectively, and was excluded from interest income.
The following is a summary of the recorded investment in impaired loans:
December 31,
-------------------------------------
1996 1995
--------------- ---------------
(In Thousands)
Loans with no valuation allowance $ 870 $ 804
Loans with a corresponding valuation allowance 3,154 3,435
------ ------
Total impaired loans $4,024 $4,239
====== ======
Corresponding valuation allowance $ 968 $1,705
====== ======
No additional funds are committed to be advanced in connection with impaired
loans.
For the years ended December 31, 1996 and 1995, the average recorded investment
in impaired loans amounted to $4,751,000 and $3,827,000, respectively. The Bank
recognized, on a cash basis, $153,000 in 1996 and $167,000 in 1995 of interest
income on impaired loans, during the period that they were impaired.
42
43
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment and their estimated useful lives follows:
December 31, Estimated
-----------------------------
1996 1995 Useful Lives
------------- ------------ ----------------------
(In thousands)
Banking Premises:
Land $ 782 $ 782 -
Buildings 9,634 9,575 5 - 50 years
Equipment 6,780 4,992 3 - 25 years
----------- --------
17,196 15,349
Less accumulated depreciation (6,300) (5,699)
----------- ---------
$ 10,896 $ 9,650
=========== =========
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
amounted to $772,000, $713,000 and $663,000, respectively.
7. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31,
-----------------------------------
1996 1995
-------------- --------------
(In thousands)
Demand $ 40,124 $ 36,427
NOW 60,839 63,248
Regular savings 245,891 244,370
Money market deposits 69,880 70,443
-------- --------
Total non-certificate accounts 416,734 414,488
-------- --------
Term certificates ($100,000 or more) 46,564 39,943
Other term certificates 328,843 337,420
-------- --------
Total term certificates 375,407 377,363
-------- --------
Total deposits $792,141 $791,851
======== ========
43
44
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS (concluded)
A summary of term certificate accounts, by maturity, is as follows:
December 31, 1996 December 31, 1995
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------------- ---------------- --------------- ----------------
(Dollars in thousands)
Within 1 year $247,599 5.17% $296,287 5.64%
Over 1 year to 3 years 113,220 5.64 55,866 5.56
Over 3 years to 5 years 14,579 6.18 25,103 5.93
Over 5 years 9 6.08 107 5.50
-------- --------
$375,407 5.35% $377,363 5.65%
======== ========
8. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
December 31, 1996 December 31, 1995
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- --------------- ------------- --------------
(Dollars in thousands)
Securities sold under agreements
to repurchase $49,584 5.99% $20,281 5.81%
Federal Reserve Bank of Boston advances 1,233 5.00 - -
Federal Home Loan Bank of Boston ("FHLBB") advances 30,000 5.56 20,000 6.03
------- -------
$80,817 5.82% $40,281 5.92%
======= =======
Securities sold under agreements to repurchase are borrowings that mature within
one year and are secured by U.S. Government obligations. (See Note 4.) The
amount of securities collateralizing the agreements to repurchase remains in
investment securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets. The maximum amount
of repurchase agreements outstanding at any month end during 1996 was
$54,840,000. The average balance of repurchase agreements for the year ended
December 31, 1996 amounted to $25,047,000.
The Bank has a $2,000,000 (treasury, tax and loan) line of credit with the
Federal Reserve Bank of Boston of which $767,000 was available to be advanced at
December 31, 1996. The interest rate adjusts weekly and certain U.S. Government
obligations have been pledged as collateral for the line of credit. (See Note
4.)
The Bank also has an available line of credit with the FHLBB at an interest rate
that adjusts daily. Borrowings under the line are limited to 2% of the Bank's
total assets. All borrowings from the FHLBB are secured by a blanket lien on
qualified collateral, defined principally as 75% of the carrying value of first
mortgage loans on owner-occupied residential property and 90% of the market
value of U.S. Government and federal agency securities.
