SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to ___________
Commission file number 0-23435
MEDFORD BANCORP, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3384928
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
29 High Street
Medford, Massachusetts 02155
---------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 395-7700
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
YES |X| NO |_|
The number of shares outstanding of Medford Bancorp, Inc.'s common stock, $0.50
par value per share, as of March 31, 2000 was 8,189,400.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets........................................ 1
Consolidated Statements of Income................................ 2-3
Consolidated Statements of Changes in Stockholders' Equity......... 4
Consolidated Statements of Cash Flows............................ 5-6
Notes to Consolidated Financial Statements......................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 8-22
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ..................................................... 22
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings................................................. 23
ITEM 2 - Changes in Securities and Use of Proceeds......................... 23
ITEM 3 - Defaults Upon Senior Securities................................... 23
ITEM 4 - Submission of Matters to a Vote of Security Holders............... 23
ITEM 5 - Other Information................................................. 23
ITEM 6 - Exhibits and Reports on Form 8-K.................................. 23
SIGNATURES........................................................ 24
Exhibit Index..................................................... 25
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
--------- ------------
(In thousands)
ASSETS
Cash and due from banks $ 14,892 $ 17,043
Interest-bearing deposits 8,924 3,867
----------- -----------
Cash and cash equivalents 23,816 20,910
----------- -----------
Investment securities available for sale 527,008 520,030
Investment securities held to maturity -- 5,000
Restricted equity securities 11,351 10,828
Loans 650,096 633,530
Less allowance for loan losses (6,827) (6,779)
----------- -----------
Loans, net 643,269 626,751
----------- -----------
Banking premises and equipment, net 11,289 11,566
Accrued interest receivable 10,072 9,162
Goodwill and deposit-based intangibles 3,402 3,679
Other assets 18,354 16,986
----------- -----------
TOTAL ASSETS $ 1,248,561 $ 1,224,912
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 943,235 $ 911,328
Short-term borrowings 30,553 67,071
Long-term debt 174,117 148,653
Accrued taxes and expenses 4,680 3,920
Other liabilities 7,614 3,070
----------- -----------
Total liabilities 1,160,199 1,134,042
----------- -----------
Stockholders' equity:
Serial preferred stock, $.50 par value, 5,000,000 shares authorized;
none issued; -- --
Common stock, 15,000,000 shares authorized;
$.50 par value, 9,122,596 shares issued 4,561 4,561
Additional paid-in capital 24,277 24,839
Retained earnings 87,874 85,153
Accumulated other comprehensive income (loss) (11,205) (9,405)
Treasury stock, at cost (933,196 and 739,344 shares, respectively) (17,145) (14,278)
----------- -----------
Total stockholders' equity 88,362 90,870
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,248,561 $ 1,224,912
=========== ===========
See accompanying notes to consolidated financial statements.
1
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
----------------
2000 1999
---- ----
(Dollars in thousands,
except per share data)
Interest and dividend income:
Interest and fees on loans $ 11,980 $ 11,063
Interest on debt securities 8,248 7,699
Dividends on equity securities 193 140
Interest on short-term investments 95 50
-------- --------
Total interest and dividend income 20,516 18,952
-------- --------
Interest expense:
Interest on deposits 8,418 8,061
Interest on short-term borrowings 784 369
Interest on long-term debt 2,344 1,899
-------- --------
Total interest expense 11,546 10,329
-------- --------
Net interest income 8,970 8,623
Provision for loan losses 75 --
-------- --------
Net interest income, after provision for loan losses 8,895 8,623
-------- --------
Other income:
Customer service fees 463 445
Gain (loss) on sales of securities, net (74) 1,243
Gain on sales of loans -- 3
Pension plan curtailment gain 1,195 --
Miscellaneous 302 199
-------- --------
Total other income 1,886 1,890
-------- --------
Operating expenses:
Salaries and employee benefits 2,726 2,591
Occupancy and equipment 669 645
Data processing 371 374
Professional fees 107 137
Amortization of intangibles 277 287
Advertising and marketing 150 141
Other general and administrative 600 488
-------- --------
Total operating expenses 4,900 4,663
-------- --------
Income before income taxes 5,881 5,850
Provision for income taxes 2,174 2,152
-------- --------
Net income $ 3,707 $ 3,698
======== ========
See accompanying notes to consolidated financial statements.
