SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
|_| 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
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of Medford Bancorp, Inc.'s common stock, $0.50
par value per share, as of March 31, 2001 was 7,783,664.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets 1
Consolidated Statements of Income 2-3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-18
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 19
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 2 - Changes in Securities and Use of Proceeds 19
ITEM 3 - Defaults Upon Senior Securities 19
ITEM 4 - Submission of Matters to a Vote of Security Holders 19
ITEM 5 - Other Information 19
ITEM 6 - Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
----------- ------------
(In thousands)
ASSETS
Cash and due from banks $ 16,632 $ 16,905
Interest-bearing deposits 31,752 5,353
----------- -----------
Cash and cash equivalents 48,384 22,258
Securities available for sale 533,943 528,690
Securities held to maturity 40,645 42,854
Federal Home Loan Bank stock, at cost 11,920 11,420
Loans 669,929 675,697
Less allowance for loan losses (6,961) (6,950)
----------- -----------
Loans, net 662,968 668,747
----------- -----------
Banking premises and equipment, net 11,220 10,884
Accrued interest receivable 10,740 10,211
Goodwill and deposit-based intangibles 2,320 2,588
Other assets 10,207 12,038
----------- -----------
Total assets $ 1,332,347 $ 1,309,690
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 998,503 $ 975,857
Short-term borrowings 30,061 20,443
Long-term debt 193,400 203,400
Accrued taxes and expenses 3,772 2,278
Other liabilities 2,480 2,747
----------- -----------
Total liabilities 1,228,216 1,204,725
----------- -----------
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 22,328 22,705
Retained earnings 96,943 94,697
Accumulated other comprehensive income 4,040 424
Treasury stock at cost (1,338,932 and 980,048 shares, respectively) (23,741) (17,422)
----------- -----------
Total stockholders' equity 104,131 104,965
----------- -----------
Total liabilities and stockholders' equity $ 1,332,347 $ 1,309,690
=========== ===========
See accompanying notes to consolidated financial statements.
1
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 12,773 $ 11,980
Interest on debt securities 9,168 8,248
Dividends on equity securities 227 193
Interest on short-term investments 221 95
-------- --------
Total interest and dividend income 22,389 20,516
-------- --------
Interest expense:
Interest on deposits 9,539 8,418
Interest on short-term borrowings 390 784
Interest on long-term debt 3,250 2,344
-------- --------
Total interest expense 13,179 11,546
-------- --------
Net interest income 9,210 8,970
Provision for loan losses -- 75
-------- --------
Net interest income, after provision for loan losses 9,210 8,895
-------- --------
Other income:
Customer service fees 538 463
Gain (loss) on sales of securities, net 216 (74)
Pension plan curtailment gain -- 1,195
Miscellaneous 328 302
-------- --------
Total other income 1,082 1,886
-------- --------
Operating expenses:
Salaries and employee benefits 2,904 2,726
Occupancy and equipment 761 669
Data processing 422 371
Professional fees 105 107
Amortization of intangibles 268 277
Advertising and marketing 148 150
Other general and administrative 601 600
-------- --------
Total operating expenses 5,209 4,900
-------- --------
Income before income taxes 5,083 5,881
Provision for income taxes 1,824 2,174
-------- --------
Net income $ 3,259 $ 3,707
======== ========
(continued)
2
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Three Months Ended
March 31,
-------------------------
2001 2000
---------- ----------
(Dollars in thousands, except per share data)
Earnings per share:
Basic $ 0.41 $ 0.45
Diluted $ 0.40 $ 0.43
Cash dividends declared per share $ 0.13 $ 0.12
Weighted averages shares outstanding:
Basic 7,911,732 8,262,640
Diluted 8,108,694 8,562,391
See accompanying notes to consolidated financial statements.