44
45
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT
Long-term debt consists of Federal Home Loan Bank of Boston advances secured by
a blanket lien on qualified collateral (see Note 8), as follows:
December 31, 1996 December 31, 1995
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
- - - ------------------------ ------------- ------------- ------------- -------------
(Amount in thousands)
1996 $ - - % $ 3,500 4.93%
1997 25,047 6.23 15,047 6.50
1998 32,200 5.86 3,200 5.03
1999 5,000 5.87 5,000 5.87
2000 5,000 7.22 5,000 7.22
2005 400 5.61 400 5.61
---------- ----------
$ 67,647 6.10% $ 32,147 6.19%
========== ===========
10. INCOME TAXES
Allocation of the provision for federal and state income taxes between current
and deferred portions is as follows:
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------ ----------- -----------
(In thousands)
Current tax provision:
Federal $ 5,774 $ 5,206 $ 4,325
State 1,366 1,659 1,352
------- ------- -------
7,140 6,865 5,677
------- ------- -------
Deferred tax benefit:
Federal (240) (306) (264)
State (55) (96) (121)
------- ------- -------
(295) (402) (385)
------- ------- -------
$ 6,845 $ 6,463 $ 5,292
======= ======= =======
45
46
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (continued)
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows:
Years Ended December 31,
--------------------------------------
1996 1995 1994
---------- --------- ----------
Statutory rates 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 5.0 6.6 6.0
Other, net .6 .1 (.9)
---- ---- ----
Effective tax rates 39.6% 40.7% 39.1%
==== ==== ====
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31,
------------------------------
1996 1995
------------ --------------
(In thousands)
Deferred tax assets:
Federal $ 4,175 $ 3,616
State 1,629 1,584
------- -------
5,804 5,200
Valuation reserve on assets - (67)
------- -------
5,804 5,133
------- -------
Deferred tax liabilities:
Federal (1,774) (2,253)
State (601) (729)
------- -------
(2,375) (2,982)
------- -------
Net deferred tax asset $ 3,429 $ 2,151
======= =======
46
47
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (concluded)
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
December 31,
---------------------------
1996 1995
----------- -----------
(In thousands)
Cash basis of accounting $ 55 $ 617
Investments:
Net unrealized (gain) loss on securities available for sale 195 (788)
Other (193) (214)
Depreciation (901) (862)
Deferred loan fees (231) (31)
Allowance for loan losses 2,465 2,472
Employee benefit plans 1,128 1,040
Other 911 (16)
------- -------
3,429 2,218
Valuation reserve - (67)
------- -------
Net deferred tax asset $ 3,429 $ 2,151
======= =======
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(In thousands)
Balance at beginning of year $2,151 $ 3,915 $2,152
Deferred tax effect of the change in net unrealized
gains and losses on securities available for sale 983 (2,166) 1,378
Deferred tax benefit for the year 295 402 385
------ ------- ------
Balance at end of year $3,429 $ 2,151 $3,915
====== ======= ======
The federal income tax reserve for loan losses at the Bank's base year is
$8,265,000. If any portion of the reserve is used for purposes other than to
absorb the losses for which established, approximately 150% of the amount
actually used (limited to the amount of the reserve) would be subject to
taxation in the fiscal year in which used. As the Bank intends to use the
reserve only to absorb loan losses, a deferred income tax liability of
$3,389,000 has not been provided.
48
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial statements.
EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
The Bank has entered into an employment agreement with the President and Chief
Executive Officer that provides for a specified minimum annual compensation and
the continuation of benefits currently received. However, such employment may be
terminated for cause, as defined, without incurring any continuing obligations.
The Bank has also entered into special termination agreements with the President
and Chief Executive Officer and certain senior executives. The agreements
generally provide for certain lump-sum severance payments within a three-year
period following a "change in control," as defined in the agreements.
LOAN COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Such commitments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized on the consolidated balance sheet. The Bank's exposure
to credit loss is represented by the contractual amount of these commitments.