(Continued)
2
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Concluded)
Three Months Ended
March 31,
----------------
2000 1999
---- ----
(Dollars in thousands,
except per share data)
Earnings per share:
Basic $0.45 $0.44
Diluted $0.43 $0.41
Cash dividends declared per share $0.12 $0.11
Weighted average shares outstanding
Basic 8,262,640 8,487,779
Diluted 8,562,391 8,918,409
See accompanying notes to consolidated financial statements.
3
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Accumulated
Common Stock Additional Treasury Stock Other
------------------ Paid-In Retained ------------------ Comprehensive
Shares Dollars Capital Earnings Shares Dollars Income (Loss) Total
------ ------- ------- -------- ------ ------- ------------- -----
(In thousands, except number of shares)
Balance at December 31, 1999 9,122,596 $ 4,561 $ 24,839 $ 85,153 (739,344) $ (14,278) $ (9,405) $ 90,870
---------
Comprehensive income:
Net income -- -- -- 3,707 -- -- -- 3,707
Change in net unrealized gain
(loss) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- -- -- (1,800) (1,800)
---------
Total comprehensive income 1,907
---------
Cash dividends declared
($.12 per share) -- (986) -- -- -- (986)
Repurchase of treasury stock -- -- -- -- (229,000) (3,529) -- (3,529)
Issuance of common stock under
stock option plan -- -- (562) -- 35,148 662 -- 100
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2000 9,122,596 $ 4,561 $ 24,277 $ 87,874 (933,196) $ (17,145) $ (11,205) $ 88,362
========= ========= ========= ========= ========= ========= ========= =========
Balance at December 31, 1998 9,122,596 $ 4,561 $ 26,389 $ 76,770 (412,768) $ (8,511) $ 3,058 $ 102,267
---------
Comprehensive income:
Net income -- -- -- 3,698 -- -- -- 3,698
Change in net unrealized gain
(loss) on securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- -- -- (3,230) (3,230)
---------
Total comprehensive income 468
---------
Cash dividends declared
($.11 per share) -- -- (919) -- -- -- -- (919)
Repurchase of treasury stock -- -- -- -- (425,796) (7,689) -- (7,689)
Issuance of common stock under
stock option plan -- -- (140) -- 8,600 172 -- 32
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1999 9,122,596 $ 4,561 $ 26,249 $ 79,549 (829,964) $ (16,028) $ (172) $ 94,159
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
----------------
2000 1999
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 3,707 $ 3,698
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 75 --
Depreciation and amortization, net 696 649
Gain (loss) on sales of securities, net 74 (1,243)
Gain on sales of loans -- (3)
Decrease (increase) in accrued interest receivable
and other assets (1,151) 1,416
Increase in accrued taxes and expenses
and other liabilities 5,827 934
--------- ---------
Net cash provided by operating activities 9,228 5,451
--------- ---------
Cash flows from investing activities:
Activity in investment securities
available for sale:
Maturities 19,400 13,250
Sales 5,964 77,753
Purchases (41,961) (135,697)
Principal amortization of mortgage-backed securities 6,472 17,966
Activity in investment securities held to maturity:
Maturities 4,997 204
Purchases (524) (1,110)
Proceeds from sale of loans, net -- 82
Loans originated and purchased, net of amortization and payoffs (16,563) (786)
Purchases of bank premises and equipment, net (22) (128)
Proceeds from foreclosed real estate -- 116
--------- ---------
Net cash used in investing activities (22,237) (28,350)
--------- ---------
See accompanying notes to consolidated financial statements.
(Continued)
5
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Three Months Ended
March 31,
----------------
2000 1999
---- ----
(In thousands)
Cash flows from financing activities:
Net increase in deposits 31,907 31,213
Net decrease in borrowings with maturities of three
months or less (36,518) (12,990)
Proceeds from long-term debt 25,464 17,000
Issuance of common stock 100 32
Payments to acquire treasury stock (3,529) (7,689)
Cash dividends paid (1,509) (1,742)
-------- --------
Net cash provided by financing activities 15,915 25,824
-------- --------
Net change in cash and cash equivalents 2,906 2,925
Cash and cash equivalents, beginning of period 20,910 22,002
-------- --------
Cash and cash equivalents, end of period $ 23,816 $ 24,927
======== ========
See accompanying notes to consolidated financial statements.
