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, 2001
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 4, 2002, on the Nasdaq
National Market was $172,207,456. 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 4, 2002, there were 7,755,300 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
29, 2002 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 within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company 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 described herein, 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 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 nineteen 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
Medford Bancorp, Inc.
In addition to the generally applicable state and federal laws governing
businesses and employers, we are further regulated by federal and state laws and
regulations applicable to financial institutions and their parent companies.
Virtually all aspects of our operations are subject to specific requirements or
restrictions and general regulatory oversight. State and federal banking laws
have as their principal objective either the maintenance of the safety and
soundness of financial institutions and the federal deposit insurance system or
the protection of consumers or classes of consumers, rather than the specific
protection of stockholders of a bank or its parent company. To the extent the
following material describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statute or regulation.
General. The Company is a Massachusetts corporation and a bank holding company
(a "BHC") subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the "FRB") pursuant to the Bank Holding Company Act of
1956, as amended (the "BHCA"), 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. The FRB has the
authority to issue orders to BHCs to cease and desist from unsound banking
practices and violations of conditions imposed by, or violations of agreements
with, the FRB. The FRB is also empowered to assess civil money penalties against
companies or individuals who violate the BHCA or orders or regulations
thereunder, to order termination of non-banking activities of non-banking
subsidiaries of BHCs, and to order termination of ownership and control of a
non-banking subsidiary by a BHC.
1
BHCA - Activities and Other Limitations. The BHCA prohibits a BHC from acquiring
substantially all the assets of a bank or acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any bank, or increasing such
ownership or control of any bank, or merging or consolidating with any BHC
without prior approval of the FRB. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") generally authorizes
BHCs to acquire banks located in any state, possibly subject to certain
state-imposed age and deposit concentration limits, and also generally
authorizes interstate mergers and to a lesser extent, interstate branching.
Unless a BHC becomes a "financial holding company" ("FHC") under the
Gramm-Leach-Bliley Act ("GLBA") (as discussed below), the BHCA also prohibits a
BHC from acquiring a direct or indirect interest in or control of more than 5%
of the voting shares of any company which is not a bank or BHC and from engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiary banks, except that it
may engage and may own shares of companies engaged in certain activities the FRB
determined to be so closely related to banking or managing and controlling banks
as to be a proper incident thereto.
The GLBA established a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the BHCA framework to permit BHCs
that qualify and elect to be treated as FHCs to engage in a range of financial
activities broader than would be permissible for traditional BHCs, such as the
Company, that have not elected to be treated as FHCs. "Financial activities" is
broadly defined to include not only banking, insurance and securities
activities, but also merchant banking and additional activities that the FRB, 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.
Capital Requirements. The FRB has adopted capital adequacy guidelines pursuant
to which it assesses the adequacy of capital in examining and supervising a BHC
and in analyzing applications to it under the BHCA. These capital adequacy
guidelines generally require BHCs to maintain total capital equal to 8% of total
risk-adjusted assets and off-balance sheet items (the "Total Risk-Based Capital
Ratio"), with at least one-half of that amount consisting of Tier I or core
capital and the remaining amount consisting of Tier II or supplementary capital.
In addition to the risk-based capital requirements, the FRB requires BHCs to
maintain a minimum leverage capital ratio of Tier I capital (defined by
reference to the risk-based capital guidelines) to total average assets (the
'Leverage Ratio') of 3.0%. Total average assets for this purpose does not
include goodwill and any other intangible assets and investments that the FRB
determines should be deducted from Tier I capital.
The Company currently is in compliance with both the Risk Based Capital Ratio
and the Leverage Ratio requirements. At December 31, 2001, the Company had a
Tier I Risk Based Capital Ratio equal to 12.9% and a Total Risk Based Capital
Ratio equal to 13.8% and a Leverage Ratio equal to 7.4%. U.S. bank regulatory
authorities and 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
appropriate capital guidelines applicable to U.S. banking institutions.
Limitations on Acquisitions of Common Stock. The Federal Change in Bank Control
Act prohibits a person or group of persons from acquiring "control" of a BHC
unless the FRB has been given at least 60 days to review the proposal. Under a
rebuttable presumption established by the FRB, the acquisition of 10% or more of
a class of voting stock of a BHC, such as the Company, with a class of
securities registered under Section 12 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, any company, as that term is broadly defined in the statute, would
be required to obtain the approval of the FRB under the BHCA before acquiring
25% (5% in the case of an acquirer that is a BHC) or more, or such lesser
percentage of our outstanding common stock as the FRB deems to constitute
control over the Company.
Massachusetts Law. The Company is deemed a bank holding company for purposes of
Massachusetts law due to the manner in which it acquired the Bank. Accordingly,
it is registered with the Commissioner and is obligated to make reports to the
Commissioner. Further, as a Massachusetts bank holding company, the Company may
not acquire all or substantially all of the stock or assets of a banking
institution or merge or consolidate with another bank holding company without
the prior consent of the Massachusetts Board of Bank Incorporation (the "BBI").
As a general matter, however, the Commissioner does not rule upon or regulate
the activities in which bank holding companies or their nonbank subsidiaries
engage.
2
Medford Savings Bank
As a Massachusetts-chartered savings bank, the Bank is subject to comprehensive
regulation and examination by the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank is also subject to certain requirements established by the FRB
and is a member of the Federal Home Loan Bank of Boston (the "FHLBB"). The
federal and state laws and regulations which are applicable to banks regulate
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans.
FDIC Insurance Premiums. The Bank pays deposit insurance premiums to the FDIC
based on an assessment rate established by the FDIC for Bank Insurance
Fund-member institutions. The FDIC has established a risk-based assessment
system under which institutions are classified, and generally pay premiums
according to their perceived risk to the federal deposit insurance funds. The
Federal Deposit Insurance Act ("FDIA") does not require the FDIC to charge all
banks deposit insurance premiums when the ratio of deposit insurance reserves to
insured deposits is maintained above specified levels. However, as a result of
general economic conditions and recent bank failures, it is possible that the
ratio of deposit insurance reserves to insured deposits could fall below the
minimum ratio that FDIA requires, which would result in the FDIC setting deposit
insurance assessment rates sufficient to increase deposit insurance reserves to
the required ratio. A resumption of assessments of deposit insurance premiums
charged to well capitalized institutions, such as the Bank, could have an effect
on our net earnings.
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. These requirements are substantially similar to
those adopted by the FRB regarding BHCs, as described above.
Transactions with Affiliates. The FDIA restricts the range of permissible
transactions between a bank and an affiliated company. The Bank is subject to
certain restrictions on loans to the Company, on investment in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
the Company's behalf. The Bank also is subject to certain restrictions on most
types of transactions with the Company, requiring that the terms of such
transactions be substantially equivalent to terms to similar transactions with
non-affiliates. The GLBA requires the FRB to promulgate rules addressing credit
exposure relating to derivatives transactions between banks and their
affiliates. The FRB has adopted interim rules addressing such transactions, and
it has solicited comments on the types of restrictions that should apply to
derivatives transactions between banks and their affiliates.
Activities and Investments of Insured State-Chartered Banks. Section 24 of the
FDIA generally limits the activities as principal and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. In 1999, the FDIC substantially revised its regulations implementing
Section 24 to ease the ability of state banks to engage in certain activities
not permissible for national banks, and to expedite FDIC review of bank
applications and notice to engage in such activities.
Further, the GLBA 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 an FHC.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires the
FDIC to evaluate the Bank's performance in helping to meet the credit needs of
the community. Massachusetts has also enacted a similar statute that requires
the Commissioner to evaluate the Bank's performance in helping to meet community
credit needs. As a part of the CRA program, the Bank is subject to periodic
examinations by the Commissioner, and maintains comprehensive records of its CRA
activities for this purpose. Management believes the Bank is currently in
compliance with all CRA requirements.
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.
3
Customer Information Security. The FRB, the FDIC and other bank regulatory
agencies have adopted final guidelines (the "Guidelines") for safeguarding
confidential customer information. The Guidelines require each financial
institution, under the supervision and ongoing oversight of its Board of
Directors, to create a comprehensive written information security program
designed to ensure the security and confidentiality of customer information,
protect against any anticipated threats or hazards to the security or integrity
of such information; and protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any
customer.
Privacy. The GLBA requires financial institutions to implement policies and
procedures regarding the disclosure of nonpublic personal information about
consumers to nonaffiliated third parties. In general, the statute requires us to
explain to consumers our policies and procedures regarding the disclosure of
such nonpublic personal information, and, except as otherwise required by law,
we are prohibited from disclosing such information except as provided in our
policies and procedures.
USA Patriot Act. The USA Patriot Act of 2001 (the "Patriot Act"), designed to
deny terrorists and others the ability to obtain anonymous access to the United
States financial system, has significant implications for depository
institutions, brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act mandates or will require financial institutions to
implement additional policies and procedures with respect to the following
matters, among others: money laundering; suspicious activities and currency
transaction reporting; and currency crimes.
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.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Interstate Act , 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 the
Interstate Act. The laws permit, subject to certain deposit and other
limitations, interstate acquisitions, mergers and branching on a reciprocal
basis.