The Bank uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
The following financial instruments were outstanding whose contract amounts
represent credit risk:
Contract Amount
at December 31,
-----------------------------
1996 1995
---------- -----------
(In thousands)
Commitments to grant loans $ 13,607 $ 4,667
Unadvanced funds on equity lines of credit 20,479 18,760
Unadvanced funds on commercial lines of credit 6,884 4,197
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for lines of credit may expire without
being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. Funds disbursed under these financial
instruments are generally collateralized by real estate, except for the
commercial lines of credit which are generally secured by the business assets of
the borrower.
48
49
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (concluded)
OPERATING LEASE COMMITMENTS
Pursuant to the terms of noncancelable lease agreements in effect at December
31, 1996, pertaining to banking premises and equipment, future minimum rent
commitments aggregate $702,000 through the year 2000. In addition, the leases
contain options to extend for periods up to fifteen years. Total rent expense
for the years ended December 31, 1996, 1995 and 1994 amounted to $282,000,
$270,000 and $185,000, respectively.
OTHER COMMITMENTS AND CONTINGENCIES
In January, 1997, the Bank entered into agreements to purchase two properties
for business expansion totaling $1,171,000.
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will not have a material effect on
the Bank's consolidated financial statements.
12. STOCKHOLDERS' EQUITY
RESTRICTIONS ON DIVIDENDS
Federal and state banking regulations place certain restrictions on dividends
paid. No dividends may be paid by the Bank if such dividends would reduce the
Bank's capital to a level below minimum regulatory capital requirements.
MINIMUM REGULATORY REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of its assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
49
50
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCKHOLDERS' EQUITY (concluded)
MINIMUM REGULATORY REQUIREMENTS (concluded)
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since the notification that management believes have
changed the Bank's category. The Bank's actual capital amounts and ratios as of
December 31, 1996 are also presented in the table.
Minimum
To Be Well
For Minimum Capitalized Under
Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- ------------- --------- ------------ ---------
(Dollars in Thousands)
Total Capital $ 92,796 16.0% $ 46,409 8.0% $ 58,012 10.0%
(to risk weighted assets)
Tier 1 Capital 85,565 14.8 23,205 4.0 34,807 6.0
(to risk weighted assets)
Tier 1 Capital 85,565 8.4 40,752 - 4.0 - 50,940 5.0
(to average assets) 50,940 5.0
SHAREHOLDER RIGHTS PLAN
The Bank has a Shareholder Rights Plan which distributed one preferred stock
purchase right for each outstanding share of common stock. Such rights only
become exercisable, or transferable apart from the common stock, ten business
days after a person or group acquires beneficial ownership of, or commences a
tender or exchange offer for, 15% or more of the Bank's common stock, or the
declaration by the Board of Directors that any person is an Adverse Person. Each
right may then be exercised to acquire one one-hundredth of a share of Series A
Junior Participating Cumulative Preferred Stock at an exercise price of $90,
subject to adjustment. If the Bank is acquired in a merger or other business
combination transaction, or 50% of the Bank's assets or earning power is sold,
the rights entitle holders to acquire common stock of the Acquiring Person
having a value twice the exercise price of the rights. The rights may be
redeemed in whole by the Bank at $.01 per right at any time prior to (i) the
declaration of a person as an Adverse Person, (ii) the tenth day following
public announcement that a 15% position has been acquired, or (iii) the
occurrence of a merger or other business combination. The rights will expire on
September 22, 2003.
50
51
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Bank provides basic and supplemental pension benefits for eligible employees
through the Savings Banks Employees Retirement Association Pension Plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in one twelve-month period beginning with such employee's date of
employment, or any anniversary thereof, automatically becomes a participant in
the pension plan. Participants are fully vested after three years of such
service.
Net periodic pension expense for the plan years ended October 31, 1996, 1995 and
1994 consisted of the following:
1996 1995 1994
---- ---- ----
(In thousands)
Service cost - benefits earned during the year $ 514 $ 395 $ 427
Interest cost on projected benefits 305 283 276
Actual return on plan assets (503) (544) (201)
Net amortization and deferral (19) (19) (19)
Net (gain) loss 218 292 (51)
----- ----- -----
$ 515 $ 407 $ 432
===== ===== =====
Total pension expense for the years ended December 31, 1996, 1995 and 1994
amounted to $540,000, $402,000 and $432,000, respectively.