6
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
Note 1. Basis of Presentation
The consolidated interim financial statements of Medford Bancorp, Inc.
(the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the
"Bank") presented herein are intended to be read in conjunction with the
consolidated financial statements presented in the Company's annual report for
the year ended December 31, 1999.
The consolidated financial information for the three months ended March
31, 2000 is unaudited. In the opinion of management, however, the consolidated
financial information reflects all adjustments (consisting solely of normal
recurring accruals) necessary for a fair presentation in accordance with
generally accepted accounting principles. Interim results are not necessarily
indicative of results to be expected for the entire year.
Note 2. Commitments
At March 31, 2000, the Company had outstanding commitments to originate
new residential and commercial real estate mortgage loans totalling
approximately $18.9 million, which are not reflected on the consolidated balance
sheet. Unadvanced funds on equity lines were $24.7 million, unadvanced
construction loan funds were $11.8 million, and unadvanced funds on commercial
lines of credit were $11.7 million at March 31, 2000.
Note 3. Earnings per share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by the Company relate
solely to outstanding stock options, and are determined using the treasury stock
method. The assumed conversion of outstanding dilutive stock options would
increase the shares outstanding but would not require an adjustment to income as
a result of the conversion.
Note 4. Defined Benefit Plan Termination
On January 26, 2000 the Board of Directors of Medford Bank voted to amend
its employee benefit programs to provide for the cessation of pension benefit
accruals effective February 29, 2000 in conjunction with its termination of the
Defined Benefit Pension Plan ("Plan") to be effective March 31, 2000. Final Plan
termination is subject to IRS approval. Medford Bank expects to record a
one-time after-tax gain of approximately $1.9 million as a result of this
action.
The one-time gain will be recognized in two stages. Within the first
quarter ended March 31, 2000, the Bank recorded an after-tax gain of
approximately $700,000 from the curtailment of its Plan. Second, it is
anticipated that the Bank will record an after-tax gain of approximately $1.2
million upon the settlement and distribution of the Plan assets during the
second half of 2000. On an on-going basis, a portion of the cost of providing
the Plan will be reallocated to enhance 401(k) benefits for employees.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
This form 10-Q 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,
changes in the size and nature of the Company's competition, and changes in the
assumptions used in making such forward-looking statements.
Consolidated net income was $3,707,000, or basic earnings per share of $0.45
($0.43 diluted basis), for the three months ended March 31, 2000, compared to
$3,698,000 or basic earnings per share of $0.44 ($0.41 diluted basis), for the
comparable prior year period.
Net interest income was $8,970,000 for the quarter ended March 31, 2000, up
$347,000 or 4.0% from the comparable 1999 period, and represented a net interest
margin of 2.98% compared to 3.08% for the comparable 1999 period. The net loss
on sales of assets totalled $74,000 for the first quarter of 2000 compared to a
gain of $1,246,000 for the same quarter in 1999. During the quarter ended March
31, 2000 there was a $1.2 million pre-tax curtailment gain from the termination
of the Company's defined benefit pension plan.
Total operating expenses were $4,900,000 for the quarter ended March 31, 2000,
up $237,000 or 5.1% from $4,663,000 during the comparable period in 1999. There
was a $75,000 provision for loan losses recorded for the three month period
ended March 31, 2000 as compared to no provision recorded for the comparable
prior year period.
For the first quarter of 2000, the annualized return on assets was 1.21% and the
annualized return on equity was 16.91%, compared to 1.31% and 15.28% for the
comparable period in 1999.
Total non-performing assets were $2,432,000 or 0.19% of total assets at March
31, 2000, compared to $2,500,000 or 0.20%, respectively, at December 31, 1999.
The allowance for loan losses at March 31, 2000 was $6,827,000, representing
1.05% of total loans. At December 31, 1999, the allowance for loan losses was
$6,779,000, representing 1.07% of total loans. The Company had no foreclosed
real estate at March 31, 2000 or December 31, 1999.
