SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 of (I.R.S. Employer
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
-------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price on March 5, 2001, on the Nasdaq
National Market was $128,650,947. Although directors and executive officers of
the registrant were assumed to be "affiliates" of the registrant for the
purposes of this calculation, this classification is not to be interpreted as an
admission of such status.
As of March 5, 2001, there were 7,822,664 shares of the registrant's
common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Medford Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the Annual Meeting of Stockholders to be held on April
30, 2001 are incorporated by reference into Part III of this Form 10-K.
PART I
The discussions set forth below and elsewhere herein contain certain statements
that may be considered forward-looking statements under the Private Securities
Litigation Reform Act of 1995. The Company may also make written or oral
forward-looking statements in other documents we file with the SEC, in our
annual reports to stockholders, in press releases and other written materials,
and in oral statements made by our officers, directors and employees. You can
identify forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," estimate," "assume," "will," "should," and other
expressions which predict or indicate future events or trends and which do not
relate to historical matters. The Company's actual results could differ
materially from those projected in the forward-looking statements as a result
of, among other factors, the risk factors below, changes in volume of loan
originations, fluctuations in prevailing interest rates, increases in costs to
borrowers of loans held, increases in costs of funds, and changes in assumptions
used in making such forward-looking statements. Readers should carefully review
the factors described under "Risk Factors and Risk Factors Affecting Forward
Looking Statements" and should not place undue reliance on our forward looking
statements. The Company assumes no obligations to update any forward-looking
statements.
ITEM 1. BUSINESS
General
Medford Bancorp Inc., (the "Company") was organized in 1997 as a Massachusetts
corporation to be the holding company for Medford Savings Bank (the "Bank").
Established 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. For a detailed description of the Company's business and
financial information, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this report. 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 eighteen banking offices located in Medford,
Malden, Arlington, Belmont, Burlington, North Reading, Somerville, Tewksbury,
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, and holding of securities.
Supervision and Regulation
General. The Company is a Massachusetts corporation and a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and files with the Federal
Reserve Board an annual report and such additional reports as the Federal
Reserve Board may require. The Company is also subject to the jurisdiction of
the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner"). As a bank holding company, the Company's activities are limited
to the business of banking and activities closely related or incidental to
banking. Provided that it does not become a "financial holding company" under
the recently enacted Gramm-Leach-Bliley Act (as discussed below), the Company
may not directly or indirectly acquire the ownership or control of more than 5
percent of any class of voting shares or substantially all of the assets of any
company that is not engaged in activities determined by the Federal Reserve
Board prior to November 12, 1999 by order or regulation to be closely related to
banking, and also generally must provide notice to or obtain approval of the
Federal Reserve Board in connection with any such acquisition.
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. 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 (the "FHLBB").
1
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 nonmember 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 minimum
leverage capital ratio of at least 3.00% for the most highly rated banks and a
minimum leverage capital ratio of 4.00% for all other banks. The Bank exceeded
all applicable requirements at December 31, 2000. Furthermore, under the capital
standards established pursuant to the FDIC Improvement Act of 1991 ("FDICIA"),
the Bank is currently well-capitalized. International bank supervisory
organizations, principally the Basel Committee on Banking Supervision, currently
are considering changes to the risk-based capital adequacy framework, which
ultimately could affect the FDIC's guidelines.
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 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 principally 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.
Massachusetts Commissioner of Banks and Board of Bank Incorporation. 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 finalized
rules in 1997 and 2000 that give Massachusetts banks, and their subsidiaries,
many powers equivalent to those of national banks. The Commissioner also has
adopted procedures expediting branching by strongly capitalized banks.
Depositors Insurance Fund. 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
also amends federal statutes governing extensions of credit to directors,
executive officers and principal shareholders of banks, savings associations 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. Effective January 1999, the FDIC revised its
regulations relating to FDICIA to generally ease the ability of state nonmember
banks and their subsidiaries to engage in certain activities not permissible for
a national bank, such as real estate development.
2
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 are
permitted. 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 also are
permissible. Affiliated banks may act as agents for one another. 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 Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act is intended, in part, to
permit bank holding companies that qualify and elect to be treated as a
financial holding company to engage in a significantly broader range of
financial activities. At this time, the Company has not determined whether it
will become a financial holding company.
More specifically, the Gramm-Leach-Bliley Act repeals provisions of the
Glass-Steagall Act: Section 20, which restricted the affiliation of banks with
firms "engaged principally" in specified securities activities, and Section 32,
which restricted officer, director, or employee interlocks between a bank and
any company or person "primarily engaged" in specified securities activities.
Moreover, the general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHC Act framework to permit a holding company system, such as the
Company, to engage in a full range of financial activities through a new entity
known as a financial holding company. "Financial activities" is broadly defined
to include not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Generally, the Gramm-Leach-Bliley Act and its implementing regulations:
o repeal historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
o permit investment in non-financial enterprises, subject to significant
operational, holding period and other restrictions;
o provide a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
o broaden the activities that may be conducted by national banks (and,
derivatively, state banks), banking subsidiaries of bank holding
companies, and their financial subsidiaries;
o require all financial institutions to provide notice of their privacy
policies at specified times to their retail customers and consumers of
their financial products or services and permits retail customers and
consumers, under certain circumstances, to prohibit financial institutions
from sharing certain nonpublic personal information pertaining to them by
opting out of such sharing;
o adopt a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the Federal
Home Loan Bank system;
o modify the laws governing the implementation of the Community Reinvestment
Act of 1977; and
o address a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions;
and
o establish guidelines for safeguarding the security, confidentiality and
integrity of customer information.
3
In order to elect to become a financial holding company and engage in the new
activities, a bank holding company, such as the Company, must meet certain tests
and file an election form with the Federal Reserve Board that generally is acted
on within thirty days. To qualify, all of a bank holding company's subsidiary
banks must be well-capitalized and well-managed, as measured by regulatory
guidelines. In addition, to engage in the new activities each of the bank
holding company's banks must have been rated "satisfactory" or better in its
most recent federal Community Reinvestment Act evaluation. Furthermore, a bank
holding company that elects to be treated as a financial holding company may
face significant consequences if its banks fail to maintain the required capital
and management ratings, including entering into an agreement with the Federal
Reserve Board that imposes limitations on its operations and may even require
divestitures. Such possible ramifications may limit the ability of a bank
subsidiary to significantly expand or acquire less than well-capitalized and
well-managed institutions.
Further, the Gramm-Leach-Bliley Act, which includes new sections of the National
Bank Act and the Federal Deposit Insurance Act governing the establishment and
operation of financial subsidiaries permits national banks and state banks, to
the extent permitted under state law, to engage in certain new activities which
are permissible for subsidiaries of a financial holding company. In addition,
the Gramm-Leach-Bliley Act expressly preserves the ability of national banks and
state banks to retain all existing subsidiaries. In order to form a financial
subsidiary, a national bank or state bank must be well-capitalized, and such
banks would be subject to certain capital deduction, risk management and
affiliate transaction rules. Also, the FDIC recently issued final rules
governing the establishment of financial subsidiaries by insured state nonmember
banks. The final rules restate the FDIC's position that activities that a
national bank could only engage in through a financial subsidiary, such as
securities underwriting, only may be conducted in a financial subsidiary by a
state nonmember bank. However, activities that a national bank could not engage
in through a financial subsidiary, such as real estate development or
investment, will continue to be governed by the FDIC's standard activities
rules. Moreover, to mirror the FRB's actions with respect to state member banks,
the final rules provide that a state bank subsidiary that engages only in
activities that the bank could engage in directly (regardless of the nature of
the activities) will not be deemed a financial subsidiary.
Federal Securities Laws. Pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company files annual, quarterly, and periodic reports with
the Securities and Exchange Commission (the "SEC"). The Company is also subject
to the insider trading requirements of Sections 16(a) and 16(b) of the Exchange
Act, as administered by the SEC.
The Gramm-Leach-Bliley Act also amended the federal securities laws to,
effective May 2001, eliminate the blanket exceptions that banks traditionally
have had from the definition of broker-dealer and investment adviser.
Accordingly, banks not falling within the specific exemptions provided by the
new law may have to register with the SEC as a broker-dealer and/or investment
adviser, as appropriate, and become subject to SEC jurisdiction.
Other Activities
The Bank owns stock in The Savings Bank Life Insurance Company of Massachusetts
("SBLI"). The Bank sells life insurance and tax-deferred annuities and sold over
$2.1 million in SBLI annuities in 2000, making it the top seller of this product
in Massachusetts.
The Bank provides safe deposit services at nine of its branches.
The Bank periodically originates 30-year, fixed-rate, residential 1-4 family
loans in correspondent relationships with third parties such as Plymouth
Mortgage Company and Federal Home Loan Mortgage Corporation (FHLMC), whereby the
Bank originates loans in exchange for an origination fee. The Bank does not
retain the servicing rights for these loans.
Competition
The Company 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 Company 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 a 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 Company competes with
regional and national firms which offer stocks, bonds, mutual funds and other
investment alternatives to the general public. The Company 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.
4
Moreover, under the Gramm-Leach-Bliley Act, as of March 11, 2000, securities
firms, insurance companies and other financial services providers that elect to
become financial holding companies may acquire banks and other financial
institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which the Company and its subsidiaries conduct
business. See "Supervision and Regulation--The Gramm-Leach-Bliley Act" above.
The financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial
services.
Management believes that the Company's emphasis on personal service and
convenience, coupled with active involvement within the communities it serves,
contributes to its ability to compete successfully.
Risk Factors and Factors Affecting Forward Looking Statements
In addition to the other information contained or incorporated by reference in
this Annual report on Form 10-K, you should consider the following factors
relating to the business of the Company.
Interest Rate Volatility May Reduce The Bank's Profitability
The Bank's profitability depends to a large extent upon its net interest income,
which is the difference between its interest income on interest-earning assets,
such as loans and investments, and its interest expense on interest bearing
liabilities, such as deposits and borrowed funds. Significant changes in market
interest rates may adversely affect both the Bank's profitability and its
financial condition. Since market interest rates may change by differing
magnitudes and at different times, significant changes in interest rates over an
extended period of time could reduce overall net interest income. (See Item 7A,
Quantitative and Qualitative Disclosures about Market Risk, for additional
discussion on interest rate risk.)
The Bank's Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan
Losses
The Bank makes various assumptions and judgments about the collectibility of its
loan portfolio and provides an allowance for potential losses based on a number
of factors. If the Bank's assumptions are wrong, its allowance for loan losses
may not be sufficient to cover its losses, which would have an adverse effect on
its operating results, and may also cause the Bank to increase the allowance in
the future. Further, the Bank's net income would decrease if it had to add
additional amounts to its allowance for loan losses.
Geographic Credit Concentration
The Bank is exposed to real estate and economic factors in the greater Boston
metropolitan area and eastern Massachusetts because virtually all of its loan
portfolio is concentrated among borrowers in this market. Further, because a
substantial portion of its loan portfolio is secured by real estate in this
area, the value of the Bank's collateral is also subject to regional real estate
market conditions. A downturn in the economy in the Bank's primary lending area
may likely adversely affect the Bank's operations.
Strong Competition within the Bank's Market Area
Competition in the banking and financial services industry is strong. In its
market area, the Bank competes for loans and deposits with commercial banks,
savings institutions, mortgage brokerage firms, credit unions, finance
companies, mutual funds, insurance companies, and brokerage and investment
banking firms operating locally as well as nationally. Many of these competitors
have substantially greater resources and lending limits than the Bank and may
offer services that the Bank does not or cannot provide. The Bank's long-term
success depends on the ability of the Bank to compete successfully with other
financial institutions in their service areas. (See information under the
caption "Competition" for additional discussion.)
In addition, as the Company strives to compete with other financial
institutions, it may expand into new areas, and there is no assurance that it
will be successful in these efforts.
5
Employees
As of December 31, 2000, the Bank employed 215 full-time staff, including 51
officers, and 93 part-time staff. None of the Bank's employees is represented by
a labor union. The Company has no officers or employees separate from the Bank.
Executive Officers of the Company and Bank
The executive officers of the Company and/or the Bank, their positions with the
Company and/or the Bank and their ages as of February 28, 2001 are as follows:
Name Age Position
Arthur H. Meehan 65 President and Chief Executive Officer of the Company and
the Bank; Chairman of the Board of Directors of the
Company and the Bank
Phillip W. Wong 51 Executive Vice President, Chief Financial Officer and
Treasurer of the Company; Executive Vice
President and Chief Financial Officer of the Bank
George A. Bargamian 52 Executive Vice President of the Bank (Retail)
Eric B. Loth 58 Senior Vice President of the Bank (Lending)
William F. Rivers 45 Senior Vice President of the Bank (Administration)
Arthur H Meehan. 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.
Phillip W. Wong. Mr. Wong commenced his employment with the Bank as Senior Vice
President in December 1992 and was promoted to Executive Vice President in 1997.
Previously, Mr. Wong served as Chief Financial Officer of Guaranty-First Trust
Co. in Waltham, Massachusetts.
George A. Bargamian. Mr. Bargamian was hired by the Bank as Director of
Marketing in January 1988, and was promoted to Senior Vice President in 1988 and
Executive Vice President of the Bank in 1999. Mr. Bargamian formerly served as
Assistant Vice President of Marketing for First Mutual of Boston.
Eric B. Loth. Mr. Loth commenced his employment with the Bank as Senior Vice
President in August 1994. Prior to this date, Mr. Loth served as Vice President
of Lending at Sterling Bank in Waltham, Massachusetts.