According to the Association's actuary, a reconciliation of the funded status of
the plan is as follows:
October 31,
-----------
1996 1995
---- ----
(In thousands)
Plan assets at fair value $ 3,994 $ 3,334
Projected benefit obligation 4,180 4,355
------- -------
Excess of projected benefit obligation over plan as (186) (1,021)
Unamortized net surplus since adoption of SFAS No 87 (284) (303)
Unrecognized net gain (1,431) (443)
------- -------
Accrued pension liability $(1,901) $(1,767)
======= =======
The accumulated benefit obligation (substantially all vested) at October 31,
1996 amounted to $2,613,000, which was less than the fair value of plan assets
at that date.
For the plan years ended October 31, 1996, 1995 and 1994, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.50%, 7.00% and
8.00%, respectively, and an expected long-term rate of return on plan assets of
8.00%, 8.00% and 7.00%, respectively. An annual salary increase of 5% was
utilized for all years.
51
52
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE BENEFIT PLANS (concluded)
401(k) PLAN
As of November 1, 1994, the Bank adopted a 401(k) plan. The plan provides for
voluntary contributions by participating employees ranging from 1 percent to 15
percent of their compensation, subject to certain limits based on federal tax
laws. Each employee reaching the age of 21 and having completed at least 1,000
hours of service in one twelve-month period beginning with such employee's date
of employment, or any anniversary thereof, becomes eligible to participate in
the plan. The Bank may choose to match a portion of the employees'
contributions. During the years ended December 31, 1996 and 1995, the Bank made
matching contributions equal to twenty-five percent (25%) of the first six
percent (6%) of annual compensation contributed to the plan. For the years ended
December 31, 1996 and 1995, expense attributable to the Plan amounted to $69,000
and $75,000, respectively.
INCENTIVE PLAN
The Bank has an executive incentive plan whereby all management executives are
eligible to receive a bonus, proportionate to their respective salary, if the
Bank meets or exceeds certain base standards. The structure of the plan is
reviewed on an annual basis by a designated committee, and performance goals are
then established. Incentive compensation expense amounted to $101,000, $181,000
and $338,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
EXECUTIVE SUPPLEMENTAL BENEFIT AGREEMENT
The Bank has entered into a supplemental executive retirement plan with its
President, effective November 1, 1994. The agreement is designed to provide the
benefits lost under defined benefit plans due to the reduction in the IRC
compensation ceiling effective November 1, 1994. The present value of future
benefits is being accrued over the term of employment. Supplemental compensation
expense for the years ended December 31, 1996 and 1995 amounted to $36,000 and
$42,000, respectively.
14. STOCK OPTION PLANS
The Bank has stock option plans, for the benefit of directors, officers and
full-time employees, covering 736,000 shares of common stock under the 1986
Stock Option Plan and 200,000 shares of common stock under the 1993 Stock Option
Plan. Both "Incentive Stock Options" and "Non-qualified Stock Options" may be
granted under the plans, with a maximum option term of ten years. Under the
terms of the plans, stock options may be granted as determined appropriate by
the Option Committee of the Board of Directors, and will have an exercise price
equal to, or in excess of, the fair market value of a share of common stock of
the Bank on the date the option is granted. The Bank applies APB Opinion 25 and
related interpretations in accounting for the plans. (See Note 1.) The plans
also permit the inclusion of stock appreciation rights ("SARs") in any option
granted which would permit the optionee to surrender an option (or portion
thereof) for cancellation and to receive cash or common stock equal to the
excess, if any, of the then fair market value of the common stock subject to
such option or portion thereof over the option exercise price. No SARs have been
granted to date.