8
The Company had total assets of $1.25 billion and capital of $88.4 million at
March 31, 2000, representing a capital to assets ratio of 7.08%, exceeding all
regulatory requirements. When compared to December 31, 1999, investment
securities increased $2.5 million or 0.5% to $538.4 million, total gross loans
increased $16.6 million or 2.6% to $650.1 million, deposits increased $31.9
million or 3.5% to $943.2 million, and borrowings decreased $11.1 million or
5.1% to $204.7 million.
A more detailed discussion and analysis of the Company's financial condition and
results of operations follows.
INVESTMENT SECURITIES
Investment securities consist of the following:
March 31, December 31,
2000 1999
---- ----
(In thousands)
Securities available for sale, at fair value $527,008 $520,030
Securities held to maturity, at amortized cost -- 5,000
Restricted equity securities:
Federal Home Loan Bank stock 10,206 9,683
Northeast Retirement Services 31 31
Massachusetts Savings Bank Life Insurance stock 1,114 1,114
-------- --------
$538,359 $535,858
======== ========
The amortized cost and fair value of investment securities, excluding restricted
equity securities, at March 31, 2000 and December 31, 1999 with gross unrealized
gains and losses, follows:
March 31, 2000
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $263,456 $ 16 $ (4,247) $259,225
Mortgage - backed 226,385 -- (11,543) 214,842
U.S. Government and
federal agency 53,161 -- (1,888) 51,273
-------- -------- -------- --------
Total debt securities 543,002 16 (17,678) 525,340
Marketable equity securities 2,305 3 (640) 1,668
-------- -------- -------- --------
Total securities
available for sale $545,307 $ 19 $(18,318) $527,008
======== ======== ======== ========
9
December 31, 1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $250,078 $ 42 $ (3,353) $246,767
Mortgage - backed 224,083 -- (9,627) 214,456
U.S. Government and
federal agency 59,144 -- (2,017) 57,127
-------- -------- -------- --------
Total debt securities 533,305 42 (14,997) 518,350
Marketable equity securities 2,097 6 (423) 1,680
-------- -------- -------- --------
Total securities
available for sale $535,402 $ 48 $(15,420) $520,030
======== ======== ======== ========
Securities Held to Maturity
U.S. Government and federal agency $ 5,000 $ 6 $ -- $ 5,006
======== ======== ======== ========
The amortized cost and fair value of debt securities by contractual maturity at
March 31, 2000 are as follows:
March 31, 2000
--------------------------
Available for Sale
--------------------------
Amortized Fair
Cost Value
---- -----
(In thousands)
Within 1 year $ 76,046 $ 75,670
After 1 year through 5 years 235,204 230,027
After 5 years through 10 years 5,367 4,801
-------- --------
316,617 310,498
Mortgage - backed securities 226,385 214,842
-------- --------
$543,002 $525,340
======== ========
10
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1999 are as follows:
December 31, 1999
-----------------------------------------
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(In thousands)
Within 1 year $ 64,996 $ 64,987 $ 5,000 $ 5,006
After 1 year through 5 years 238,848 234,204 -- --
After 5 years through 10 years 5,378 4,703 -- --
-------- -------- -------- --------
309,222 303,984 5,000 5,006
Mortgage - backed securities 224,083 214,456 -- --
-------- -------- -------- --------
$533,305 $518,350 $ 5,000 $ 5,006
======== ======== ======== ========
Investment securities increased $2.5 million from $535.9 million at December 31,
1999 to $538.4 million at March 31, 2000. At March 31, 2000, the securities
portfolio classified as "available for sale" reflected an unrealized pre-tax
loss of $18.3 million as a result of the ongoing rise in market rates as
compared to an unrealized pre-tax loss of $15.4 million at December 31, 1999. In
accordance with the Company's asset-liability strategies, purchases of
mortgage-backed securities are primarily in fifteen year mortgages with
weighted-average lives of six years and other investment securities are
generally short-term with maturities of five years or less.
Sales of debt securities produced losses of $64,000 during the 2000 first
quarter compared to gains of $1.2 million for the first quarter ended March 31,
1999. Sales of equities produced losses of $10,000 during the 2000 first quarter
compared to gains of $4,000 for the quarter ended March 31, 1999.