William F. Rivers. Mr. Rivers commenced his employment with the Bank in January
1974, served as Assistant Treasurer from 1980-1985, Vice President from
1985-1988, and was promoted to Senior Vice President in 1988.
6
ITEM 2. PROPERTIES
All of the Bank's branches located in Medford (except for the West Medford
branch), the branch located in Arlington, the Malden Center, Maplewood and Oak
Grove branches located in Malden, and the Tewksbury branch, located in
Tewksbury, are owned by the Bank. All other branches are leased from unrelated
third parties. The Company also owns an office building currently housing the
Company's lending and certain administrative offices. Additional space in this
operations center is leased to third parties. Subject to the foregoing, the
Company believes that its properties are adequate for its present needs.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company'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 Sale Prices Dividends Declared
------------------------ ------------------
High Low Per Share
---- --- ---------
2000 1st quarter $16 1/2 $12 1/8 $0.12
2nd quarter 15 5/8 13 3/4 0.12
3rd quarter 16 1/8 13 7/8 0.12
4th quarter 15 5/8 13 3/8 0.16
1999 1st quarter $18 13/16 $17 $0.11
2nd quarter 18 7/16 15 1/4 0.11
3rd quarter 19 1/4 15 0.11
4th quarter 17 5/8 15 3/4 0.18
At March 5, 2001, according to the Company's transfer agent, the Company had
approximately 1,046 record holders of its common stock. The number of holders of
record does not reflect the number of persons or entities who or which held
their stock in nominee or "street" name through various brokerage firms or other
entities.
The declaration of future dividends to the Company's stockholders is subject to
future operating results, financial conditions, tax and legal considerations and
other factors, such as the Bank's ability to declare and pay dividends to the
Company. As the principal asset of the Company, the Bank currently provides the
only source of payment of dividends by the Company. FDICIA limits the ability of
undercapitalized insured banks to pay dividends. Moreover, under Massachusetts
law, a stock-form savings bank may pay dividends no more frequently than
quarterly only out of its net profits and only to the extent such dividends do
not impair the Bank's capital stock, as defined; and the Commissioner's approval
may be required under certain circumstances. Under Federal Reserve Board and
FDIC regulations, the Company and the Bank would be prohibited from declaring
dividends if, among other things, they were not in compliance with applicable
regulatory capital requirements. Funds held by the Company are available for
various corporate uses, including the payment of future dividends.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At December 31,
------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- ------------
BALANCE SHEET DATA
Total assets $ 1,309,690 $ 1,224,912 $ 1,151,188 $ 1,135,572 $ 1,039,098
Investment securities (includes FHLB stock) 582,964 534,713 511,534 512,304 423,852
Loans, net 668,747 626,751 580,665 570,844 560,855
Deposits 975,857 911,328 871,702 821,706 792,141
Borrowed funds 223,843 215,724 170,116 205,779 148,464
Stockholders' equity 104,965 90,870 102,267 101,510 92,521
Book value per share 12.89 10.84 11.74 11.18 10.20
Stockholders' equity to total assets 8.01% 7.42% 8.88% 8.94% 8.90%
Number of offices 18 17 17 16 16
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- ------------
STATEMENT OF OPERATIONS DATA
Interest and dividend income $ 86,050 $ 77,849 $ 76,802 $ 75,332 $ 68,711
Interest expense 49,914 43,109 42,613 41,349 36,462
------------- ------------- ------------- ------------- ------------
Net interest income 36,136 34,740 34,189 33,983 32,249
------------- ------------- ------------- ------------- ------------
Provision for loan losses 175 - 75 125 215
Other income:
Gain (loss) on sales of securities, net (1,031) 1,522 1,670 835 413
All other income 7,781 2,680 3,088 3,007 2,902
------------- ------------- ------------- ------------- ------------
Total other income 6,750 4,202 4,758 3,842 3,315
------------- ------------- ------------- ------------- ------------
Operating expenses 19,991 19,301 19,074 19,054 18,075
------------- ------------- ------------- ------------- ------------
Income before income taxes 22,720 19,641 19,798 18,646 17,274
Provision for income taxes 8,951 6,990 7,546 7,256 6,845
------------- ------------- ------------- ------------- ------------
Net income $ 13,769 $ 12,651 $ 12,252 $ 11,390 $ 10,429
============= ============= ============= ============= ============
Basic earnings per share $ 1.69 $ 1.51 $ 1.38 $ 1.25 $ 1.15
============= ============= ============= ============= ============
Diluted earnings per share $ 1.64 $ 1.44 $ 1.31 $ 1.19 $ 1.10
============= ============= ============= ============= ============
Cash dividends declared per share $ 0.52 $ 0.51 $ 0.50 $ 0.45 $ 0.42
============= ============= ============= ============= ============
SELECTED RATIOS
Return on average assets 1.09% 1.07% 1.09% 1.05% 1.05%
Return on average equity 15.06 13.52 11.99 11.81 11.72
Average equity to average assets 7.23 7.88 9.07 8.91 8.98
Weighted average rate spread 2.49 2.63 2.72 2.84 3.00
Net yield on average earning assets 2.93 3.03 3.16 3.26 3.39
Dividend payout ratio - basic earnings per share 30.77 33.77 36.23 36.00 36.52
- ------------------------------------------------------------------------------------------------------------------------------------
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussions set forth below and elsewhere herein contain certain statements
that may be considered forward-looking statements under the Private Securities
Litigation Reform Act of 1995. The Company may make written or oral
forward-looking statements in other documents we file with the SEC, in our
annual reports to stockholders, in press releases and other written materials,
and in oral statements made by our officers, directors or employees. You can
identify forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "will," "should," and other
expressions which predict or indicate future events or trends and which do not
relate to historical matters. You should not rely on forward-looking statements,
because they involve known and unknown risks, uncertainties and other factors,
some of which are beyond the control of the Company. These risks, uncertainties
and other factors may cause the actual results, performance or achievements of
the Company to be materially different from the anticipated future results,
performance or achievements expressed or implied by the forward-looking
statements.
Some of the factors that might cause these differences include the following:
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 laws and regulations; changes in the size and nature of the Company's
competition; and changes in the assumptions used in making such forward-looking
statements. You should carefully review all of these factors, and you should be
aware that there may be other factors that could cause these differences,
including, among others, the factors listed under "Risk Factors and Factors
Affecting Forward Looking Statements," beginning on page 5. Readers should
carefully review the factors described under "Risk Factors and Factors Affecting
Forward Looking Statements" and should not place undue reliance on our
forward-looking statements.
These forward-looking statements were based on information, plans and estimates
at the date of this report, and we do not promise to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
GENERAL
The Company'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 Company'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 Company is significantly affected by general economic
conditions, by the Company'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 on sales of
securities and other fees derived from various banking services contribute
positively to the Company's results. The principal operating expenses of the
Bank are salaries and employee benefits, occupancy and equipment expenses, data
processing expenses, amortization of intangibles, advertising and marketing and
other general and administrative expenses.
2000 marks the eighth consecutive year that the Company achieved record
earnings, with net income of $13.8 million, an increase of $1,118,000, or 8.8%,
compared to net income of $12.7 million for 1999. Earnings per share for 2000
were $1.69 ($1.64 on a diluted basis) compared with $1.51 ($1.44 on a diluted
basis) for 1999, an increase of 20 cents on a diluted basis or 13.9% compared to
the previous year.
At December 31, 2000, total assets were $1.3 billion, an increase of 6.9% from
the prior year. Total loans increased 6.7% to $675.7 million at December 31,
2000. Investment securities, including FHLB stock, increased 9.0% to $583.0
million at December 31, 2000 while total deposits increased $64.5 million, or
7.1%, to $975.9 million, and borrowed funds increased 3.8% to $223.8 million.
Stockholders' equity totaled $105.0 million at December 31, 2000, representing a
book value of $12.89 per share, compared to $10.84 per share at December 31,
1999. Stockholders' equity to total assets was 8.01% at December 31, 2000,
exceeding all regulatory requirements.
10
FINANCIAL CONDITION
Investment Portfolio
The investment policy of the Company 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 within guidelines approved by
the Board of Directors, while earning market returns. Accordingly, the majority
of securities are in shorter-term Government, agency, or high-quality (rated "A"
or better) corporate securities. Debt securities purchased generally have
maturities or call dates within three years or less. Although the emphasis on
short-term and medium-term investments reduces the overall yield, this strategy
is in accordance with the Company's desire to minimize interest rate risk.
Investment securities, including FHLB stock, were higher than 1999 year-end
levels, at $583.0 million at December 31, 2000 versus $534.7 million at December
31, 1999. During 2000, the Company continued to modify the mix of the investment
portfolio to generate higher levels of interest income. The strategy included
replacing U.S. Government and federal agency securities as they matured or were
sold with mortgage-backed securities and corporate bonds. Investments in
corporate bonds consisted primarily of "A" or better rated or bonds with
maturities of three years or less. At December 31, 1998, U.S. Government and
federal agency securities represented 18% of total investment securities, and
mortgage-backed securities represented 43%. At December 31, 1999, U.S.
Government and federal agency securities equaled 12% of total investment
securities while mortgage-backed securities represented 40%. At December 31,
2000, U.S. Government and federal agency securities were reduced to 1.3% of
total investment securities while mortgage-backed securities and corporate bonds
increased to 43% and 54%, respectively. The mortgage-backed securities pools
added to this portfolio throughout 1999 and 2000 consisted primarily of
fixed-rate, low-coupon, government-backed securities that have limited extension
or contraction risk. Consideration is given to the underlying collateral, the
impact of rising or falling rates on the average life of these securities and
other factors associated with the Bank's investment policies and strategies.
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 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, net of tax, in other
comprehensive income (loss) in stockholders' equity. As of December 31, 2000,
the net unrealized gain on investments classified as "available for sale" was
$651,000 as compared to the net unrealized loss of $15.4 million as of December
31, 1999.
The Bank also holds 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
securities portfolio at carrying value:
At December 31,
---------------------------------------------
2000 1999 1998
------------- ------------- ------------
(In thousands)
Debt securities:
U.S. Government and federal agency $ 7,806 $ 62,127 $ 93,735
Mortgage-backed securities 249,452 214,456 218,197
Corporate bonds 312,315 246,767 190,019
Equity securities 1,971 1,680 2,261
------------- ------------- ------------
Total marketable securities 571,544 525,030 504,212
Federal Home Loan Bank stock 11,420 9,683 7,322
------------- ------------- ------------
Total investment securities $ 582,964 $ 534,713 $ 511,534
============= ============= ============
11
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, 2000
-------------------------------------------------------
Weighted Weighted
Within Average Over 1 Year Average
1 Year Yield to 5 Years Yield
------------- ----------- ------------ -----------
(Dollars in thousands)
U.S. Government and
federal agency $ - 0.00% $ 7,806 7.16%
Corporate bonds 83,942 6.46 228,373 6.34
------------- ------------
$ 83,942 6.46% $ 236,179 6.37%
============= ============
Loan Portfolio
The Company 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 and
commercial business loans. As a portfolio lender, the Company generally retains
all newly originated loans. From time to time, the Company originates and
retains 30-year, fixed-rate residential loans. More frequently, however, the
30-year, fixed-rate residential loan product is generally offered whereby the
Bank originates these loans for correspondent banks and collects origination
fees therefrom.
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 Company 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.
Total loans increased to $675.7 million at December 31, 2000 compared to $633.5
million at December 31, 1999. The increase in loans was primarily in residential
mortgages, with year-to-year growth of $22.4 million, or 4.8%. Commercial real
estate loans increased $12.1 million, or 10.8%, to $124.2 million from $112.1
million in 1999. Outstanding commercial and residential construction loans were
$19.9 million and $13.5 million at December 31, 2000 and 1999, respectively,
reflecting an increase of 47.4%. In 1999, the Company bolstered its staff of
commercial real estate lenders whose successful efforts have led to the combined
$18.5 million growth in both commercial real estate and construction loans. All
other loan categories remained relatively stable from December 31, 1999. The
Company expects continued intense competition for loans within its geographic
region. Within this framework, management continues intense marketing efforts
for loans.
12
The following table shows the composition of the loan portfolio by type of loan:
At December 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------ ------------- ------------- ------------
(In thousands)
Commercial loans $ 17,219 $ 18,124 $ 17,358 $ 14,941 $ 11,014
Loans secured by real estate:
Residential 487,964 465,618 421,685 389,863 380,981
Construction loans, net of unadvanced
funds 19,913 13,504 13,073 11,278 8,719
Commercial 124,201 112,050 109,561 124,094 123,158
Second mortgages 699 774 1,111 1,539 1,928
Equity lines of credit 21,609 19,394 20,606 22,146 21,169
Consumer loans 2,925 2,912 3,145 (1) 12,931 20,548
------------- ------------ ------------- ------------- ------------
674,530 632,376 586,539 576,792 567,517
Add: Net deferred origination costs 1,167 1,154 1,002 785 569
Less: Allowance for loan losses (6,950) (6,779) (6,876) (6,733) (7,231)
------------- ------------ ------------- ------------- ------------
Loans, net $ 668,747 $ 626,751 $ 580,665 $ 570,844 $ 560,855
============= ============ ============= ============= ============
(1) The Bank sold $11.0 million of education loans in 1998 thereby exiting
this business due to profitability concerns.
