the heart of community banking is the branch office and the connection to the customer [Logo] Medford Bancorp, Inc. Annual Report 2000 build long-term relationships with customers by meeting their financial needs throughout life financial highlights - -------------------------------------------------------------------------------- (Dollars in Thousands) 2000 1999 Total Assets $ 1,309,690 $ 1,224,912 Investment Securities 582,964 534,713 Net Loans 668,747 626,751 Deposits 975,857 911,328 Total Borrowings 223,843 215,724 Net Income 13,769 12,651 Stockholders' Equity 104,965 90,870 Shares Outstanding 8,142,548 8,383,252 Per Common Share: Basic Earnings $ 1.69 $ 1.51 Diluted Earnings 1.64 1.44 Book Value 12.89 10.84 Cash Dividends Declared 0.52 0.51 Financial Ratios: Return on Average Assets 1.09% 1.07% Return on Average Equity 15.06 13.52 Stockholders' Equity to Assets 8.01 7.42 Net Interest Rate Spread 2.49 2.63 Net Yield on Average Earning Assets 2.93 3.03 Employees (at year end), Full-Time Equivalent 256 254 Shareholders of Record 1,046 1,126 Annual Meeting The Annual Meeting of Shareholders will be held April 30, 2001 at 10 a.m. at Anthony's of Malden, 105 Canal Street, Malden, Massachusetts. Corporate Information Medford Bancorp, Inc. Medford Bank 29 High Street Medford, MA 02155 781.395.7700 www.medfordbank.com Accessing Information Additional copies of this Annual Report and Form 10-K may be obtained without charge by writing to the Company's Shareholder Relations Department. These reports are also available to the public on request as required by the Securities and Exchange Commission (SEC). These statements have not been reviewed or confirmed for accuracy or relevance by the SEC. On the Cover: Branch Officer Kelly Hannify manages our new Somerville Office. dear shareholders Completing another year of continued strong financial performance, Medford Bancorp, Inc. increased diluted earnings per share by 13.9% in 2000. We reported diluted earnings per share of $1.64 in 2000, compared to diluted earnings per share of $1.44 for the prior year. We achieved an annualized return on assets of 1.09% and an annualized return on equity of 15.06% for 2000. Also notable, even as we completed our third stock repurchase program, increased the regular dividend, and announced our eighth consecutive special dividend, our capital grew to $105 million. This capital growth was achieved through earnings retention and improvement in the valuation of the AFS investment portfolio increasing book value per share by 19% to $12.89 at year-end. Our branch network was focused on deposit generation throughout the year as we gained $64.5 million in deposits in 2000. We were well positioned to capture new business with the fallout from the merger of Fleet and BankBoston and Sovereign Bank entering the marketplace. In particular, we experienced a significantly higher growth rate in our suburban communities of Wilmington, North Reading and Tewksbury. We continue to be dominant in Medford and Malden with ten locations and a number one deposit market share of 48.26% and 41.05% respectively. Also, our municipal banking department continued to grow with a portfolio of $40 million at year-end. As part of our strategic plan, we actively pursue new branch opportunities that will enhance our franchise. In January 2001, we opened our eighteenth branch office in Somerville, Massachusetts. Somerville is an attractive market both in proximity and demographics to our primary market area. We have served Somerville indirectly for many years by providing deposit products, mortgages and commercial loans to the area. The new branch office will allow us to penetrate the consumer and commercial markets much more effectively and provide local service to our existing customers. As previously announced, a new full service branch, our nineteenth, opens at 430 Massachusetts Avenue in Arlington Center this June. It will be situated at the entrance of the new Legacy Apartment complex and allow us to better serve Arlington residents and area businesses. Our branch network remains critical to our success as a leading community bank. We will continue to look for new branch opportunities in locations that we believe have high growth potential. During 2000, we promoted a number of employees to officer level positions rewarding them for their hard work. I congratulate William L. Marshall, III for his promotion to executive vice president and also extend congratulations to Laurence J. Packenham and Elizabeth J. Stodolski for their promotions to senior vice president. Moreover, I would like to thank each employee for their efforts and dedication throughout the year. Their collective contributions help make us one of the leading community banks in Massachusetts. In closing, I thank our Board of Directors for their dedication and guidance and thank you, our shareholders, for your continued support and confidence. Sincerely, /s/ Arthur H. Meehan Arthur H. Meehan Chairman of the Board, President and Chief Executive Officer [The following tables were represented as bar charts in the printed material.] return on equity 1998 11.99% 1999 13.52% 2000 15.06% return on assets 1998 1.09% 1999 1.07% 2000 1.09% regular cash dividends 1998 $0.40 1999 $0.44 2000 $0.48 diluted earnings per share 1996 $1.10 1997 $1.19 1998 $1.31 1999 $1.44 2000 $1.64 lasting value, the year in review Retail Banking Connecting with customers is at the heart of community banking. Although alternative delivery channels are growing in popularity, the branch office remains the single most valuable asset to us as a community bank. In 2000, we made improvements to our branch network. We constructed our new Somerville Office to expand our primary market area, we upgraded and added ATM equipment at some locations for greater customer convenience and we refurbished several customer lobby areas for a more updated appearance. The customer experience in the branch office is also a critical element to our overall success as a community bank. We pay strict attention to the quality of the interaction between the employee and the customer by hiring an independent firm to monitor and rate our service quality. Our branch employees are well trained and consistently receive top ratings. The bank also rates highly as a whole when compared to other financial institutions. For many consumers, time saving conveniences are a must. Banking is just a point and a click away for customers connected to the internet. Medford Bank Online, our new internet banking service, is easily accessed from our web site at: www.medfordbank.com. Using Medford Bank Online, customers can view account activity, make transfers between accounts or even pay bills. We also enhanced our web site with added functionality, expanded content and interactive elements. New features enable users to open accounts, apply for loans, obtain current stock quotes, reorder checks and more. InfoLine, our 24-hour automated banking service, now handles tens of thousands of calls monthly. Our Call Center at 1-888-MEDFORD, provides convenience by allowing customers to open or service accounts or apply for loans without having to visit a branch. We are also seeing marked growth in our ATM and debit card base due to our acquisition of new customers. Transaction volumes have also increased with our participation in the SUM network. Whether it is the high level of service or convenience that brings customers to Medford Bank, we also offer a broad range of products to meet their needs. We license most of our platform staff to sell Savings Bank Life Insurance (SBLI) and have ranked number one in the state for the sale of SBLI annuities for ten consecutive years. We consistently earn Bauer Financial's Five-Star rating and Veribanc's Blue Ribbon status in recognition of financial strength and performance. Overall, Medford Bank is recognized as a leading community bank. [The following table was depicted as a pie chart in the printed material.] Deposit Mix as of December 31, 2000 (in thousands) Term CDs $458,974 47.03% Savings $323,298 33.13% Demand & Official Checks $128,228 13.14% Money Market $65,357 6.70% create value for customers and shareholders alike a financial partner committed to helping local businesses succeed Commercial Lending In 2000, we restructured our commercial lending group. Commercial and industrial, asset based and commercial real estate were aligned under the direction of our Executive Vice President William Marshall, III. With a renewed focus on developing commercial business, much of Mr. Marshall's work during the year has been setting the foundation for future growth. Our Commercial Lending Division is better positioned to serve companies in the small to mid-size business market with annual sales up to $25 million. By concentrating on the local market only, we are able to provide a high-service alternative to the Boston-based banks. In today's market, businesses need a fast, responsive financial resource to stay competitive. We pride ourselves on our personalized service, experience and our innovative approach to financing. Our range of lending solutions helps local businesses expand or operate more efficiently. From lines of credit to the purchase of fixed assets, a seasoned C&I lender works closely with the business owner to structure a financing plan that meets their needs. By having a dedicated asset based lending group, we offer a financing alternative for companies in need of loans between $1 and $6 million. We are able to design a flexible program that leverages the equity in a company's balance sheet to solve cash flow problems. Companies that are in need of ongoing working capital lines of credit, seasonal inventory support or financing for acquisitions, benefit with an asset based lending solution. We maintained our high credit quality