11
LOANS
A summary of the Company's outstanding loan balances as of the dates
indicated follows:
March 31, December 31,
2000 1999
---- ----
(In thousands)
Mortgage loans on real estate:
Residential 1-4 family $ 471,720 $ 465,420
Commercial 118,799 112,050
Construction 27,719 25,239
Second mortgages 689 774
Equity lines of credit 20,138 19,394
--------- ---------
639,065 622,877
Less: Unadvanced construction
loan funds (11,762) (11,735)
--------- ---------
627,303 611,142
--------- ---------
Other loans:
Commercial loans 18,577 18,124
Personal loans 2,127 2,071
Education and other 807 841
--------- ---------
21,511 21,036
--------- ---------
Add: Premium on loans acquired 184 198
Net deferred loan origination fees 1,098 1,154
--------- ---------
Total loans 650,096 633,530
Less: Allowance for loan losses (6,827) (6,779)
--------- ---------
Loans, net $ 643,269 $ 626,751
========= =========
Total gross loans outstanding at March 31, 2000 increased $16.6 million to
$650.1 million when compared to the December 31, 1999 level. The $16.6 million
increase in gross loans can be principally explained by the growth in
residential 1-4 family real estate mortgage loans of $6.3 million, commercial
real estate loans of $6.7 million and construction real estate loans of $2.5
million from the December 31, 1999 levels. Changes in all other loan categories
during the three months ended March 31, 2000 are representative of net activity
in new loan originations and amortization and payoffs.
NON-PERFORMING ASSETS
Total non-performing assets were $2.4 million and $2.5 million at March 31, 2000
and December 31, 1999, respectively. There were no foreclosed assets at March
31, 2000 or December 31, 1999. As a percentage of total assets, non-performing
assets equaled 0.19% and 0.20% at March 31, 2000 and December 31, 1999,
respectively. Fluctuations in total non-performing assets occur from quarter to
quarter but remain at historically low levels. It is the Company's general
policy to place loans on a non-accrual status when such loans become 90 days
contractually delinquent or when the collectibility of principal or
12
interest payments becomes doubtful. When a loan is placed on non-accrual status,
its interest income accrual ceases and all income previously accrued but unpaid
is reversed.
In accordance with SFAS No. 114, a loan is considered impaired when, based on
current information and events, it is probable that the borrower will be unable
to meet principal or interest payments as agreed in the original loan contract.
The principal balance of impaired loans at March 31, 2000 was $2.4 million, all
of which were included in the $2.4 million non-performing assets referenced in
the preceding paragraph. The loan loss allowance allocated to these impaired
loans was $241,000 at March 31, 2000.
ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses follows:
Three Months Ended
--------------------------
March 31, March 31,
2000 1999
---- ----
(In thousands)
Balance at beginning
of period $ 6,779 $ 6,876
Provisions 75 --
Recoveries 8 15
Less: Charge-offs (35) (67)
------- -------
Balance at end of period $ 6,827 $ 6,824
======= =======
The allowance for loan losses is established through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the collectibility of the loan balance is unlikely.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, known inherent risks in the nature and volume of
the loan portfolio, levels of non-performing loans, adverse situations that may
affect the borrowers' ability to repay, trends in delinquencies and charge-offs,
estimated value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available. Ultimate losses may vary from current estimates and future additions
to the allowance may be necessary.
The allowance for loan losses was $6.8 million at March 31, 2000, a reserve
coverage of 1.05% of total loans. At December 31, 1999, the allowance for loan
losses was $6.8 million, representing 1.07% of total loans.
13
DEPOSITS
Total deposits increased $31.9 million from December 31, 1999 to $943.2 million
at March 31, 2000. Generally, the Company's strategy is to maintain stable
deposit rates and to increase deposit levels through selective core deposit and
term deposit promotions. To retain core deposits, the Company continues to
promote its "ComboPlus" account, which combines a statement savings and a demand
account. This "ComboPlus" account has contributed to an increase in both its
related savings and demand deposits. The following table indicates the balances
in various deposit accounts at the dates indicated.