52
53
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLANS (concluded)
Stock option activity under the plans is as follows:
Years Ended December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Amount Price Amount Price Amount Price
------------ ------------ ------------- ------------- ------------- ----------
Shares under option:
Outstanding at beginning of year 453,634 $ 8.90 482,034 $ 8.71 446,644 $ 6.23
Granted 12,000 22.13 6,000 18.09 94,590 18.25
Cancelled -- -- (7,000) 17.38 (600) 6.13
Exercised (111,458) 5.48 (27,400) 5.47 (58,600) 5.23
-------- ---- ------- ---- ------- ----
Outstanding at end of year 354,176 10.42 453,634 8.90 482,034 8.71
======= ===== ======= ==== ======= ====
Exercisable at end of year 315,299 9.33 377,980 7.35 330,228 5.87
======= ==== ======= ==== ======= ====
Information pertaining to options outstanding at December 31, 1996 is as
follows:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- --------------- ------------- ----------- -------------- -----------
$5.19 - $6.13 154,700 4.1 years $ 5.26 154,700 $ 5.26
$7.63 - $10.88 90,886 5.7 9.50 90,886 9.50
$12.25 - $14.44 16,000 7.1 13.99 11,200 13.81
$17.25 - $19.44 77,590 7.6 18.83 54,313 18.83
$20.75 - $25.75 15,000 9.4 22.05 4,200 21.04
------------ -----------
Outstanding at end of year 354,176 5.6 years $ 10.42 315,299 $ 9.33
=============== ===========
15. EMPLOYEES' STOCK OWNERSHIP PLAN
The Bank has an Employees' Stock Ownership Plan ("ESOP") for the benefit of each
employee that has reached the age of 21 and has completed at least 500 hours of
service with the Bank in the previous twelve-month period. The Bank may
contribute to the ESOP cash or shares of common stock as voted by the Board of
Directors, not to exceed the maximum amount deductible for federal income tax
purposes. At December 31, 1996, the ESOP held 258,794 shares, all of which have
been allocated to participants. Dividends on all shares held by the ESOP are
allocated to participants on a pro rata basis.
The ESOP previously had a loan agreement with a third-party lender whereby
$1,500,000 was borrowed for the purpose of purchasing additional shares of the
Bank's common stock. Shares purchased with loan proceeds were held in a suspense
account and released for allocation to participants as the loans were repaid.
The loan provided for quarterly interest payments and varying annual principal
payments. The principal balance was fully paid during 1994. Total compensation
and interest expense applicable to the ESOP amounted to $465,000 for the year
ended December 31, 1994.
53
54
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosures of estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating fair
value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Investment securities: Fair values for investment securities, excluding
restricted equity securities, are based on quoted market prices. The carrying
values of restricted equity securities approximate fair values.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values for
other loans (e.g., commercial real estate and investment property, mortgage
loans, commercial and industrial loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for non-performing
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposits: The fair values disclosed for non-certificate accounts are, by
definition, equal to the amount payable on demand at the reporting date which is
the carrying amount. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Borrowings: The carrying amounts of short-term borrowings maturing within 90
days approximate their fair values. Fair values of other borrowings are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing, and are not material.