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.
4
Other Securities Laws Issues. The GLBA also amended the federal securities laws
to eliminate the blanket exceptions that banks traditionally have had from the
definition of broker dealer and investment adviser. With respect to broker
dealer registration, the SEC has extended the date by which banks must comply
with new broker-dealer registration requirements until May 12, 2002. Banks not
falling within the specific exemptions provided by the new law may have to
register with the SEC as a broker-dealer and become subject to SEC jurisdiction.
With respect to investment adviser registration, the GLBA requires a bank that
acts as investment adviser to a registered investment company to register as an
investment adviser or to conduct such advisory activities through a separately
identifiable department or division of the bank so registered. The Bank will not
be required to register as a broker dealer or investment adviser as a result of
these changes.
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
$1.4 million in SBLI annuities in 2001, 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 General Motors
Acceptance Corporation (GMAC), 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.
Moreover, under the GLBA, 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 GLBA
may significantly change the competitive environment in which the Company and
its subsidiaries conduct business. See "Supervision and Regulation
- --BHCA-Activities and Other Limitations" 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.)
5
Defaults in the Repayment of Loans by Customers May Negatively Impact the Bank's
Business
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 market conditions 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 by impacting the ability of
the Bank's borrowers to repay their loans and affecting the value of the
collateral securing these loans.
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; as a
result, these competitors may have a marketplace advantage because they are able
to maintain numerous banking locations, mount extensive promotional campaigns
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.
Employees
As of December 31, 2001, the Bank employed 223 full-time staff, including 50
officers, and 114 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.
ITEM 2. PROPERTIES
All of the Bank's branches located in Medford (except for the West Medford
branch), the branches located in Arlington (except for Arlington Center), 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. In the opinion of
management, final disposition of these proceedings will not have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded 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
------ ------ ------------------
2001 1st quarter $19.00 $15.13 $0.13
2nd quarter 20.45 17.30 0.13
3rd quarter 23.22 19.30 0.13
4th quarter 22.05 19.13 0.15
2000 1st quarter $16.50 $12.13 $0.12
2nd quarter 15.63 13.75 0.12
3rd quarter 16.13 13.88 0.12
4th quarter 15.63 13.38 0.16
At March 4, 2002, according to the Company's transfer agent, the Company had
approximately 1,007 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. The Federal Deposit
Insurance Corporation Improvement Act of 1991 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.
7
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At December 31,
------------------------------------------------------------------
(Dollars in thousands, except per
share data) 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Total assets $1,412,771 $1,309,690 $1,224,912 $1,151,188 $1,135,572
Securities (includes FHLB stock) 657,205 582,964 534,713 511,534 512,304
Loans, net 675,183 668,747 626,751 580,665 570,844
Deposits 1,095,947 975,857 911,328 871,702 821,706
Borrowed funds 200,281 223,843 215,724 170,116 205,779
Stockholders' equity 111,565 104,965 90,870 102,267 101,510
Book value per share 14.43 12.89 10.84 11.74 11.18
Stockholders' equity to total assets 7.90% 8.01% 7.42% 8.88% 8.94%
Number of offices 19 18 17 17 16
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
STATEMENT OF INCOME DATA
Interest and dividend income $88,889 $86,050 $77,849 $76,802 $75,332
Interest expense 51,073 49,914 43,109 42,613 41,349
------- ------- ------- ------- -------
Net interest income 37,816 36,136 34,740 34,189 33,983
Provision for loan losses 150 175 -- 75 125
------- ------- ------- ------- -------
Net interest income, after provision for loan losses 37,666 35,961 34,740 34,114 33,858
------- ------- ------- ------- -------
Other income:
Gain (loss) on sales of securities, net 2,121 (1,031) 1,522 1,670 835
All other income 3,417 7,781 2,680 3,088 3,007
------- ------- ------- ------- -------
Total other income 5,538 6,750 4,202 4,758 3,842
------- ------- ------- ------- -------
Operating expenses 21,683 19,991 19,301 19,074 19,054
------- ------- ------- ------- -------
Income before income taxes 21,521 22,720 19,641 19,798 18,646
Provision for income taxes 7,743 8,951 6,990 7,546 7,256
------- ------- ------- ------- -------
Net income $13,778 $13,769 $12,651 $12,252 $11,390
======= ======= ======= ======= =======
Basic earnings per share $ 1.76 $ 1.69 $ 1.51 $ 1.38 $ 1.25
======= ======= ======= ======= =======
Diluted earnings per share $ 1.72 $ 1.64 $ 1.44 $ 1.31 $ 1.19
======= ======= ======= ======= =======
Cash dividends declared per share $ 0.54 $ 0.52 $ 0.51 $ 0.50 $ 0.45
======= ======= ======= ======= =======
SELECTED RATIOS
Return on average assets 1.02% 1.09% 1.07% 1.09% 1.05%
Return on average equity 12.81 15.06 13.52 11.99 11.81
Average equity to average assets 7.92 7.23 7.88 9.07 8.91
Weighted average rate spread 2.44 2.49 2.63 2.72 2.84
Net yield on average earning assets 2.88 2.93 3.03 3.16 3.26
Dividend payout ratio - basic earnings per share 30.68 30.77 33.77 36.23 36.00
- -----------------------------------------------------------------------------------------------------------
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussions set forth below, elsewhere herein, in our press releases and in
oral statements we make by or with the approval of our authorized executives
contain certain statements that may be considered forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company 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 exercise
caution in interpreting and relying 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 of the Company to be materially different
from the anticipated future results 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, including changes
that adversely affect borrowers ability to service and repay our loans; 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, which readers should
carefully review.
These forward-looking statements reflect our good faith beliefs based on
information, plans and estimates at the date of this report, and we expressly
disclaim any duty 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, 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.
Despite a challenging economic environment in 2001, for the ninth consecutive
year the Company continued to improve its earnings per share performance.
Earnings per share for 2001 were $1.76 ($1.72 on a diluted basis), compared with
$1.69 ($1.64 on a diluted basis) for 2000, an increase of $0.08 on a diluted
basis or 4.9%. Due to the gain recorded from the curtailment and settlement of
its defined benefit plan in year 2000, the Company's year-to-year earnings
remained essentially level with $13,778,000 in 2001 as compared to $13,769,000
in 2000.
At December 31, 2001, total assets were $1.4 billion, an increase of $103.1
million or 7.9% from the prior year. Growth in the funding side of the balance
sheet was led by strong growth in total deposits of 12.3%, with core deposits
growing by 15.7%. Stockholders' equity increased 6.3% to $111.6 million at
December 31, 2001, representing a book value of $14.43 per share, compared to
$12.89 per share at December 31, 2000. Stockholders' equity to total assets was
7.90% at December 31, 2001, exceeding all regulatory requirements. The growth in
deposits and stockholders' equity allowed the Company to modestly reduce its
total borrowings by $23.6 million to a level of $200.3 million at December 31,
2001. The sources of funds were principally utilized by the Company to grow its
interest-bearing deposits and investment portfolio in 2001, which increased by
$97.2 million, or 16.5%. As the Company exercised restraint in growing its loan
portfolio during a weakening economy, gross loans increased by a more modest
level of $6.6 million or 1.0%.
9
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.
Securities, including FHLB stock, were higher than 2000 year-end levels, at
$657.2 million at December 31, 2001 versus $583.0 million at December 31, 2000.
During 2001, as rates declined and the economy weakened, the Company modified
the mix of the investment portfolio to generate higher levels of interest income
and to reduce credit risk. The strategy included the replacement of corporate
bonds as they matured or were sold with U.S. Government, federal agency, and
mortgage-backed securities. At December 31, 2000, U.S. Government, federal
agency and mortgage-backed securities equaled 44.1% of total securities while
corporate bonds equaled 53.6%. At December 31, 2001, U.S. Government, federal
agency and mortgage-backed securities increased to 58.6% of total securities
while corporate bond exposure was reduced to 39.4% from 53.6%. Investments in
corporate bonds consist primarily of "A" or better rated or bonds with
maturities of three years or less. Purchases of mortgage-backed securities
throughout 2000 and 2001 consist primarily of fixed-rate, low-coupon,
government-backed securities that have limited extension or contraction risk.
Purchases of mortgage-backed securities give consideration 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, 2001,
the pre-tax net unrealized gain on investments classified as "available for
sale" was $9.1 million as compared to the net unrealized gain of $651,000 as of
December 31, 2000.
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 securities
portfolio at carrying value:
At December 31,
------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Debt securities:
U.S. Government and federal agency $ 78,452 $ 7,806 $ 62,127
Mortgage-backed securities 306,995 249,452 214,456
Corporate bonds 258,958 312,315 246,767
Marketable equity securities 880 1,971 1,680
-------- -------- --------
Total marketable securities 645,285 571,544 525,030
Federal Home Loan Bank stock 11,920 11,420 9,683
-------- -------- --------
Total securities $657,205 $582,964 $534,713
======== ======== ========
10
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, 2001
--------------------------------------------------------------------
Weighted Weighted Weighted
Within Average Over 1 Year Average Over Average
1 Year Yield to 5 Years Yield 5 Years Yield
--------- --------- ---------- --------- --------- ---------
(Dollars in thousands)
U.S. Government and
federal agency $ -- --% $ 64,842 4.18% $13,550 5.27%
Corporate bonds 76,891 6.30 174,640 6.31 -- --
------- -------- -------
$76,891 6.30% $239,482 5.73% $13,550 5.27%
======= ======== =======
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. As mortgage interest rates declined in 2001 to their lowest
level in years, the Company has, from time to time, also elected to originate
15-year fixed-rate residential loan products for correspondent banks.
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.
Gross loans increased to $682.3 million at December 31, 2001 compared to $675.7
million at December 31, 2000. The modest increase in loans was primarily the
result of growth in commercial real estate and equity lines of credit which
increased $6.0 million and $3.6 million, respectively. The growth in such
categories was partially offset by the contraction in the other loan segments.
Residential real estate loans declined as external refinances and the
origination of 15 and 30 year fixed rate loans for correspondents offset record
volume generation in 2001. The Company expects continued intense competition for
loans within its geographic region. Within this framework, management continues
its marketing efforts for loans.
11
The following table shows the composition of the loan portfolio by type of loan:
At December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)
Commercial loans $ 17,954 $ 17,219 $ 18,124 $ 17,358 $ 14,941
Loans secured by real estate:
Residential 487,331 487,964 465,618 421,685 389,863
Construction loans, net of unadvanced
funds 17,228 19,913 13,504 13,073 11,278
Commercial 130,207 124,201 112,050 109,561 124,094
Second mortgages 444 699 774 1,111 1,539
Equity lines of credit 25,199 21,609 19,394 20,606 22,146
Consumer loans 2,652 2,925 2,912 3,145(1) 12,931
-------- -------- -------- -------- --------
681,015 674,530 632,376 586,539 576,792
Net deferred loan origination costs 1,248 1,167 1,154 1,002 785
Allowance for loan losses (7,080) (6,950) (6,779) (6,876) (6,733)
-------- -------- -------- -------- --------
Loans, net $675,183 $668,747 $626,751 $580,665 $570,844
======== ======== ======== ======== ========
(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, 2001:
Maturities
------------------------------------------------
1 Year Over 1 Year Over
or Less to 5 Years 5 Years Total
--------- ----------- --------- --------
(In thousands)
Commercial loans $13,760 $3,263 $ 931 $17,954
Construction loans 7,217 1,144 8,867 17,228
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 $2,389 $ -- $2,389
Adjustable rates 874 931 1,805
------ ---- ------
$3,263 $931 $4,194
====== ==== ======
12
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,
--------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(In thousands)
Impaired loans accounted for on a non-accrual basis $975 $1,047 $2,482 $1,766 $1,726
Other loans accounted for on a non-accrual basis 1 -- 18 47 --
Foreclosed real estate -- -- 119 48
---- ------ ------ ------ ------
$976 $1,047 $2,500 $1,932 $1,774
==== ====== ====== ====== ======
For non-accrual loans at December 31, 2001, gross interest income of $289,000
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 $260,000.
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, and
current economic conditions. 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.
13
An analysis of the allowance for loan losses is presented in the following
table:
Years Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)
Allowance for loan losses, beginning of year $6,950 $6,779 $6,876 $6,733 $7,231
------ ------ ------ ------ ------
Loans charged-off --- Residential real estate (13) (20) (2) (24) (38)
--- Commercial real estate -- (5) (16) -- (720)
--- Consumer (65) (28) (25) (33) (42)
--- Commercial -- (6) (121) (108) (31)
Recoveries --- Residential real estate 38 36 11 20 26
--- Commercial real estate 14 7 24 204 147
--- Consumer 5 10 19 9 25
--- Commercial 1 2 13 -- 10
------ ------ ------ ------ ------
Net recoveries (charge-offs) (20) (4) (97) 68 (623)
------ ------ ------ ------ ------
Provision for loan losses, charged to operations 150 175 -- 75 125
------ ------ ------ ------ ------
Allowance for loan losses, end of year $7,080 $6,950 $6,779 $6,876 $6,733
====== ====== ====== ====== ======
Ratio of net charge-offs (recoveries) to average loans 0.00% 0.00% 0.02% (0.01)% 0.11%
====== ====== ====== ====== ======
An analysis of the allocation of the allowance for loan losses is presented in
the following table:
At December 31,
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Residential real estate $2,133 75.32% $2,002 75.66% $1,858 76.86% $1,683 75.64% $1,067 71.73%
Commercial real estate 4,222 19.12 4,179 18.41 4,121 17.69 4,433 18.65 5,220 21.49
Construction 360 2.53 398 2.95 270 2.13 261 2.22 169 1.95
Consumer 38 0.39 44 0.43 41 0.46 42 0.54 48 2.24
Commercial 327 2.64 327 2.55 489 2.86 457 2.95 229 2.59
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $7,080 100.00% $6,950 100.00% $6,779 100.00% $6,876 100.00% $6,733 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
While management considers the allowance for loan losses to be adequate at
December 31, 2001, there is no assurance that additional charge-offs and
provisions will not be necessary in 2002. The unallocated allowance component
has been allocated principally to commercial real estate for purposes of the
above presentation. The provision for loan losses during 2002 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 2001.
14
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 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 $120.1 million, or 12.3%, to $1.1 billion at December
31, 2001 from $975.9 million at December 31, 2000. With the equities market in a
second year of decline and a lower interest rate environment, the Bank's Combo
savings account provided a safe haven and a competitive rate. Combo savings
increased $113.5 million or 87.9% from $129.1 million at December 31, 2000 to a
level of $242.5 million at December 31, 2001. As retail customers continue to
seek alternative banking relationships in a consolidating market, demand
deposits increased $11.5 million or 18.2%, when compared to the prior year. The
growth in money market deposits and decline in term certificates of $100,000 or
more can be explained primarily by the shift in the mix of municipal accounts
even as municipal deposit balances remained relatively unchanged year-over-year.
The decrease in other term certificates is a reflection of customers shifting to
the Combo savings account seeking liquidity and higher rates in a declining rate
environment.
At December 31, 2001, term certificates of deposit having balances of $100,000
or more, by maturity, are as follows:
At December 31, 2001
----------------------------------------------------------------------
3 Months Over 3 Months Over 6 Months Over
or Less to 6 Months to 12 Months 12 Months Total
---------- ------------- -------------- ----------- ---------
(In thousands)
$29,332 $8,868 $17,182 $29,076 $84,458
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 may also enter 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 decreased to $200.3 million at December 31, 2001 from $223.8 million at
December 31, 2000.
15
The following table presents information pertaining to the Bank's short-term
borrowings:
At December 31,
------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
FHLBB advances $10,000 $20,000 $45,000
Federal Reserve Bank of Boston advances 206 443 844
Securities sold under agreements to repurchase -- -- 21,227
------- ------- -------
Total short-term borrowings $10,206 $20,443 $67,071
======= ======= =======
Weighted average rate at year end 5.04% 6.53% 5.35%
Average balance of short-term borrowings during
the year $17,845 $37,441 $48,265
Weighted average rate paid on short-term
borrowings during the year 5.48% 6.17% 5.07%
Maximum amount outstanding at any month-end
during the year $30,389 $66,480 $75,991
Stockholders' Equity
Stockholders' equity to total assets was 7.90% at December 31, 2001, compared to
8.01% at December 31, 2000. Stockholders' equity at December 31, 2001 and 2000
exceeded all regulatory requirements. Book value at December 31, 2001 was $14.43
per share, compared with $12.89 per share at December 31, 2000. (See "Liquidity
and Capital Resources.")
16
RESULTS OF OPERATIONS
General
In 2001, the Company reported consolidated net income of $13.8 million or $1.76
per share (basic), as compared to net income of $13.8 million or $1.69 per share
in 2000, and net income of $12.7 million or $1.51 per share in 1999. Diluted
earnings per share were $1.72, $1.64, and $1.44 for 2001, 2000 and 1999,
respectively. Consolidated net income in 2001 increased .1% over 2000 and
consolidated net income in 2000 increased 8.8% over 1999. Diluted earnings per
share in 2001 increased 4.9% over 2000, and diluted earnings per share in 2000
increased 13.9% over 1999. The Company's return on average assets was 1.02% for
2001, as compared to 1.09% in 2000 and 1.07% in 1999. The return on average
equity decreased to 12.81% in 2001 from 15.06% in 2000 and 13.52% in 1999.
Net Interest Income
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. In 2001, as the economy
slowed, the Federal Reserve Bank lowered the overnight federal funds target rate
an unprecedented total of eleven times for a 475 basis point decline from 6.50%
to 1.75% at December 31, 2001. During such periods of volatile changes in rates,
management continues to focus on managing its net interest margin by the
constant monitoring of its mix of earning assets and paying liabilities and the
interest yields and costs thereon.
As detailed in the following "Rate/Volume Analysis (RVA)" and "Distribution of
Assets and Liabilities (DAL)" schedules, the Bank has improved its net interest
income principally through its ability to constantly grow its average earning
asset volumes, even as the net yield on average earning assets has declined.
The Company reported net interest income of $37.8 million in 2001, an increase
of $1.7 million or 4.6% from 2000. Net interest income in 2001, as compared to
2000, increased $2.4 million due to changes in volume, while changes in rate
created a negative affect of $675,000.
In 2000, net interest income was $36.1 million, an increase of $1.4 million or
4.0% from the 1999 level. The improvement in net interest income in 2000, as
compared to 1999, can be similarly explained by the favorable changes in volume
partially offset by the changes in rate of $2.4 million and $1.0 million,
respectively.
Interest and Dividend Income
Interest and dividend income totaled $88.9 million for 2001, an increase of $2.8
million or 3.3% from 2000. Interest and dividend income totaled $86.1 million
for 2000, an increase of $8.2 million or 10.5% from 1999.
The $2.8 million increase in interest and dividend income in 2001 can be
accounted for by growth in the average volume of earning assets. Average earning
assets increased from $1.23 billion for 2000 to $1.31 billion in 2001 and the
change in volume provided $4.4 million of interest income as detailed in the RVA
schedule. With the exception of mortgage-backed securities, which essentially
remained level, the DAL schedule shows that the average balance of each category
of earning assets increased year over year. The contribution from changes in
volume were partially offset by the changes in rate of $1.6 million as yields
declined on total average earning assets from 6.98% in 2000 to 6.78% in 2001.
Increases in interest and dividend income of $8.2 million in 2000, as compared
to 1999, is accounted for by growth in the average volume of earning assets and
an increase in yield on average earning assets. The DAL schedule shows average
earning asset volumes and rates increased from 1999 to 2000 from $1.15 billion
and 6.78% to $1.23 billion and 6.98%, respectively. As detailed in the RVA
schedule, the change in volume and rate provided increases of $6.1 million and
$2.1 million, respectively.
Interest Expense
Interest expense totaled $51.1 million for 2001, an increase of $1.2 million or
2.3% from 2000. Interest expense totaled $49.9 million for 2000, an increase of
$6.8 million or 15.8% from 1999.
The $1.2 million increase in interest expense when comparing 2001 to 2000 can be
explained by the growth in total interest-bearing liabilities. Total average
interest-bearing liabilities increased from $1.11 billion in 2000 to $1.18
billion in 2001 or $67.4 million. The growth in volume accounts for interest
expense increasing $2.1 million while lower average rates paid decreased
interest expense by $906,000. Although the volumes of the various categories of
interest-bearing liabilities have changed, it is the Bank's Combo savings that
primarily accounts for the increase. The lower rates paid on interest-bearing
liabilities reflects the Federal Reserve Bank's interest rate policies during
2001.
17
Interest expense was $49.9 million in 2000 compared to $43.1 million in 1999.
The increase in interest expense in 2000 is primarily attributable to increases
in both volume and rates on interest-bearing liabilities. In 2000, average
interest-bearing deposits increased $40.7 million and rates increased from 3.85%
to 4.09%. The average balance of borrowings increased $30.9 million and the
rates paid increased from 5.53% to 6.14%.
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.
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) Increase (Decrease)
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
INTEREST AND DIVIDEND INCOME
Short-term investments $ 911 $ (261) $ 650 $ -- $ 85 $ 85
Mortgage-backed securities 1 2,708 2,709 (52) 289 237
Other securities 2,005 (2,502) (497) 1,916 958 2,874
Loans 1,503 (1,526) (23) 4,218 787 5,005
------- ------- ------- ------ ------ ------
Total interest and dividend income 4,420 (1,581) 2,839 6,082 2,119 8,201
------- ------- ------- ------ ------ ------
INTEREST EXPENSE
NOW deposits 11 (22) (11) (7) 8 1
Savings deposits and MMDA 2,116 (495) 1,621 525 482 1,007
Term certificates 17 (191) (174) 1,302 1,462 2,764
Short-term borrowings (1,097) (233) (1,330) (609) 472 (137)
Long-term debt 1,018 35 1,053 2,520 650 3,170
------- ------- ------- ------ ------ ------
Total interest expense 2,065 (906) 1,159 3,731 3,074 6,805
------- ------- ------- ------ ------ ------
Net interest income $ 2,355 $ (675) $ 1,680 $2,351 $ (955) $1,396
======= ======= ======= ====== ====== ======
18
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, 2001 December 31, 2000 December 31, 1999
- -------------------------------------------------------------------- ------------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
ASSETS
Earning assets:
Short-term investments $ 31,302 $ 1,066 3.41% $ 6,719 $ 416 6.19% $ 6,696 $ 331 4.94%
Mortgage-backed
securities 234,064 17,185 7.34 234,064 14,476 6.18 234,928 14,239 6.06
Other securities 368,205 20,614 5.60 334,647 21,111 6.31 303,784 18,237 6.00
Loans (a) 678,102 50,024 7.38 658,041 50,047 7.61 602,429 45,042 7.48
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,311,673 88,889 6.78 1,233,471 86,050 6.98 1,147,837 77,849 6.78
Other assets 45,487 -- -- 30,485 -- -- 39,696 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,357,160 -- -- $1,263,956 -- -- $1,187,533 -- --
====================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW deposits $ 61,548 $ 333 0.54% $ 59,674 $ 344 0.58% $ 60,931 $ 343 0.56%
Savings deposits and MMDA 460,147 14,168 3.08 391,883 12,547 3.20 375,169 11,540 3.08
Term certificates 441,075 23,458 5.32 440,761 23,632 5.36 415,643 20,868 5.02
Short-term borrowings 17,845 979 5.48 37,441 2,309 6.17 48,265 2,446 5.07
Long-term debt 197,312 12,135 6.15 180,747 11,082 6.13 139,034 7,912 5.69
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,177,927 51,073 4.34 1,110,506 49,914 4.49 1,039,042 43,109 4.15
Demand deposits 65,947 -- -- 55,244 -- -- 47,409 -- --
Other liabilities 5,750 -- -- 6,768 -- -- 7,479 -- --
Stockholders' equity 107,536 -- -- 91,438 -- -- 93,603 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,357,160 -- -- $1,263,956 -- -- $1,187,533 -- --
====================================================================================================================================
Net interest income $37,816 $36,136 $34,740
Weighted average rate spread (b) 2.44% 2.49% 2.63%
Net yield on average earning assets (c) 2.88% 2.93% 3.03%
====================================================================================================================================
(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.
19
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 $150,000 and $175,000 for the
years ended 2001 and 2000, respectively, while no provision was recorded for
1999. The provision for loan losses is primarily based upon growth, changes in
mix and risk levels of non-performing loans in the loan portfolio. Credit
quality of the Bank's loan portfolio remains strong as gross loans charged-off
were $78,000 in 2001, $59,000 in 2000 and $164,000 in 1999 or less than 0.03% of
average loans in each of the three years.
Growth in total loans over the past three years of $94.5 million has come
primarily from residential real estate, commercial and construction real estate
and equity lines of credit of $65.6 million, $24.8 million and $4.6 million,
respectively. Applying general risk allocations to the growth in each of these
loan categories has modestly increased the level of allowance for loan losses
over the period. While management considers the allowance for loan losses to be
adequate at December 31, 2001, there is no assurance that additional charge-offs
and provisions will not be necessary in 2002. The provision for loan losses
during 2002 will depend primarily on market conditions and the Bank's actual
experience.
Other Income
Total other income amounted to $5.5 million in 2001, down $1.2 million or 18.0%
from $6.8 million in 2000. When comparing 2001 with 2000, changes in net gain
(loss) on sales of securities of $3.2 million and improvement in both customer
service fees and miscellaneous income of $435,000 increased other income by $3.6
million. However, the increase in these other income categories did not offset
the $4.8 million gain from the termination of the defined benefit plan recorded
in 2000.
The $2.5 million increase in other income when comparing year 2000 with 1999 can
primarily be accounted for by the recognition of a $4.8 million gain from the
termination of the defined benefit plan in 2000 partially offset by the $2.6
million decrease in net gain (loss) on sales of securities. 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%.
Operating Expenses
Operating expenses totaled $21.7 million for 2001, increasing $1.7 million or
8.5% year over year. Approximately 66% of the overall increase is related to the
increase in salaries and employee benefits which increased $1.1 million or
10.0%. Much of the increase in this expense category is related to staffing
costs associated with de-novo branching, salary increases, and rising insurance
costs of employee benefits. The Bank's de-novo branching strategy has also
increased its costs relative to occupancy and equipment expenses by $349,000 and
data processing by $237,000 from 2000 to 2001.
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.
Provision for Income Taxes
The Bank's effective tax rate for the year ended December 31, 2001 was 36.0% as
compared with 39.4% and 35.6% for 2000 and 1999, 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.
20
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
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 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 2001, cash flow
from maturities of securities was $73.8 million and proceeds from sales of
securities totaled $103.7 million, compared to maturities of securities of $70.0
million and proceeds from sales of securities of $55.2 million in 2000.
Principal payments on mortgage-backed securities in 2001 and 2000 totaled $71.4
million and $32.4 million, respectively. Purchases of securities during 2001 and
2000 totaled $312.7 million and $190.9 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,
2001, the Bank's outstanding borrowings from the FHLBB were $200.1 million. The
Bank also utilizes repurchase agreements to fund loan purchases or to leverage
the balance sheet. At December 31, 2001, there were no securities sold under
agreements to repurchase.
Residential and commercial mortgage loan originations for 2001, 2000 and 1999
totaled $117.6 million, $139.2 million and $147.9 million, respectively.
Commitments to originate commercial and residential real estate mortgages at
December 31, 2001 were $21.5 million, excluding unadvanced construction funds
totaling $9.6 million. Unadvanced funds on equity and commercial lines of credit
aggregated $38.9 million at December 31, 2001. 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 $111.6 million, or
7.90% of total assets at December 31, 2001, compared with $105.0 million, or
8.01% of total assets at December 31, 2000. In 2001, the Company completed 5%
and 100,000 share stock repurchase plans. A total of 500,048 shares of common
stock were repurchased. In addition, the Company recently announced another
stock repurchase plan of up to 300,000 outstanding shares.
21
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.
22
The following table presents, as of December 31, 2001, 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) 0-1 yr. 1-2 yrs. 2-3 yrs. 3-4 yrs. 4-5 yrs. 5+ yrs. Total
---------- ---------- ---------- ---------- ---------- --------- -----------
Rate-sensitive assets:
Short-term investments $ 28,280 $ -- $ -- $ -- $ -- $ -- $ 28,280
1.54%
Mortgage-backed investments 152,311 65,642 35,456 9,694 4,068 38,290 305,461
5.91% 6.04% 6.04% 6.04% 6.04% 6.04%
Other investment securities 76,891 118,059 44,695 64,030 12,698 13,500 329,873
6.29% 6.06% 5.68% 5.38% 5.62% 5.30%
Adjustable-rate mortgages 167,198 76,599 70,994 40,173 66,902 22,224 444,090
6.88% 7.28% 7.02% 7.55% 6.84% 6.81%
Fixed-rate mortgages 27,513 22,355 21,617 19,618 21,835 103,632 216,570
7.35% 7.11% 7.09% 7.03% 7.04% 7.03%
All other loans 17,889 1,335 1,135 197 70 -- 20,626
6.20% 10.05% 9.11% 10.48% 8.41%
- ------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 470,082 283,990 173,897 133,712 105,573 177,646 1,344,900
- ------------------------------------------------------------------------------------------------------------------------------
Rate-sensitive liabilities:
NOW accounts 1,031 31,828 31,827 -- -- -- 64,686
0.66% 0.49% 0.49%
Savings accounts 111,445 111,445 111,445 111,446 -- -- 445,781
2.70% 2.70% 2.70% 2.70%
Money market accounts 21,562 21,562 21,562 21,564 -- -- 86,250
2.18% 2.18% 2.18% 2.18%
Term certificates 258,940 127,351 27,101 5,369 5,816 51 424,628
4.33% 4.71% 4.67% 6.09% 4.72% 5.67%
Borrowings 80,206 87,500 16,600 10,975 5,000 -- 200,281
6.26% 5.37% 4.25% 4.11% 4.69%
- ------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 473,184 379,686 208,535 149,354 10,816 51 1,221,626
- ------------------------------------------------------------------------------------------------------------------------------
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
lifetime 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 0-1 year
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.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report..................................................25
Consolidated Balance Sheets at December 31, 2001 and 2000.....................26
Consolidated Statements of Income for the
Years Ended December 31, 2001, 2000 and 1999..........................27
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999..........................28
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2001, 2000 and 1999.......................29-30
Notes to Consolidated Financial Statements.................................31-55
24
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
Boston, Massachusetts
January 16, 2002
25
MEDFORD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
2001 2000
--------- ----------
(In thousands)
ASSETS
Cash and due from banks $ 18,210 $ 16,905
Interest-bearing deposits 28,280 5,353
---------- ----------
Cash and cash equivalents 46,490 22,258
Securities available for sale 588,263 528,690
Securities held to maturity 57,022 42,854
Federal Home Loan Bank of Boston stock, at cost 11,920 11,420
Loans 682,263 675,697
Less allowance for loan losses (7,080) (6,950)
---------- ----------
Loans, net 675,183 668,747
---------- ----------
Banking premises and equipment, net 11,578 10,884
Accrued interest receivable 9,596 10,211
Intangible assets 1,532 2,588
Other assets 11,187 12,038
---------- ----------
Total assets $1,412,771 $1,309,690
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,095,947 $ 975,857
Short-term borrowings 10,206 20,443
Long-term debt 190,075 203,400
Accrued taxes and expenses 2,338 2,278
Other liabilities 2,640 2,747
---------- ----------
Total liabilities 1,301,206 1,204,725
---------- ----------
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 21,985 22,705
Retained earnings 104,275 94,697
Treasury stock, at cost (1,388,948 and 980,048
shares, respectively) (24,883) (17,422)
Shares held in rabbi trust, at cost 1,167 1,071
Deferred compensation obligation (1,167) (1,071)
Accumulated other comprehensive income 5,627 424
---------- ----------
Total stockholders' equity 111,565 104,965
---------- ----------
Total liabilities and stockholders' equity $1,412,771 $1,309,690
========== ==========
See accompanying notes to consolidated financial statements.
26
MEDFORD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------
2001 2000 1999
------- ------- ------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $50,024 $ 50,047 $45,042
Interest on debt securities 37,018 34,686 31,827
Dividends on equity securities 781 901 649
Interest on interest-bearing deposits 1,066 416 331
------- -------- -------
Total interest and dividend income 88,889 86,050 77,849
------- -------- -------
Interest expense:
Interest on deposits 37,959 36,523 32,751
Interest on short-term borrowings 979 2,309 2,446
Interest on long-term debt 12,135 11,082 7,912
------- -------- -------
Total interest expense 51,073 49,914 43,109
------- -------- -------
Net interest income 37,816 36,136 34,740
Provision for loan losses 150 175 --
------- -------- -------
Net interest income, after provision for loan losses 37,666 35,961 34,740
------- -------- -------
Other income:
Customer service fees 2,285 1,968 1,851
Gain (loss) on sales of securities, net 2,121 (1,031) 1,522
Pension plan curtailment and settlement gains -- 4,799 --
Miscellaneous 1,132 1,014 829
------- -------- -------
Total other income 5,538 6,750 4,202
------- -------- -------
Operating expenses:
Salaries and employee benefits 12,181 11,069 10,673
Occupancy and equipment 2,960 2,611 2,488
Data processing 1,790 1,553 1,512
Professional fees 421 497 657
Amortization of intangibles 1,056 1,091 1,128
Advertising and marketing 610 690 654
Other general and administrative 2,665 2,480 2,189
------- -------- -------
Total operating expenses 21,683 19,991 19,301
------- -------- -------
Income before income taxes 21,521 22,720 19,641
Provision for income taxes 7,743 8,951 6,990
------- -------- -------
Net income $13,778 $ 13,769 $12,651
======= ======== =======
Weighted average shares outstanding:
Basic 7,814 8,139 8,393
======= ======== =======
Diluted 8,014 8,395 8,775
======= ======== =======
Earnings per share:
Basic $ 1.76 $ 1.69 $ 1.51
======= ======== =======
Diluted $ 1.72 $ 1.64 $ 1.44
======= ======== =======
See accompanying notes to consolidated financial statements.
27
MEDFORD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Common Stock Additional Treasury Stock Other
--------------- Paid-In Retained ------------------ Comprehensive
Shares Dollars Capital Earnings Shares Dollars Income (Loss) Total
------ ------- -------- --------- ------ -------- ------------- --------
(In thousands)
Balance at December 31, 1998 9,123 $4,561 $26,389 $ 76,770 (413) $ (8,511) $ 3,058 $102,267
--------
Comprehensive income:
Net income -- -- -- 12,651 -- -- -- 12,651
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification
adjustment and tax effects -- -- -- -- -- -- (12,463) (12,463)
--------
Total comprehensive income 188
--------
Cash dividends declared ($.51 per share) -- -- -- (4,268) -- -- -- (4,268)
Repurchase of treasury stock -- -- -- -- (425) (7,689) -- (7,689)
Issuance of common stock under option plan -- -- (1,550) -- 99 1,922 -- 372
------ ------ -------- --------- ------ -------- -------- --------
Balance at December 31, 1999 9,123 4,561 24,839 85,153 (739) (14,278) (9,405) 90,870
--------
Comprehensive income:
Net income -- -- -- 13,769 -- -- -- 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 ($.52 per share) -- -- -- (4,225) -- -- -- (4,225)
Repurchase of treasury stock -- -- -- -- (423) (6,428) -- (6,428)
Issuance of common stock under option plan -- -- (2,790) -- 182 3,284 -- 494
Income tax benefits on options exercised -- -- 656 -- -- -- -- 656
------ ------ -------- --------- ------ -------- -------- --------
Balance at December 31, 2000 9,123 4,561 22,705 94,697 (980) (17,422) 424 104,965
--------
Comprehensive income:
Net income -- -- -- 13,778 -- -- -- 13,778
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification
adjustment and tax effects -- -- -- -- -- -- 5,203 5,203
--------
Total comprehensive income 18,981
--------
Cash dividends declared ($.54 per share) -- -- -- (4,200) -- -- -- (4,200)
Repurchase of treasury stock -- -- -- -- (500) (9,078) -- (9,078)
Issuance of common stock under option plan -- -- (967) -- 91 1,617 -- 650
Income tax benefits on options exercised -- -- 247 -- -- -- -- 247
------ ------ -------- --------- ------ -------- -------- --------
Balance at December 31, 2001 9,123 $4,561 $21,985 $104,275 (1,389) $(24,883) $ 5,627 $111,565
====== ====== ======== ========= ====== ======== ======== ========
See accompanying notes to consolidated financial statements.
28
MEDFORD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Cash flows from operating activities:
Net income $ 13,778 $ 13,769 $ 12,651
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 150 175 --
Depreciation and amortization, net 2,812 2,594 3,183
(Gain) loss on sales of securities, net (2,121) 1,031 (1,522)
Deferred tax provision (benefit) (241) 448 (100)
Decrease (increase) in accrued interest receivable and other assets (1,758) (1,598) 549
Increase (decrease) in accrued taxes and expenses
and other liabilities 585 (1,104) 367
--------- --------- ---------
Net cash provided by operating activities 13,205 15,315 15,128
--------- --------- ---------
Cash flows from investing activities:
Activity in securities available for sale:
Maturities 73,773 64,974 45,250
Sales 103,707 55,196 105,440
Purchases (280,087) (144,649) (259,337)
Principal amortization of mortgage-backed securities 53,330 32,369 47,360
Activity in securities held to maturity:
Maturities -- 4,997 21,000
Purchases (32,115) (44,552) --
Principal amortization of mortgage-backed securities 18,102 -- --
Purchases of Federal Home Loan Bank of Boston stock (500) (1,737) (2,361)
Loans originated and purchased, net of amortization and payoffs (6,961) (42,358) (46,460)
Proceeds from sales of loans -- -- 77
Proceeds from sales of real estate -- -- 431
Additions to banking premises and equipment, net (1,978) (491) (1,036)
--------- --------- ---------
Net cash used by investing activities (72,729) (76,251) (89,636)
--------- --------- ---------
See accompanying notes to consolidated financial statements.
29
MEDFORD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended December 31,
--------------------------------
2001 2000 1999
--------- --------- --------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 120,090 64,529 39,626
Net decrease in short-term borrowings with maturities
of three months or less (237) (21,628) (16,392)
Proceeds from short-term borrowings with maturities in
excess of three months 15,000 67,166 55,000
Repayment of short-term borrowings with maturities in
excess of three months (25,000) (92,166) (10,000)
Proceeds from long-term debt 109,675 123,000 67,000
Repayment of long-term debt (123,000) (68,253) (50,000)
Issuance of common stock 650 494 372
Payments to acquire treasury stock (9,078) (6,428) (7,689)
Cash dividends paid (4,344) (4,430) (4,501)
--------- --------- --------
Net cash provided by financing activities 83,756 62,284 73,416
--------- --------- --------
Net change in cash and cash equivalents 24,232 1,348 (1,092)
Cash and cash equivalents at beginning of year 22,258 20,910 22,002
--------- --------- --------
Cash and cash equivalents at end of year $ 46,490 $ 22,258 $ 20,910
========= ========= ========
Supplementary information:
Interest paid on deposit accounts $ 38,053 $ 36,486 $ 32,413
Interest paid on borrowed funds 13,339 13,207 10,115
Income taxes paid, net of refunds 7,666 8,054 7,285
See accompanying notes to consolidated financial statements.
30
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000 and 1999
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 nineteen 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.
31
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 components. Specific
allocations include the results of measuring impaired loans under Statement of
Financial Accounting Standards 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 and
current economic conditions. 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.
32
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Other intangible assets are amortized by the straight-line method over
periods ranging from 10 to 15 years.
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 March 31, 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. (See Note 12.)
Advertising Costs
Advertising costs are charged to expense as incurred.
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, 2001, 2000 and 1999, options applicable to
12,000 shares, 149,000 shares and 62,000 shares, respectively, were
anti-dilutive and excluded from the diluted earnings per share computations.
33
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
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,
------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Change in unrealized holding gains (losses) on securities available for sale $ 10,547 $ 14,992 $(18,877)
Reclassification adjustment for (gains) losses realized in income (2,121) 1,031 (1,522)
-------- -------- --------
Change in net unrealized gains (losses) 8,426 16,023 (20,399)
Tax effects (3,223) (6,194) 7,936
-------- -------- --------
Net-of-tax amount $ 5,203 $ 9,829 $(12,463)
======== ======== ========
Recent Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for business combinations initiated
after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. In addition, this Statement
requires that acquired identifiable intangible assets, as defined, be amortized
over their useful lives. Unidentified intangible assets pertaining to
acquisitions of banking or thrift institutions, where the fair value of
liabilities assumed exceeds the fair value of assets acquired, will continue to
be amortized, as such transactions are outside the scope of SFAS. No.142. This
Statement is effective for the Company on January 1, 2002. Management does not
anticipate that the adoption of these Statements will have a material impact on
the consolidated financial statements.
Accounting Change
In June 1998, the FASB issued 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.
34
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and
losses at December 31, 2001 and 2000, follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
- ------------------------------------------------ --------- ---------- ---------- --------
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $251,531 $ 7,760 $ (333) $258,958
Mortgage-backed securities 253,323 2,397 (863) 254,857
U.S. Government and federal agency 73,458 334 (224) 73,568
-------- ------- ------- --------
Total debt securities 578,312 10,491 (1,420) 587,383
Marketable equity securities 874 98 (92) 880
-------- ------- ------- --------
Total securities available for sale $579,186 $10,589 $(1,512) $588,263
======== ======= ======= ========
Securities Held to Maturity
Federal agency obligations $ 4,884 $ 335 $ -- $ 5,219
Mortgage-backed securities 52,138 1,217 (93) 53,262
-------- ------- ------- --------
Total securities held to maturity $ 57,022 $ 1,552 $ (93) $ 58,481
======== ======= ======= ========
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
======== ====== ======= ========
35
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SECURITIES (concluded)
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 2001 is as follows:
Available for Sale Held to Maturity
--------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
(In thousands)
Within 1 year $ 76,891 $ 78,275 $ -- $ --
After 1 year through 5 years 234,598 240,704 4,884 5,219
After 5 years 13,500 13,547 -- --
-------- -------- ------- -------
324,989 332,526 4,884 5,219
Mortgage-backed securities 253,323 254,857 52,138 53,262
-------- -------- ------- -------
$578,312 $587,383 $57,022 $58,481
======== ======== ======= =======
At December 31, 2001, mortgage-backed securities with an amortized cost of
$6,815,000 and a fair value of $6,894,000 have been pledged as collateral for a
line of credit and mortgage-backed securities with an amortized cost of
$18,812,000 and a fair value of $18,693,000 have been pledged as collateral for
a loan and credit agreement. 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 and 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.
For the years ended December 31, 2001, 2000 and 1999, proceeds from the sales of
securities available for sale amounted to $103,707,000, $55,196,000 and
$105,440,000, respectively. Gross realized gains amounted to $2,292,000, $3,000
and $1,529,000, respectively. Gross realized losses amounted to $171,000,
$1,031,000 and $7,000, respectively. For the year ended December 31, 2000,
proceeds from the sales of securities held to maturity that were sold within
three months of maturity amounted to $4,997,000. Gross realized losses on these
sales amounted to $3,000. 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.
36
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. LOANS
A summary of the balances of loans follows:
December 31,
--------------------------
2001 2000
--------- ---------
(In thousands)
Mortgage loans on real estate:
Residential $ 487,331 $ 487,964
Commercial 130,207 124,201
Construction 17,228 19,913
Second mortgages 444 699
Equity lines of credit 25,199 21,609
--------- ---------
660,409 654,386
--------- ---------
Other loans:
Commercial 17,954 17,219
Personal and other 2,652 2,925
--------- ---------
20,606 20,144
--------- ---------
Net deferred loan origination costs 1,248 1,167
--------- ---------
Total loans 682,263 675,697
Less allowance for loan losses (7,080) (6,950)
--------- ---------
Loans, net $ 675,183 $ 668,747
========= =========
An analysis of the allowance for loan losses follows:
Years Ended December 31,
-----------------------------------
2001 2000 1999
------- ------- -------
(In thousands)
Balance at beginning of year $ 6,950 $ 6,779 $ 6,876
Provision for loan losses 150 175 --
Recoveries 58 55 67
Loans charged-off (78) (59) (164)
------- ------- -------
Balance at end of year $ 7,080 $ 6,950 $ 6,779
======= ======= =======
Impaired loans at December 31, 2001 and 2000 amounted to $976,000 and
$1,047,000, 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, 2001, 2000 and 1999, the average recorded
investment in impaired loans amounted to $1,385,000, $1,593,000 and $2,888,000,
respectively. Impaired loans are generally placed on non-accrual status. The
Bank recognized interest income on impaired loans, on a cash basis, of $0 in
2001, $6,000 in 2000 and $52,000 in 1999 during the periods that they were
impaired.
37
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment follows:
December 31,
--------------------------
2001 2000
-------- --------
(In thousands)
Banking Premises:
Land $ 2,068 $ 2,068
Buildings 10,875 10,321
Equipment 6,182 6,609
-------- --------
19,125 18,998
Less accumulated depreciation (7,547) (8,114)
-------- --------
$ 11,578 $ 10,884
======== ========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
amounted to $1,284,000, $1,173,000 and $1,174,000, respectively.
Pursuant to the terms of noncancelable lease agreements in effect at December
31, 2001, pertaining to banking premises and equipment, future minimum rent
commitments under various operating leases are as follows:
Years Ending
December 31, Amount
-------------- ------
(In thousands)
2002 $ 425
2003 374
2004 348
2005 145
2006 75
Thereafter 60
------
$1,427
======
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, 2001, 2000 and 1999 amounted to $450,000, $378,000 and $332,000,
respectively.
38
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31,
-------------------------
2001 2000
---------- ----------
(In thousands)
Demand $ 74,602 $ 63,122
NOW 64,686 65,106
Regular savings 445,781 323,298
Money market deposits 86,250 65,357
---------- ----------
Total non-certificate accounts 671,319 516,883
---------- ----------
Term certificates ($100,000 or more) 84,458 101,406
Other term certificates 340,170 357,568
---------- ----------
Total term certificates 424,628 458,974
---------- ----------
Total deposits $1,095,947 $ 975,857
========== ==========
A summary of term certificate accounts, by maturity, is as follows:
December 31, 2001 December 31, 2000
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- --------- --------- ---------
(Dollars in thousands)
Within 1 year $258,940 4.33% $375,579 5.70%
Over 1 year to 3 years 154,452 4.70 72,123 6.03
Over 3 years to 5 years 11,185 5.38 11,165 5.45
Over 5 years 51 5.67 107 5.30
-------- --------
$424,628 4.50% $458,974 5.75%
======== ========
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
December 31, 2001 December 31, 2000
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- --------- -------- ---------
(Dollars in thousands)
Federal Reserve Bank of Boston advances $ 206 1.50% $ 443 6.29%
Federal Home Loan Bank of Boston advances 10,000 5.11 20,000 6.54
------- -------
$10,206 5.04% $20,443 6.53%
======= =======
39
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. SHORT-TERM BORROWINGS (concluded)
The Federal Home Loan Bank of Boston ("FHLBB") advances mature within four
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.
The Company has a $3,000,000 line of credit (treasury, tax and loan) with the
Federal Reserve Bank of Boston ("FRB") at December 31, 2001 and 2000, of which
$206,000 and $443,000, respectively, was advanced. The interest rate adjusts
weekly and certain mortgage-backed securities have been pledged as collateral
for the line of credit at December 31, 2001 and 2000, respectively. At December
31, 2001 and 2000, the Company also has 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, 2001 December 31, 2000
-------------------- -------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
- --------------- -------- -------- -------- --------
(Dollars in thousands)
2001 $ -- --% $113,000 6.09%
2002 70,000 6.50 60,000 6.78
2003 87,500 5.37 30,000 6.28
2004 16,600 4.25 -- --
2005 10,975 4.11 400 5.61
2006 5,000 4.69 -- --
-------- --------
$190,075 5.60% $203,400 6.32%
======== ========
At December 31, 2001 and 2000, a $400,000 advance maturing in 2005 is callable
on a quarterly basis by the FHLBB.
40
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
---------------------------
2001 2000 1999
------- ------- -------
(In thousands)
Current tax provision:
Federal $ 7,513 $ 7,928 $ 6,702
State 471 575 388
------- ------- -------
7,984 8,503 7,090
------- ------- -------
Deferred tax provision (benefit):
Federal (180) 335 (99)
State (61) 113 (1)
------- ------- -------
(241) 448 (100)
------- ------- -------
$ 7,743 $ 8,951 $ 6,990
======= ======= =======
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,
---------------------------
2001 2000 1999
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 1.2 2.0 1.3
Tax on pension plan settlement -- 2.8 --
Other, net (.2) (.4) (.7)
---- ---- ----
Effective tax rates 36.0% 39.4% 35.6%
==== ==== ====
41
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (continued)
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31,
--------------------
2001 2000
------- -------
(In thousands)
Deferred tax assets:
Federal $ 3,986 $ 3,914
State 1,336 1,312
------- -------
5,322 5,226
------- -------
Deferred tax liabilities:
Federal (3,864) (1,266)
State (827) (347)
------- -------
(4,691) (1,613)
------- -------
Net deferred tax asset $ 631 $ 3,613
======= =======
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
December 31,
---------------------
2001 2000
------- -------
(In thousands)
Cash basis of accounting $ 362 $ 401
Investments:
Net unrealized (gain) loss on
securities available for sale (3,450) (227)
Other (288) (288)
Depreciation (961) (961)
Allowance for loan losses 2,961 2,814
Employee benefit plans 709 669
Other 1,298 1,205
------- -------
Net deferred tax asset $ 631 $ 3,613
======= =======
42
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (concluded)
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Balance at beginning of year $ 3,613 $ 10,255 $ 2,219
Deferred tax effect of the change in net unrealized
gains and losses on securities available for sale (3,223) (6,194) 7,936
Deferred tax (provision) benefit for the year 241 (448) 100
-------- -------- --------
Balance at end of year $ 631 $ 3,613 $ 10,255
======== ======== ========
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.
43
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. OTHER COMMITMENTS AND CONTINGENCIES (concluded)
Loan Commitments (concluded)
The following financial instruments were outstanding whose contract amounts
represent credit risk:
December 31,
--------------------
2001 2000
-------- -------
(In thousands)
Commitments to grant loans $22,442 $ 4,856
Unadvanced funds on equity lines of credit 26,161 23,322
Unadvanced funds on commercial lines of credit 12,693 9,765
Unadvanced funds on construction loans 9,611 16,271
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
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, 2001 and 2000, that
the Company and the Bank met all capital adequacy requirements to which they are
subject.
44
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCKHOLDERS' EQUITY (continued)
Minimum Regulatory Capital Requirements (concluded)
As of December 31, 2001, 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, 2001 and 2000, are also presented in the table.
Minimum
To Be
Minimum Categorized
Capital as Well
Actual Requirement Capitalized
----------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
(Dollars in thousands)
December 31, 2001:
Total Capital to Risk-Weighted Assets:
Consolidated $111,486 13.8% $64,626 8.0% $ -- --%
Bank 109,940 13.6 64,626 8.0 80,782 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 104,406 12.9 32,313 4.0 -- --
Bank 102,860 12.7 32,313 4.0 48,469 6.0
Tier 1 Capital to Average Assets:
Consolidated 104,406 7.4 42,179 3.0 -- --
Bank 102,860 7.3 42,179 3.0 70,298 5.0
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 38,930 3.0 -- --
Bank 97,280 7.5 38,930 3.0 64,883 5.0
45
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2001, $64,626,000 of the Company's equity in the Bank was
restricted and funds available for loans or advances amounted to $10,994,000.
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.
46
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. EMPLOYEE BENEFIT PLANS
Pension Plan
The Bank has in the past 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
------- -------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,106 $ 5,472
Service cost -- 642
Interest cost 406 369
Amendment (409) --
Actuarial gain -- (1,010)
Benefits paid (5,103) (367)
------- -------
Benefit obligation at end of year -- 5,106
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 6,879 5,464
Actual return on plan assets 1,420 1,076
Employer contribution -- 706
Benefits paid (5,103) (367)
Distribution to employer (3,196) --
------- -------
Fair value of plan assets at end of year -- 6,879
------- -------
Funded status -- 1,773
Unrecognized net actuarial gain -- (3,242)
Transition asset -- (227)
------- -------
Accrued pension cost $ -- $(1,696)
======= =======
Net periodic pension (income) expense for the plan years ended October 31, 2000
and 1999 consisted of the following:
2000 1999
------ ------
(In thousands)
Service cost $ -- $ 642
Interest cost 406 369
Expected return on plan assets (498) (437)
Net amortization and deferral -- (20)
Net gain -- (75)
------ ------
Net periodic pension (income) expense $ (92) $ 479
====== ======
47
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. EMPLOYEE BENEFIT PLANS (concluded)
Pension Plan (concluded)
Total pension (income) expense for the years ended December 31, 2000 and 1999
amounted to $(131,000) and $418,000, respectively.
For the plan years ended October 31, 2000 and 1999, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.00% and 6.75%,
respectively, and an expected long-term rate of return on plan assets of 6.00%
and 8.00%, respectively. An annual salary increase of 4.50% was used for the
year ended October 31, 1999.
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, 2001, 2000 and 1999, expense attributable to the Plan
amounted to $335,000, $289,000 and $76,000, 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 $337,000, $266,000 and $136,000 for the years ended December 31,
2001, 2000 and 1999, 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, 2001, 2000 and 1999 amounted to
$32,000, $192,000 and $240,000, 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 and 1993 Stock Option Plans
covered 1,472,000 and 400,000 shares of common stock, respectively, (the options
under which have all 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.
48
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
-----------------------------
2001 2000 1999
------- -------- --------
(In thousands, except per share data)
Net income:
As reported $13,778 $13,769 $12,651
Pro forma 13,601 13,404 12,459
Basic earnings per share:
As reported $ 1.76 $ 1.69 $ 1.51
Pro forma 1.74 1.65 1.48
Diluted earnings per share:
As reported $ 1.72 $ 1.64 $ 1.44
Pro forma 1.70 1.60 1.42
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,
-----------------------------
2001 2000 1999
-------- -------- --------
Dividend yield 2.7% 3.5% 3.1%
Expected life 10 years 10 years 10 years
Expected volatility 58% 54% 50%
Risk-free interest rate 4.9% 5.2% 6.4%
49
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. STOCK OPTION PLANS (concluded)
Stock option activity under the plans is as follows:
Years Ended December 31,
-------------------------------------------------------------------------
2001 2000 1999
--------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Amount Price Amount Price Amount Price
--------- -------- --------- -------- --------- ---------
Shares under option:
Outstanding at beginning of year 527,236 $11.06 674,632 $ 8.50 725,852 $ 7.37
Granted 18,700 19.78 42,000 14.78 54,000 16.36
Cancelled (3,200) 15.64 (7,000) 4.55 (6,000) 20.25
Exercised (91,148) 7.13 (182,396) 2.71 (99,220) 3.75
-------- --------- --------
Outstanding at end of year 451,588 12.18 527,236 11.06 674,632 8.50
======== ========= ========
Exercisable at end of year 433,388 $11.87 475,586 $10.60 589,732 $ 7.27
======== ========= ========
Weighted average fair value of
options granted during the year $ 10.19 $ 6.68 $ 8.07
======== ========= ========
Information pertaining to options outstanding at December 31, 2001 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 81,000 1.1 years $ 5.25 81,000 $ 5.25
$ 6.13 - $ 7.22 20,000 1.8 6.87 20,000 6.87
$ 8.63 - $ 9.72 127,388 2.6 9.53 127,388 9.53
$10.38 - $10.88 18,000 4.1 10.54 18,000 10.54
$12.44 - $14.94 52,000 8.1 14.24 52,000 14.24
$16.00 - $17.70 84,500 7.7 16.60 79,000 16.57
$19.35 - $21.63 68,700 6.8 20.26 56,000 20.15
------- -------
Outstanding at end of year 451,588 4.6 years $12.18 433,388 $11.87
======= =======
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, 2001, the ESOP held 344,508 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, 2001, 2000 or 1999.
50
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
51
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
------------------------------------------------------
2001 2000
-------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ------------ ------------ --------
(In thousands)
Financial assets:
Cash and cash equivalents $ 46,490 $ 46,490 $ 22,258 $ 22,258
Securities available for sale 588,263 588,263 528,690 528,690
Securities held to maturity 57,022 58,481 42,854 43,935
FHLBB stock 11,920 11,920 11,420 11,420
Loans, net 675,183 677,737 668,747 669,808
Accrued interest receivable 9,596 9,596 10,211 10,211
Financial liabilities:
Deposits 1,095,947 1,100,545 975,857 976,783
Short-term borrowings 10,206 10,206 20,443 20,443
Long-term debt 190,075 196,205 203,400 204,465
Accrued interest payable 1,578 1,578 1,897 1,897
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Medford Bancorp, Inc. is as follows:
BALANCE SHEETS
December 31,
-------------------
2001 2000
-------- --------
(In thousands)
Assets
Short-term investments with Medford Savings Bank $ 1,472 $ 4,812
Investment in common stock of Medford Savings Bank 110,019 100,476
Other assets 1,247 992
-------- --------
Total assets $112,738 $106,280
======== ========
Liabilities and Stockholders' Equity
Dividends payable on common stock $ 1,173 $ 1,315
Stockholders' equity 111,565 104,965
-------- --------
Total liabilities and stockholders' equity $112,738 $106,280
======== ========
52
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
STATEMENTS OF INCOME
Years Ended December 31,
----------------------------
2001 2000 1999
------- -------- -------
(In thousands)
Interest on short-term investments with Medford Savings Bank $ 53 $ 96 $ 40
Dividends from Medford Savings Bank 9,450 11,200 11,200
------- ------- -------
9,503 11,296 11,240
Operating expenses 71 86 199
------- ------- -------
Income before income taxes and equity in
undistributed net income of Medford Savings Bank 9,432 11,210 11,041
Applicable income tax provision (benefit) (6) 4 (55)
------- ------- -------
9,438 11,206 11,096
Equity in undistributed net income of Medford Savings Bank 4,340 2,563 1,555
------- ------- -------
Net income $13,778 $13,769 $12,651
======= ======= =======
STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 13,778 $ 13,769 $ 12,651
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Medford Savings Bank (4,340) (2,563) (1,555)
Decrease (increase) in due from Medford Savings Bank -- 3,500 (1,725)
Other, net (6) 2 (306)
-------- -------- --------
Net cash provided by operating activities 9,432 14,708 9,065
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 650 494 372
Payments to acquire treasury stock (9,078) (6,428) (7,689)
Cash dividends paid (4,344) (4,430) (4,501)
-------- -------- --------
Net cash used by financing activities (12,772) (10,364) (11,818)
-------- -------- --------
Net change in cash and cash equivalents (3,340) 4,344 (2,753)
Cash and cash equivalents at beginning of year 4,812 468 3,221
-------- -------- --------
Cash and cash equivalents at end of year $ 1,472 $ 4,812 $ 468
======== ======== ========
53
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. QUARTERLY DATA (UNAUDITED)
A summary of consolidated operating results on a quarterly basis is as follows:
Year Ended December 31, 2001
--------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share data)
Interest and dividend income $ 21,902 $ 22,267 $ 22,331 $ 22,389
Interest expense (11,917) (12,876) (13,101) (13,179)
-------- -------- -------- --------
Net interest income 9,985 9,391 9,230 9,210
Provision for loan losses (50) (100) -- --
-------- -------- -------- --------
Net interest income, after provision
for loan losses 9,935 9,291 9,230 9,210
Gain on sales of securities, net 124 1,626 155 216
Other income 957 776 818 866
Operating expenses (5,709) (5,458) (5,307) (5,209)
-------- -------- -------- --------
Income before income taxes 5,307 6,235 4,896 5,083
Provision for income taxes (1,922) (2,254) (1,743) (1,824)
-------- -------- -------- --------
Net income $ 3,385 $ 3,981 $ 3,153 $ 3,259
======== ======== ======== ========
Earnings per share:
Basic $ 0.44 $ 0.51 $ 0.41 $ 0.41
======== ======== ======== ========
Diluted $ 0.43 $ 0.50 $ 0.40 $ 0.40
======== ======== ======== ========
54
MEDFORD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
16. QUARTERLY DATA (UNAUDITED) (concluded)
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 -- -- --
Loss on sales of securities, net (867) (90) -- (74)
Other income 741 731 745 765
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
======== ======== ======== ========
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
The response to this item is incorporated by reference from the discussion under
the captions "Directors," and "Executive Officers of the Company and the Bank"
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 29, 2002 (the "Proxy Statement"), to be filed with the SEC pursuant to
Regulation 14A of the Exchange Act Rules.
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)
10.14 Special Termination Agreement with William L. Marshall (filed as
Exhibit 10.14 to the Company's Form 10Q filed with the SEC on August
14, 2001, and incorporated herein by reference)
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
* Filed herewith
(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, 2002
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, March 5, 2002
- ------------------------------ Chief Executive Officer
Arthur H. Meehan and Director
/s/ Phillip W. Wong Executive Vice President, March 5, 2002
- ------------------------------ Chief Financial Officer
Phillip W. Wong and Treasurer
/s/ Edward D. Brickley Director March 5, 2002
- ------------------------------
Edward D. Brickley
/s/ David L. Burke Director March 5, 2002
- ------------------------------
David L. Burke
/s/ Deborah A. Burke-Santoro Director March 5, 2002
- ------------------------------
Deborah A. Burke-Santoro
Director ,2002
- ------------------------------
Paul J. Crowley
Director ,2002
- ------------------------------
Mary L. Doherty
/s/ Edward J. Gaffey Clerk and Director March 5, 2002
- ------------------------------
Edward J. Gaffey
/s/ Andrew D. Guthrie, Jr. Director March 5, 2002
- ------------------------------
Andrew D. Guthrie, Jr.
/s/ Robert A. Havern, III Director March 5, 2002
- ------------------------------
Robert A. Havern, III
/s/ Francis D. Pizzella Director March 5, 2002
- ------------------------------
Francis D. Pizzella
/s/ John J. Sheehan Director March 5, 2002
- ------------------------------
John J. Sheehan
59