March 31, December 31,
2000 1999
------ -----
(In thousands)
Demand accounts $ 56,454 $ 51,202
NOW accounts 61,001 60,811
Savings & money market accounts 391,252 382,970
Term certificates 434,528 416,345
-------- --------
$943,235 $911,328
======== ========
BORROWED FUNDS
Historically, the Company has selectively engaged in long-term borrowings to
fund loans and has entered into short-term repurchase agreements to fund
investment securities purchases. At March 31, 2000, the Company's long-term
borrowings increased by $25.5 million to $174.1 million from $148.6 million at
December 31, 1999 while its short-term borrowings decreased by $36.5 million to
$30.6 million from $67.1 million at year end. At March 31, 2000, borrowed funds
totalled $204.7 million, decreasing $11.1 million from the $215.7 million
reported at December 31, 1999.
14
STOCKHOLDERS' EQUITY
The Company's capital to assets ratio was 7.08% and 7.42% at March 31, 2000 and
December 31, 1999, respectively.
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and/or the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Holding companies, such as the Company, are not subject to prompt
corrective action provisions. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined) to average assets (as defined). As of December
31, 1999, the Company and the Bank met all capital adequacy requirements to be
categorized as well capitalized. No conditions or events occurred during the
first three months of 2000 that management believes have changed the Company's
or the Bank's category. Therefore, management believes as of March 31, 2000 that
the Company and the Bank met all capital adequacy requirements to continue to be
categorized as well capitalized.
The Company's book value at March 31, 2000 was $10.79 per share, compared with
$10.84 per share at December 31, 1999.
15
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 vs QUARTER ENDED MARCH 31, 1999
NET INTEREST INCOME
Interest and dividend income from loans and investments increased $1.6 million
or 8.3% to $20.5 million for the 2000 first quarter when compared to the same
quarter in 1999. For the 2000 first quarter, average earning assets totalled
$1.2 billion, an increase of $97.9 million or 8.9% over the average for the
comparable 1999 period with $43.1 million of that increase attributed to short
and long-term investment securities and $54.8 million attributed to loans. The
annualized yields on earning assets were 6.82% and 6.86% for the first quarters
in 2000 and 1999, respectively. The yield on investment securities was 6.07% for
the first quarter 2000 as compared to 6.08% for the first quarter 1999. Short
and long-term investments contributed $647,000 of additional interest and
dividend income when comparing the first quarter of 2000 to the first quarter of
1999, primarily as a result of higher average balances. The increase in the
average balance on loans partially offset by a yield decline, from 7.57% to
7.50%, caused interest income on loans to increase by $917,000 from its 1999
first quarter level.
Total interest expense for the three months ended March 31, 2000 was $11.5
million, reflecting an increase of $1.2 million or 11.8% over the same period in
1999. At March 31, 2000 average interest bearing liabilities were $1.09 billion,
an increase of $88.5 million or 8.9% over the comparable prior year period. This
period-to-period increase can be attributed to average deposit growth of $38.8
million and average borrowed funds increasing $49.7 million. Deposit growth
occurred even as rates paid declined from 3.98% to 3.89% for the quarters ended
March 31, 2000 and 1999, respectively. Overall, interest expense on deposits
increased $357,000 to $8.4 million as increases in average deposits more than
offset the decline in rates paid. Interest expense on borrowed funds increased
$860,000 as the average balances increased and the rates paid on borrowed funds
increased 27 basis points to 5.71% in the first quarter of 2000 compared to the
first quarter of 1999. The overall cost of interest bearing liabilities
increased to 4.25% from 4.18% when comparing the two quarters.
Net interest income increased 4.0% or $347,000 to $9.0 million when comparing
the first quarter in 2000 to the same quarter in 1999, as the weighted average
rate spread and the net interest margin decreased by 11 and 10 basis points,
respectively. The increase in net interest income is primarily due to increased
levels of earning assets while the basis points declines in spread and margin
reflect the changing mix of earning assets and of interest bearing liabilities.
The yield on earning assets declined 4 basis points to 6.82% in the first
quarter 2000 as compared to the same quarter in 1999, while the cost of interest
bearing liabilities increased by 7 basis points to 4.25%. This resulted in an
interest rate spread and a net interest margin of 2.57% and 2.98%, respectively,
for the three months ended March 31, 2000.
16
MEDFORD BANCORP, INC.