54
55
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16.FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values, and related carrying amounts, of the Bank's financial
instruments are as follows:
December 31,
-----------------------------------------------------
1996 1995
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(In thousands)
Financial assets:
Cash and cash equivalents $ 16,429 $ 16,429 $ 28,770 $ 28,770
Investment securities 424,966 425,221 363,599 365,865
Loans, net 560,855 558,971 529,424 529,620
Accrued interest receivable 9,291 9,291 7,877 7,877
Financial liabilities:
Deposits 792,141 791,875 791,851 792,995
Short-term borrowings 80,817 80,817 40,281 40,298
Long-term debt 67,647 67,997 32,147 32,710
Accrued interest payable 851 851 504 504
55
56
MEDFORD SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY DATA (UNAUDITED)
A summary of consolidated operating results on a quarterly basis is as follows:
Year Ended December 31, 1996
-------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ------------
(In thousands, except per share data)
Interest and dividend income $ 17,764 $ 17,139 $ 16,992 $ 16,816
Interest expense (9,598) (9,091) (8,979) (8,794)
-------- -------- -------- --------
Net interest income 8,166 8,048 8,013 8,022
Provision for loan losses (20) (45) (90) (60)
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,146 8,003 7,923 7,962
Other income 920 742 759 894
Operating expenses (4,549) (4,595) (4,514) (4,417)
-------- -------- -------- --------
Income before income taxes 4,517 4,150 4,168 4,439
Provision for income taxes (1,825) (1,646) (1,632) (1,742)
-------- -------- -------- --------
Net income $ 2,692 $ 2,504 $ 2,536 $ 2,697
======== ======== ======== ========
Earnings per share:
Primary $ 0.57 $ 0.53 $ 0.54 $ 0.57
======== ======== ======== ========
Fully diluted $ 0.57 $ 0.53 $ 0.54 $ 0.57
======== ======== ======== ========
Year Ended December 31, 1995
---------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------
(In thousands, except per share data)
Interest and dividend income $ 16,563 $ 16,290 $ 16,159 $ 15,393
Interest expense (8,771) (8,618) (8,101) (7,234)
-------- -------- -------- --------
Net interest income 7,792 7,672 8,058 8,159
Provision for loan losses (130) (200) (196) (246)
-------- -------- -------- --------
Net interest income, after provision for loan losses 7,662 7,472 7,862 7,913
Other income 813 822 866 645
Operating expenses (4,508) (4,289) (4,917) (4,455)
-------- -------- -------- --------
Income before income taxes 3,967 4,005 3,811 4,103
Provision for income taxes (1,651) (1,551) (1,551) (1,710)
-------- -------- -------- --------
Net income $ 2,316 $ 2,454 $ 2,260 $ 2,393
======== ======== ======== ========
Earnings per share:
Primary $ 0.49 $ 0.52 $ 0.49 $ 0.52
======== ======== ======== ========
Fully diluted $ 0.49 $ 0.52 $ 0.49 $ 0.52
======== ======== ======== ========
56
57
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK
DIRECTORS OF THE BANK:
The response to this item is incorporated by reference from the discussion under
the captions entitled "Directors" and "The Board of Directors and its
Committees" in the Proxy Statement.
PRINCIPAL OFFICERS OF THE BANK:
Arthur H. Meehan, age 61, is President and Chief Executive Officer of the Bank
and Chairman of the Board of Directors. Mr. Meehan commenced his employment with
the Bank in February 1992. Prior to this date, Mr. Meehan served as Executive
Vice President of the Bank of New England Corporation.
George A. Bargamian, age 48, is Senior Vice President of the Bank. He was hired
by the Bank as Director of Marketing in 1988, and was promoted to Vice President
and Senior Vice President of the Bank during 1988. Mr. Bargamian formerly served
as Assistant Vice President of Marketing for First Mutual of Boston.
Eric B. Loth, age 54, is Senior Vice President of the Bank. Mr. Loth commenced
his employment with the Bank at this level in August 1994. Prior to this date,
Mr. Loth served as Vice President of Lending at Sterling Bank in Waltham,
Massachusetts.
William F. Rivers, age 41, is Senior Vice President of the Bank. He has been
with the Bank since 1974, serving as Assistant Treasurer from 1980-1985, and as
Vice President from 1985-1989.
Phillip W. Wong, age 47, is Senior Vice President and Chief Financial Officer of
the Bank. Mr. Wong commenced his employment with the Bank at this level in
December 1992. Prior to this date, Mr. Wong served as Chief Financial Officer of
Guaranty-First Trust Co. in Waltham, Massachusetts.
FAMILY RELATIONSHIPS AND INVOLVEMENTS IN CERTAIN LEGAL PROCEEDINGS
The response to this item is incorporated by reference from the discussion under
the caption, "Relationships and Transactions with the Bank", in the Proxy
Statement. The directors and officers had no involvement in any material legal
proceedings.
ITEM 10. MANAGEMENT COMPENSATION AND TRANSACTIONS
The response to this item is incorporated by reference from the discussion under
the caption entitled "Executive Compensation" in the Proxy Statement and the
discussion concerning Section 16 Compliance therein.
57
58
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
MEDFORD SAVINGS BANK:
Under date of January 24, 1997, we reported on the consolidated balance sheets
of Medford Savings Bank as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996,
which are included in this Form F-2. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedules III and V included in this Form F-2.
These financial statement schedules are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 24, 1997
58
59
MEDFORD SAVINGS BANK
SCHEDULE III
LOANS AND LEASE FINANCING RECEIVABLES
December 31,
-----------------------------
1996 1995
------------- ------------
(In thousands)
Loans secured by real estate:
Construction and land development $ 8,719 $ 8,591
Secured by farm land -- --
Secured by 1-4 family residential properties 404,078 376,670
Secured by multifamily residential properties 28,603 27,754
Secured by nonfarm, nonresidential properties 94,555 98,017
Loans to depository institutions -- --
Loans to finance agricultural production and other
loans to farmers -- --
Commercial and industrial loans (1) 11,014 9,075
Loans to individuals for households, family and other
personal expenditures:
Credit card and related plans 722 700
Other 19,826 16,010
Loans to foreign governments and official institutions -- --
Obligations (other than securities) of states and political
subdivisions in the U.S. -- --
Other loans -- --
-------- --------
567,517 536,817
Deferred loan costs 569 73
-------- --------
$568,086 $536,890
======== ========
(1) All commercial loans are to U.S. addresses
59
60
MEDFORD SAVINGS BANK
SCHEDULE V
INVESTMENTS IN, INCOME FROM DIVIDENDS, AND EQUITY IN EARNINGS OR
LOSSES OF SUBSIDIARIES AND ASSOCIATED COMPANIES
For the Year Ended
At December 31, 1996 December 31, 1996
----------------------------------------------- -----------------------------
Percent of Equity in
Voting Underlying Amount Bank's
Stock Total Net of Share of
Owned Investment Assets Dividends Earnings (1)
----------- -------------- -------------- ------------- ------------
Name of Issuer (In thousands)
Medford Securities Corporation 100% $ 107,825 $ 107,825 $ -- $ 4,484
=========== ============== ============== ============= ============
For the Year Ended
At December 31, 1995 December 31, 1995
----------------------------------------------- -----------------------------
Percent of Equity in
Voting Underlying Amount Bank's
Stock Total Net of Share of
Owned Investment Assets Dividends Earnings (1)
----------- -------------- -------------- ------------- ------------
Name of Issuer (In thousands)
Medco Realty, Inc. (2) 100% $ 130 $ 130 $ -- $ 157
=========== ============== ============== ============= ============
Medford Securities Corporation 100% $ 103,834 $ 103,834 $ -- $ 2,126
=========== ============== ============== ============= ============
For the Year Ended
At December 31, 1994 December 31, 1994
----------------------------------------------- -----------------------------
Percent of Equity in
Voting Underlying Amount Bank's
Stock Total Net of Share of
Owned Investment Assets Dividends Earnings (1)
----------- -------------- -------------- ------------- ------------
Name of Issuer (In thousands)
Medco Realty, Inc. 100% $ (27) $ (27) $ -- $ 132
=========== ============== ============== ============= ============
(1) Exclusive of income tax effect.
(2) Medco Realty, Inc. was dissolved in January 1996 and the Bank acquired all
of its assets and liabilities.
60
61
PART IV
ITEM 11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM F-3
(a) CONTENTS:
(1) Financial Statements: All Financial Statements are included as
Part II, Item 8 of this Report.
(2) Financial Statement Schedules: Schedules I, IV and VI are
omitted because the required information is contained in or
may be obtained from the consolidated financial statement or
notes thereto included as Item 8 of this Report. Schedule II
is omitted because it is not applicable. Schedules III and V
are set forth in this Item 11 of this Report.
(3) No new exhibits required by Item 11(c) are being filed with
this report.
(b) REPORTS ON FORM F-3: None filed during the fourth quarter of 1996.
(c) EXHIBITS:
(1) Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of
Medford Savings Bank**
(b) Amended and Restated Bylaws of Medford Savings Bank**
(2) Instruments Defining the Rights of Security Holders
(a) Amended and Restated Articles of Incorporation of
Medford Savings Bank**
(b) Amended and Restated Bylaws of Medford Savings Bank**
(c) Specimen Certificate of Medford Savings Bank's Common
Stock, $.50 per value per share**
(d) Shareholder Rights Agreement dated September 22, 1993
by and between the Bank and State Street Bank and
Trust Co., as Rights Agent***
(3) Material Contracts
(a) Stock Option Plans:
(i) Medford Savings Bank 1986 Stock Option
Plan**
(ii) Medford Savings Bank 1993 Stock Option
Plan**
(b) Employment Agreement with Arthur H. Meehan**
(c) Termination Agreements
(i) Termination Agreement with Arthur H.
Meehan**
(ii) Termination Agreement with William F.
Rivers**
(iii) Termination Agreement with George A.
Bargamian**
(iv) Termination Agreement with Joseph S.
Winning**
(v) Termination Agreement with Phillip W. Wong**
(vi) Termination Agreement with Eric B. Loth*
(d) Executive Supplemental Benefit Agreements
(i) Executive Supplemental Benefit Agreement
with Thomas F. O'Connor**
(ii) Supplemental Executive Retirement Plan with
Arthur H. Meehan*
(e) Deferred Investment Plan for Outside Directors**
* Filed pursuant to Item 11 of the Annual Report for the fiscal year
ended December 31, 1994, previously filed with the FDIC.
** Filed pursuant to Item 11 of the Annual Report for the fiscal year
ended December 31, 1993, previously filed with the FDIC.
*** Filed as Exhibit 1 to the Registration Statement on Form F-10 filed
with the FDIC on September 27, 1993.
61
62
(4) Statement Regarding Computation of Per Share Earnings
Such computation can be clearly determined from the material
contained in this Annual Report on Form F-2.
(5) Statement Regarding Computation of Ratios
As the Bank does not have any debt securities registered under
Section 12 of the Act, no ratio of earnings to fixed charges
appears in this Annual Report on Form F-2.
(6) Annual Report to Security Holders
The Medford Savings Bank 1996 Annual Report is furnished only
for the information of the FDIC and is not deemed to be filed
herewith.
(7) Letter Regarding Change in Accounting Principles
None.
(8) Previously Unfiled Documents
None.
(9) List of all Subsidiaries of the Bank, the State or Other
Jurisdiction of Incorporation or Organization of each, and the
Names under which such Subsidiaries do Business
Medford Securities Corporation
- Incorporated in Massachusetts
62
63
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDFORD SAVINGS BANK
By: /s/Arthur H. Meehan
------------------------------------------------
Arthur H. Meehan
Chairman, President, Chief Executive Officer
and Director
Date: February 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Bank and in the
capacities and on the dates indicated.
/s/Arthur H. Meehan Chairman, President, Chief February 25, 1997
- - - ----------------------- Executive Officer and Director
Arthur H. Meehan
/s/Phillip W. Wong Senior Vice President February 25, 1997
- - - ----------------------- and Chief Financial Officer
Phillip W. Wong
/s/Edward D. Brickley Director February 25, 1997
- - - -----------------------
Edward D. Brickley
/s/David L. Burke Director February 25, 1997
- - - -----------------------
David L. Burke
- - - ----------------------- Director February 25, 1997
Paul J. Crowley
/s/Mary L. Doherty Director February 25, 1997
- - - -----------------------
Mary L. Doherty
- - - ----------------------- Director February 25, 1997
Edward J. Gaffey
/s/Andrew D. Guthrie, Jr. Director February 25, 1997
- - - -----------------------
Andrew D. Guthrie, Jr.
/s/Robert A. Havern, III Director February 25, 1997
- - - -----------------------
Robert A. Havern, III
/s/Hugh J. MacIsaac Director February 25, 1997
- - - -----------------------
Hugh J. MacIsaac
/s/Eugene R. Murray Clerk and Director February 25, 1997
- - - -----------------------
Eugene R. Murray
/s/Francis D. Pizzella Director February 25, 1997
- - - -----------------------
Francis D. Pizzella
63