The following table presents the maturity distribution of commercial and
construction loans at December 31, 2000:
Maturities
----------------------------------------------------------
1 Year Over 1 Year Over
or Less to 5 Years 5 Years Total
----------- -------------- ----------- -----------
(In thousands)
Commercial loans $11,809 $4,676 $ 734 $17,219
Construction loans 5,842 7,211 6,860 19,913
Generally, construction loans provide for payments of interest only during the
construction period, and then payments of principal and interest throughout the
remaining life of the loans. In all cases, these construction loans have
adjustable interest rates.
Commercial loans with maturities of over one year are 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 $ 2,648 $ - $ 2,648
Adjustable rates 2,028 734 2,762
-------------- ------------- -------------
$ 4,676 $ 734 $ 5,410
============== ============= =============
13
Non-performing Assets
It is the Bank's policy to discontinue the accrual of interest on loans 90 days
or more 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. Non-accrual loans are generally classified as impaired
loans.
The Bank recognizes impaired loans based on 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. Impaired loans are generally placed on non-accrual status whereby
interest income is recognized only when received. The Bank does not apply SFAS
No. 114 to individual consumer loans which are collectively evaluated for
impairment.
The following table sets forth information with respect to impaired and
non-accrual loans and foreclosed real estate, at the dates indicated. There were
no loans 90 days or more past due and still accruing at the dates indicated.
At December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- ---------- --------- ----------
(In thousands)
Impaired loans accounted for on a non-accrual basis $ 1,047 $ 2,482 $ 1,766 $ 1,726 $ 2,752
Other loans accounted for on a non-accrual basis - 18 47 - 687
Foreclosed real estate - - 119 48 276
---------- --------- ---------- --------- ----------
$ 1,047 $ 2,500 $ 1,932 $ 1,774 $ 3,715
========== ========= ========== ========= ==========
For non-accrual loans at December 31, 2000, gross interest income of $354,000
would have been recorded during the year had the loans 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 $219,000.
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. 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. The Bank also
engages an independent third party to review and ascertain the underlying
quality of targeted portfolio segments, three times a year, to support a
comprehensive analysis of the overall portfolio. These review processes identify
weaknesses as well as improvements in lending relationships since the last
review. Management utilizes the results in its evaluation of the adequacy of its
allowance for loan losses. Specific allocations include the results of measuring
impaired loans under SFAS No. 114. General risk allocations are determined by
formula whereby the loan portfolio is stratified by loan type and by risk rating
category. Loss factors are then applied to each category based on various
considerations including historical loss experience, delinquency trends, current
economic conditions, industry standards and regulatory guidelines. Any remaining
unallocated portion is reviewed for adequacy in relation to the overall loan
portfolio and in recognition of estimates inherent in the calculation
methodology.
14
An analysis of the allowance for loan losses is presented in the following
table:
Years Ended December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
--------- ---------- --------- ---------- ---------
(In thousands)
Allowance for loan losses, beginning of year $ 6,779 $ 6,876 $ 6,733 $ 7,231 $ 7,466
--------- ---------- --------- ---------- ---------
Loans charged-off --- Residential real estate (20) (2) (24) (38) (64)
--- Commercial real estate (5) (16) - (720) (656)
--- Consumer (28) (25) (33) (42) (89)
--- Commercial (6) (121) (108) (31) (21)
Recoveries --- Residential real estate 36 11 20 26 7
--- Commercial real estate 7 24 204 147 348
--- Consumer 10 19 9 25 8
--- Commercial 2 13 - 10 17
--------- ---------- --------- ---------- ---------
Net recoveries (charge-offs) (4) (97) 68 (623) (450)
--------- ---------- --------- ---------- ---------
Provision for loan losses, charged to operations 175 - 75 125 215
--------- ---------- --------- ---------- ---------
Allowance for loan losses, end of year $ 6,950 $ 6,779 $ 6,876 $ 6,733 $ 7,231
========= ========== ========= ========== =========
Ratio of net charge-offs (recoveries) to average loans 0.00% 0.02% (0.01)% 0.11% 0.08%
========= ========== ========= ========== =========
An analysis of the allocation of the allowance for loan losses is presented in
the following table:
At December 31,
---------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- -------------------------
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 $ 2,002 75.66% $ 1,858 76.86% $ 1,683 75.64%
Commercial real estate 4,179 18.41 4,121 17.69 4,433 18.65
Construction 398 2.95 270 2.13 261 2.22
Consumer 44 0.43 41 0.46 42 0.54
Commercial 327 2.55 489 2.86 457 2.95
--------- ----------- ---------- ------------ ---------- -----------
Total $ 6,950 100.00% $ 6,779 100.00% $ 6,876 100.00%
========= =========== ========== ============ ========== ===========
-----------------------------------------------------
1997 1996
------------------------- -------------------------
Percent Percent
of Loans of Loans
to Total to Total
Amount Loans Amount Loans
---------- ------------ ---------- -----------
Residential real estate $ 1,067 71.73% $ 1,179 71.23%
Commercial real estate 5,220 21.49 5,711 21.68
Construction 169 1.95 131 1.53
Consumer 48 2.24 44 3.62
Commercial 229 2.59 166 1.94
---------- ------------ ---------- -----------
Total $ 6,733 100.00% $ 7,231 100.00%
========== ============ ========== ===========
While management considers the allowance for loan losses to be adequate at
December 31, 2000, there is no assurance that additional charge-offs and
provisions will not be necessary in 2001. The unallocated allowance component
has been allocated principally to commercial real estate for purposes of the
above presentation. The provision for loan losses during 2001 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 2000.
15
Deposits
Deposits historically have been the Bank's primary source of funds. The Bank
offers a wide variety of deposit products 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.
To maintain stable deposit rates and manage interest rate risk, the Bank's
strategy has been to attract deposits through selective promotions. To increase
core deposits, the Bank continues to promote its "ComboPlus" account, which
combines a statement savings account and checking account into one convenient
account offered at a competitive rate which exceeds the regular statement and
passbook savings account rates. This account type has contributed significantly
to the increase in savings and demand deposits.
Total deposits increased $64.5 million, or 7.1%, to $975.9 million at December
31, 2000 from $911.3 million at December 31, 1999. As retail checking customers
sought alternative banking relationships in a consolidating market, demand
deposits increased $11.9 million or 23.3%, when compared to the prior year. NOW
deposits increased 7.1%, savings and money market deposits increased 1.5% and
term certificates increased 10.2%. In the rising rate environment during the
first half of 2000, the Bank offered a competitive rate product to attract term
certificates with maturities in excess of one year. This program played a
significant role in the $42.6 million, or 10.2%, increase in term certificates.
The following table indicates the balances in various deposit accounts at the
end of each year:
At December 31,
----------------------------------------------
2000 1999 1998
-------------- ------------- ------------
(In thousands)
Demand accounts $ 63,122 $ 51,202 $ 51,936
NOW accounts 65,106 60,811 64,888
Savings and money market
accounts 388,655 382,970 351,047
Term certificates 458,974 416,345 403,831
-------------- ------------- ------------
$ 975,857 $ 911,328 $ 871,702
============== ============= ============
The following table sets forth the average deposits of the Bank with related
average rates paid during each year:
Years Ended December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Demand $ 55,244 -% $ 47,409 -% $ 41,272 -%
NOW 59,674 0.58 60,931 0.56 60,111 0.98
Savings and money market deposits 391,883 3.20 375,169 3.08 337,456 3.02
Term certificates 440,761 5.36 415,643 5.02 393,493 5.39
Included in term certificates of deposit are certificates having balances of
$100,000 or more. At December 31, 2000, such term certificates had the following
maturities:
At December 31, 2000
- ----------------------------------------------------------------------------------------
3 Months Over 3 Months Over 6 Months Over
or Less to 6 Months to 12 Months 12 Months Total
- -------------- --------------- ----------------- -------------- -------------
(In thousands)
$ 53,142 $ 12,180 $ 23,034 $ 13,050 $ 101,406
16
Borrowed Funds
The Bank is a voluntary member of the FHLBB. As such, the Bank may borrow up to
the amount of its qualified collateral, as defined by the FHLBB.
The Bank has selectively borrowed long-term funds from the FHLBB to fund large
commercial real estate loans in addition to purchases of mortgage-backed
securities. Short-term borrowings are generally used to meet the Bank's daily
liquidity needs. 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 $223.8 million at December 31, 2000 from $215.7 million at
December 31, 1999.
The following table presents, by category, information pertaining to the Bank's
borrowings:
At December 31,
----------------------------------------------
2000 1999 1998
------------- ------------ -------------
(Dollars in thousands)
Short-term borrowings:
FHLBB advances $ 20,000 $ 45,000 $ -
Federal Reserve Bank of Boston advances 443 844 114
Securities sold under agreements to repurchase - 21,227 38,349
------------- ------------ -------------
Total short-term borrowings $ 20,443 $ 67,071 $ 38,463
============= ============ =============
Weighted average rate 6.53% 5.35% 4.01%
Average balance of short-term borrowings during
the year $ 37,441 $ 48,265 $ 60,215
Weighted average rate paid on short-term
borrowings during the year 6.17% 5.07% 5.33%
Maximum amount outstanding at any month-end
during the year $ 66,480 $ 75,991 $ 82,514
Long-term debt:
FHLBB advances $ 203,400 $ 148,653 $ 131,653
============= ============ =============
Weighted average rate 6.32% 5.62% 5.74%
Average balance of long-term debt during the year $ 180,747 $ 139,034 $ 123,358
Weighed average rate paid on long-term
debt during the year 6.13% 5.69% 6.02%
Maximum amount outstanding at any month-end
during the year $ 212,117 $ 148,653 $ 136,653
Stockholders' Equity
Stockholders' equity to total assets was 8.01% at December 31, 2000, compared to
7.42% at December 31, 1999. Stockholders' equity at December 31, 2000 and 1999
exceeded all regulatory requirements. Book value at December 31, 2000 was $12.89
per share, compared with $10.84 per share at December 31, 1999. (See "Liquidity
and Capital Resources.")
17
RESULTS OF OPERATIONS
General
In 2000, the Company reported consolidated net income of $13.8 million or $1.69
per share (basic), as compared to net income of $12.7 million or $1.51 per share
in 1999, and net income of $12.3 million or $1.38 per share in 1998. Diluted
earnings per share were $1.64, $1.44, and $1.31 for 2000, 1999 and 1998,
respectively. Consolidated net income in 2000 increased 8.8% over 1999 and
consolidated net income in 1999 increased 3.3% over 1998. Diluted earnings per
share in 2000 increased 13.9% over 1999, and diluted earnings per share in 1999
increased 9.9% over 1998. The Company's return on assets was 1.09% for 2000, as
compared to 1.07% in 1999 and 1.09% in 1998. The return on equity increased to
15.06% in 2000 from 13.52% in 1999 and 11.99% in 1998.
Net Interest Income
Net interest income was $36.1 million in 2000, an increase of $1.4 million or
4.0% from 1999. Average earning assets in 2000 increased $85.6 million as
compared to an increase of $71.5 million in interest-bearing liabilities. As a
result, the excess of earning assets over interest-bearing liabilities increased
13.1% to $123.0 million from $108.8 million in 1999.
Net interest income was $34.7 million in 1999, an increase of $551,000 or 1.6%
from $34.2 million in 1998. Average earning assets in 1999 increased $65.3
million as compared to an increase of $64.4 million of increased
interest-bearing liabilities. As a result, the excess of earning assets over
interest-bearing liabilities increased 0.83% to $108.8 million from $107.9
million in 1998.
The Company's most integral challenge is managing net interest income through
various interest rate environments. In 2000, rates increased in the first half
and the yield curve inverted during the second half. Management continues to
focus on minimizing net interest margin compression by monitoring its mix of
earning assets and funding costs under varying market rate environments to
maximize yield. During 2000, average loan balances represented 53.3% of average
earning assets, as compared with 52.5% in 1999 and 53.7% in 1998. The average
short-term investments and investment securities balances were 46.7% of average
earning assets in 2000 as compared to 47.5% in 1999 and 46.3% in 1998.
Management utilizes borrowings as an alternative to deposits when pricing or
availability is more advantageous. Average deposits represented 80.4%, and
average borrowings represented 19.6%, of total interest bearing liabilities in
2000, as compared to 82.0% and 18.0%, respectively, in 1999, and 81.2% and
18.8%, respectively in 1998.
Although the Company improved its yield on earning assets by modestly increasing
its percentage of loans to assets coupled with rising rates in year 2000, the
more significant rise in the cost of term certificates and borrowings more than
offset this increase. As earning asset yields increased 20 basis points from
6.78% in 1999 to 6.98% in 2000, costs of interest bearing liabilities increased
34 basis points in the same comparable period from 4.15% to 4.49%. This resulted
in compression of the Company's net interest margin from an average of 3.03% in
1999 to 2.93% in year 2000.
Interest and Dividend Income
Interest and dividend income totalled $86.0 million for 2000, an increase of
$8.2 million or 10.5% from 1999. Interest and dividend income totalled $77.8
million for 1999, an increase of $1.0 million or 1.4% from 1998. The weighted
average yield on earning assets was 6.98% in 2000, compared to 6.78% in 1999 and
7.09% in 1998.
Interest income on loans increased 11.1%, or $5.0 million, to $50.0 million in
2000, as a result of increases in the average loans outstanding and an increase
in the average yield on loans to 7.61%. Increased residential 1-4 family loan
volume contributed $3.3 million of additional interest income. The average yield
on residential 1-4 family loans rose to 7.18% when compared with the 7.06%
earned in 1999. Interest income on commercial and industrial loans increased
$224,000 as a result of greater volume and higher yields. The yield on
commercial and industrial loans increased to 9.56% when compared to 8.51% in
1999, as a result of increases in the prime rate during 2000. Commercial real
estate loans contributed $1.5 million of additional interest income in 2000 as
outstanding loans increased and the yield decreased to 8.91% from 8.94% in 1999.
Interest income on loans was $45.0 million in 1999 compared with $45.7 million
in 1998. Increases in the average loans outstanding were more than offset by a
reduction in the average yield on loans to 7.48%. Interest income on residential
1-4 family loans increased $1.0 million in 1999 compared to 1998 levels as loan
volume increased. Interest income on commercial loans increased $53,000 while
the yield declined to 8.51% when compared to 9.41% in 1998.
18
Interest income on investments increased $3.2 million to $36.0 million in 2000
compared with $32.8 million in 1999. The $3.2 million increase in investment
interest income is accounted for by a $30.0 million increase in the average
balance and the increase in yield from 6.03% in 1999 to 6.26% in 2000.
Interest income on investments was $32.8 million in 1999 compared with $31.1
million in 1998. The $44.0 million increase in the average balance of investment
securities contributed $2.7 million of interest income in 1999, offset by a
$929,000 decrease as a result of the decline in the yield on investment
securities to 6.03% in 1999 from 6.20% in 1998.
Interest Expense
Interest expense was $49.9 million in 2000 compared to $43.1 million in 1999.
The increase in interest expense is primarily attributable to increases in both
volume and rates on term certificates, savings deposits and MMDA, and long-term
borrowings. As a result, the cost of funds in 2000 increased to 4.49% from 4.15%
in 1999. Interest expense on deposits was $36.5 million in 2000, compared with
$32.8 million in 1999. Average interest-bearing deposits increased $40.7 million
and rates increased from 3.85% to 4.09%, resulting in an increase in interest
expense of $3.8 million. Interest expense on borrowings was $13.4 million in
2000, compared with $10.4 million in 1999. The increase in interest expense is a
result of a $30.9 million increase in the average balance of borrowings and an
increase in the cost of borrowings from 5.53% to 6.14%.
Interest expense was $43.1 million in 1999, an increase of $496,000 or 1.2% from
1998. Interest expense on deposits was $32.8 million and interest on borrowed
funds was $10.4 million in 1999, compared with $32.0 million and $10.6 million,
respectively, in 1998. The cost of funds decreased to 4.15% from 4.37% in 1998
principally as a result of declining rates paid on term certificates and
borrowings.
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.
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Increase (Decrease)
------------------------------------------- -------------------------------------------
Volume Rate Total Volume Rate Total
----------- ------------- ----------- ----------- ------------- -----------
(In thousands)
INTEREST AND DIVIDEND INCOME
Short-term investments $ - $ 85 $ 85 $ 136 $ (10) $ 126
Mortgage-backed investments (52) 289 237 3,867 (607) 3,260
Other investment securities 1,916 958 2,874 (1,329) (312) (1,641)
Loans 4,218 787 5,005 1,639 (2,337) (698)
----------- ------------- ----------- ----------- ------------- -----------
Total interest and dividend income 6,082 2,119 8,201 4,313 (3,266) 1,047
----------- ------------- ----------- ----------- ------------- -----------
INTEREST EXPENSE
NOW deposits (7) 8 1 8 (252) (244)
Savings deposits and MMDA 525 482 1,007 1,157 185 1,342
Term certificates 1,302 1,462 2,764 1,156 (1,478) (322)
Short-term borrowings (609) 472 (137) (611) (153) (764)
Long-term debt 2,520 650 3,170 907 (423) 484
----------- ------------- ----------- ----------- ------------- -----------
Total interest expense 3,731 3,074 6,805 2,617 (2,121) 496
----------- ------------- ----------- ----------- ------------- -----------
Net interest income $ 2,351 $ (955) $ 1,396 $ 1,696 $ (1,145) $ 551
=========== ============= =========== =========== ============= ===========
19
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, 2000 December 31, 1999
- ------------------------------------------------------------------------------ ------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
ASSETS
Earning assets:
Short-term investments $ 6,719 $ 416 6.19% $ 6,696 $ 331 4.94%
Mortgage-backed
investments 234,064 14,476 6.18 234,928 14,239 6.06
Other investment securities 334,647 21,111 6.31 303,784 18,237 6.00
Loans (a) 658,041 50,047 7.61 602,429 45,042 7.48
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets 1,233,471 86,050 6.98 1,147,837 77,849 6.78
Other assets 30,485 - - 39,696 - -
- ----------------------------------------------------------------------------------------------------------------------
Total assets $1,263,956 - - $1,187,533 - -
======================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW deposits $ 59,674 $ 344 0.58% $ 60,931 $ 343 0.56%
Savings deposits and MMDA 391,883 12,547 3.20 375,169 11,540 3.08
Term certificates 440,761 23,632 5.36 415,643 20,868 5.02
Short-term borrowings 37,441 2,309 6.17 48,265 2,446 5.07
Long-term debt 180,747 11,082 6.13 139,034 7,912 5.69
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,110,506 49,914 4.49 1,039,042 43,109 4.15
Other liabilities 62,012 - - 54,888 - -
Stockholders' equity 91,438 - - 93,603 - -
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,263,956 - - $1,187,533 - -
======================================================================================================================
Net interest income $36,136 $34,740
Weighted average rate spread (b) 2.49% 2.63%
Net yield on average earning assets (c) 2.93% 3.03%
======================================================================================================================
Years Ended December 31, 1998
- ------------------------------------------ ------------------------------------
Interest Average
Average Earned/ Yield/
Balance Paid Rate
---------- ---------- ----------
ASSETS
Earning assets:
Short-term investments $ 3,941 $ 205 5.20%
Mortgage-backed
investments 171,581 10,979 6.40
Other investment securities 325,852 19,878 6.10
Loans (a) 581,154 45,740 7.87
- ---------------------------------------------------------------------------------
Total earning assets 1,082,528 76,802 7.09
Other assets 44,518 - -
- ---------------------------------------------------------------------------------
Total assets $1,127,046 - -
=================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW deposits $ 60,111 $ 587 0.98%
Savings deposits and MMDA 337,456 10,198 3.02
Term certificates 393,493 21,190 5.39
Short-term borrowings 60,215 3,210 5.33
Long-term debt 123,358 7,428 6.02
- ---------------------------------------------------------------------------------
Total interest-bearing liabilities 974,633 42,613 4.37
Other liabilities 50,194 - -
Stockholders' equity 102,219 - -
- ---------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,127,046 - -
=================================================================================
Net interest income $34,189
Weighted average rate spread (b) 2.72%
Net yield on average earning assets (c) 3.16%
=================================================================================
(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
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 a provision for loan losses of $175,000 in 2000. This compares
with no provision in 1999 and a provision of $75,000 in 1998. Gross loans
charged-off declined to $59,000 in 2000 versus $164,000 and $165,000 in 1999 and
1998, respectively. Net loans charged-off totaled $4,000 and $97,000,
respectively, in 2000 and 1999, while in 1998 the Company experienced net loan
recoveries of $68,000.
The loan portfolio increased $42.2 million during 2000 with $22.4 million
related to residential real estate loans, which are assigned a relatively low
risk rating as compared to other categories in the Company's loan portfolio. The
impact of applying general risk allocations to the growth in residential and
commercial real estate loans, as well as construction loans, was partially
offset by the net improvement in the general risk ratings applicable to certain
commercial lending relationships. While management considers the allowance for
loan losses to be adequate at December 31, 2000, there is no assurance that
additional charge-offs and provisions will not be necessary in 2001. The
provision for loan losses during 2001 will depend primarily on market conditions
and the Bank's actual experience.
Other Income
Total other income amounted to $6.8 million in 2000, as compared to $4.2 million
in 1999 and $4.8 million in 1998. When comparing 2000 with 1999, the $4.8
million gain from the termination of the defined benefit plan was partially
offset by the net change in securities gains and losses of $2.5 million. The
Company recorded a net loss on sales of securities of $1.0 million in 2000 as
compared to a net gain on sales of securities of $1.5 million in 1999. The net
loss on sales of securities in 2000 is reflective of a portfolio restructuring,
whereby securities totaling $40.2 million and yielding 5.02% were sold and the
proceeds were reinvested in securities yielding approximately 7.0%.
The $556,000 decrease in other income when comparing year 1999 with 1998 can be
primarily accounted for by the change in level of gains recorded from sales of
assets. Gains on sales of assets in 1999 totaled $1.5 million, compared with
$2.0 million in 1998, representing a decrease of $500,000. In 1999, customer
service fees declined $27,000 from 1998, in part reflecting lower revenues on
deposit accounts as customers migrated to deposit products with lower or no
service fees.
Operating Expenses
Operating expenses were $20.0 million for 2000, up $690,000 or 3.6% over 1999
operating expenses of $19.3 million. This increase in operating expenses was
driven by staff related costs to support Company growth, which were partially
offset by a net overall decline of $336,000 in defined benefit pension and
401(k) plan expense. This decline is a result of the Bank's termination of its
defined benefit pension plan effective February 29, 2000.
Operating expenses were $19.3 million for 1999, up $227,000 or 1.2% over 1998
operating expenses of $19.1 million. Occupancy, equipment and data processing
rose $287,000 or 7.7% when compared to 1998 as a result of additional operating
expenses associated with reopening and opening of branch sites. Professional
fees increased $132,000 or 25% over 1998 as a result of expenses applicable to
shareholder matters.
Provision for Income Taxes
The Bank's effective tax rate for the year ended December 31, 2000 was 39.4% as
compared with 35.6% and 38.1% for 1999 and 1998, respectively. The effective tax
rates exceeded the statutory federal tax rate of 35.0% (for taxable income
exceeding $10.0 million) due to state taxes, and in 2000, due principally to a
tax of $639,000 related to the pension plan settlement.
21
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, 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.
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. In
2000, cash flow from maturities of securities was $70.0 million and proceeds
from sales of securities totaled $55.2 million, compared to maturities of
securities of $66.3 million and proceeds from sales of securities of $105.4
million in 1999. Principal payments on mortgage-backed securities in 2000 and
1999 totaled $32.4 million and $47.4 million, respectively. Purchases of
securities during 2000 and 1999 totaled $190.9 million and $261.7 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,
2000, the Bank's outstanding borrowings from the FHLBB were $223.4 million. The
Bank also utilizes repurchase agreements to fund loan purchases or to leverage
the balance sheet. At December 31, 2000, there were no securities sold under
agreements to repurchase.
Residential and commercial mortgage loan originations for 2000, 1999 and 1998
totaled $139.2 million, $147.9 million and $159.5 million, respectively.
Commitments to originate commercial and residential real estate mortgages at
December 31, 2000 were $4.9 million, excluding unadvanced construction funds
totaling $16.3 million. Unadvanced funds on equity and commercial lines of
credit aggregated $33.1 million at December 31, 2000. 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 $105.0 million, or
8.01% of total assets at December 31, 2000, compared with $90.9 million, or
7.42% of total assets at December 31, 1999. In 2000, the Company utilized the
holding company structure to exercise greater control in managing capital with
the completion of a 5% stock repurchase plan. A total of 423,100 shares of
common stock were repurchased. In addition, the Company announced in November
2000 another stock repurchase plan of up to 5% of outstanding shares.
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 consolidated Company's and
the Bank's tier 1 risk-based capital ratios, as defined, at December 31, 2000
were 12.1% and 11.6%, respectively, 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% or 4.0% of total
assets, as adjusted, depending on an individual bank's rating. The Bank's
leverage capital ratio at December 31, 2000, as defined by the FDIC, was 7.5%,
which exceeds the FDIC's requirements.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, interest rate, credit and market risk.
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Bank's market risk arises primarily from interest rate risk
inherent in lending, investing in marketable securities, deposit taking, and
borrowing activities. To that end, management actively monitors and manages its
interest rate risk exposure. In addition, the Bank is exposed to equity price
risk associated with investing in marketable equity securities, which is not
material.
The Bank's primary objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the Bank's net interest income
and capital, while adjusting the Bank's asset-liability mix to achieve the
maximum yield to cost spread from the mix. However, a sudden and substantial
increase or decrease in interest rates may adversely impact the Bank's earnings
to the extent that interest sensitive assets and liabilities do not change at
the same speed, to the same extent, or on the same basis. 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, monitoring 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.
23
The following table presents, as of December 31, 2000, interest-rate sensitive
assets and liabilities categorized by expected maturity and weighted average
rate. Expected maturities are contractual maturities adjusted for amortization
and prepayments of principal. For adjustable-rate instruments, contractual
maturity is deemed to be the earliest possible interest rate adjustment date.
(Dollars in thousands) Overnight 0-1 yr. 1-2 yrs. 2-3 yrs.
-------------- ------------- ------------ ------------
Rate-sensitive assets:
Short-term investments $ 5,353 $ - $ - $ -
6.29%
Mortgage-backed investments - 64,719 52,786 44,573
6.33% 6.33% 6.33%
Other investment securities - 84,062 103,071 100,569
6.42% 6.23% 6.19%
Adjustable-rate mortgages 21,609 151,907 75,767 77,450
9.43% 8.41% 7.61% 7.49%
Fixed-rate mortgages - 22,984 22,656 20,915
7.40% 7.35% 7.23%
All other loans 14,446 2,664 1,319 790
10.10% 10.00% 10.18% 10.38%
- -----------------------------------------------------------------------------------------------------
Total rate-sensitive assets 41,408 326,336 255,599 244,297
- -----------------------------------------------------------------------------------------------------
Rate-sensitive liabilities:
NOW accounts 831 - 32,137 32,138
0.72% 0.58% 0.58%
Savings accounts 80,824 - 80,824 80,824
3.09% 3.09% 3.09%
Money market accounts 16,339 - 16,339 16,339
3.96% 3.96% 3.96%
Term certificates - 375,579 58,691 13,432
5.70% 6.08% 5.83%
Borrowings - 133,443 60,000 30,000
6.13% 6.78% 6.28%
- -----------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 97,994 509,022 247,991 172,733
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands) 3-4 yrs. 4-5 yrs. 5+ yrs. Total
------------ ------------ ------------ ------------
Rate-sensitive assets:
Short-term investments $ - $ - $ - $ 5,353
Mortgage-backed investments 33,041 23,123 32,392 250,634
6.33% 6.33% 6.33%
Other investment securities 30,272 - - 317,974
6.98%
Adjustable-rate mortgages 57,901 48,563 16,147 449,344
7.19% 7.74% 6.91%
Fixed-rate mortgages 21,867 19,393 97,343 205,158
7.25% 7.15% 7.21%
All other loans 862 43 24 20,148
8.68% 11.62% 7.00%
- --------------------------------------------------------------------------------------------------
Total rate-sensitive assets 143,943 91,122 145,906 1,248,611
- --------------------------------------------------------------------------------------------------
Rate-sensitive liabilities:
NOW accounts - - - 65,106
Savings accounts 80,826 - - 323,298
3.09%
Money market accounts 16,340 - - 65,357
3.96%
Term certificates 5,773 5,392 107 458,974
4.86% 4.85% 5.30%
Borrowings - 400 - 223,843
5.61%
- --------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 102,939 5,792 107 1,136,578
- --------------------------------------------------------------------------------------------------
The prepayment experience reflected is based on the Bank's historical
experience. Based on the Bank's experience, partial or full payment prior to
contractual maturity can be expected and is reflected. Loans and mortgage-backed
securities reflect regular amortization of principal and pre-payment estimates.
When adjustable-rate loans reprice at the rate adjustment date, they are
generally indexed to the one-, three-, or five-year Treasury rate with an
average spread of 275 basis points, with average period caps of 2.0% and
life-time caps of 6.0%. The table does not include loans which have been placed
on non-accrual status.
Assets and liabilities that immediately reprice are placed in the overnight
column. These financial instruments do not have a contractual maturity date.
Although NOW, savings and money market deposit accounts are subject to immediate
repricing or withdrawal, based on the Bank's history, management considers these
liabilities to have longer lives and less interest rate sensitivity than term
certificates.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report..................................................26
Consolidated Balance Sheets at December 31, 2000 and 1999.....................27
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998.........................................28
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998.....................29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998......................................30-31
Notes to Consolidated Financial Statements.................................32-55
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Medford Bancorp, Inc.:
We have audited the consolidated balance sheets of Medford Bancorp, Inc. and
subsidiary as of December 31, 2000 and 1999, 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, 2000. These consolidated
financial statements are the responsibility of the Company'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 auditing standards generally accepted
in the United States of America. 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 Bancorp,
Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 19, 2001
26
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2000 1999
----------- -----------
(In thousands)
ASSETS
Cash and due from banks $ 16,905 $ 17,043
Interest-bearing deposits 5,353 3,867
----------- -----------
Cash and cash equivalents 22,258 20,910
Securities available for sale 528,690 520,030
Securities held to maturity 42,854 5,000
Federal Home Loan Bank of Boston stock, at cost 11,420 9,683
Loans 675,697 633,530
Less allowance for loan losses (6,950) (6,779)
----------- -----------
Loans, net 668,747 626,751
----------- -----------
Banking premises and equipment, net 10,884 11,566
Accrued interest receivable 10,211 9,162
Goodwill and deposit-based intangibles 2,588 3,679
Other assets 12,038 18,131
----------- -----------
Total assets $ 1,309,690 $ 1,224,912
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 975,857 $ 911,328
Short-term borrowings 20,443 67,071
Long-term debt 203,400 148,653
Accrued taxes and expenses 2,278 3,920
Other liabilities 2,747 3,070
----------- -----------
Total liabilities 1,204,725 1,134,042
----------- -----------
Commitments and contingencies (Notes 4 and 9)
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 22,705 24,839
Retained earnings 94,697 85,153
Treasury stock, at cost (980,048 and 739,344 shares, respectively) (17,422) (14,278)
Shares held in rabbi trust, at cost 1,071 930
Deferred compensation obligation (1,071) (930)
Accumulated other comprehensive income (loss) 424 (9,405)
----------- -----------
Total stockholders' equity 104,965 90,870
----------- -----------
Total liabilities and stockholders' equity $ 1,309,690 $ 1,224,912
=========== ===========
See accompanying notes to consolidated financial statements.
27
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------------
2000 1999 1998
-------- ------- -------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 50,047 $45,042 $45,740
Interest on debt securities 34,686 31,827 30,331
Dividends on equity securities 901 649 526
Interest on short-term investments 416 331 205
-------- ------- -------
Total interest and dividend income 86,050 77,849 76,802
-------- ------- -------
Interest expense:
Interest on deposits 36,523 32,751 31,975
Interest on short-term borrowings 2,309 2,446 3,210
Interest on long-term debt 11,082 7,912 7,428
-------- ------- -------
Total interest expense 49,914 43,109 42,613
-------- ------- -------
Net interest income 36,136 34,740 34,189
Provision for loan losses 175 - 75
-------- ------- -------
Net interest income, after provision for loan losses 35,961 34,740 34,114
-------- ------- -------
Other income:
Customer service fees 1,968 1,851 1,878
Gain (loss) on sales of securities, net (1,031) 1,522 1,670
Gain on sale of loans - - 370
Pension plan curtailment and settlement gains 4,799 - -
Miscellaneous 1,014 829 840
-------- ------- -------
Total other income 6,750 4,202 4,758
-------- ------- -------
Operating expenses:
Salaries and employee benefits 11,069 10,673 10,788
Occupancy and equipment 2,611 2,488 2,296
Data processing 1,553 1,512 1,417
Professional fees 497 657 525
Amortization of intangibles 1,091 1,128 1,171
Advertising and marketing 690 654 545
Other general and administrative 2,480 2,189 2,332
-------- ------- -------
Total operating expenses 19,991 19,301 19,074
-------- ------- -------
Income before income taxes 22,720 19,641 19,798
Provision for income taxes 8,951 6,990 7,546
-------- ------- -------
Net income $ 13,769 $12,651 $12,252
======== ======= =======
Weighted average shares outstanding:
Basic 8,139 8,393 8,904
======== ======= =======
Diluted 8,395 8,775 9,377
======== ======= =======
Earnings per share:
Basic $ 1.69 $ 1.51 $ 1.38
======== ======= =======
Diluted $ 1.64 $ 1.44 $ 1.31
======== ======= =======
See accompanying notes to consolidated financial statements.
28
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Common Stock Additional
------------------------- Paid-In Retained
Shares Dollars Capital Earnings
------------- --------- ------------ ------------
(In thousands)
Balance at December 31, 1997 4,541 $ 2,271 $ 28,977 $ 68,938
Comprehensive income:
Net income - - - 12,252
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment and tax effects - - - -
Total comprehensive income
Cash dividends declared ($.50 per share) - - - (4,420)
Stock split (2 for 1) 4,541 2,271 (2,271) -
Repurchase of treasury stock - - - -
Issuance of common stock under option plan 40 19 (527) -
Income tax benefits on options exercised - - 210 -
------------- --------- ------------ ------------
Balance at December 31, 1998 9,122 4,561 26,389 76,770
Comprehensive income:
Net income - - - 12,651
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment and tax effects - - - -
Total comprehensive income
Cash dividends declared ($.51 per share) - - - (4,268)
Repurchase of treasury stock - - - -
Issuance of common stock under option plan - - (1,550) -
------------- --------- ------------ ------------
Balance at December 31, 1999 9,122 4,561 24,839 85,153
Comprehensive income:
Net income - - - 13,769
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment and tax effects - - - -
Total comprehensive income
Cash dividends declared ($.52 per share) - - - (4,225)
Repurchase of treasury stock - - - -
Issuance of common stock under option plan - - (2,790) -
Income tax benefits on options exercised - - 656 -
------------- --------- ------------ ------------
Balance at December 31, 2000 9,122 $ 4,561 $ 22,705 $ 94,697
============= ========= ============ ============
Accumulated
Treasury Stock Other
--------------------------- Comprehensive
Shares Dollars Income (Loss) Total
------------- ------------ ------------------ -------------
(In thousands)
Balance at December 31, 1997 - $ - $ 1,324 $ 101,510
-------------
Comprehensive income:
Net income - - - 12,252
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment and tax effects - - 1,734 1,734
-------------
Total comprehensive income 13,986
-------------
Cash dividends declared ($.50 per share) - - - (4,420)
Stock split (2 for 1) - - - -
Repurchase of treasury stock (454) (9,378) - (9,378)
Issuance of common stock under option plan 41 867 - 359
Income tax benefits on options exercised - - - 210
------------- ------------ ------------------ -------------
Balance at December 31, 1998 (413) (8,511) 3,058 102,267
-------------
Comprehensive income:
Net income - - - 12,651
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment and tax effects - - (12,463) (12,463)
-------------
Total comprehensive income 188
-------------
Cash dividends declared ($.51 per share) - - - (4,268)
Repurchase of treasury stock (425) (7,689) - (7,689)
Issuance of common stock under option plan 99 1,922 - 372
------------- ------------ ------------------ -------------
Balance at December 31, 1999 (739) (14,278) (9,405) 90,870
-------------
Comprehensive income:
Net income - - - 13,769
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment and tax effects - - 9,829 9,829
-------------
Total comprehensive income 23,598
-------------
Cash dividends declared ($.52 per share) - - - (4,225)
Repurchase of treasury stock (423) (6,428) - (6,428)
Issuance of common stock under option plan 182 3,284 - 494
Income tax benefits on options exercised - - - 656
------------- ------------ ------------------ -------------
Balance at December 31, 2000 (980) $ (17,422) $ 424 $ 104,965
============= ============ ================== =============
See accompanying notes to consolidated financial statements.
29
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 13,769 $ 12,651 $ 12,252
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 175 - 75
Depreciation and amortization, net 2,594 3,183 2,275
(Gain) loss on sales of securities, net 1,031 (1,522) (1,670)
Gain on sale of loans - - (370)
Deferred tax provision (benefit) 448 (100) (344)
Decrease (increase) in accrued interest receivable and other assets (1,598) 549 (1,366)
Increase (decrease) in accrued taxes and expenses
and other liabilities (1,104) 367 629
-------- -------- --------
Net cash provided by operating activities 15,315 15,128 11,481
-------- -------- --------
Cash flows from investing activities: Activity in securities available for sale:
Maturities 64,974 45,250 52,180
Sales 55,196 105,440 138,046
Purchases (144,649) (259,337) (297,537)
Principal amortization of mortgage-backed securities 32,369 47,360 39,077
Activity in securities held to maturity:
Maturities 4,997 21,000 74,803
Purchases (44,552) - -
Purchases of Federal Home Loan Bank of Boston stock (1,737) (2,361) (1,564)
Loans originated and purchased, net of amortization and payoffs (42,358) (46,460) (20,796)
Proceeds from sales of loans - 77 11,336
Proceeds from sales of real estate - 431 70
Additions to banking premises and equipment, net (491) (1,036) (2,275)
-------- -------- --------
Net cash used by investing activities (76,251) (89,636) (6,660)
-------- -------- --------
(continued)
See accompanying notes to consolidated financial statements.
30
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended December 31,
-----------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 64,529 39,626 49,996
Net decrease in short-term borrowings with maturities
of three months or less (21,628) (16,392) (57,207)
Proceeds from short-term borrowings with maturities in
excess of three months 67,166 55,000 10,000
Repayment of short-term borrowings with maturities in
excess of three months (92,166) (10,000) (10,000)
Proceeds from long-term debt 123,000 67,000 68,536
Repayment of long-term debt (68,253) (50,000) (46,992)
Issuance of common stock 494 372 359
Payments to acquire treasury stock (6,428) (7,689) (9,378)
Cash dividends paid (4,430) (4,501) (4,313)
-------- -------- --------
Net cash provided by financing activities 62,284 73,416 1,001
-------- -------- --------
Net change in cash and cash equivalents 1,348 (1,092) 5,822
Cash and cash equivalents at beginning of year 20,910 22,002 16,180
-------- -------- --------
Cash and cash equivalents at end of year $ 22,258 $ 20,910 $ 22,002
======== ======== ========
Supplementary information:
Interest paid on deposit accounts $ 36,486 $ 32,413 $ 31,835
Interest paid on borrowed funds 13,207 10,115 10,681
Income taxes paid, net of refunds 8,054 7,285 7,626
See accompanying notes to consolidated financial statements.
31
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of Medford Bancorp,
Inc. (the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the
"Bank"). The Bank's wholly-owned subsidiary, Medford Securities Corporation,
engages in the buying, selling, dealing in, or holding of securities. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, 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 and Operating Segments
The Company 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 Company is
headquartered in Medford, Massachusetts. It has a network of eighteen banking
offices located in Medford, Malden, Arlington, Belmont, Burlington, North
Reading, Somerville, Tewksbury, Waltham, and Wilmington. The Company's primary
market area includes these communities as well as other cities and towns in
Middlesex County and the surrounding area north of Boston.
Management evaluates the Company's performance and allocates resources based on
a single segment concept. Accordingly, there are no separately identified
operating segments for which discrete financial information is available. The
Company does not derive revenues from, or have assets located in, foreign
countries, nor does it derive revenues from any single customer that represents
10% or more of the Company's total revenues.
Cash and Cash Equivalents
Cash and cash equivalents include cash, amounts due from banks and
interest-bearing deposits that mature overnight or on demand.
Securities
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 securities are classified as "available
for sale" and reflected on the consolidated balance sheet at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income (loss), net of related tax effects, in stockholders'
equity. Purchase premiums and discounts on debt securities are amortized to
earnings by the interest method over the terms of the securities. Declines in
the value of securities that are deemed to be other than temporary are reflected
in earnings when identified. Gains and losses on disposition of securities are
recorded on the trade date and computed by the specific identification method.
32
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans
The Company 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 Company'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 net deferred loan origination costs
and reduced by the allowance for loan losses.
Interest on loans is recognized on the interest method 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. Loans which are identified
as impaired are generally 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.
Net deferred loan origination costs are amortized as an adjustment of the
related loan yield by the interest method over the contractual lives of the
loans.
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 Company's loans, which have been
identified as impaired, have been measured by the fair value of existing
collateral.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer loans for impairment disclosure.
Allowance for Loan Losses
The allowance for loan losses is established, as losses are estimated to have
occurred, 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 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 revision as more information becomes
available. Ultimate losses may vary from current estimates and future additions
to the allowance may be necessary.
The allowance consists of specific, general and unallocated loss components.
Specific allocations include the results of measuring impaired loans under SFAS
No. 114. General risk allocations are determined by formula whereby the loan
portfolio is stratified by loan type and by risk rating category. Loss factors
are then applied to each category based on various considerations including
historical loss experience, delinquency trends, current economic conditions,
industry standards and regulatory guidelines. Any remaining unallocated portion
is reviewed for adequacy in relation to the overall loan portfolio and in
recognition of estimates inherent in the calculation methodology.
33
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Banking Premises and Equipment
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.
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.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
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 Company'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 defined 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. The defined
benefit plan was terminated effective February 29, 2000.
Stock Compensation Plans
The Company measures compensation cost for its stock compensation plans using
the intrinsic value based method of accounting, 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 Company's stock option plans have no
intrinsic value at the grant date and no compensation cost is recognized for
them. The Company is required to make pro forma disclosures of net income and
earnings per share as if compensation cost had been measured at the grant date
based on the fair value of the award and recognized over the service period,
which is usually the vesting period.
Advertising Costs
Advertising costs are charged to expense as incurred.
34
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
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 stock options had been exercised. Additional
common shares are determined using the treasury stock method.
For the years ended December 31, 2000, 1999 and 1998, options applicable to
149,000 shares, 62,000 shares and 61,000 shares, respectively, were
anti-dilutive and excluded from the diluted earnings per share computations.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for
sale, are reported as a separate component of the equity section of the
consolidated balance sheet, such items, along with net income, are components of
comprehensive income (loss).
The components of other comprehensive income (loss) and related tax effects are
as follows:
Years Ended December 31,
---------------------------------------
2000 1999 1998
------------ ----------- -----------
(In thousands)
Unrealized holding gains (losses) on securities available for sale $ 14,992 $(18,877) $ 4,541
Reclassification adjustment for (gains) losses realized in income 1,031 (1,522) (1,670)
------------ ----------- -----------
Net unrealized gains (losses) 16,023 (20,399) 2,871
Tax effects (6,194) 7,936 (1,137)
------------ ----------- -----------
Net-of-tax amount $ 9,829 $(12,463) $ 1,734
============ =========== ===========
Subsequent Accounting Change
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative as a hedging
instrument. The Statement generally provides for matching the timing of the
recognition of the gain or loss on derivatives designated as hedging instruments
with the recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either net income or
other comprehensive income. For a derivative not designated as a hedging
instrument, changes in fair value will be recognized in net income in the period
of change. The Company adopted this Statement on January 1, 2001, with no impact
on the consolidated financial statements.
35
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and
losses at December 31, 2000 and 1999, follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
- ------------------------------------------------------- --------- ---------- ---------- --------
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $310,165 $2,628 $ (478) $312,315
Mortgage-backed securities 212,589 668 (1,850) 211,407
Federal agency obligations 3,000 - (3) 2,997
-------- ------ -------- --------
Total debt securities 525,754 3,296 (2,331) 526,719
Marketable equity securities 2,285 81 (395) 1,971
-------- ------ -------- --------
Total securities available for sale $528,039 $3,377 $ (2,726) $528,690
======== ====== ======== ========
Securities Held to Maturity
Federal agency obligations $ 4,809 $ 210 $ - $ 5,019
Mortgage-backed securities 38,045 871 - 38,916
-------- ------ -------- --------
Total securities held to maturity $ 42,854 $1,081 $ - $ 43,935
======== ====== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- ------------------------------------------------------- --------- ---------- ---------- --------
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $250,078 $ 42 $ (3,353) $246,767
Mortgage-backed securities 224,083 - (9,627) 214,456
U.S. Government and federal agency obligations 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 obligations $ 5,000 $ 6 $ - $ 5,006
======== ====== ======== ========
36
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES (concluded)
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 2000 is as follows:
Available for Sale Held to Maturity
---------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------- ------------- ------------ ------------
(In thousands)
Within 1 year $ 84,062 $ 83,942 $ - $ -
After 1 year through 5 years 229,103 231,370 4,809 5,019
------------- ------------- ------------ ------------
313,165 315,312 4,809 5,019
Mortgage-backed securities 212,589 211,407 38,045 38,916
------------- ------------- ------------ ------------
$ 525,754 $ 526,719 $ 42,854 $ 43,935
============= ============= ============ ============
At December 31, 2000, mortgage-backed securities with an amortized cost of
$8,063,000 and a fair value of $8,002,000 have been pledged as collateral for a
line of credit. Mortgage-backed securities with an amortized cost of $22,179,000
and a fair value of $21,851,000 have been pledged as collateral for a loan and
credit agreement. At December 31, 1999, U.S. Government obligations with an
amortized cost of $21,865,000 and a fair value of $20,965,000 were pledged as
collateral for securities sold under agreements to repurchase. In addition, U.S.
Government obligations with an amortized cost of $22,265,000 and a fair value of
$21,022,000 were pledged as collateral for a loan and credit agreement. (See
Note 6.)
For the years ended December 31, 2000, 1999 and 1998, proceeds from the sales of
securities available for sale amounted to $55,196,000, $105,440,000 and
$138,046,000, respectively. Gross realized gains amounted to $3,000, $1,529,000
and $1,711,000, respectively. Gross realized losses amounted to $1,031,000,
$7,000 and $52,000, respectively. For the years ended December 31, 2000 and
1998, proceeds from the sales of securities held to maturity that were sold
within three months of maturity amounted to $4,997,000 and $15,003,000,
respectively. Gross realized gains (losses) on these sales amounted to $(3,000)
and $11,000 for the years ended December 31, 2000 and 1998, respectively. These
sales have been included in the Statement of Cash Flows as maturities.
Mortgage-backed securities consist of collateralized mortgage obligations and
participation certificates guaranteed by the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation or the Government
National Mortgage Association.
37
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS
A summary of the balances of loans follows:
December 31,
--------------------------------
2000 1999
-------------- --------------
(In thousands)
Mortgage loans on real estate:
Residential 1 - 4 family $ 487,964 $ 465,618
Commercial 124,201 112,050
Construction 19,913 13,504
Second mortgages 699 774
Equity lines of credit 21,609 19,394
-------------- --------------
654,386 611,340
-------------- --------------
Other loans:
Commercial 17,219 18,124
Personal and other 2,925 2,912
-------------- --------------
20,144 21,036
-------------- --------------
Net deferred loan origination costs 1,167 1,154
-------------- --------------
Total loans 675,697 633,530
Less allowance for loan losses (6,950) (6,779)
-------------- --------------
Loans, net $ 668,747 $ 626,751
============== ==============
An analysis of the allowance for loan losses follows:
Years Ended December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands)
Balance at beginning of year $ 6,779 $ 6,876 $ 6,733
Provision for loan losses 175 - 75
Recoveries 55 67 233
Loans charged-off (59) (164) (165)
----------- ----------- -----------
Balance at end of year $ 6,950 $ 6,779 $ 6,876
=========== =========== ===========
Impaired loans at December 31, 2000 and 1999 amounted to $1,047,000 and
$2,482,000, respectively, none of which required a corresponding valuation
allowance. No additional funds are committed to be advanced in connection with
impaired loans.
For the years ended December 31, 2000, 1999 and 1998, the average recorded
investment in impaired loans amounted to $1,593,000, $2,888,000 and $1,749,000,
respectively. Impaired loans are generally placed on non-accrual status. The
Bank recognized interest income on impaired loans, on a cash basis, of $6,000 in
2000, $52,000 in 1999 and $39,000 in 1998 during the periods that they were
impaired.
38
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment follows:
December 31,
--------------------------
2000 1999
----------- -----------
(In thousands)
Banking Premises:
Land $ 2,068 $ 2,068
Buildings 10,321 10,235
Equipment 6,609 6,305
----------- -----------
18,998 18,608
Less accumulated depreciation (8,114) (7,042)
----------- -----------
$ 10,884 $ 11,566
=========== ===========
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
amounted to $1,173,000, $1,174,000 and $1,005,000, respectively.
Pursuant to the terms of noncancelable lease agreements in effect at December
31, 2000, pertaining to banking premises and equipment, future minimum rent
commitments (in thousands) under various operating leases are as follows:
Years Ending
December 31, Amount
--------------------- -----------
2001 $ 398
2002 389
2003 373
2004 355
2005 146
Thereafter 136
-----------
$ 1,797
===========
The leases contain options to extend for periods from one to ten years. The cost
of such rentals is not included above. Total rent expense for the years ended
December 31, 2000, 1999 and 1998 amounted to $378,000, $332,000 and $285,000,
respectively.
39
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31,
-----------------------
2000 1999
-------- --------
(In thousands)
Demand $ 63,122 $ 51,202
NOW 65,106 60,811
Regular savings 323,298 314,353
Money market deposits 65,357 68,617
-------- --------
Total non-certificate accounts 516,883 494,983
-------- --------
Term certificates ($100,000 or more) 101,406 89,198
Other term certificates 357,568 327,147
-------- --------
Total term certificates 458,974 416,345
-------- --------
Total deposits $975,857 $911,328
======== ========
A summary of term certificate accounts, by maturity, is as follows:
December 31, 2000 December 31, 1999
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(Dollars in thousands)
Within 1 year $375,579 5.70% $251,711 4.85%
Over 1 year to 3 years 72,123 6.03 154,537 5.24
Over 3 years to 5 years 11,165 5.45 9,994 4.97
Over 5 years 107 5.30 103 5.26
-------- --------
$458,974 5.75% $416,345 5.00%
======== ========
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
December 31, 2000 December 31, 1999
---------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- ------- --------
(Dollars in thousands)
Securities sold under agreements to repurchase $ -- --% $21,227 5.11%
Federal Reserve Bank of Boston advances 443 6.29 844 4.55
Federal Home Loan Bank of Boston advances 20,000 6.54 45,000 5.48
------- -------
$20,443 6.53% $67,071 5.35%
======= =======
40
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM BORROWINGS (concluded)
The Federal Home Loan Bank of Boston ("FHLBB") advances mature within five
months. The Company 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.
At December 31, 1999, securities sold under agreements to repurchase are
borrowings that mature within one month and are secured by U.S. Government
obligations. (See Note 2.) The amount of securities collateralizing the
agreements to repurchase remains in securities and the obligation to repurchase
securities sold is reflected as a liability in the consolidated balance sheets.
The Company had a $3,000,000 and a $1,925,000 line of credit (treasury, tax and
loan) with the Federal Reserve Bank of Boston ("FRB") at December 31, 2000 and
1999, of which $443,000 and $844,000, respectively, was advanced. The interest
rate adjusts weekly and certain mortgage-backed securities and U.S. Government
obligations have been pledged as collateral for the line of credit at December
31, 2000 and 1999, respectively. At December 31, 2000, the Company also had a
loan and credit agreement with the FRB at an interest rate which adjusts daily.
Borrowings under the agreement are limited to 95% of the fair value of pledged
collateral. Certain mortgage-backed securities have been pledged as collateral
for the loan and credit agreement. (See Note 2.)
7. LONG-TERM DEBT
Long-term debt consists of FHLBB advances secured by a blanket lien on qualified
collateral (see Note 6), as follows:
December 31, 2000 December 31, 1999
--------------------------- ----------------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
- --------------------- ----------- ----------- ----------- -----------
(Dollars in thousands)
2000 $ -- --% $ 58,253 5.58%
2001 113,000 6.09 65,000 5.57
2002 60,000 6.78 5,000 6.36
2003 30,000 6.28 10,000 6.18
2004 - - 10,000 5.29
2005 400 5.61 400 5.61
----------- -----------
$203,400 6.32% $148,653 5.62%
=========== ===========
The advance maturing in 2005 is callable on a quarterly basis by the FHLBB.
41
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
Allocation of the provision for federal and state income taxes between current
and deferred portions is as follows:
Years Ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Current tax provision:
Federal $ 7,928 $ 6,702 $ 7,051
State 575 388 839
------- ------- -------
8,503 7,090 7,890
------- ------- -------
Deferred tax provision (benefit):
Federal 335 (99) (296)
State 113 (1) (48)
------- ------- -------
448 (100) (344)
------- ------- -------
$ 8,951 $ 6,990 $ 7,546
======= ======= =======
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,
------------------------
2000 1999 1998
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 2.0 1.3 2.6
Tax on pension plan settlement 2.8 -- --
Other, net (.4) (.7) .5
------ ------ ------
Effective tax rates 39.4% 35.6% 38.1%
====== ====== ======
42
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31,
---------------------
2000 1999
-------- -------
(In thousands)
Deferred tax assets:
Federal $ 3,914 $ 9,397
State 1,312 2,450
------- -------
5,226 11,847
------- -------
Deferred tax liabilities:
Federal (1,266) (1,203)
State (347) (389)
------- -------
(1,613) (1,592)
------- -------
Net deferred tax asset $ 3,613 $10,255
======= =======
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
December 31,
----------------------
2000 1999
-------- --------
(In thousands)
Cash basis of accounting $ 401 $ 384
Investments:
Net unrealized (gain) loss on securities available for sale (227) 5,967
Other (288) (288)
Depreciation (961) (1,100)
Allowance for loan losses 2,814 2,649
Employee benefit plans 669 1,356
Other 1,205 1,287
------ -------
Net deferred tax asset $3,613 $10,255
====== =======
43
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (concluded)
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31,
-----------------------------------
2000 1999 1998
-------- -------- --------
Balance at beginning of year $10,255 $ 2,219 $ 3,012
Deferred tax effect of the change in net unrealized
gains and losses on securities available for sale (6,194) 7,936 (1,137)
Deferred tax (provision) benefit for the year (448) 100 344
------- ------- -------
Balance at end of year $ 3,613 $10,255 $ 2,219
======= ======= =======
The federal income tax reserve for loan losses at the Company'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 it was established, approximately 150% of the amount
actually used (limited to the amount of the reserve) would be subject to
taxation in the year in which used. As the Company intends to use the reserve
only to absorb loan losses, a deferred income tax liability of $3,389,000 has
not been provided.
9. OTHER 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 Company 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 Company and/or the Bank have 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 Company 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
Company's exposure to credit loss is represented by the contractual amount of
these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
44
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER COMMITMENTS AND CONTINGENCIES (concluded)
Loan Commitments (concluded)
The following financial instruments were outstanding whose contract amounts
represent credit risk:
Contract Amount
at December 31,
-------------------
2000 1999
------- -------
(In thousands)
Commitments to grant loans $ 4,856 $15,314
Unadvanced funds on equity lines of credit 23,322 25,182
Unadvanced funds on commercial lines of credit 9,765 10,734
Unadvanced funds on construction loans 16,271 11,735
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 Company 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.
Legal Contingencies
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 Company's consolidated financial statements.
10. STOCKHOLDERS' EQUITY
Common Stock Repurchase
On November 28, 2000, the Board of Directors approved a plan to repurchase 5% of
the Company's outstanding shares of common stock. No repurchases have been made
under this plan at December 31, 2000.
Minimum Regulatory Capital Requirements
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 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 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 (set
forth in the following table) of total and Tier 1 capital (as defined) to
risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2000 and 1999, that
the Company and the Bank met all capital adequacy requirements to which they are
subject.
45
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (continued)
Minimum Regulatory Capital Requirements (continued)
As of December 31, 2000, 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, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables. As a
well capitalized entity, the Bank is entitled to engage in specified activities
on a more expedited basis than entities that are not well capitalized. There are
no conditions or events that management believes have changed the Bank's
category. The Company's and the Bank's actual capital amounts and ratios as of
December 31, 2000 and 1999, are also presented in the tables.
Minimum
Minimum To Be Categorized
Capital as Well
Actual Requirement Capitalized
------------------------ ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
December 31, 2000:
Total Capital to Risk-Weighted Assets:
Consolidated $108,719 13.0% $ 67,125 8.0% $ -- --%
Bank 104,230 12.4 67,125 8.0 83,906 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 101,769 12.1 33,562 4.0 -- --
Bank 97,280 11.6 33,562 4.0 50,343 6.0
Tier 1 Capital to Average Assets:
Consolidated 101,769 7.9 51,907 4.0 -- --
Bank 97,280 7.5 51,907 4.0 64,883 5.0
December 31, 1999:
Total Capital to Risk-Weighted Assets:
Consolidated $103,131 13.9% $ 59,429 8.0% $ -- --%
Bank 100,346 13.6 59,429 8.0 74,286 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 96,352 13.0 29,714 4.0 -- --
Bank 93,567 12.7 29,714 4.0 44,572 6.0
Tier 1 Capital to Average Assets:
Consolidated 96,352 8.0 36,461 4.0 -- --
Bank 93,567 7.7 36,461 4.0 60,768 5.0
46
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (concluded)
Restrictions on Dividends, Loans and Advances
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. Under Massachusetts
law, stock savings banks such as the Bank, like national banks, may pay
dividends no more often than quarterly, and only out of net profits and to the
extent that such payments will not impair the Bank's capital stock, as defined.
Moreover, prior Commissioner approval is required if the total dividends for a
calendar year would exceed net profits for that year combined with retained net
profits for the previous two years. These restrictions on the ability of the
Bank to pay dividends to the Company may restrict the ability of the Company to
pay dividends to its stockholders. Loans or advances are limited to 10% of the
Bank's capital stock and surplus, as defined, (which for this purpose represents
Tier 1 and Tier 2 capital, as calculated under the risk-based capital
guidelines, plus the balance of the allowance for loan losses excluded from Tier
2 capital) on a secured basis.
In addition, dividends paid by the Bank to the Company would be prohibited if
the effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
At December 31, 2000, $67,125,000 of the Company's equity in the Bank was
restricted and funds available for loans or advances amounted to $10,423,000.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan under which one preferred stock
purchase right was distributed 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 Company'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 specified in the Company's Amended and Restated Shareholder
Rights Agreement (the "Rights Agreement") subject to adjustment. If the Company
is acquired in a merger or other business combination transaction, or 50% of the
Company's assets or earning power is sold, the rights entitle holders to acquire
common stock of the Acquiring Person (as defined in the Rights Agreement) having
a value twice the exercise price of the rights. The rights may be redeemed in
whole by the Company at $.01 per right at any time until the earliest of (i) the
declaration of a person as an Adverse Person (as defined in the Rights
Agreement), (ii) the tenth day following public announcement that a 15% position
has been acquired, or (iii) the expiration date of the Rights Agreement. The
rights will expire on September 22, 2003.
Director Deferred Compensation Plan
The Company has deferred compensation arrangements with certain members of the
Board of Directors, whereby directors' fees earned are paid to a "Rabbi Trust"
and used to purchase shares of the Company's common stock in the open market.
The plan does not permit diversification of assets held, and the plan's
obligation to each director must be settled by the delivery of the fixed number
of shares of the Company's common stock purchased on the director's behalf. The
cost of the Company's common stock held by the rabbi trust, and the related
deferred compensation obligation offset, are reflected in stockholders' equity.
47
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS
Pension Plan
The Bank has provided 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 became a participant in
the pension plan. Participants were fully vested after three years of such
service. Effective March 31, 2000, the Bank terminated its defined benefit
pension plan and transferred plan assets to its vested employees who had the
option to rollover into the Bank's 401(k) plan, or an IRA, or receive a cash
payout in amounts that would effectively settle the plan's accumulated benefit
obligation. As a result, the Company recognized settlement and curtailment gains
totaling $4,799,000 in 2000. Information pertaining to activity in the plan is
as follows:
Years Ended October 31,
---------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,106 $ 5,472 $ 4,965
Service cost -- 642 591
Interest cost 406 369 360
Amendment (409) -- --
Actuarial gain -- (1,010) (151)
Benefits paid (5,103) (367) (293)
------- ------- -------
Benefit obligation at end of year -- 5,106 5,472
------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 6,879 5,464 4,830
Actual return on plan assets 1,420 1,076 395
Employer contribution -- 706 532
Benefits paid (5,103) (367) (293)
Distribution to employer (3,196) -- --
------- ------- -------
Fair value of plan assets at end of year -- 6,879 5,464
------- ------- -------
Funded status -- 1,773 (8)
Unrecognized net actuarial gain -- (3,242) (1,668)
Transition asset -- (227) (247)
------- ------- -------
Accrued pension cost $ -- $(1,696) $(1,923)
======= ======= =======
Net periodic pension (income) expense for the plan years ended October 31, 2000,
1999 and 1998 consisted of the following:
2000 1999 1998
----- ----- -----
(In thousands)
Service cost $ -- $ 642 $ 591
Interest cost 406 369 360
Expected return on plan assets (498) (437) (386)
Net amortization and deferral -- (20) (19)
Net gain -- (75) (69)
----- ----- -----
Net periodic pension (income) expense $ (92) $ 479 $ 477
===== ===== =====
48
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS (concluded)
Pension Plan (concluded)
Total pension (income) expense for the years ended December 31, 2000, 1999 and
1998 amounted to $(131,000), $418,000 and $486,000, respectively.
For the plan years ended October 31, 2000, 1999 and 1998, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.00%, 6.75% and
7.50%, respectively, and an expected long-term rate of return on plan assets of
6.00%, 8.00% and 8.00%. An annual salary increase of 4.50% and 5.00% was used
for the years ended October 31, 1999 and 1998, respectively.
401(k) Plan
The Bank maintains a 401(k) plan that 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. Employees are
eligible to participate in the plan upon hire and receive matching contributions
after three months of service. Prior to January 1, 2000, the Bank made matching
contributions equal to twenty-five percent (25%) of the first six percent (6%)
of annual compensation contributed to the plan. Effective January 1, 2000, the
Bank makes matching contributions equal to seventy-five percent (75%) of the
first six percent (6%) of annual compensation contributed to the plan. For the
years ended December 31, 2000, 1999 and 1998, expense attributable to the Plan
amounted to $289,000, $76,000 and $83,000, respectively.
Incentive Plan
Short-term incentives can be earned through a discretionary bonus plan,
administered by the Compensation and Options Committee of the Board of
Directors. Senior executive officers as well as other officers are eligible to
receive a bonus payable prior to the end of the first quarter of the following
year if the Company or the Bank meets or exceeds certain base standards and
individual performance warrants consideration. Incentive compensation expense
amounted to $266,000, $136,000 and $195,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
Executive Supplemental Benefit Agreement
The Company has entered into supplemental executive retirement agreements with
its President that are designed to provide benefits lost under defined benefit
plans and to increase overall retirement benefits. The present value of future
benefits is being accrued over the term of employment. Supplemental compensation
expense for the years ended December 31, 2000, 1999 and 1998 amounted to
$192,000, $240,000 and $239,000, respectively.
12. STOCK OPTION PLANS
The Company has stock option plans for the benefit of directors, officers and
full-time employees. The Medford Savings Bank 1986 Stock Option Plan covered
1,472,000 shares of common stock (the options under which have all been
granted). Of the 400,000 options under the Medford Bancorp, Inc. 1993 Stock
Option Plan, 384,500 have been granted. 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 Compensation and Options 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 Company on the date
the option is granted. 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.
49
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS (continued)
The Company measures compensation cost for its stock option plans using the
intrinsic value based method of accounting. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- --------
(In thousands, except per share data)
Net income:
As reported $13,769 $12,651 $12,252
Pro forma 13,404 12,459 12,023
Basic earnings per share:
As reported $ 1.69 $ 1.51 $ 1.38
Pro forma 1.65 1.48 1.35
Diluted earnings per share:
As reported $ 1.64 $ 1.44 $ 1.31
Pro forma 1.60 1.42 1.28
In determining the pro forma amounts, the fair value of each option grant was
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Years Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Dividend yield 3.5% 3.1% 3.5%
Expected life 10 years 10 years 10 years
Expected volatility 54% 50% 52%
Risk-free interest rate 5.2% 6.4% 5.3%
50
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS (concluded)
Stock option activity under the plans is as follows:
Years Ended December 31,
----------------------------------------------------------------------------
2000 1999 1998
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Amount Price Amount Price Amount Price
----------- ---------- ---------- ---------- ---------- ----------
Shares under option:
Outstanding at beginning of year 674,632 $ 8.50 725,852 $ 7.37 761,352 $ 6.41
Granted 42,000 14.78 54,000 16.36 49,500 18.40
Cancelled (7,000) 4.55 (6,000) 20.25 (4,000) 19.75
Exercised (182,396) 2.71 (99,220) 3.75 (81,000) 4.43
----------- ---------- ----------
Outstanding at end of year 527,236 11.06 674,632 8.50 725,852 7.37
=========== ========== ==========
Exercisable at end of year 475,586 $10.60 589,732 $ 7.27 646,952 $ 6.04
=========== ========== ==========
Weighted average fair value of
options granted during the year $ 6.68 $ 8.07 $ 7.98
=========== ========== ==========
Information pertaining to options outstanding at December 31, 2000 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
--------------- --------------- ------------- ----------- ------------- -----------
$3.06 - $5.44 137,956 1.8 years $ 4.75 137,956 $ 4.75
$6.13 - $7.22 26,000 3.1 6.95 26,000 6.95
$8.63 - $9.72 139,780 3.6 9.49 139,780 9.49
$10.38 - $10.88 18,000 5.1 10.54 18,000 10.54
$12.44 - $12.88 17,000 6.2 12.57 17,000 12.57
$14.13 - $14.94 42,000 9.9 14.78 4,000 14.13
$16.00 - $16.81 84,500 8.6 16.53 70,850 16.51
$19.75 - $21.63 62,000 7.1 20.11 62,000 20.11
--------------- -------------
Outstanding at end of year 527,236 4.9 years $11.06 475,586 $10.60
=============== =============
13. EMPLOYEES' STOCK OWNERSHIP PLAN
The Company 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 Company in the previous twelve-month period. The
Company 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, 2000, the ESOP held 379,872 shares, all of
which have been allocated to participants and included in outstanding shares for
earnings per share calculations. Dividends on all shares held by the ESOP are
allocated to participants on a pro rata basis. There were no contributions to
the ESOP for the years ended December 31, 2000, 1999 or 1998.
51
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Securities: Fair values for securities are based on quoted market prices.
FHLBB stock: The carrying value of FHLBB stock approximates fair value based on
stock redemption provisions.
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 ninety
days approximate their fair values. Fair values of other borrowings are
estimated using discounted cash flow analyses based on the Company'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.
52
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
December 31,
--------------------------------------------------
2000 1999
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In thousands)
Financial assets:
Cash and cash equivalents $ 22,258 $ 22,258 $ 20,910 $ 20,910
Securities available for sale 528,690 528,690 520,030 520,030
Securities held to maturity 42,854 43,935 5,000 5,006
FHLBB stock 11,420 11,420 9,683 9,683
Loans, net 668,747 669,808 626,751 621,849
Accrued interest receivable 10,211 10,211 9,162 9,162
Financial liabilities:
Deposits 975,857 976,783 911,328 911,051
Short-term borrowings 20,443 20,443 67,071 67,071
Long-term debt 203,400 204,465 148,653 147,525
Accrued interest payable 1,897 1,897 1,673 1,673
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Medford Bancorp, Inc. is as follows:
BALANCE SHEETS
December 31,
----------------------
2000 1999
-------- --------
(In thousands)
Assets
Short-term investments with Medford Savings Bank $ 4,812 $ 468
Investment in common stock of Medford Savings Bank 100,476 88,085
Due from Medford Savings Bank -- 3,500
Other assets 992 340
-------- --------
Total assets $106,280 $ 92,393
======== ========
Liabilities and Stockholders' Equity
Accrued expenses $ -- $ 2
Dividends payable on common stock 1,315 1,521
-------- --------
Total liabilities 1,315 1,523
Stockholders' equity 104,965 90,870
-------- --------
Total liabilities and stockholders' equity $106,280 $ 92,393
======== ========
53
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------
(In thousands)
Interest on short-term investments with Medford Savings Bank $ 96 $ 40 $ 142
Dividends from Medford Savings Bank 11,200 11,200 9,600
-------- -------- --------
11,296 11,240 9,742
Operating expenses 86 199 147
-------- -------- --------
Income before income taxes and equity in
undistributed net income of Medford Savings Bank 11,210 11,041 9,595
Applicable income tax provision (benefit) 4 (55) (3)
-------- -------- --------
11,206 11,096 9,598
Equity in undistributed net income of Medford Savings Bank 2,563 1,555 2,654
-------- -------- --------
Net income $ 13,769 $ 12,651 $ 12,252
======== ======== ========
STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 13,769 $ 12,651 $ 12,252
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Medford Savings Bank (2,563) (1,555) (2,654)
Decrease (increase) in due from Medford Savings Bank 3,500 (1,725) (125)
Other, net 2 (306) 52
-------- -------- --------
Net cash provided by operating activities 14,708 9,065 9,525
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 494 372 359
Payments to acquire treasury stock (6,428) (7,689) (9,378)
Cash dividends paid (4,430) (4,501) (4,313)
-------- -------- --------
Net cash used by financing activities (10,364) (11,818) (13,332)
-------- -------- --------
Net change in cash and cash equivalents 4,344 (2,753) (3,807)
Cash and cash equivalents at beginning of year 468 3,221 7,028
-------- -------- --------
Cash and cash equivalents at end of year $ 4,812 $ 468 $ 3,221
======== ======== ========
54
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
16. QUARTERLY DATA (UNAUDITED)
A summary of consolidated operating results on a quarterly basis is as follows:
Year Ended December 31, 2000
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share data)
Interest and dividend income $ 22,461 $ 21,894 $ 21,179 $ 20,516
Interest expense (13,397) (12,884) (12,087) (11,546)
-------- -------- -------- --------
Net interest income 9,064 9,010 9,092 8,970
Provision for loan losses (100) -- -- (75)
-------- -------- -------- --------
Net interest income, after provision
for loan losses 8,964 9,010 9,092 8,895
Pension plan curtailment gain -- -- -- 1,195
Pension plan settlement gain 3,604 -- -- --
Other income (loss) (126) 641 745 691
Operating expenses (5,136) (4,997) (4,958) (4,900)
-------- -------- -------- --------
Income before income taxes 7,306 4,654 4,879 5,881
Provision for income taxes (3,390) (1,638) (1,749) (2,174)
-------- -------- -------- --------
Net income $ 3,916 $ 3,016 $ 3,130 $ 3,707
======== ======== ======== ========
Earnings per share:
Basic $ 0.48 $ 0.37 $ 0.39 $ 0.45
======== ======== ======== ========
Diluted $ 0.47 $ 0.36 $ 0.37 $ 0.43
======== ======== ======== ========
Year Ended December 31, 1999
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share data)
Interest and dividend income $ 19,982 $ 19,665 $ 19,250 $ 18,952
Interest expense (11,141) (10,881) (10,758) (10,329)
-------- -------- -------- --------
Net interest income 8,841 8,784 8,492 8,623
Other income 675 647 990 1,890
Operating expenses (5,109) (4,777) (4,752) (4,663)
-------- -------- -------- --------
Income before income taxes 4,407 4,654 4,730 5,850
Provision for income taxes (1,484) (1,626) (1,728) (2,152)
-------- -------- -------- --------
Net income $ 2,923 $ 3,028 $ 3,002 $ 3,698
======== ======== ======== ========
Earnings per share:
Basic $ 0.35 $ 0.36 $ 0.36 $ 0.44
======== ======== ======== ========
Diluted $ 0.33 $ 0.35 $ 0.34 $ 0.41
======== ======== ======== ========
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
With the exception of certain information regarding the executive officers of
the Company and the Bank, the response to this item is incorporated by reference
from the discussion under the captions "Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on April 30, 2001 (the "Proxy
Statement"), to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act Rules.
Information regarding the executive officers of the Company and the Bank is
contained in Item I of Part I to this Report under the caption "Executive
Officers of the Company and Bank."
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion under
the captions "Executive Compensation" and "The Board of Directors, its
Committees and Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion under
the caption "Ownership by Management and Other Stockholders" in the Company's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion under
the caption "Relationships and Transactions with the Company" in the Company's
Proxy Statement.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Contents:
(1) Financial Statements: All financial statements are included in Item
8 of Part II to this Report.
(2) Financial Statement Schedules: All financial statement schedules
have been omitted because they are not required, not applicable or
are included in the consolidated financial statements or related
notes.
(3) Exhibits:
EXHIBIT INDEX
Exhibit Description
2.1 Plan of Reorganization and Acquisition dated as of July 29, 1997
between the Company and the Bank (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the SEC on November
26, 1997, and incorporated herein by reference)
3.1 Amended Articles of Organization of the Company (filed as Exhibit
3.1 to the Company's Current Report on Form 8-K filed with the SEC
on May 15, 1998, and incorporated herein by reference)
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to
the Company's Annual Report on Form 10-K filed with the SEC on March
23, 1998, and incorporated herein by reference)
4.1 Specimen certificate for shares of Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K
filed with the SEC on November 26, 1997, and incorporated herein by
reference)
4.2 Articles IV, VI(A), VI(C), VI(I)-(J) of the Amended Articles of
Organization of the Company (see Exhibit 3.1)
4.3 Articles II and V of the Amended and Restated By-laws of the Company
(see Exhibit 3.2)
4.4 Amended and Restated Shareholder Rights Agreement, dated November
26, 1997, between Medford Bancorp, Inc. and State Street Bank and
Trust Company, as Rights Agent (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the SEC on November
26, 1997, and incorporated herein by reference)
10.1 Amended and Restated Employment Agreement with Arthur H. Meehan
(filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K
filed with the SEC on March 23, 1998, and incorporated herein by
reference)
10.2 Amended and Restated Special Termination Agreement with Arthur H.
Meehan (filed as Exhibit 10.2 to the Company's Annual Report on Form
10-K filed with the SEC on March 23, 1998, and incorporated herein
by reference)
10.3 Amended and Restated Special Termination Agreement with Phillip W.
Wong (filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K filed with the SEC on March 23, 1998, and incorporated herein
by reference)
10.4 Amended and Restated Special Termination Agreement with George A.
Bargamian (filed as Exhibit 10.4 to the Company's Annual Report on
Form 10-K filed with the SEC on March 23, 1998, and incorporated
herein by reference)
10.5 Amended and Restated Special Termination Agreement with Eric B. Loth
(filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K
filed with the SEC on March 23, 1998, and incorporated herein by
reference)
10.6 Amended and Restated Special Termination Agreement with William F.
Rivers (filed as Exhibit 10.6 to the Company's Annual Report on Form
10-K filed with the SEC on March 23, 1998, and incorporated herein
by reference)
57
10.7 Supplemental Executive Retirement Plan and Corresponding Adoption
Agreement with Arthur H. Meehan (filed as Exhibit 10.7 to the
Company's Annual Report on Form 10-K filed with the SEC on March 23,
1998, and incorporated herein by reference)
10.8 Executive Supplemental Benefit Agreement with Arthur H. Meehan
(filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K
filed with the SEC on March 23, 1998, and incorporated herein by
reference)
10.9 Deferred Investment Plan for Outside Directors (filed as Exhibit 4.4
to the Company's Registration Statement on Form S-8 filed with the
SEC on December 24, 1997, and incorporated herein by reference)
10.10 First Amendment to Deferred Investment Plan for Outside Directors
(filed as Exhibit 4.5 to the Company's Registration Statement on
Form S-8 filed with the SEC on December 24, 1997, and incorporated
herein by reference)
10.11 Medford Savings Bank 1986 Stock Option Plan (filed as Exhibit 4.4 to
the Company's Registration Statement on Form S-8 filed with the SEC
on November 26, 1997, and incorporated herein by reference)
10.12 Medford Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-8 filed with the SEC on
November 26, 1997, and incorporated herein by reference)
10.13 Discretionary Bonus Plan (not set forth in a formal document -- a
description of the plan is contained in both the Proxy Statement to
be filed with the SEC, and incorporated herein by reference, under
the caption "Compensation Committee Report on Executive
Compensation" and in the "Notes to Consolidated Financial
Statements" under the caption "Employee Benefit Plans -- Incentive
Plan" in Item 8 to this Report)
11 Statement Regarding Computation of Per Share Earnings -- Such
computation can be clearly determined from the material contained in
this Report.
12 Statement Regarding Computation of Ratios -- As the Company does not
have any debt securities registered under Section 12 of the
Securities and Exchange Act of 1934, no ratio of earnings to fixed
charges appears in this Report.
13 Medford Bancorp, Inc. 2000 Annual Report, which, except for those
portions expressly incorporated herein by reference, is furnished
only for the information of the SEC and is not deemed to be filed.
21 Subsidiaries of the Company -- The Company has one direct
subsidiary: Medford Savings Bank, a Massachusetts-chartered savings
bank in stock form. Medford Savings Bank has one subsidiary: Medford
Securities Corporation, a Massachusetts corporation.
23 Consent of Wolf & Company, P.C. as independent certified public
accountants
(b) Reports on Form 8-K: None.
58
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Arthur H. Meehan
------------------------------------------
Arthur H. Meehan
Chairman, President, Chief Executive
Officer and Director
Date: March 5, 2001
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 registrant and
in the capacities and on the dates indicated.
/s/ Arthur H. Meehan Chairman, President, Chief Executive Officer
- ------------------------------- and Director March 5, 2001
Arthur H. Meehan
/s/ Phillip W. Wong Executive Vice President,
- ------------------------------- Chief Financial Officer and Treasurer March 5, 2001
Phillip W. Wong
/s/ Edward D. Brickley Director March 5, 2001
- -------------------------------
Edward D. Brickley
Director , 2001
- -------------------------------
David L. Burke
/s/ Deborah A. Burke-Santoro Director March 5, 2001
- -------------------------------
Deborah A. Burke-Santoro
/s/ Paul J. Crowley Director March 5, 2001
- -------------------------------
Paul J. Crowley
Director , 2001
- -------------------------------
Mary L. Doherty
/s/ Edward J. Gaffey Director March 5, 2001
- -------------------------------
Edward J. Gaffey
/s/ Andrew D. Guthrie, Jr. Director March 5, 2001
- -------------------------------
Andrew D. Guthrie, Jr.
/s/ Robert A. Havern, III Director March 5, 2001
- -------------------------------
Robert A. Havern, III
Clerk and Director , 2001
- -------------------------------
Eugene R. Murray
/s/ Francis D. Pizzella Director March 5, 2001
- -------------------------------
Francis D. Pizzella
59