INTEREST RATE SPREAD
Three Months Ended
March 31,
---------
2000 1999
---- ----
Weighted average yield earned on:
Short-term investments 5.53% 4.66%
Investment securities 6.07 6.08
Loans 7.50 7.57
---- ----
All earning assets 6.82% 6.86%
---- ----
Weighted average rate paid on:
Deposits 3.89% 3.98%
Borrowed funds 5.71 5.44
---- ----
All interest-bearing liabilities 4.25% 4.18%
---- ----
Weighted average rate spread 2.57% 2.68%
==== ====
Net interest margin 2.98% 3.08%
==== ====
17
PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision is determined by
management on the basis of many factors, including the quality of specific
loans, risk characteristics of the loan portfolio generally, the level of
non-performing loans, current economic conditions, trends in delinquency and
charge-offs, and value of the underlying collateral. Management considers the
allowance for loan losses to be adequate at March 31, 2000, although there can
be no assurance that the allowance is adequate or that additional provisions to
the allowance for loan losses will not be necessary.
Due to growth in the loan portfolio, partially offset by the reduced allocation
associated with non-performing loans, the Company recorded a $75,000 provision
for loan losses for the first quarter of 2000. No provision for loan losses was
recorded for the first quarter of 1999. The Company recorded net loan
charge-offs of $27,000 for the three months ended March 31, 2000 compared to net
loan charge-offs of $52,000 for the same period in 1999.
OTHER INCOME
Other income, including customer service fees and gains and losses on sales of
assets equaled $1.9 million in the first quarter of 2000 as compared to $1.9
million in the first quarter of 1999, representing a decrease of $4,000 or .21%.
The $1.3 million decrease in combined gains on sales of securities and loans,
when comparing the first quarters of 2000 and 1999, was offset by a $1.2 million
pre-tax curtailment of the Company's defined benefit pension plan. See related
discussions under "Investment Securities" included in "Management's Discussion
and Analysis" in Item 2 of Part I of this report and "Note 4" in Item 1 of Part
I of this report.
OPERATING EXPENSES
Operating expenses increased $237,000 or 5.1% to $4,900,000 for the three months
ended March 31, 2000 when compared to the same period in 1999. The most
significant increases were in salaries and employee benefits, up 5.2%,
reflecting combined effects of increased staffing and wage pressures in a tight
labor market and other general and administrative ex[enses, up 23%. The
Company's annualized expense ratio, which is the ratio of non-interest expense
to average assets, was 1.60% for the three months ended March 31, 2000, as
compared to 1.65% for the prior year comparable period. The Company continues to
focus on cost containment with the intent to be a low cost provider of high
quality banking products and services.
PROVISION FOR INCOME TAXES
The Bank's effective tax rate for the three months ended March 31, 2000 was
36.97% as compared to 36.79% for the period ended March 31, 1999.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales or maturities of various investment
securities. The Company is a voluntary member of the Federal Home Loan Bank of
Boston ("FHLBB"), and as such may take advantage of the FHLBB's borrowing
programs to enhance liquidity and leverage its favorable capital position. The
Company also may draw on lines of credit at the FHLBB and a large commercial
bank, and it may pledge U.S. Government securities to borrow from certain
investment firms and the Mutual Savings Central Fund of Massachusetts. These
various sources of liquidity are used to fund withdrawals, new loans, and
investments.
Management seeks to promote deposit growth while controlling the Company'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 assist retention of the
Company's base of lower-costing deposits.
Maturities and sales of investment securities provide significant liquidity to
the Company. The Company's policy of purchasing shorter-term debt securities
reduces market risk in the bond portfolio while providing significant cash flow.
For the three months ended March 31, 2000 cash flow from maturities and sales of
securities was $30.3 million compared to $91.2 million for the three months
ended March 31, 1999. Principal payments received on mortgage-backed investments
during the three months ended March 31, 2000 and 1999 totalled $6.5 million and
$18.0 million, respectively. During periods of high interest rates, maturities
in the bond portfolio have provided significant liquidity at a lower cost than
borrowings.
Amortization and payoffs of the loan portfolio also contribute significant
liquidity to the Company. Traditionally, the amortization and payoffs have been
reinvested into loans. When payoff rates exceed origination rates, excess
liquidity from loan payoffs is shifted into the investment portfolio.