standards and added $12 million to our commercial real estate portfolio in 2000. At year-end, the commercial real estate portfolio totaled $124 million, excluding construction mortgages. Our commercial real estate lenders handle all types of properties including apartment complexes, office buildings, retail and mixed-use property, warehouse and industrial facilities, residential subdivisions and other new construction. The potential to generate new business through our commercial lending division remains strong. Our commercial lenders are dedicated to helping local businesses succeed and are very responsive to the business owner or manager. This approach, combined with resources of a $1.3 billion bank, enables us to serve the local market very effectively. [The following table was depicted as a pie chart in the printed material.] Loan Mix as of December 31, 2000 (in thousands) Residential Mortgages $489,106 72.39% Commercial Mortgages $124,201 18.38% Second Mortgages & Equity Lines $22,311 3.30% Construction Mortgages $19,913 2.95% Commercial Loans $17,241 2.55% Consumer Loans $2,925 0.43% [MAP] Tewksbury North Reading Wilmington Burlington Medford Malden Arlington Belmont Somerville Waltham Boston Residential Lending Our Residential Lending Division is a major asset generator for the bank with $489 million in loans comprising 72% of the total loan portfolio. During 2000, more than $90 million in new loans were originated, the majority of which were for new purchases. With inventory relatively low in the real estate market, home prices reached an all-time-high in many communities, frustrating many home shoppers. Medford Bank was able to make home buying easier for most families. We dedicated a total of $7.5 million to first time home buyer programs, giving the pride of home ownership to a number of local families. Additionally, we helped other families with our Pre-Approval Program. Our Pre-Approval Program gives home buyers tremendous buying power and a stronger position when negotiating the purchase of a new home. In a competitive market, Pre-Approval is an essential tool enabling the home buyer to act fast. We also held a series of home buying seminars in 2000 for the general public. These informative sessions included expert advice from real estate attorneys, home inspectors and other professionals. Medford Bank is a leading lender in several communities. We hold the number two market share position in both Medford and Malden, and rank fourth in our primary market overall. Our entire lending area extends beyond our primary market, throughout Eastern Massachusetts with each of our mortgage originators assigned to key segments of this territory. Much of the success we have experienced in residential mortgage lending is a result of the high level of personal service that our originators provide. Our lenders are available to meet with home buyers at the time and place most convenient for them. This one-on-one interaction is just one of the ways we stay in touch with the needs of our mortgage customers. For consumers who prefer to search for a mortgage online, we have greatly expanded the home mortgage section on our web site. In addition to current rates, mortgage shoppers can review program options and details, calculate mortgage payments, determine the maximum loan amount they qualify for or even apply for their mortgage online. By offering versatile mortgage programs, competitive interest rates, personalized service and the convenience of online information and applications, home buyers have many choices at Medford Bank. We are dedicated to making home ownership possible. Arlington Route 60 & Mystic Valley Parkway 781.393.6355 Arlington Center 430 Massachusetts Ave. (opening June 2001) Belmont 4 Hill Road, Corner of Brighton St. 781.393.6320 Burlington 258 Cambridge St. 781.272.5700 Malden Malden Center 399 Main St. 781.393.6386 Broadway 44 Broadway 781.393.6334 Maplewood 28 Lebanon St. 781.393.6329 Oak Grove 876 Main St. 781.393.6326 West Side 443 Charles St. 781.393.6337 Medford Main Office 29 High St. 781.395.7700 Loan Center 5 High St. 781.395.7700 Haines Square 257 Spring St. 781.393.6380 South Medford 448 Main St. 781.393.6340 Wellington 499 Riverside Ave. 781.393.6350 West Medford 501 High St. 781.393.6344 North Reading 80 Main St. 978.664.5581 Somerville 328 Broadway 617.666.4521 Tewksbury 295 Main St. 978.851.0841 Waltham 695 Main St. 781.647.4848 Wilmington 240 Main St. 978.658.9134 a rich heritage [Logo] and a leading community bank today Directors Arthur H. Meehan* Chairman of the Board, President and Chief Executive Officer, Medford Bank Edward D. Brickley Manager of Corporate International Accounting at Polaroid Corporation Cambridge, MA (Retired) David L. Burke President and Treasurer, Boston Steel & Manufacturing Co. Malden, MA Deborah A. Burke-Santoro Marketing and Communications Director, Office of the Mayor, City of Malden Paul J. Crowley* President, CSC Consulting Group Cambridge, MA (Retired) Mary Lou Doherty Assistant Principal, Medford School System (Retired) Edward J. Gaffey* President, Country Way Trust Belmont, MA Andrew D. Guthrie, Jr., M.D. Physician, President of Mistick Pediatrics Associates (Retired) Robert A. Havern, III Attorney, Arlington, MA Member of State Legislature of Commonwealth of Massachusetts Eugene R. Murray* Underwriting Manager of the Boston Office of Cigna Special Risk Facility (Retired) Francis D. Pizzella* Attorney and President of The Savings Bank Life Insurance Company of Massachusetts, President of The Savings Bank Employees Retirement Association (Retired) Officers of MedfordBank Arthur H. Meehan** Chairman, President and Chief Executive Officer Vincent Gargano Senior Vice President, Strategic Planning and Risk Management Paula M. McNabb Vice President, CRA/Compliance Officer Administration William F. Rivers Senior Vice President David L. Korp Senior Vice President, Operations Officer Joan P. Cronholm Vice President, Loan Operations Officer Jane M. Quercia Vice President, Director of Human Resources Maria A. Leo Assistant Vice President, EFT Services Officer Charles E. Samour Assistant Vice President, Security Officer Joanne Teixeira Assistant Vice President, Deposit Operations Officer Finance Phillip W. Wong** Executive Vice President, Chief Financial Officer Mary E. Auterio Vice President, Controller Jane E. Cybulski Vice President, Investment/ALCO Officer Martin J. Heneghan Vice President, Senior Audit Officer Christine Panno-West Assistant Vice President, Assistant Controller Lending William L. Marshall, III Executive Vice President, Commercial Lending Eric B. Loth Senior Vice President Laurence J. Packenham Senior Vice President, Commercial Real Estate Donald L. Cullen Vice President, Collections Officer Mary Ann Devlin Vice President, Commercial Real Estate Kim S. Foster Vice President, Commercial Loan Officer Joanne M. Franco Vice President, Senior Credit Officer Richard P. Lane Vice President, Commercial Loan Officer Michael D. MacDonald Vice President, Commercial Loan Officer Deborah Sousa Vice President, Residential Lending Anne M. Barry Assistant Vice President, Mortgage Representative Harold L. Goldsmith Assistant Vice President, Mortgage Representative Charles M. Byron Mortgage Loan Officer Joanne M. Fitzpatrick Mortgage Officer Cathryn L. Kent Credit Officer Deborah M. Ofcharsky Mortgage Officer Retail George A. Bargamian Executive Vice President Elizabeth J. Stodolski Senior Vice President, Marketing Director Anthony R. Visco Senior Vice President, Branch Administrator Theresa R. Barile Vice President, Pension Officer Anna Beaudoin Vice President, Retail Systems Administrator Kathleen M. Beasley Assistant Vice President, Regional Branch Officer Cheryl A. Cannon Assistant Vice President, Retail Training and Support Teresa Cunha Assistant Vice President, Call Center Officer Judith A. Gilligan Assistant Vice President, Regional Branch Officer Lea Hamel Assistant Vice President, Regional Branch Officer Dana Mann Assistant Vice President, Municipal Officer Christine Santapaola Assistant Vice President, Regional Branch Officer Andree Brulhart Branch Officer Kelly A. Hannify Branch Officer Catherine Masiello Branch Officer Kathleen Pasquale Branch Officer Barbara Purcell Branch Officer Zoe RajBhandary Marketing Officer Stephanie M. Tiernan Branch Officer Deborah R. White Branch Officer [LOGO] * Member of Executive Committee ** Officer of Medford Bancorp, Inc. people you know. experience you trust. [LOGO] Medford Bancorp, Inc. 781.395.7700 www.medfordbank.com Shareholder Information The Company's common stock trades on the Nasdaq Stock Market under the symbol MDBK. The stock is listed under various abbreviations in the Wall Street Journal and other newspapers. There were 1,046 shareholders of record as of December 31, 2000. Quarterly Stock Performance The following tabulation shows the range of price quotations per share as reported by Nasdaq for the periods indicated: (adjusted for stock split). 2000 High Low - ------------------------------------------ First Quarter $ 16.50 $ 12.13 Second Quarter $ 15.63 $ 13.75 Third Quarter $ 16.13 $ 13.88 Fourth Quarter $ 15.63 $ 13.38 Dividend Reinvestment And Stock Purchase Plan Stockholders may obtain a detailed brochure of the plan by writing to the Company's Shareholder Relations Department. Transfer Agent Contact our stock transfer agent directly for assistance regarding: change of address; transfer of stock certificates; replacement of lost, stolen, or destroyed certificates or dividend checks; elimination of duplicate mailing. Boston EquiServe P.O. Box 43011 Providence, RI 02940-3011 800.426.5523 Legal Counsel Goodwin Procter LLP Exchange Place Boston, MA 02109 617.570.1000 Independent Certified Public Accountant Wolf & Company, P.C. One International Place Boston, MA 02110 617.439.9700