3
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2001 and 2000
Accumulated
Common Stock Additional Treasury Stock Other
------------------- Paid-In Retained --------------------- Comprehensive
Shares Dollars Capital Earnings Shares Dollars Income (Loss) Total
--------- ------- ---------- -------- ---------- -------- ------------- --------
(In thousands) (In thousands)
Balance at December 31, 2000 9,122,596 $4,561 $22,705 $94,697 (980,048) $(17,422) $ 424 $104,965
--------
Comprehensive income:
Net income -- -- -- 3,259 -- -- -- 3,259
Change in net unrealized gain
(loss) on securities
available for sale,
net of reclassification
adjustment and tax effects -- -- -- -- -- -- 3,616 3,616
--------
Total comprehensive income 6,875
--------
Cash dividends declared ($.13 per share) -- -- -- (1,013) -- -- -- (1,013)
Repurchase of treasury stock -- -- -- -- (389,048) (6,852) -- (6,852)
Issuance of common stock under stock
option plan -- -- (377) -- 30,164 533 -- 156
--------- ------ ------- ------- ---------- -------- -------- --------
Balance at March 31, 2001 9,122,596 $4,561 $22,328 $96,943 (1,338,932) $(23,741) $ 4,040 $104,131
========= ====== ======= ======= ========== ======== ======== ========
Balance at December 31, 1999 9,122,596 $4,561 $24,839 $85,153 (739,344) $(14,278) $ (9,405) $ 90,870
--------
Comprehensive income:
Net income -- -- -- 3,707 -- -- -- 3,707
Change in net unrealized gain
(loss) on securities
available for sale,
net of reclassification
adjustment and tax effects -- -- -- -- -- -- (1,800) (1,800)
--------
Total comprehensive income 1,907
--------
Cash dividends declared ($.12 per share) -- -- -- (986) -- -- -- (986)
Repurchase of treasury stock -- -- -- -- (229,000) (3,529) -- (3,529)
Issuance of common stock under stock
option plan -- -- (562) -- 35,148 662 -- 100
--------- ------ ------- ------- ---------- -------- -------- --------
Balance at March 31, 2000 9,122,596 $4,561 $24,277 $87,874 (933,196) $(17,145) $(11,205) $ 88,362
========= ====== ======= ======= ========== ======== ======== ========
See accompanying notes to consolidated financial statements.
(continued)
4
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 3,259 $ 3,707
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses -- 75
Depreciation and amortization, net 506 696
Loss (gain) on sales of investment securities, net (216) 74
Increase in accrued interest receivable and other assets (921) (1,151)
Decrease in accrued taxes and expenses and other liabilities 1,518 5,827
-------- --------
Net cash provided by operating activities 4,146 9,228
-------- --------
Cash flows from investing activities:
Activity in investment securities available for sale:
Maturities 24,500 19,400
Sales 16,701 5,964
Purchases (50,691) (41,961)
Principal amortization of mortgage-backed securities 12,486 6,472
Activity in investment securities held to maturity:
Maturities -- 4,997
Purchases (500) (524)
Loans originated and purchased, net of amortization
and payoffs 5,854 (16,563)
Additions to banking premises and equipment, net (634) (22)
-------- --------
Net cash provided by (used in) investing activities 7,716 (22,237)
-------- --------
(continued)
5
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 22,646 31,907
Increase (decrease) in borrowings with maturities of
three months or less 9,618 (36,518)
Proceeds from long-term debt (10,000) 25,464
Issuance of common stock 156 100
Payments to acquire treasury stock (6,852) (3,529)
Cash dividends paid (1,304) (1,509)
-------- --------
Net cash provided by financing activities 14,264 15,915
-------- --------
Net change in cash and cash equivalents 26,126 2,906
Cash and cash equivalents at beginning of period 22,258 20,910
-------- --------
Cash and cash equivalents at end of period $ 48,384 $ 23,816
======== ========
See accompanying notes to consolidated financial statements.
6
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Note 1. Basis of Presentation
The consolidated interim financial statements of Medford Bancorp, Inc. (the
"Company") and its wholly-owned subsidiary, Medford Savings Bank (the "Bank")
presented herein are intended to be read in conjunction with the consolidated
financial statements presented in the Company's annual report for the year ended
December 31, 2000.
The consolidated financial information for the three months ended March 31, 2001
is unaudited. In the opinion of management, however, the consolidated financial
information reflects all adjustments (consisting solely of normal recurring
accruals) necessary for a fair presentation in accordance with generally
accepted accounting principles. Interim results are not necessarily indicative
of results to be expected for the entire year.
Note 2. Commitments
At March 31, 2001, the Company had outstanding commitments to originate new
residential and commercial real estate mortgage loans totaling approximately
$27.8 million, which are not reflected on the consolidated balance sheet.
Unadvanced funds on equity lines were $22.9 million, unadvanced construction
loan funds were $12.6 million, and unadvanced funds on commercial lines of
credit were $10.9 million at March 31, 2001.
At March 31, 2001, the Company had an outstanding commitment to purchase a
mortgage-backed security for $25.0 million on a "when-issued" basis.
Note 3. Earnings per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed conversion.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
The assumed conversion of outstanding dilutive stock options would increase the
shares outstanding but would not require an adjustment to income as a result of
the conversion.
7
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operation
GENERAL
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
expression 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 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," as found in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000. 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.
Consolidated net income was $3,259,000, or basic earnings per share of $0.41
($0.40 diluted basis), for the three months ended March 31, 2001, compared to
$3,707,000, or basic earnings per share of $0.45 ($0.43 diluted basis), for the
comparable prior year period.
Net interest income was $9,210,000 for the quarter ended March 31, 2001, up
$240,000 or 2.7% from the comparable 2000 period, and represented a net interest
margin of 2.86%, which compared to 2.98% for the comparable 2000 period. The net
gain on sales of assets totaled $216,000 for the first quarter of 2001 compared
to a loss of $74,000 for the same quarter of 2000. During the quarter ended
March 31, 2000 there was a $1.2 million pre-tax curtailment gain from the
termination of the Company's defined benefit pension plan.
Total operating expenses were $5,209,000 for the quarter ended March 31, 2001,
up $309,000 or 6.3% from $4,900,000 during the comparable period in 2000. There
was no provision for loan losses recorded for the three-month period ended March
31, 2001 compared to a provision of $75,000 recorded for the comparable prior
year period.
For the first quarter of 2001, the annualized return on assets was 1.01% and the
annualized return on equity was 12.75%, compared to 1.21% and 16.91%,
respectively, for the comparable period in 2000.
8
Total non-performing assets were $1,081,000 or 0.08% of total assets at March
31, 2001 unchanged from levels recorded at December 31, 2000. The allowance for
loan losses at March 31, 2001 was $6,961,000, representing 1.04% of total loans.
At December 31, 2000, the allowance for loan losses was $6,950,000, representing
1.03% of total loans. The Company had no foreclosed real estate at March 31,
2001 or December 31, 2000.
The Company had total assets of $1.33 billion and capital of $104.1 million at
March 31, 2001, representing a capital to assets ratio of 7.82%, exceeding all
regulatory requirements. When compared to December 31, 2000, securities
increased $3.5 million or .61% to $586.5 million, total gross loans decreased
$5.8 million or 0.86% to $669.9 million, deposits increased $22.6 million or
2.3% to $998.5 million, and borrowings decreased $382,000 or 0.17% to $223.5
million.
A more detailed discussion and analysis of the Company's financial condition and
results of operations follows.
SECURITIES
The amortized cost and fair value of investment securities, excluding restricted
equity securities, at March 31, 2001 and December 31, 2000 with gross unrealized
gains and losses, follows:
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2001 Cost Gains Losses Value
- -------------------------------------------------------------- ------------ ------------- ------------- ------------
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $313,689 $ 6,152 $ (152) $319,689
Mortgage-backed 212,502 1,404 (632) 213,274
-------- -------- -------- --------
Total debt securities 526,191 7,556 (784) 532,963
Marketable equity securities 1,261 16 (297) 980
-------- -------- -------- --------
Total securities available for sale $527,452 $ 7,572 $ (1,081) $533,943
======== ======== ======== ========
Securities Held to Maturity
Debt securities:
Federal agency obligations $ 4,828 $ 288 $ -- $ 5,116
Mortgage-backed 35,817 1,168 -- 36,985
-------- -------- -------- --------
Total securities held to maturity $ 40,645 $ 1,456 $ -- $ 42,101
======== ======== ======== ========
9
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 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 38,045 871 -- 38,916
-------- -------- -------- --------
Total securities held to maturity $ 42,854 $ 1,081 $ -- $ 43,935
======== ======== ======== ========
The amortized cost and fair value of debt securities by contractual maturity at
March 31, 2001 are as follows:
Available for Sale Held to Maturity
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(In thousands)
Within 1 year $ 69,980 $ 70,327 $ -- $ --
After 1 year through 5 years 240,556 246,182 4,828 5,116
After 5 years through 10 years 3,153 3,180 -- --
-------- -------- -------- --------
313,689 319,689 4,828 5,116
Mortgage-backed securities 212,502 213,274 35,817 36,985
-------- -------- -------- --------
$526,191 $532,963 $ 40,645 $ 42,101
======== ======== ======== ========
Securities increased $3.5 million from $583.0 million at December 31, 2000 to
$586.5 million at March 31, 2001. At March 31, 2001, the securities portfolio
classified as "available for sale" reflected a $7.9 million appreciation in
market value as a result of the ongoing changes in market interest rates as
compared to $651,000 at December 31, 2000. In accordance with the Company's
asset-liability strategies, purchases of mortgage-backed securities are
primarily in fifteen year mortgages with weighted-average lives of six years and
other investment securities are generally short-term with maturities of five
years or less.
Sales of debt securities produced a gain of $156,000 during the 2001 first
quarter and a loss of $64,000 for the three months ended March 31, 2000. Sales
of equities produced gains of $60,000 during the three months ended March 31,
2001 compared to losses of $10,000 for the three months ended March 31, 2000.
10
LOANS
A summary of the Company's outstanding loan balances as of the dates indicated
as follows:
March 31, December 31,
2001 2000
--------- ------------
(In thousands)
Mortgage loans on real estate:
Residential 1 - 4 family $ 481,794 $ 487,964
Commercial 128,116 124,201
Construction 17,543 19,913
Second mortgages 667 699
Equity lines of credit 21,463 21,609
--------- ---------
649,583 654,386
Other loans:
Commercial 16,496 17,219
Personal 2,738 2,925
--------- ---------
19,234 20,144
--------- ---------
Net deferred loan origination costs 1,112 1,167
--------- ---------
Total loans 669,929 675,697
Less allowance for loan losses (6,961) (6,950)
--------- ---------
Loans, net $ 662,968 $ 668,747
========= =========
Total gross loans outstanding at March 31, 2001 decreased $5.8 million to $669.9
million when compared to the December 31, 2000 level. As residential mortgage
rates decreased during the first quarter of 2001, refinancing activity increased
contributing to a decline in residential 1-4 family real estate mortgage loans
of $6.2 million. Construction real estate and commercial and industrial loans
also declined by $2.4 million and $0.7 million, respectively, from December 31,
2000 levels. Offsetting these decreases, the Company's commitment to rebuild its
commercial real estate portfolio continues to make gains as they grew $3.9
million during the quarter ended March 31, 2001.
NON-PERFORMING ASSETS
Total non-performing assets were $1.1 million and $1.0 million at March 31, 2001
and December 31, 2000, respectively. There were no foreclosed assets at March
31, 2001 or December 31, 2000. As a percentage of total assets, nonperforming
assets equaled 0.08% at March 31, 2001 and December 31, 2000. Fluctuations in
total nonperforming assets occur from quarter to quarter but remain at
historically low levels. It is the Company's general policy to place loans on a
non-accrual status when such loans become 90 days contractually delinquent or
when the collectibility of principal or interest payments becomes doubtful. When
a loan is placed on non-accrual status, its interest income accrual ceases and
all income previously accrued but unpaid is reversed.
In accordance with SFAS No. 114, a loan is considered impaired when, based on
current information and events, it is probable that the borrower will be unable
to meet principal or interest payments as agreed in the original loan contract.
The principal balance of impaired loans at March 31, 2001 was $1.1 million, all
of which were included in the $1.1 million non-performing assets referenced in
the preceding paragraph.
11
ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses follows:
Three Months Ended
March 31,
------------------------
2001 2000
------- -------
(In thousands)
Balance at beginning of period $ 6,950 $ 6,779
Provision for loan losses -- 75
Recoveries 45 8
Loans charged-off (34) (35)
------- -------
Balance at end of period $ 6,961 $ 6,827
======= =======
The allowance for loan losses is established through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the collectibility of the loan balance is unlikely.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, known inherent risks in the nature and volume of
the loan portfolio, levels of non-performing loans, adverse situations that may
affect the borrowers' ability to repay, trends in delinquencies and charge-offs,
estimated value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective, as it requires estimates
that are susceptible to significant revision, as more information becomes
available. Ultimate losses may vary from current estimates and future additions
to the allowance may be necessary.
The allowance for loan losses was $7.0 million at March 31, 2001, a reserve
coverage of 1.04% of total loans. At December 31, 2000, the allowance for loan
losses was $7.0 million, representing 1.03% of total loans.
DEPOSITS
Total deposits increased $22.6 million from December 31, 2000 to $998.5 million
at March 31, 2001. Demand deposits and NOW accounts increased $4.1 million and
$2.7 million, respectively, from year-end levels. During the first quarter of
2001, savings and money market accounts increased $37.2 million as retail
depositors sought alternative banking relationships, in a consolidating market,
and municipalities shifted from certificates of deposits to money market
accounts for increased liquidity. The shift in municipal deposits contributed to
the $21.4 million decrease in term certificates from $459.0 million at December
31, 2000 to $437.6 million at March 31, 2001.
The following table indicates the balances in various deposit accounts at the
dates indicated.
12
March 31, December 31,
2001 2000
-------- ------------
(In thousands)
Demand $ 67,234 $ 63,122
NOW 67,773 65,106
Savings and money market accounts 425,881 388,655
Term certificates 437,615 458,974
-------- --------
Total deposits $998,503 $975,857
======== ========
BORROWED FUNDS
At March 31, 2001, the Company's long-term borrowings decreased by $10.0 million
to $193.4 million from $203.4 million at December 31, 2000. Short-term
borrowings increased by $9.6 million to $30.0 million from $20.4 million at
year-end as the Company positioned itself in anticipation of lower interest
rates. At March 31, 2001, borrowed funds totaled $223.4 million, decreasing
$382,000 from the $223.8 million reported at December 31, 2000.
STOCKHOLDERS' EQUITY
The Company's capital to assets ratio was 7.82% and 8.01% at March 31, 2001 and
December 31, 2000, respectively.
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and/or the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Holding companies, such as the Company, are not subject to prompt
corrective action provisions. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined) to average assets (as defined). As of December
31, 2000, the Company and the Bank met all capital adequacy requirements to be
categorized as well capitalized. No conditions or events occurred during the
first three months of 2000 that management believes have changed the Company's
or the Bank's category. Therefore, management believes as of March 31, 2001 that
the Company and the Bank met all capital adequacy requirements to continue to be
categorized as well capitalized.
The Company's book value at March 31, 2001 was $13.38 per share, compared with
$12.89 per share at December 31, 2000.
13
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2001 VS QUARTER ENDED MARCH 31, 2000
NET INTEREST INCOME
Interest and dividend income from loans and investments increased $1.9 million
or 9.1% to $22.4 million for the 2001 first quarter when compared to the same
quarter in 2000. For the 2001 first quarter, average earning assets totaled $1.3
billion, an increase of $66.1 million or 5.2% over the comparable average for
2000, with $33.3 million of that increase attributed to short and long-term
investment securities and $32.8 million attributed to loans. The annualized
yields on earning assets were 7.06% and 6.82% for the first quarters in 2001 and
2000, respectively. The yield on investment securities was 6.47% for the first
quarter 2001 as compared 6.07% for the first quarter 2000. Short and long-term
investments contributed $1.080 million of additional interest and dividend
income when comparing the first quarter of 2001 to the first quarter of 2000,
primarily as a result of higher average balances and yield. The increase in the
average balance on loans and an increase in the yield, from 7.50% to 7.60%,
caused interest income on loans to increase by $793,000 from its 2000 first
quarter level.
Total interest expense for the three months ended March 31, 2001 was $13.2
million, reflecting an increase of $1.6 million or 14.1% over the same period in
2000. At March 31, 2001 average interest-bearing liabilities were $1.14 billion,
an increase of $54.2 million or 4.8% over the comparable prior year period. This
period-to-period increase can be attributed to average deposit growth of $39.2
million and average borrowed funds increasing $15.0 million. Overall, interest
expense on deposits increased $1.12 million to $9.5 million as a result of the
increase in average deposits and in rates paid from 3.89% to 4.26% for the
quarters ended March 31, 2000 and 2001, respectively. Interest expense on
borrowed funds increased $512,000 as the average balances increased and the
rates paid on borrowed funds increased 55 basis points to 6.26% in the first
quarter of 2001 compared to the first quarter in 2000. The overall cost of
interest bearing liabilities increased to 4.67% from 4.25% when comparing the
two quarters.
Net interest income increased 2.7% or $240,000 to $9.2 million when comparing
the first quarter in 2001 to the same quarter in 2000 even as the weighted
average rate spread decreased by 18 basis points to 2.39% while the net interest
margin decreased 12 basis points to 2.86%. The increase in net interest income
is primarily due to increased levels of earning assets while the basis point
declines in spread and margin reflect the changing mix of earning assets and
interest bearing liabilities. The yield on earning assets increased 24 basis
points to 7.06% in the first quarter 2001 as compared to the same quarter in
2000, while the cost of interest-bearing liabilities increased by 42 basis
points to 4.67%. This resulted in an interest rate spread and a net interest
margin of 2.39% and 2.86%, respectively, for the three months ended March 31,
2001.
14
MEDFORD BANCORP, INC.
INTEREST RATE SPREAD
Three Months Ended
March 31,
---------------------
2001 2000
------- -------
Weighted average yield earned on:
Short-term investments 5.40% 5.53%
Investment securities 6.47 6.07
Loans 7.60 7.50
------- -------
All earning assets 7.06% 6.82%
------- -------
Weighted average rate paid on:
Deposits 4.26% 3.89%
Borrowed funds 6.26 5.71
------- -------
All interest-bearing liabilities 4.67% 4.25%
------- -------
Weighted average rate spread 2.39% 2.57%
======= =======
Net interest margin 2.86% 2.98%
======= =======
15
PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision is determined by
management on the basis of many factors, including the quality of specific
loans, risk characteristics of the loan portfolio generally, the level of
non-performing loans, current economic conditions, trends in delinquency and
charge-offs, and value of the underlying collateral. Management considers the
allowance for loan losses to be adequate at March 31, 2001, although there can
be no assurance that the allowance is adequate or that additional provisions to
the allowance for loan losses will not be necessary.
The Company recorded no provision for loan losses for the first quarter of 2001
as compared to $75,000 for the same period in 2000. The Company recorded net
loan recoveries of $11,000 for the three months ended March 31, 2001 compared to
net loan charge-offs of $27,000 for the same period in 2000.
OTHER INCOME
Other income, including customer service fees and gains and losses on sales of
assets equaled $1,082,000 for the first quarter of 2001 as compared to
$1,886,000 in the first quarter of 2000, representing a decrease of $804,000 or
42.6%. When comparing the first quarter 2001 with 2000, this decrease is
primarily due to the pre-tax gain of $1.195 million from the curtailment of the
Company's defined benefit pension plan recorded in the first quarter of 2000
partially offset by the net change in securities gains and losses of $290,000.
See related discussions under "Securities" included in "Management's Discussion
and Analysis" in Item 2 of Part 1 of this report.
OPERATING EXPENSES
Operating expenses increased $309,000 or 6.3% to $5,209,000 for the three months
ended March 31, 2001 when compared to the same period in 2000. Salaries and
employee benefits increased $178,000, when comparing the first quarter of 2001
to the first quarter of 2000. Occupancy, equipment and data processing expenses
increased $92,000 and $51,000, respectively, when compared to the first quarter
of 2000 as a result of additional operating expenses associated with the opening
of our Somerville branch site. The Company's annualized expense ratio, which is
the ratio of non-interest expense to average assets, was 1.61% for the three
months ended March 31, 2001, as compared to 1.60% for the prior year comparable
period.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for three months ended March 31, 2001 of 35.9%
is comparable to 37% for the period ended March 31, 2000.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are customer deposits, amortization and
payoff of existing loan principal and sales or maturities of various investment
securities. The Company is a voluntary member of the Federal Home Loan Bank of
Boston ("FHLBB"), and as such may take advantage of the FHLBB's borrowing
programs to enhance liquidity and leverage its favorable capital position. The
Company also may draw on lines of credit at the FHLBB and a large commercial
bank, and it may pledge U.S. Government securities to borrow from certain
investment firms and the Mutual Savings Central Fund of Massachusetts. These
various sources of liquidity are used to fund withdrawals, new loans, and
investments.
Management seeks to promote deposit growth while controlling the Company's cost
of funds. Sales oriented programs to attract new depositors and the
cross-selling of various products to its existing customer base are currently in
place. Management reviews, on an ongoing basis, possible new products, with
particular attention to products and services that will assist retention of the
Company's base of lower-costing deposits.
Maturities and sales of investment securities provide significant liquidity to
the Company. The Company's policy of purchasing shorter-term debt securities
reduces market risk in the bond portfolio while providing significant cash flow.
For the three months ended March 31, 2001 cash flow from maturities and sales of
securities was $41.2 million compared to $30.4 million for the three months
ended March 31, 2000. Principal payments received on mortgage-backed investments
during the three months ended March 31, 2001 and 2000 totaled $12.5 million and
$6.5 million, respectively. During periods of high interest rates, maturities in
the bond portfolio could provide significant liquidity at a lower cost than
borrowings.
Amortization and payoffs of the loan portfolio also contribute significant
liquidity to the Company. Traditionally, the amortization and payoffs have been
reinvested into loans. When payoff rates exceed origination rates, excess
liquidity from loan payoffs is shifted into the investment portfolio.
The Company also uses borrowed funds as a source of liquidity. These borrowings
generally contribute toward funding over-all loan growth as well as purchases of
mortgage-backed securities. The Company's outstanding borrowings from the FHLBB
were $223.4 million at March 31, 2001 and $223.4 million at December 31, 2000.
The Company also utilizes repurchase agreements as a source of funding when
management deems market conditions to be conducive to such activities.
Commitments to originate residential and commercial real estate mortgage loans
at March 31, 2001, excluding unadvanced construction funds of $12.6 million,
were $27.8 million. Management believes that adequate liquidity is available to
fund loan commitments utilizing deposits, loan amortization, maturities of
securities, or borrowings.
Purchases of securities during the three months ended March 31, 2001 totaled
$51.1 million, consisting of debt instruments generally maturing in less than
five years and equities. This compares with purchases of $42.5 million for the
three months ended March 31, 2000.
Residential and commercial real estate mortgage loan originations for the three
months ended March 31, 2001 totaled $20.4 million, compared with $42.5 million
for the three months ended March 31, 2000.
The Company's capital position (total stockholders' equity) was $104.1 million
or 7.82% of total assets at March 31, 2001 compared with $105.0 million or 8.01%
of total assets at December 31, 2000. During the three months ended March 31,
2001 the Company purchased 389,048 shares of its common stock in accordance with
a previously announced stock purchase program. The Company's capital position
exceeds all regulatory requirements
17
ASSET-LIABILITY MANAGEMENT
Through the Company's Asset-Liability Management Committee ("ALCO"), which is
comprised of certain senior and middle management personnel, the Company
monitors the level and general mix of interest rate-sensitive assets and
liabilities. The primary objective of the ALCO is to manage the assets and
liabilities of the Company to provide for optimum profitability and capital at
prudent levels of liquidity and interest rate, credit, and market risk.
It is ALCO's general policy to closely match the maturity or rate sensitivity of
its assets and liabilities. In accordance with this policy, certain strategies
have been implemented to improve the match between interest rate sensitive
assets and liabilities. These strategies include, but are not limited to: daily
monitoring of the Company's changing cash requirements, with particular
concentration on investment in short term securities; originating adjustable and
fixed rate mortgage loans for the Company's own portfolio; managing the cost and
structure of deposits; and generally using matched borrowings to fund specific
purchases of loan packages and large loan origination. Occasionally, management
may choose to deviate from specific matching of maturities of assets and
liabilities, if an attractive opportunity to enhance yields becomes available.
The Company actively manages its liability portfolio in order to effectively
plan and manage growth and maturities of deposits. Management recognizes the
need for strict attention to all deposits. Accordingly, plans for growth of all
deposit types are reviewed regularly. Programs are in place which are designed
to build multiple relationships with customers and to enhance the Company's
ability to retain deposits at controlled rates of interest, and management has
adopted a policy of reviewing interest rates on an ongoing basis on all deposit
accounts in order to control deposit growth and interest costs
In addition to attracting deposits, the Company has selectively borrowed funds
using advances from the FHLBB and, upon occasion, reverse repurchase agreements.
These funds have generally been used to fund loans typically having a matched
repricing date as well as purchases of mortgage-backed securities.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary effect of inflation on the operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all
assets of a financial institution are monetary in nature. As a result, interest
rates have a more significant effect on a financial institution's performance
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services.
18
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the Company's management of market risk exposure, see
"Asset-Liability Management" in Item 2 of Part I of this report and Item 7A of
Part II of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (the "2000 Annual Report").
For quantitative information about market risk, see Item 7A of Part II of the
Company's 2000 Annual Report.
There have been no material changes in the quantitative and qualitative
disclosures about market risk as of March 31, 2001 from those presented in the
Company's 2000 Annual Report.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
There are no material legal proceedings to which the Company
is a party or to which any of its property is subject,
although the Company is a party to ordinary routine litigation
incidental to its business.
ITEM 2 - Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3 - Defaults Upon Senior Securities
Not applicable.
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibit Description
------- -----------
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the three-month period ended March 31, 2001.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDFORD BANCORP, INC.
Date: May 15, 2001
/s/ Arthur H. Meehan
---------------------------------------------------------------
Arthur H. Meehan
Chairman, President and Chief Executive Officer
Date: May 15, 2001
/s/ Phillip W. Wong
---------------------------------------------------------------
Phillip W. Wong
Executive Vice President, Treasurer and Chief Financial Officer
20