The Company also uses borrowed funds as a source of liquidity. These borrowings
generally contribute toward funding over-all loan growth. At March 31, 2000 the
Company's outstanding borrowings from the FHLBB were $204.1 million, as compared
to $193.6 million at December 31, 1999. The Company also utilizes repurchase
agreements as a source of funding when management deems market conditions to be
conducive to such activities. There were no repurchase agreements at March 31,
2000 as compared to $21.2 million at December 31, 1999.
19
LIQUIDITY AND CAPITAL RESOURCES
(continued)
Commitments to originate residential and commercial real estate mortgage loans
at March 31, 2000, excluding unadvanced construction funds of $11.8 million,
were $18.9 million. Management believes that adequate liquidity is available to
fund loan commitments utilizing deposits, loan amortization, maturities of
securities, or borrowings.
Purchases of securities during the three months ended March 31, 2000 totalled
$42.5 million consisting of debt instruments generally maturing in less than
five years and equities. This compares with purchases of $136.8 million for the
three months ended March 31, 1999.
Residential and commercial real estate mortgage loan originations for the three
months ended March 31, 2000 totalled $42.5 million, compared with $31.4 million
for the three months ended March 31, 1999.
The Company's capital position (total stockholders' equity) was $88.4 million or
7.08% of total assets at March 31, 2000 compared with $90.9 million or 7.42% of
total assets at December 31, 1999. During the three months ended March 31, 2000
the Company began a third 5% stock repurchase plan. A total of 229,000 shares of
common stock were repurchased. The Company's capital position exceeds all
regulatory requirements.
(Remainder of this page intentionally left blank.)
20
ASSET-LIABILITY MANAGEMENT
Through the Company's Asset-Liability Management Committee ("ALCO"), which is
comprised of certain senior and middle management personnel, the Company
monitors the level and general mix of interest rate-sensitive assets and
liabilities. The primary objective of the Company's ALCO program is to manage
the assets and liabilities of the Company to provide for optimum profitability
and capital at prudent levels of liquidity and interest rate, credit, and market
risk.
It is ALCO's general policy to closely match the maturity or rate sensitivity of
its assets and liabilities. In accordance with this policy, certain strategies
have been implemented to improve the match between interest rate sensitive
assets and liabilities. These strategies include, but are not limited to: daily
monitoring of the Company's changing cash requirements, with particular
concentration on investment in short term securities; originating adjustable and
fixed rate mortgage loans for the Company's own portfolio; managing the cost and
structure of deposits; and generally using matched borrowings to fund specific
purchases of loan packages and large loan origination. Occasionally, management
may choose to deviate from specific matching of maturities of assets and
liabilities, if an attractive opportunity to enhance yields becomes available.
The Company actively manages its liability portfolio in order to effectively
plan and manage growth and maturities of deposits. Management recognizes the
need for strict attention to all deposits. Accordingly, plans for growth of all
deposit types are reviewed regularly. Programs are in place which are designed
to build multiple relationships with customers and to enhance the Company's
ability to retain deposits at controlled rates of interest, and management has
adopted a policy of reviewing interest rates on an ongoing basis on all deposit
accounts, in order to control deposit growth and interest costs.
In addition to attracting deposits, the Company has selectively borrowed funds
using advances from the FHLBB and upon occasion, reverse repurchase agreements.
These funds have generally been used to purchase loans typically having a
matched repricing date.
21
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 Company 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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the Company's management of market risk exposure, see
"Asset-Liability Management" in Item 2 of Part I of this report and Item 7A of
Part II of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (the "1999 Annual Report").
For quantitative information about market risk, see Item 7A of Part II of the
Company's 1999 Annual Report.
There have been no material changes in the quantitative and qualitative
disclosures about market risk as of March 31, 2000 from those presented in the
Company's 1999 Annual Report.
22
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
There are no material legal proceedings to which the Company
is a party or to which any of its property is subject,
although the Company is a party to ordinary routine litigation
incidental to its business.
ITEM 2 - Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3 - Defaults Upon Senior Securities
Not applicable.
ITEM 4 - Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5 - Other Information
None.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three month period ended March 31, 2000.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDFORD BANCORP, INC.
Date: May 10, 2000
-----------------------------------------------
Arthur H. Meehan
Chairman, President and Chief Executive Officer
Date: May 10, 2000
-----------------------------------------------
Phillip W. Wong
Executive Vice President, Treasurer and Chief Financial Officer
24
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule