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, 1997
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 0001049895
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 3, 1998, on the NASDAQ
National Market was $197,894,463. 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 3, 1998, 4,549,298 shares of the registrant's common stock
were 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
27, 1998 are incorporated by reference into Parts I and III of this Form 10-K.
PART I
ITEM 1. BUSINESS
General
Medford Bancorp Inc., (the "Company") was organized by Medford Savings Bank (the
"Bank") for the purpose of reorganizing the Bank into a holding company
structure. The Company acquired 100% of the outstanding shares of the Bank's
common stock in a 1:1 exchange of the Company's common stock. This
reorganization became effective on November 26, 1997 whereupon the Bank became a
wholly-owned subsidiary of the Company and the Bank's former stockholders became
stockholders of the Company (the "Reorganization").
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 sixteen banking offices located in Medford,
Malden, Arlington, Belmont, Burlington, North Reading, Waltham, and Wilmington.
The Bank's primary market area includes these communities as well as other
cities and towns in Middlesex County and the surrounding area north of Boston.
The Bank presently has one wholly-owned subsidiary, Medford Securities
Corporation ("MSC"), which became operational on March 1, 1995. MSC engages
exclusively in the buying, selling, dealing in, and holding of securities.
Supervision and Regulation
General. The Company is a Massachusetts corporation and a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding
Company Act of 1956, as amended, 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 Massachusetts
Commissioner of Banks. 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 Company may not directly or indirectly acquire the ownership or
control of more than 5 percent of any class of voting shares or substantially
all of the assets of any company that is not engaged in activities closely
related to banking and also generally must provide notice to or obtain approval
of the Federal Reserve Board in connection with any such acquisition.
As a Massachusetts-chartered savings bank, the Bank is subject to comprehensive
regulation and examination by the Federal Deposit Insurance Corporation (the
"FDIC") which insures its deposits to the maximum extent permitted by law, and
by the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner"). The Bank is also subject to certain requirements established by
the Federal Reserve Board and is a member of the Federal Home Loan Bank of
Boston.
Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit
accounts to the $100,000 maximum per separately insured account. As a
state-chartered, FDIC-insured nonmember savings bank, the Bank is subject to
regulation, examination, and supervision by the FDIC and to reporting
requirements of the FDIC. The FDIC has adopted requirements setting minimum
standards for capital adequacy. Pursuant to FDIC requirements, the Bank must
maintain a Tier 1 capital to risk-weighted assets ratio of 4.00% and a total
capital to risk-weighted assets ratio of 8.00%. The FDIC also imposes a leverage
capital ratio of at least 3.00% for the most highly rated banks and a leverage
capital ratio between 4.00% and 5.00% for other banks. The Bank exceeded all
applicable requirements at December 31, 1997. Furthermore, under the capital
standards established pursuant to the FDIC Improvement Act of 1991 ("FDICIA"),
the Bank is currently well-capitalized.
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 Federal Home Loan Bank of Boston ("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 only for the purpose of providing funds for residential housing
finance.
1
Federal Reserve Board Regulations. Regulation D promulgated by the Federal
Reserve Board requires all depository institutions, including the Bank, to
maintain reserves against its transaction accounts (generally, demand deposits,
NOW accounts and certain other types of accounts that permit payments or
transfer to third parties) or non-personal time deposits (generally, money
market deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the amount of the
institution's interest-bearing assets.
Massachusetts Commissioner of Banks. 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, in 1997 the Commissioner
finalized rules 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. All Massachusetts-chartered savings banks are
required to be members of the Depositors Insurance Fund ("DIF"), a corporation
created by the Commonwealth of Massachusetts for the purpose of insuring savings
bank deposits not covered by federal deposit insurance. To the extent the Bank's
deposit accounts are not insured by federal insurance, such deposits are insured
by the DIF.
Federal Deposit Insurance Corporation Improvement Act of 1991. FDICIA made
extensive changes to the federal banking laws. Among other things, FDICIA
requires federal bank regulatory agencies to take prompt corrective action to
address the problems of, and imposes significant restrictions on,
under-capitalized banks. With certain exceptions, FDICIA prohibits state banks
from making equity investments and engaging, as principals, in activities which
are not permissible for national banks, such as insurance underwriting. FDICIA
required banks to divest any impermissible equity investments by December 19,
1996. FDICIA also amends federal statutes governing extensions of credit to
directors, executive officers and principal shareholders of banks, savings
associations and their holding companies, limits the aggregate amount of
depository institutions' loans to insiders to the amount of the institution's
unimpaired capital and surplus, restricts depository institutions that are not
well-capitalized from accepting brokered deposits without an express waiver from
the FDIC, and imposes certain advance notice requirements before closing a
branch office. Pursuant to the FDICIA, the FDIC has adopted a framework of
risk-based deposit insurance assessments that take into account different
categories and concentrations of bank assets and liabilities. In late 1997, the
FDIC proposed to revise its regulations relating to FDICIA to generally ease the
ability of state nonmember banks and their subsidiaries to engage in certain
activities not permissible for a national bank, such as real estate development.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities are
permitted. Interstate transactions and activities provided for under the law
include: (i) bank holding company acquisitions of separately held banks in a
state other than a bank holding company's home state; (ii) mergers between banks
with different home states, including consolidations of affiliated banks; (iii)
establishment of interstate branches either de novo or by branch acquisition;
and (iv) affiliate banks acting as agents for one another for certain banking
functions without being considered a "branch". In general, subject to certain
limitations, nationwide interstate acquisitions are now permissible,
irrespective of state law limitations other than limitations related to deposit
concentrations and bank age requirements. Interstate mergers also are
permissible. Affiliated banks may act as agents for one another. Each of the
transactions and activities must be approved by the appropriate federal bank
regulator, with separate and specific criteria established for each category.
In 1996, Massachusetts enacted interstate banking laws in response to
Riegle-Neal. The laws permit, subject to certain deposit and other limitations,
interstate acquisitions, mergers and branching on a reciprocal basis. The new
interstate banking law is likely to make it easier for out-of-state institutions
to attempt to purchase or otherwise acquire or to compete with the Bank in
Massachusetts, and similarly makes it easier for Massachusetts banks to compete
outside the state.
Financial Modernization. Various federal legislative proposals are pending to
"modernize" the nation's financial system. Although the proposals vary, most
generally would allow for some mixing of banking and commerce and generally
would repeal most laws limiting the ability of banks and securities companies to
be affiliated.
2
Federal Securities Laws. Upon consummation of the Reorganization, the reporting
obligations of the Bank under the Securities Exchange Act of 1934 (the "Exchange
Act"), as administered by the FDIC, were replaced with substantially identical
obligations of the Company under the Exchange Act, as administered by the
Securities and Exchange Commission (the "SEC"). Pursuant to the Exchange Act,
the Company files annual, quarterly, and periodic reports with 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. In connection with
the Reorganization, the Bank deregistered the Bank's common stock under the
Exchange Act.
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
$1.7 million in SBLI annuities in 1997, making it the top seller of this product
in Massachusetts.
The Bank provides safe deposit services at nine of its branches.
The Bank originates 30-year, fixed-rate, residential 1-4 family loans in
correspondent relationships with third parties such as Plymouth Mortgage Company
and Chase Manhattan Mortgage Corporation, whereby the Bank originates loans in
exchange for an origination fee.
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 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.
Management believes that the Company's emphasis on personal service and
convenience, coupled with active involvement within the communities it serves,
contribute to its ability to compete successfully.
Employees
As of December 31, 1997, the Bank employed 215 full-time staff, including 41
officers, and 82 part-time staff. None of the Bank's employees is represented by
a labor union. The Company has no officers or employees separate from the Bank.
Executive Officers of the Company and Bank
The executive officers of the Company and/or the Bank, their positions with the
Company and/or the Bank and their ages as of February 28, 1998 are as follows:
Name Age Position
Arthur H. Meehan [62] President and Chief Executive Officer of the Company
and the Bank; Chairman of the Board of Directors of
the Company and the Bank
Phillip W. Wong [48] Senior Vice President, Chief Financial Officer and
Treasurer of the Company; Executive Vice
President and Chief Financial Officer of the Bank
George A. Bargamian [49] Senior Vice President of the Bank (Retail)
3
Name Age Position
Mona Bishlawi [37] Senior Vice President of the Bank (Finance)
Eric B. Loth [55] Senior Vice President of the Bank (Lending)
William F. Rivers [42] Senior Vice President of the Bank (Administration)
Arthur H Meehan. Mr. Meehan commenced his employment with the Bank in February
1992. Prior to this date, Mr. Meehan served as Executive Vice President of the
Bank of New England Corporation.
Phillip W. Wong. Mr. Wong commenced his employment with the Bank as Senior Vice
President in December 1992 and was promoted to Executive Vice President in 1997.
Prior to this date, Mr. Wong served as Chief Financial Officer of Guaranty-First
Trust Co. in Waltham, Massachusetts.
George A. Bargamian. Mr. Bargamian was hired by the Bank as Director of
Marketing in 1988, and was promoted to Vice President and Senior Vice President
of the Bank during 1988. Mr. Bargamian formerly served as Assistant Vice
President of Marketing for First Mutual of Boston.
Mona Bishlawi. Ms. Bishlawi commenced her employment with the Bank as Controller
in 1993, served as Vice President from 1994-1997, and was promoted to Senior
Vice President in 1997. Ms. Bishlawi formerly served as Assistant Vice President
and Assistant Controller at Eastern Bank Corporation in Lynn, Massachusetts.
Eric B. Loth. Mr. Loth commenced his employment with the Bank as Senior Vice
President in August 1994. Prior to this date, Mr. Loth served as Vice President
of Lending at Sterling Bank in Waltham, Massachusetts.
William F. Rivers. Mr. Rivers commenced his employment with the Bank in January
1974, served as Assistant Treasurer from 1980-1985, Vice President from
1985-1988, and was promoted to Senior Vice President in 1988.
ITEM 2. PROPERTIES
All of the Bank's branches located in Medford (except for the West Medford
branch), the branch located in Arlington, and the Malden Center, Maplewood and
Oak Grove branches located in Malden are owned by the Bank. All other branches
are leased from unrelated third parties. The Company also owns a building that
houses the Company's finance department, which is currently available for sale.
The Company also owns an office building currently housing the Company's lending
and certain administrative offices. Additional space in this building is leased
to third parties, and the remainder is available for the Bank's expansion needs.
In 1997, the Bank purchased an office building located between the main branch
office in Medford and the lending and administrative office building. The
Company also purchased a tract of land in the City of Tewksbury with plans to
construct a new branch office. Subject to the foregoing, the Company believes
that its properties are adequate for its present needs.
The Bank has also acquired properties through foreclosure, which are presently
being marketed by local real estate brokers or the Company's lending staff.
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.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 16, 1997, a special meeting of the stockholders of the Bank (the
"Special Meeting") was held to consider and vote upon the Reorganization. A
brief description of the vote and the results of the vote are incorporated
herein by reference to the Bank's proxy statement for the Special Meeting and
the Bank's Current Report on Form F-3, respectively, filed as exhibits to the
Company's Current Report on Form 8-K filed with the SEC on November 26, 1997.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's (and, prior to the Reorganization, the Bank's) common stock is
quoted on the NASDAQ National Market System under the symbol "MDBK". The
following table sets forth cash dividends declared on common stock and the high
and low closing prices for the quarters indicated. All prices set forth below
are based on information provided by the National Association of Securities
Dealers, Inc.
Common Stock Sale Prices
------------------------ Dividends Declared
High Low Per Share
---- --- ---------
1997 1st quarter $29 3/4 $24 1/2 $0.18
2nd quarter 30 1/2 24 3/4 0.18
3rd quarter 36 29 1/4 0.18
4th quarter 42 34 0.36
1996 1st quarter $24 1/4 $20 $0.17
2nd quarter 23 1/4 19 3/4 0.17
3rd quarter 24 1/2 20 3/4 0.17
4th quarter 27 23 0.32
At March 2, 1998, according to the Company's transfer agent, the Company had
approximately 1,182 record holders of its common stock. The number of holders of
record does not reflect the number of persons or entities who or which held
their stock in nominee or "street" name through various brokerage firms or other
entities.
The declaration of future dividends to the Company's stockholders is subject to
future operating results, financial conditions, tax and legal considerations and
other factors, such as the Bank's ability to declare and pay dividends to the
Company. As the principal asset of the Company, the Bank currently provides the
only source of payment of dividends by the Company. FDICIA limits the ability of
undercapitalized insured banks to pay dividends. Moreover, under Massachusetts
law, a stock-form savings bank may pay dividends only out of its net profits and
only to the extent such dividends do not impair the Bank's capital and surplus
accounts. Provided that the Bank can meet these requirements, Massachusetts law
permits a bank to distribute net profits as a dividend so long as, after such
distribution, either (i) the Bank's capital and surplus accounts equal at least
10% of its deposit liabilities or (ii) the Bank's surplus account equals 100% of
its capital account, subject to certain exceptions. 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. If there is no surplus, dividends
may be paid out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Funds held by the Company are
available for various corporate uses, including the payment of future dividends.
6
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At December 31,
-------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Total assets $1,135,572 $1,039,098 $ 955,933 $ 915,055 $ 831,939
Investment securities 513,418 424,966 363,599 332,248 294,390
Loans, net 570,844 560,855 529,424 523,125 478,632
Deposits 821,706 792,141 791,851 791,780 735,753
Stockholders' equity 101,510 92,521 86,076 76,363 71,352
Book value per share 22.35 20.40 19.46 17.37 16.45
Stockholders' equity to total assets 8.94% 8.90% 9.00% 8.35% 8.58%
Number of offices 16 16 16 15 12
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Years Ended December 31,
-------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA
Interest and dividend income $ 75,332 $ 68,711 $ 64,405 $ 55,401 $ 55,868
Interest expense 41,349 36,462 32,724 24,523 25,642
---------- ---------- ---------- ---------- ----------
Net interest income 33,983 32,249 31,681 30,878 30,226
---------- ---------- ---------- ---------- ----------
Provision for loan losses 125 215 772 583 2,110
Other income:
Gain (loss) on investment securities, net 835 413 96 (65) 753
All other income 3,007 2,902 3,050 2,960 2,383
---------- ---------- ---------- ---------- ----------
Total other income 3,842 3,315 3,146 2,895 3,136
---------- ---------- ---------- ---------- ----------
Operating expenses 19,054 18,075 18,169 19,645 19,418
---------- ---------- ---------- ---------- ----------
Income before income taxes 18,646 17,274 15,886 13,545 11,834
Provision for income taxes 7,256 6,845 6,463 5,292 4,665
---------- ---------- ---------- ---------- ----------
Net income $ 11,390 $ 10,429 $ 9,423 $ 8,253 $ 7,169
========== ========== ========== ========== ==========
Basic earnings per share $ 2.51 $ 2.31 $ 2.14 $ 1.89 $ 1.66
========== ========== ========== ========== ==========
Diluted earnings per share $ 2.39 $ 2.21 $ 2.02 $ 1.78 $ 1.57
========== ========== ========== ========== ==========
Cash dividends declared per share $ 0.90 $ 0.83 $ 0.71 $ 0.62 $ 0.50
========== ========== ========== ========== ==========
SELECTED RATIOS
Return on average assets 1.05% 1.05% 1.01% 0.95% 0.87%
Return on average equity 11.81 11.72 11.52 11.14 10.21
Average equity to average assets 8.91 8.98 8.75 8.53 8.49
Weighted average rate spread 2.84 3.00 3.20 3.50 3.64
Net yield on average earning assets 3.26 3.39 3.54 3.74 3.86
Dividend payout ratio - basic earnings per share 35.86 35.93 33.18 32.80 30.12
- ------------------------------------------------------------------------------------------------------------------------------------
On May 6, 1994, the Bank acquired certain assets and assumed certain liabilities
of the former Commercial Bank and Trust Company ("CBTC").
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-K contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors, of
changes in general, national or regional economic conditions, changes in loan
default and charge-off rates, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
The following discussion should be read in conjunction with the accompanying
consolidated financial statements and selected consolidated financial data
included within this report. Given that the Company's principal activity
currently is ownership of the Bank, for ease of reference, the term "Company' in
this Item generally will refer to the investments and activities of the Company
and the Bank, except where otherwise noted.
GENERAL
The Company's net income is primarily attributable to its level of net interest
income, which represents the difference between interest and dividend income
earned on earning assets and interest paid on deposits and other borrowed money.
The main components of the Company's earning assets are loans, investment
securities and short-term investments. Interest-bearing deposits include NOW,
savings, money market and term certificates of deposit. The net interest income
performance of the Company is significantly affected by general economic
conditions, by the Company's corporate strategies, its asset/liability
management, tactical programs and by the policies of regulatory authorities.
Sources of non-interest income such as loan servicing fees, gains/losses on
sales of investment 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, deposit insurance premiums, amortization of
intangibles, advertising and marketing and other general and administrative
expenses.
In 1996, the Company invested approximately $1.7 million in the purchase and
installation of a new loan and deposit processing system. The one-time expenses
charged to operations in 1996 to convert to the new system were approximately
$378,000.
The Company achieved record net income of $11.4 million for 1997, an increase of
$961,000, or 9.2% compared to net income of $10.4 million for 1996. Earnings per
share for 1997 were $2.51 ($2.39 on a diluted basis) compared with $2.31 ($2.21
on a diluted basis) for 1996, an increase of 20 cents or 8.7% compared to the
previous year.
At December 31, 1997, total assets were $1.1 billion, an increase of 9.3% from
the prior year. Total loans increased 1.7% to $577.6 million at December 31,
1997. The Bank sold $11.1 million of education loans in the second quarter of
1997 and $20.5 million of residential loans in the fourth quarter of 1997.
Excluding the loan sales, loan growth was approximately 7.0%. Investment
securities increased 20.8% to $513.4 million at December 31, 1997. Total
deposits increased 3.7% to $821.7 million, and borrowed funds increased 38.6% to
$205.8 million. Stockholders' equity increased 9.7% to $101.5 million at
December 31, 1997, representing a book value of $22.35 per share, up from $20.40
at December 31, 1996. The capital to assets ratio was 8.94%, exceeding all
regulatory requirements.
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 investments are in shorter-term government, agency, or high-quality (rated
"A" or better) corporate securities. Investment bonds 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.
8
Investment securities increased 20.8% from $425.0 million at December 31, 1996
to $513.4 million at December 31, 1997. The increase was primarily in
mortgage-backed securities and corporate bonds designated as "available for
sale". During 1997, the Company implemented a strategy using the investment
portfolio to increase earning assets and generate higher levels of interest
income. In order to increase the overall yield of the investment portfolio, the
strategy also included a program of replacing U.S. Government and federal
agencies as they matured or were sold with mortgage-backed securities and
corporate bonds. At December 31, 1996, 53% of the investment portfolio was in
U.S. Government and federal agencies, while mortgage-backed securities
represented 7%. At December 31, 1997, U.S. Government and federal agencies were
reduced to 37% of total investment securities, and mortgage-backed securities
were increased to 24%. The mortgage-backed securities pools added to this
portfolio throughout 1997 consisted primarily of fixed-rate, low-coupon,
government-backed securities that have limited extension or contraction risk.
Consideration is given to the underlying collateral, the impact of rising or
falling rates on the average life of these securities and other factors
associated with the Bank's investment policies and strategies.
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. All other marketable investment 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 as a separate
component of stockholders' equity. As of December 31, 1997, the net unrealized
gain on investments classified as "available for sale" was $2,156,000 and the
net unrealized gain on investments classified as "held to maturity" was
$279,000.
In November 1995, the Financial Accounting Standards Board issued guidance
allowing a one-time reassessment of an entity's investment classifications
during the period November 15, 1995 to December 31, 1995. As a result, the
amortized cost of securities held to maturity that were transferred to available
for sale amounted to $26,987,000 and the related unrealized loss amounted to
$206,000.
In addition, the Bank also held limited amounts of equity securities subject to
the investment limitations imposed by FDICIA and the Commissioner.
The following table sets forth certain information concerning the investment
portfolio at carrying value:
At December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Investment securities:
Debt securities:
U.S. Government and federal agency $190,579 $224,519 $193,106
Mortgage-backed securities 122,447 27,814 32,780
State and municipal -- 89 232
Corporate bonds 185,859 159,892 126,545
Equity securities 14,533 12,652 10,936
-------- -------- --------
Total investment securities $513,418 $424,966 $363,599
======== ======== ========
9
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, 1997
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Within Average Over 1 Year Average Over 5 Years Average
1 Year Yield to 5 Years Yield to 10 Years Yield
--------- ----------- ------------ ------------ ------------ -----------
(Dollars in thousands)
U.S. Government and
federal agency $ 60,918 5.85% $ 34,134 6.16% $ -- --%
Other 54,878 5.97 218,451 6.00 8,057 5.95
--------- ------------ -----------
$ 115,796 5.91% $ 252,585 6.02% $ 8,057 5.95%
========= ============ ===========
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,
education 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 is generally
offered whereby the Bank originates the loan for a correspondent and collects an
origination fee. During the fourth quarter of 1997, the Company originated and
retained $4.1 million of 30-year, fixed-rate residential loans in order to
improve the yield on residential loans.
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.
Loans increased modestly in 1997 as the Bank sold $11.1 million of education
loans in the second quarter, and $20.5 million of residential loans in the
fourth quarter. Excluding the loan sales, loan growth was approximately 7.0%. It
is the Bank's intention to sell education loans in the repayment stage as
conditions warrant. The increase in loans is primarily in residential,
construction, and commercial asset-based loans. All other loan categories
remained fairly stable from December 31, 1996 as new loan originations replaced
amortization and payoffs. The Company expects continued intense competition for
loans within its geographic region despite improvement in the regional economy.
Within this framework, management has intensified marketing efforts for
residential loans and asset-based lending.
10
Composition of portfolio. The following table shows the composition of the loan
portfolio by type of loan:
At December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands)
Commercial loans $ 14,941 $ 11,014 $ 9,075 $ 10,270 $ 9,991
Loans secured by real estate:
Residential * 389,593 380,627 353,172 350,013 308,895
Construction loans, net of unadvanced
funds 11,278 8,719 8,591 7,577 2,541
Commercial 124,094 123,158 125,771 125,190 127,550
Second mortgages 1,539 1,928 2,175 2,441 3,087
Equity lines of credit 22,146 21,169 20,819 20,080 18,943
Consumer loans 12,931 20,548 16,710 14,396 13,942
--------- --------- --------- --------- ---------
576,522 567,163 536,313 529,967 484,949
Add: Net premium on loans acquired 270 354 504 648 833
Net deferred origination costs (fees) 785 569 73 49 (143)
Less: Allowance for loan losses (6,733) (7,231) (7,466) (7,539) (7,007)
--------- --------- --------- --------- ---------
Loans, net $ 570,844 $ 560,855 $ 529,424 $ 523,125 $ 478,632
========= ========= ========= ========= =========
* Residential first mortgages represent qualified collateral under a blanket
lien securing FHLBB borrowings. See "Borrowings" for a more detailed
explanation of this lien.
The following table presents the maturity distribution of commercial and
construction loans at December 31, 1997:
Maturities
----------------------------------------------------------
1 Year Over 1 Year Over
or Less to 5 Years 5 Years Total
----------- -------------- ----------- -----------
(In thousands)
Commercial loans $ 9,907 $ 4,341 $ 693 $ 14,941
Construction loans 4,807 2,422 4,049 11,278
Generally, construction loans provide for payments of interest only during the
construction period, and then payments of principal and interest throughout the
life of the loans. In all cases, these loans have adjustable interest rates.
Commercial loans with maturities of over one year will be 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 $ 1,106 $ -- $ 1,106
Adjustable rates 3,235 693 3,928
------------- ----------- ------------
$ 4,341 $ 693 $ 5,034
============= =========== ============
11
Non-performing Assets
It is the Bank's general policy to discontinue the accrual of interest on loans
over 90 days 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.
On January 1, 1995, the Bank adopted 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. When
impaired loans become 90 days or more delinquent, they are generally maintained
on non-accrual status whereby interest income is recognized only when received.
The restatement of previously issued financial statements to conform with SFAS
No. 114 is expressly prohibited. 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 non-accrual loans,
restructured loans and foreclosed real estate at the dates indicated. The Bank
did not have any loans 90 days or more past due and still accruing at the dates
indicated.
At December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
Impaired loans accounted for on a non-accrual basis $ 1,726 $ 2,752 $ 4,239 $ n/a $ n/a
Other loans accounted for on a non-accrual basis -- 687 82 1,740 2,229
Troubled debt restructurings n/a n/a n/a 829 2,082
Foreclosed real estate 48 276 350 1,444 2,763
------- ------- ------- ------- -------
$ 1,774 $ 3,715 $ 4,671 $ 4,013 $ 7,074
======= ======= ======= ======= =======
At December 31, 1997, all loans on non-accrual status were considered impaired.
At December 31, 1996, $687,000 of loans were 90 days or more past due but were
not considered impaired. Management expected the two commercial real estate
borrowers involved to resume scheduled payments of principal and interest in
accordance with the contractual terms of the loan agreements.
The balance of in-substance foreclosures that would have been restated and
classified as impaired loans in accordance with SFAS No. 114 at December 31,
1994 was $302,000. The increase in non-accrual loans in 1995 was primarily
attributable to the death of a commercial real estate borrower. Subsequent to
the borrower's death, the debt was assumed by a new borrower and loan
performance resumed.
Loans accounted for on a non-accrual basis at December 31, 1997 had gross
interest income of $406,000 that would have been recorded during 1997 if the
loans had 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
$85,000.
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. Among the factors that management
considers are the quality of specific loans, risk characteristics of the loan
portfolio, level of non-performing loans, current economic conditions, trends in
delinquency and charge-offs and collateral value of the underlying security.
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. After specific
allocations are made, a review is made to determine whether the remaining
unallocated portion of the allowance is adequate to cover possible unidentified
loan losses.
12
The Bank recorded a provision for loan losses for the year ended December 31,
1997 of $125,000, compared with $215,000 for the year ended December 31, 1996.
At December 31, 1997, the allowance for loan losses totaled $6.7 million or 390%
of non-accrual loans at that date, compared with $7.2 million or 210.3% of
non-accrual loans at December 31, 1996. Non-accrual loans at December 31, 1997
were $1.7 million or 0.30% of total net loans, compared with $3.4 million or
0.61% of total net loans at December 31, 1996.
An analysis of the allowance for loan losses is presented in the following
table:
At December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
Allowance for loan losses, beginning of year $ 7,231 $ 7,466 $ 7,539 $ 7,007 $ 6,649
------- ------- ------- ------- -------
Loans charged-off --- Residential real estate (38) (64) (66) (267) (406)
--- Commercial real estate (720) (656) (884) -- (1,329)
--- Consumer (42) (89) (28) (34) (28)
--- Commercial (31) (21) (100) (8) (227)
Recoveries --- Residential real estate 26 7 104 218 4
--- Commercial real estate 147 348 102 35 229
--- Consumer 25 8 10 5 5
--- Commercial 10 17 17 -- --
------- ------- ------- ------- -------
Net charge-offs (623) (450) (845) (51) (1,752)
------- ------- ------- ------- -------
Provision for loan losses, charged to operations 125 215 772 583 2,110
------- ------- ------- ------- -------
Allowance for loan losses, end of year $ 6,733 $ 7,231 $ 7,466 $ 7,539 $ 7,007
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans 0.11% 0.08% 0.16% 0.01% 0.37%
======= ======= ======= ======= =======
An analysis of the allocation of the allowance for loan losses is presented in
the following table:
At December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
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 $1,067 71.73% $1,179 71.23% $1,036 70.17% $2,669 70.29% $2,397 68.24%
Commercial real estate 5,220 21.49 5,711 21.68 6,118 23.43 4,553 23.62 4,444 26.30
Construction 169 1.95 131 1.53 129 1.60 114 1.43 22 0.52
Consumer 48 2.24 44 3.62 47 3.11 49 2.72 44 2.88
Commercial 229 2.59 166 1.94 136 1.69 154 1.94 100 2.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $6,733 100.00% $7,231 100.00% $7,466 100.00% $7,539 100.00% $7,007 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
While management considers the allowance for loan losses to be adequate at
December 31, 1997, there is no assurance that additional charge-offs and
provisions will not be necessary in 1998. The provision for loan losses during
1998 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 1997.
13
Deposits
Deposits historically have been the Bank's primary source of funds. The Bank
offers a wide variety of deposit programs to attract both short-term and
long-term deposits from individuals, partnerships and corporations, non-profits
and municipalities. Deposit products include regular savings accounts, NOW
accounts, money market deposit accounts, individual retirement accounts, term
certificates, and retail and commercial demand deposit accounts. The Bank also
solicits corporate and municipal jumbo term deposits.
The Bank's Retail Banking Division places emphasis on sales of its products and
quality of service to attract and retain customers. Management measures the
sales performance of platform personnel in terms of cross-sales of additional
products above the primary product which the customer requests. Platform
personnel are evaluated in part, based on a cross-sell ratio which is the total
number of these additional products sold to a customer divided by the number of
customers. For 1997 this cross-sell ratio was 1.96, meaning for each customer
"buying" one product, the customer was "sold" a total of 1.96 products, or
approximately two products per customer.
The Bank utilizes products and services such as its FREEDOM 55(TM) mature market
program targeted to particular market segments to attract depositors interested
in long-term savings and to create multiple account relationships with these
depositors. Management believes that the customers attracted to these programs
have an increased sense of loyalty to the Bank, and accordingly, the funds
deposited into these programs are less volatile than other deposits.
While deposit flows are by nature unpredictable, management controls the Bank's
deposit growth through selective pricing and sales oriented marketing programs.
The low interest rate environment, coupled with continued strength in the stock
market and mutual funds continue to present management with the challenge of
attracting and retaining deposits. To maintain stable deposit rates and manage
interest rate risk, the Bank's strategy has been to grow deposit levels 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 to the increase in savings and demand deposits.
Total deposits increased $29.6 million or 3.7% to $821.7 million at December 31,
1997 from $792.1 million at December 31, 1996. When compared to the prior year,
demand deposits increased 10.1% while NOW deposits decreased 2.4%. Savings and
money market deposits increased 3.0% and term certificates increased 4.6%. In
previous years, the Bank experienced disintermediation from regular savings
deposits and money market deposits to term certificates. In 1997, the response
to a flat yield curve by customers of the Bank has been an increase in more
liquid and shorter term deposit products.
The following table indicates the balances in various deposit accounts at the
end of each reported period:
At December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Demand accounts $ 44,196 $ 40,124 $ 36,427
NOW accounts 59,368 60,839 63,248
Savings and money market accounts 325,340 315,771 314,813
Term certificates 392,802 375,407 377,363
--------- --------- ---------
$ 821,706 $ 792,141 $ 791,851
========= ========= =========
14
The following table sets forth the average deposits of the Bank with related
average rates paid during each reported period:
1997 1996 1995
---------------------- ----------------------- -----------------------
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
Demand accounts $ 35,210 --% $ 30,935 --% $ 25,752 --%
NOW accounts 59,485 1.00 61,317 1.10 62,178 1.47
Savings and money market deposits 322,079 2.96 316,498 2.80 334,739 2.68
Term certificates 391,204 5.42 378,680 5.52 357,031 5.32
Included in term certificates of deposit are certificates having balances of
$100,000 or more. At December 31, 1997, such term certificates had the following
maturities:
At December 31, 1997
- ---------------------------------------------------------------------------
3 Months Over 3 Months Over 6 Months Over
or Less to 6 Months to 12 Months 12 Months Total
- ------------ --------------- ----------------- ------------ -----------
(In thousands)
$ 19,265 $ 6,335 $ 9,158 $ 19,036 $ 53,794
Borrowed Funds
The Bank is a voluntary member of the FHLBB. As such, the Bank may borrow up to
its qualified collateral, as defined by the FHLBB.
The Bank has selectively borrowed funds from the FHLBB to fund purchases of
loans or large loan originations in addition to purchases of mortgage-backed
securities. Short-term borrowings typically fund purchases or originations of
one-year adjustable-rate loans, or are used to meet the Bank's daily liquidity
needs. Long-term debt typically funds purchases of three-year adjustable-rate
residential mortgage loans or the origination of certain commercial real estate
loans. The Bank also enters into repurchase or reverse repurchase agreements
with a number of authorized brokers as an alternative source of funds.
Securities sold under agreements to repurchase are borrowings that mature within
one year and are secured by U.S. government obligations. Total borrowed funds
increased to $205.8 million at December 31, 1997 from $148.5 million at December
31, 1996, reflecting management's decision to utilize borrowings as a supplement
to current deposit activity levels. The Bank took advantage of relatively low
interest rates to increase long-term borrowings which were employed to fund the
increase in the residential loan portfolio and purchases of mortgage-backed
securities.
15
The following table presents, by category, the borrowings of the Bank for the
reported periods:
At December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
Short-term borrowings:
FHLBB advances $ -- $ 30,000 $ 20,000
Federal Reserve Bank of Boston advances 2,059 1,233 --
Securities sold under agreements to repurchase 93,611 49,584 20,281
-------- -------- --------
Total short-term borrowings $ 95,670 $ 80,817 $ 40,281
======== ======== ========
Weighted average rate 5.72% 5.82% 5.92%
Average balance of short-term borrowings during
the year $ 70,417 $ 49,123 $ 34,594
Weighted average rate paid on short-term
borrowings during the year 5.53% 5.37% 6.17%
Maximum amount outstanding at any month-end
during the year $ 99,593 $ 80,817 $ 42,406
Long-term debt:
FHLBB advances $110,109 $ 67,647 $ 32,147
======== ======== ========
Weighted average rate 6.02% 6.10% 6.19%
Average balance of long-term debt during the year $ 98,972 $ 55,276 $ 29,307
Weighed average rate paid on long-term
debt during the year 6.19% 6.14% 5.88%
Maximum amount outstanding at any month-end
during the year $115,156 $ 68,647 $ 32,147
Stockholders' Equity
The Bank's capital to assets ratio was 8.94% at December 31, 1997, compared to
8.90% at December 31, 1996. The Bank's capital ratios at December 31, 1997 and
1996 exceeded all regulatory requirements. Book value at December 31, 1997 was
$22.35 per share, compared with $20.40 per share at December 31, 1996. (See
"Liquidity and Capital Resources.")
16
RESULTS OF OPERATIONS
General
In 1997, the Company reported consolidated net income of $11.4 million or $2.51
basic earnings per share, as compared to net income of $10.4 million or $2.31
per share in 1996 and net income of $9.4 million or $2.14 per share in 1995.
Diluted earnings per share were $2.39, $2.21 and $2.02 for 1997, 1996 and 1995,
respectively. Consolidated net income in 1997 increased 9% over 1996 and
consolidated net income in 1996 increased 11% over 1995. Diluted earnings per
share in 1997 increased 8% over 1996 and diluted earnings per share in 1996
increased 9% over 1995. The Company's return on assets was 1.05% for 1997 and
1996, as compared to 1.01% in 1995. The return on equity increased to 11.81% in
1997 from 11.72% in 1996 and 11.52% in 1995.
The increased earnings for 1997 when compared to 1996 reflect a $1.7 million
increase in net interest income due to higher average earning assets, a
reduction in the provision for loan losses of $90,000 due to positive credit
quality trends, and an increase in net gains on the sale of securities and loans
amounting to $719,000. Service fees from transaction accounts and other income
decreased $192,000 from the prior year, as customers shifted to lower cost
products. Total operating expenses increased $979,000 from the prior year.
Included in the increase were one-time expenses of approximately $200,000
related to the formation of the holding company, and $260,000 applicable to tax
filing matters. In 1996, the Company incurred $378,000 of one-time expenses
concurrent with the purchase and installation of a new loan and deposit system.
The increase in earnings in 1996 when compared to 1995 reflects an increase in
net interest income, a reduction in the provision for loan losses, and an
increase in net gains on the sales of investment securities. "Core" operating
expenses, which are defined to exclude net gains and losses from foreclosed real
estate and one-time expenses decreased $806,000 between 1996 and 1995. The
reduction is attributed to the virtual elimination in 1996 of deposit insurance
expense and on-going cost control. A total of $1.7 million was invested in 1996
on the installation of a new system that is represented by hardware and software
which was capitalized.
Net Interest Income
Net interest income was $34.0 million in 1997; an increase of $1.7 million or
5.4% from $32.2 million in 1996, and an increase of $2.3 million or 7.3% from
$31.7 million in 1995. Average earning assets in 1997 increased $91.3 million as
compared to $81.3 million of increased interest-bearing liabilities; the
difference resulting from higher demand deposits and capital. As a result, the
excess of earning assets to interest-bearing liabilities increased 11.2% to
$99.9 million from the $89.8 million in 1996. In addition, the Bank improved its
average earning assets to average assets ratio to 96.2%, up from 96.0% in the
prior year. The earnings on this excess flow directly to interest income.
The flattening of the yield curve in 1997 has compressed the net interest margin
and spread. As a result, changes in the mix of earning assets and higher funding
costs reduced the net interest margin in 1997 to 3.26% from 3.39% in 1996 and
3.54% in 1995. The Company's most integral challenge is managing net interest
income. Management continued to maintain a stable net interest margin by closely
monitoring the behavior of the loan portfolio under varying market rate
environments in order to maximize the yield on earning assets. During 1997,
average loan balances represented 53.2% of average assets. This compares with
54.9% in 1996, and 57.4% in 1995. The average investment securities balance was
43.0% of average assets in 1997 as compared to 41.1% in 1996 and 38.1% in 1995.
As the percentage of loans to assets decreases and the percentage of investments
to assets increases, the net interest margin declines as loans are typically a
higher yielding asset than the types of securities in which the Bank generally
invests.
Management closely monitors funding costs, and utilizes borrowings as an
alternative to deposits when pricing or availability is more advantageous. The
average deposits balance represented 82.0%, and average borrowings represented
18.0%, of total interest bearing liabilities in 1997 as compared to 87.9% and
12.1%, respectively, in 1996, and 92.2% and 7.8%, respectively, in 1995. The
increased reliance on borrowings in 1997 resulted in a higher cost of funds,
thereby reducing the net interest margin.
17
Interest and Dividend Income
Interest and dividend income totalled $75.3 million for 1997; an increase of
$6.6 million or 9.6% from 1996. Interest and dividend income totalled $68.7
million for 1996; an increase of $4.3 million or 6.7% from 1995. The weighted
average yield on earning assets was 7.23% in 1997 and 1996, compared to 7.20% in
1995.
Interest income on loans increased 6.3% or $2.8 million to $46.2 million in 1997
primarily as the result of increases in the average loans outstanding and a
modest increase in the average yield on loans to 8.02%. Increased residential
1-4 family loan volume contributed $2.3 million of additional interest income.
The average yield on residential 1-4 family loans remained flat at 7.50% when
compared with 1996. Interest income on commercial loans increased $417,000 as a
result of asset-based loan volume. In addition, the yield on commercial loans
improved 9 basis points to 9.62% in 1997 as asset-based loans typically command
a higher rate.
Commercial real estate loans contributed $97,000 of additional interest income
in 1997. Included in interest income from commercial real estate loans in 1996
was $251,000 which related to recoveries that had been charged-off in a prior
period. Interest income on consumer loans increased a modest $16,000 from the
prior year primarily due to the sale of $11.1 million in education loans in the
second quarter of 1997.
Interest income on investments was $29.1 million in 1997 compared with $25.3
million in 1996. The $58.6 million increase in the average balance of investment
securities, principally in higher yielding corporate bonds and mortgage-backed
securities, contributed $3.8 million of additional interest income. Investing in
higher yielding instruments increased the yield on investments by 5 basis points
to 6.25% in 1997.
Interest income on loans was $43.5 million in 1996 compared with $42.7 million
in 1995, as modest increases in average loans outstanding and yield combined to
generate $774,000 in additional interest income on loans. Interest income on
residential 1-4 family loans increased $248,000 in 1996 compared to 1995 levels
as loan volume increased. The yield on residential loans remained stable from
year to year at approximately 7.50%. Interest income on commercial real estate
loans increased $393,000 from 1995 levels; $251,000 of which related to
recoveries that had been charged-off in a prior period. The remaining increase
is attributable to the upward repricing of adjustable-rate loans. Interest
income on consumer loans increased $154,000 in 1996; primarily as a result of
growth in student loan volume. The increases were offset by a decrease in
interest income on commercial loans of $21,000 as the yield on loans declined.
As in 1995, the Bank elected not to price loan products aggressively, thereby
generating only a modest increase in volume. The overall yield on loans
increased from 7.94% in 1995 to 7.99% in 1996.
Interest income on investments was $25.3 million in 1996 compared with $21.7
million in 1995. The increase of $49.4 million in the average balance of
investments in 1996 coupled with an increase in the yield on investments
contributed an additional $3.5 million in interest income. During 1996, the Bank
increased its investment in U.S. government and agency obligations and corporate
bonds with the intent to generate additional interest income. The weighted
average yield on investment securities, including short-term investments,
increased to 6.20% in 1996 from 6.09% in 1995, reflecting the purchase of
additional investment securities and the reinvestment of proceeds from
maturities and sales at higher yields.
Interest Expense
Interest expense was $41.3 million in 1997, up $4.9 million or 13.4% from 1996.
Interest expense was $36.5 million in 1996, an increase of $3.3 million or 11.4%
from 1995. The cost of funds increased to 4.39% in 1997 compared with 4.23% in
1996 and 4.00% in 1995 principally as a result of the increased reliance on
borrowed funds.
Interest expense on deposits was $31.3 million in 1997, compared with $30.4
million in 1996. Average interest-bearing deposits increased $16.3 million
resulting in an increase in interest expense of $895,000. The Company continues
to focus on increasing certain core deposit accounts. As a result, pricing
strategies were implemented raising certain core deposit product rates while
lowering term certificate rates. The weighted average rate paid on savings and
money market deposits increased to 2.96% in 1997 compared with 2.80% in 1996.
The increased rate coupled with a $5.6 million increase in the average balance
added $688,000 of interest expense in 1997. The weighted average rate paid on
term certificates decreased to 5.42% from 5.52%. The lower rate partially offset
the increased interest expense on term certificates, resulting from a $12.5
million increase in the average balance which added $288,000 of interest
expense. The average balance of NOW deposits decreased a modest $1.8 million.
This decrease along with a lowering of the rate paid reduced interest expense by
$81,000. The overall weighted average rate paid on deposits increased to 4.06%
in 1997 from 4.03% in 1996. The increase is principally due to
disinteremediation from the lower rate passbook savings into the higher rate
"ComboPlus" statement savings, an increase in money market rates, and the 2 year
certificate of deposit promotion offered during the first six months of the
year.
18
Interest expense on borrowed funds was $10.0 million in 1997, compared with $6.0
million in 1996. Management took advantage of declining interest rates to extend
and increase borrowings. Longer-term FHLBB borrowings were acquired to fund and
manage the interest rate risk resulting from growth in the residential loan
portfolio. The increase in interest expense is the result of a $65.0 million
increase in the average balance of borrowings coupled with a weighted average
rate that was 15 basis points over the prior year's cost of funds. The increase
in rate is attributed to the longer term of the borrowings. In addition, a
significant portion of overall borrowings continue to include short-term
repurchase agreements of U.S. Government securities that contribute to the
funding of the Bank's investment portfolio.
Interest expense on deposits was $30.4 million and interest expense on borrowed
funds was $6.0 million in 1996, compared with $28.9 million and $3.9 million,
respectively, in 1995. While interest-bearing deposit levels remained stable in
1996 as compared with 1995, a certain level of disintermediation from lower rate
passbook savings accounts to higher rate core deposits and term certificates
increased the average cost of interest-bearing deposits. In addition, the Bank
leveraged its strong capital position by increasing average borrowed funds to
$104.4 million at an average cost of 5.78% in 1996 from $63.9 million at an
average cost of 6.04% in 1995. This cost reduction was achieved by adjusting the
borrowed funds mix, in part towards greater short-term, secured borrowings, such
as repurchase agreements, at rates averaging 5.07% in 1996 versus 5.93% in 1995.
This rate decline more than offset the higher average rates paid for increased
average levels of long-term FHLBB advances, at 6.14% in 1996 versus 5.88% in
1995.
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.
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(In thousands)
INTEREST AND DIVIDEND INCOME
Short-term investments $ (234) $ 1 $ (233) $ 54 $ (50) $ 4
Mortgage-backed investments 2,668 87 2,755 333 106 439
Other investment securities 1,362 (22) 1,340 2,727 362 3,089
Loans 2,623 136 2,759 505 269 774
------- ------- ------- ------- ------- -------
Total interest and dividend income 6,419 202 6,621 3,619 687 4,306
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
NOW deposits (20) (61) (81) (12) (226) (238)
Savings deposits and MMDA 158 530 688 (500) 392 (108)
Term certificates 683 (395) 288 1,179 736 1,915
Short-term borrowings 1,176 83 1,259 808 (307) 501
Long-term debt 2,704 29 2,733 1,590 78 1,668
------- ------- ------- ------- ------- -------
Total interest expense 4,701 186 4,887 3,065 673 3,738
------- ------- ------- ------- ------- -------
Net interest income $ 1,718 $ 16 $ 1,734 $ 554 $ 14 $ 568
======= ======= ======= ======= ======= =======
19
Distribution of Assets and Liabilities; Interest Rates and Interest Differential
The following presents an analysis of average yields earned and rates paid for
the years indicated. Average balances are computed using daily averages except
for average stockholders' equity for which month-end balances are used.
Years Ended December 31, 1997 December 31, 1996 December 31, 1995
- --------------------------------------------------------------------- --------------------------- ---------------------------
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
Earnings assets:
Short-term investments $ 3,852 $ 205 5.32% $ 8,257 $ 438 5.30% $ 7,289 $ 434 5.95%
Mortgage-backed
investments 70,635 4,588 6.50 29,506 1,833 6.21 24,059 1,394 5.79
Other investment securities 391,312 24,326 6.22 369,421 22,986 6.22 325,504 19,897 6.11
Loans (a) 576,258 46,213 8.02 543,547 43,454 7.99 537,226 42,680 7.94
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,042,057 75,332 7.23 950,731 68,711 7.23 894,078 64,405 7.20
Other assets 41,288 -- -- 40,101 -- -- 41,457 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,083,345 -- -- $990,832 -- -- $935,535 -- --
================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW deposits $ 59,485 $ 595 1.00% $ 61,317 $ 676 1.10% $ 62,178 $ 914 1.47%
Savings deposits and MMDA 322,079 9,540 2.96 316,498 8,851 2.80 334,739 8,959 2.68
Term certificates 391,204 21,193 5.42 378,680 20,906 5.52 357,031 18,991 5.32
Short-term borrowings 70,417 3,896 5.53 49,123 2,637 5.37 34,594 2,136 6.17
Long-term debt 98,972 6,125 6.19 55,276 3,392 6.14 29,307 1,724 5.88
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 942,157 41,349 4.39 860,894 36,462 4.23 817,849 32,724 4.00
Other liabilities 44,704 -- -- 40,982 -- -- 35,868 -- --
Stockholders' equity 96,484 -- -- 88,956 -- -- 81,818 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,083,345 -- -- $990,832 -- -- $935,535 -- --
================================================================================================================================
Net interest income $33,983 $32,249 $31,681
Weighted average rate spread (b) 2.84% 3.00% 3.20%
Net yield on average earning assets (c) 3.26% 3.39% 3.54%
================================================================================================================================
(a) Includes non-accrual loans.
(b) Weighted average yield on earning assets less weighted average rate paid
on interest-bearing liabilities.
(c) Net interest income divided by average earning assets.
20
Provision for loan losses
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision is determined by
management on the basis of many factors including the quality of specific loans,
risk characteristics of the loan portfolio, the level of non-performing loans,
current economic conditions, trends in delinquency and charge-offs, and
collateral values of the underlying security. Ultimate losses may vary from
current estimates.
The Bank recorded a provision of $125,000 for loan losses in 1997. This compares
with a provision of $215,000 for the year ended December 31, 1996 and $772,000
for the year ended December 31, 1995. In 1997, the Bank continued to experience
positive trends in credit quality as indicated by the decline in non-performing
loans from $4.3 million in 1995 to $3.4 million in 1996 and to $1.7 million in
1997. Net loans charged-off totaled $623,000, $450,000 and $845,000,
respectively, for the years ended December 31, 1997, 1996 and 1995. The increase
in net loans charged-off in 1997 is principally the result of charging off one
large commercial real estate borrower. A reserve for loan losses had been
provided for this loan in a prior year.
While management considers the allowance for loan losses to be adequate at
December 31, 1997, there is no assurance that additional charge-offs and
provisions will not be necessary in 1998. The provision for loan losses during
1998 will depend primarily on market conditions and the Bank's actual
experience.
Other income
Total other income amounted to $3.8 million for the year ended December 31,
1997, as compared to $3.3 million for year ended December 31, 1996, and $3.1
million for the year ended December 31, 1995. In 1997, customer service fees
declined $185,000 from 1996 and $374,000 from 1995, in part reflecting lower
revenues on deposit accounts as customers migrate to deposit products with lower
or no service fees. The Company's experience in recent years has been customer
willingness to forego earning interest on a deposit account in exchange for
reduced service charges. Net gains on the sale of securities were $835,000 in
1997, compared with net gains of $413,000 and $96,000 in 1996 and 1995,
respectively. Management elects to sell securities when tactical opportunities
arise to do so and recognize a gain without impairing the yield or liquidity of
the investment portfolio. The net gain on the sale of loans of $306,000 in 1997
was related to the sale of education loans.
Operating expenses
Operating expenses were $19.1 million for 1997, up $979,000 or 5.4% over 1996
operating expenses of $18.1 million. Included in professional fees and other
general and administrative operating expenses were $200,000 of one-time expenses
incurred in the formation of a holding company structure, which the Company
elected not to capitalize. Also included in other general and administrative
operating expenses was $260,000 of one-time expenses applicable to tax filing
matters. 1996 operating expenses reflect $378,000 of one-time expenses
associated with the conversion to new operating systems. The most significant
increase in 1997 operating expenses was in salary and benefit costs, which
increased 5.5% as a result of regular annual merit increases. Other increases
include occupancy and equipment depreciation resulting from the Bank's
investment of approximately $1.7 million in new technology. Upgrading to new
technology has enabled the Bank to realize savings in data processing operating
expenses. In 1997, the Bank experienced a $99,000 increase in FDIC deposit
insurance expense after a significant reduction from 1995 to 1996. The Bank's
expense ratio, which is the ratio of operating expenses to average assets was
1.76% in 1997 compared with 1.82% in 1996 and 1.94% in 1995. Management
continues to focus on cost containment with the intent to be a low cost provider
of high quality banking products and services.
21
Operating expenses were $18.1 million for 1996, down $94,000 or 0.5% from $18.2
million in 1995. As shown in the table below, "core" operating expenses,
excluding gains and losses on the sale of foreclosed real estate and $378,000 of
one-time expenses associated with the conversion to new operating systems, were
comparable to 1995 except for the virtual elimination of FDIC deposit insurance
assessments in 1996. The $378,000 of one-time expenses are shown by category in
the table below:
"Core" Comparable
1996 Conversion- 1995
Operating Related Operating
Expenses, One-time Expenses,
as Reported Expenses Net as Reported Change
------------- -------------- ------------- ------------- -------------
(Dollars in thousands)
Salaries and employee benefits $ 9,778 $ 12 $ 9,766 $ 9,551 $ 215
Occupancy and equipment 1,998 10 1,988 1,910 78
Deposit insurance 13 - 13 927 (914)
Data processing 1,606 179 1,427 1,452 (25)
Professional fees 517 19 498 577 (79)
Amortization of intangibles 1,248 - 1,248 1,293 (45)
Advertising and marketing 722 28 694 692 2
Other general and administrative 2,128 130 1,998 2,036 (38)
------------ ------------- ------------ ------------ ------------
Totals $18,010 $378 $17,632 $18,438 $(806)
============ ============= ============ ============ ============
Salaries and employee benefits increased 2.4% as a result of regular annual
merit increases. Occupancy and equipment expenses increased in 1996 over 1995 as
the Bank incurred a full year of operating expenses associated with the Waltham
branch which was opened in April 1995.
Provision for income taxes
The Bank's effective tax rate for the year ended December 31, 1997 was 38.9% as
compared with 39.6% and 40.7% for the years ended December 31, 1996 and 1995.
The effective tax rates exceeded the statutory federal tax rates of 34.0% for
taxable income up to $10.0 million and 35.0% for taxable income exceeding $10.0
million principally due to state taxes. The passage of tax legislation in 1995
reduced the Bank's state tax rate.
22
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary effect of inflation on the operations of the Bank is reflected in
increased operating costs. Unlike most industrial companies, virtually all
assets of a financial institution are monetary in nature. As a result, interest
rates have a more significant effect on a financial institution's performance
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales or maturities of various investment
securities. The Bank is a voluntary member of the FHLBB and as such, may take
advantage of the FHLBB's borrowing programs to enhance liquidity and leverage
its favorable capital position. The Bank also may draw on lines of credit at the
FHLBB and a large commercial bank or enter into repurchase or reverse repurchase
agreements with authorized brokers. These various sources of liquidity are used
to fund withdrawals, new loans, and investments.
Management seeks to promote deposit growth while controlling the Bank's cost of
funds. Sales-oriented programs to attract new depositors and the cross-selling
of various products to its existing customer base are currently in place.
Management reviews, on an ongoing basis, possible new products, with particular
attention to products and services which will aid in retaining the Bank's base
of lower-costing deposits.
Maturities and sales of investment securities provide significant liquidity to
the Bank. The Bank's policy of purchasing shorter-term debt securities reduces
market risk in the bond portfolio while providing significant cash flow. For the
year ended December 31, 1997, cash flow from maturities of securities was $99.2
million and proceeds from sales of securities totaled $19.6 million, compared to
maturities of securities of $87.9 million and proceeds from sales of securities
of $32.6 million for the year ended December 31, 1996. Principal payments on
mortgage-backed investments during the years ended December 31, 1997 and 1996
totaled $8.7 million and $4.7 million, respectively. Purchases of securities
during 1997 and 1996 totaled $212.5 million and $188.7 million, respectively.
These purchases consisted primarily of short-term debt instruments. During
periods of high interest rates or active mortgage origination, maturities in the
bond portfolio have provided significant liquidity to the Bank, generally at a
lower cost than borrowings.
Amortization and pay-offs of the loan portfolio contribute significant liquidity
to the Bank. Traditionally, amortization and pay-offs are reinvested into loans.
Excess liquidity is invested in short-term debt instruments.
The Bank has also used borrowed funds as a source of liquidity. At December 31,
1997, the Bank's outstanding borrowings from the FHLBB were $110.1 million. The
Bank also utilizes repurchase agreements to fund loan purchases or to leverage
the balance sheet. At December 31, 1997, securities sold under agreements to
repurchase totaled $93.6 million.
Residential and commercial mortgage loan originations for the years ended
December 31, 1997, 1996 and 1995 totaled $124.2 million, $96.4 million and $65.4
million, respectively. Commitments to originate commercial and residential real
estate mortgages at December 31, 1997 were $14.9 million, excluding unadvanced
construction funds totaling $10.7 million. 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 $101.5 million, or
8.94% of total assets at December 31, 1997, compared with $92.5 million, or
8.90% of total assets at December 31, 1996.
The FDIC imposes capital guidelines on the Bank. The guidelines define core or
"tier 1" capital and supplementary or "tier 2" capital and assign weights to
broad categories of assets and certain off-balance sheet items. Ratios of tier 1
and tier 1 plus tier 2 capital to assets are then calculated. Banks must
maintain a tier 1 capital to risk-weighted assets ratio of 4.00% and a total
capital to risk-weighted assets ratio of 8.00%. The consolidated Company and the
Bank's tier 1 risk-based capital ratio, as defined by the FDIC, at December 31,
1997 was 14.7% and 13.6%, respectively, which exceeds both risk-based capital
requirements.
Massachusetts-chartered savings banks insured by the FDIC are required to
maintain minimum leverage capital (tier 1 capital) of 3.0% to 5.0% of total
assets, as adjusted, depending on an individual bank's rating. The Bank's
leverage capital ratio at December 31, 1997, as defined by the FDIC, was 7.8%,
which exceeds the FDIC's requirements.
23
YEAR 2000 DISCLOSURE
The year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900, or, not
at all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
A Year 2000 Task Force Committee represented by members of senior management was
formed in 1997 and is responsible for year 2000 compliance. The Committee has
developed an action plan with goals, objectives and target dates. In 1997, the
Company assessed and continues to assess the impact of the year 2000 issue on
its operations. Anticipated spending for the year 2000 computer system
programming modifications will be expensed as incurred and, based upon currently
available information, is not expected to have a material impact on the
Company's on-going results of operations. However, if the efforts initiated by
the Committee are not completed on time, or if the cost of updating or replacing
the Company's information systems exceeds the Company's current estimates, the
Year 2000 issue could have a material adverse impact on the Company's business,
financial condition or results of operations.
The Company also intends to determine the extent to which the Company may be
vulnerable to any failures by its service providers, other third party vendors,
and customers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time, the Company
is unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of these third parties to achieve Year 2000
compliance, although the Company does not currently anticipate any material
adverse impact. However, there can be no assurance that these third parties will
not experience Year 2000 problems or that any problems would not have a material
effect on the Company's operations. Because the cost and timing of Year 2000
compliance by third parties such as service providers and customers is not
within the Company's control, no assurance can be given with respect to the cost
or timing of such efforts or any potential adverse effects on the Company of any
failure by these third parties to achieve Year 2000 compliance.
24
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; for example holding fixed-rate
mortgage loans in portfolio in the last quarter of 1997.
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.
25
The following table presents, as of December 31, 1997, interest-rate sensitive
assets and liabilities categorized by expected maturity and weighted average
rate. Expected maturities are contractual maturities adjusted for amortization
and prepayments of principal. For adjustable-rate instruments, contractual
maturity is deemed to be the earliest possible interest rate adjustment date.
(Dollars in thousands) Overnight 0-1 yr. 1-2 yrs. 2-3 yrs. 3-4 yrs. 4-5 yrs. 5+ yrs. Total
--------- -------- -------- -------- -------- ------- -------- ----------
Rate-sensitive assets:
Short-term investments $ 2,804 $ -- $ -- $ -- $ -- $ -- $ -- $ 2,804
5.35%
Mortgage-backed investments -- 25,754 20,360 17,001 13,763 10,383 34,703 121,964
6.61% 6.61% 6.61% 6.61% 6.61% 6.61%
Other investment securities -- 125,764 116,873 83,467 44,014 -- 5,075 375,193
6.09% 6.13% 6.42% 6.09% 5.63%
Adjustable-rate mortgages 22,146 157,976 85,966 45,060 36,243 33,456 23,193 404,040
8.95% 8.41% 8.27% 8.06% 7.76% 7.76% 7.31%
Fixed-rate mortgages -- 18,886 17,204 16,584 15,425 16,055 59,825 143,979
7.76% 7.61% 7.60% 7.59% 7.59% 7.40%
All other loans 22,916 2,913 1,180 575 165 39 44 27,832
8.80% 10.88% 10.26% 10.39% 10.00% 10.00% 8.19%
- -------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 47,866 331,293 241,583 162,687 109,610 59,933 122,840 1,075,812
- -------------------------------------------------------------------------------------------------------------------------------
Rate-sensitive liabilities:
NOW accounts 59,368 -- -- -- -- -- -- 59,368
1.00%
Regular savings 254,741 -- -- -- -- -- -- 254,741
2.76%
Money market accounts 70,599 -- -- -- -- -- -- 70,599
3.69%
Term certificates -- 265,321 98,153 15,918 5,709 7,567 134 392,802
5.28% 5.90% 6.11% 5.94% 5.94% 5.59%
Borrowings -- 142,662 50,000 12,717 -- -- 400 205,779
5.66% 6.02% 6.41% 5.61%
- -------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 384,708 407,983 148,153 28,635 5,709 7,567 534 983,289
- -------------------------------------------------------------------------------------------------------------------------------
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. Given the interest rate
environment at December 31, 1997, management applies the assumption that on
average, 7% of the outstanding loan and mortgage-backed securities balances will
prepay annually. When adjustable-rate loans reprice at the rate adjustment date,
they are generally indexed to the one-, three-, or five-year Treasury rate with
an average spread of 275 basis points, with average period caps of 2.0% and
life-time caps of 6.0%. The table does not include loans which have been placed
on non-accrual status.
Assets and liabilities that are immediately replicable are placed in the
overnight column. These financial instruments do not have a contractual maturity
date. Although NOW, savings and money market deposit accounts are subject to
immediate repricing or withdrawal, based on the Bank's history, management
considers these liabilities to have longer lives and less interest rate
sensitivity than term certificates.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report..................................................28
Consolidated Balance Sheets at December 31, 1997 and 1996.....................29
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995...............................................................30
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995......................................31
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.........................................32-33
Notes to Consolidated Financial Statements.................................34-60
27
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, 1997 and 1996, 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, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 21, 1998
28
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
1997 1996
-------------- --------------
(In thousands)
ASSETS
Cash and due from banks $ 13,376 $ 11,900
Short-term investments (Note 2) 2,804 4,529
----------- -----------
Cash and cash equivalents 16,180 16,429
Investment securities available for sale (Note 3) 402,723 268,379
Investment securities held to maturity (Note 3) 103,823 150,591
Restricted equity securities 6,872 5,996
Loans (Notes 4 and 7) 577,577 568,086
Less allowance for loan losses (6,733) (7,231)
----------- -----------
Loans, net 570,844 560,855
----------- -----------
Banking premises and equipment, net (Note 5) 10,738 10,896
Accrued interest receivable 9,472 9,291
Goodwill and deposit-based intangibles 5,748 6,896
Other assets (Note 9) 9,172 9,765
----------- -----------
Total assets $ 1,135,572 $ 1,039,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6) $ 821,706 $ 792,141
Short-term borrowings (Note 7) 95,670 80,817
Long-term debt (Note 8) 110,109 67,647
Accrued taxes and expenses (Note 12) 3,988 3,701
Other liabilities 2,589 2,271
----------- -----------
Total liabilities 1,034,062 946,577
----------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 11 and 13):
Serial preferred stock, $.50 par value, 5,000,000 shares authorized;
none issued -- --
Common stock, 15,000,000 shares authorized; $.50 par value,
4,541,148 and 4,534,648 shares issued, respectively 2,271 2,267
Additional paid-in capital 28,977 28,848
Retained earnings 68,938 61,634
----------- -----------
100,186 92,749
Net unrealized gain (loss) on securities available for sale,
after tax effects (Notes 3 and 9) 1,324 (228)
----------- -----------
Total stockholders' equity 101,510 92,521
----------- -----------
Total liabilities and stockholders' equity $ 1,135,572 $ 1,039,098
=========== ===========
See accompanying notes to consolidated financial statements.
29
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -------------
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 46,213 $ 43,454 $ 42,680
Interest on debt securities 28,210 24,167 20,864
Dividends on equity securities 704 652 427
Interest on short-term investments 205 438 434
---------- ---------- ----------
Total interest and dividend income 75,332 68,711 64,405
---------- ---------- ----------
Interest expense:
Interest on deposits 31,328 30,433 28,864
Interest on short-term borrowings 3,896 2,637 2,136
Interest on long-term debt 6,125 3,392 1,724
---------- ---------- ----------
Total interest expense 41,349 36,462 32,724
---------- ---------- ----------
Net interest income 33,983 32,249 31,681
Provision for loan losses (Note 4) 125 215 772
---------- ---------- ----------
Net interest income, after provision for loan losses 33,858 32,034 30,909
---------- ---------- ----------
Other income:
Customer service fees 1,973 2,158 2,347
Gain on sales of investment securities, net (Note 3) 835 413 96
Gain on sale of loans 306 -- --
Miscellaneous 728 744 703
---------- ---------- ----------
Total other income 3,842 3,315 3,146
---------- ---------- ----------
Operating expenses:
Salaries and employee benefits (Note 12) 10,320 9,778 9,551
Occupancy and equipment (Notes 5 and 10) 2,289 1,998 1,910
Deposit insurance 112 13 927
Data processing 1,416 1,606 1,452
Professional fees 672 517 577
Amortization of intangibles 1,206 1,248 1,293
Advertising and marketing 614 722 692
Other general and administrative 2,425 2,193 1,767
---------- ---------- ----------
Total operating expenses 19,054 18,075 18,169
---------- ---------- ----------
Income before income taxes 18,646 17,274 15,886
Provision for income taxes (Note 9) 7,256 6,845 6,463
---------- ---------- ----------
Net income $ 11,390 $ 10,429 $ 9,423
========== ========== ==========
Weighted averages shares outstanding:
Basic 4,540,256 4,522,839 4,409,906
========== ========== ==========
Diluted 4,770,442 4,723,649 4,659,059
========== ========== ==========
Earnings per share:
Basic $ 2.51 $ 2.31 $ 2.14
========== ========== ==========
Diluted $ 2.39 $ 2.21 $ 2.02
========== ========== ==========
See accompanying notes to consolidated financial statements.
30
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Net
Unrealized
Gain (Loss) on
Common Stock Additional Securities
--------------------- Paid-In Retained Available
Shares Dollars Capital Earnings for Sale Total
--------- --------- --------- --------- --------- ---------
(In thousands, except number of shares)
Balance at December 31, 1994 4,395,790 $ 2,198 $ 27,390 $ 48,677 $ (1,902) $ 76,363
Net income -- -- -- 9,423 -- 9,423
Cash dividends declared ($.71 per share) -- -- -- (3,134) -- (3,134)
Issuance of common stock under stock
option plan and related income tax benefits 27,400 14 252 -- -- 266
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- 3,158 3,158
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 4,423,190 2,212 27,642 54,966 1,256 86,076
Net income -- -- -- 10,429 -- 10,429
Cash dividends declared ($.83 per share) -- -- -- (3,761) -- (3,761)
Issuance of common stock under stock
option plan and related income tax benefits 111,458 55 1,206 -- -- 1,261
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- (1,484) (1,484)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 4,534,648 2,267 28,848 61,634 (228) 92,521
Net income -- -- -- 11,390 -- 11,390
Cash dividends declared ($.90 per share) -- -- -- (4,086) -- (4,086)
Issuance of common stock under stock
option plan and related income tax benefits 6,500 4 129 -- -- 133
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- 1,552 1,552
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 4,541,148 $ 2,271 $ 28,977 $ 68,938 $ 1,324 $ 101,510
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
31
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -------------
(In thousands)
Cash flows from operating activities:
Net income $ 11,390 $ 10,429 $ 9,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and foreclosed real estate losses 125 265 611
Depreciation and amortization, net 2,163 2,205 1,640
Net gain on sales of foreclosed real estate (44) (15) (299)
Gains on sales of investment securities, net (835) (413) (96)
Gain on sale of loans (306) -- --
Increase in accrued interest receivable and other assets (291) (2,294) (1,341)
Deferred tax benefit (610) (295) (402)
Increase in accrued taxes and expenses
and other liabilities 521 1,576 727
--------- --------- ---------
Net cash provided by operating activities 12,113 11,458 10,263
--------- --------- ---------
Cash flows from investing activities:
Maturities of investment securities available for sale 52,185 38,168 26,210
Proceeds from sales of investment securities available for sale 19,572 32,602 25,363
Purchases of investment securities available for sale (211,653) (153,844) (103,142)
Maturities of investment securities held to maturity 47,034 49,780 97,782
Purchases of investment securities held to maturity and FHLBB stock (876) (34,886) (76,519)
Principal amortization of mortgage-backed investments
available for sale 8,701 4,746 4,796
Loans originated and purchased, net of amortization and payoffs (42,032) (32,163) (8,492)
Proceeds from sale of loans 31,900 -- --
Proceeds from sales of foreclosed real estate 662 384 2,920
Purchases of banking premises and equipment, net (866) (2,018) (755)
--------- --------- ---------
Net cash used in investing activities (95,373) (97,231) (31,837)
--------- --------- ---------
(continued)
See accompanying notes to consolidated financial statements.
32
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------- -------------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 29,565 290 71
Net increase in borrowings with maturities of three months
or less 44,853 35,536 23,356
Proceeds of short-term borrowings with maturities in
excess of three months -- 25,000 25,000
Repayment of short-term borrowings with maturities in
excess of three months (30,000) (20,000) (25,000)
Proceeds from long-term debt 67,509 39,000 16,400
Repayment of long-term debt (25,047) (3,500) (9,500)
Issuance of common stock 34 610 150
Cash dividends paid (3,903) (3,504) (2,907)
-------- -------- --------
Net cash provided by financing activities 83,011 73,432 27,570
-------- -------- --------
Net change in cash and cash equivalents (249) (12,341) 5,996
Cash and cash equivalents at beginning of year 16,429 28,770 22,774
-------- -------- --------
Cash and cash equivalents at end of year $ 16,180 $ 16,429 $ 28,770
======== ======== ========
Supplementary information:
Interest paid on deposit accounts $ 31,263 $ 30,474 $ 28,773
Interest paid on borrowed funds 9,942 5,640 3,662
Income taxes paid, net of refunds 7,455 6,671 6,234
See accompanying notes to consolidated financial statements.
33
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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"). Pursuant to a Plan of Reorganization and Acquisition (the "Plan") dated
July 29, 1997, the Bank formed the Company as a subsidiary of the Bank and
completed a reorganization on November 26, 1997 whereby the Company became the
Bank's parent company. Each issued and outstanding share of common stock of the
Bank, par value $.50 per share (together with associated preferred stock
purchase rights) was converted into and exchanged for one share of common stock
of the Company, par value $.50 per share (together with associated preferred
stock purchase rights). 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 generally accepted
accounting principles, 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
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, which is located approximately seven
miles north of downtown Boston. It has a network of sixteen banking offices
located in Medford, Malden, Arlington, Belmont, Burlington, North Reading,
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.
Reclassification
Certain amounts have been reclassified in the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash, amounts due from banks and short-term
investments.
Short-term Investments
Short-term investments mature within one year and are carried at cost.
34
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment 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 investment 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 as a separate
component of stockholders' equity. Purchase premiums and discounts on debt
securities are amortized to earnings by a method which approximates the interest
method over the terms of the investments. Declines in the value of investments
that are deemed to be other than temporary are reflected in earnings when
identified. Gains and losses on disposition of investments are recorded on the
trade date and computed by the specific identification method.
Restricted equity securities include stock of the Federal Home Loan Bank of
Boston and The Savings Bank Life Insurance Company of Massachusetts, both of
which are carried at cost.
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 the net premium on loans acquired and
net deferred loan origination costs, and reduced by unadvanced loan funds and
the allowance for loan losses.
Interest on loans is recognized on a simple interest basis 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.
Premiums and discounts on loans acquired and net deferred loan origination costs
are amortized as an adjustment of the related loan yields by the interest method
over the contractual lives of the loans.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to operations and is maintained at a level considered adequate to
provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular basis by
management and are 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 change. Ultimate losses
may vary from current estimates and future additions to the allowance may be
necessary.
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.
35
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (concluded)
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.
Larger groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Company does not separately identify individual
consumer loans for impairment disclosures.
Foreclosed Real Estate
Real estate properties acquired through foreclosure, included in other assets,
are initially recorded at the lower of cost or fair value at the date of
foreclosure. Costs relating to development and improvement of property are
capitalized, whereas costs relating to holding property are expensed. Valuations
are periodically performed by management, and an allowance for losses is
established through a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs to sell.
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. It is the Bank's general practice to charge the cost
of maintenance and repairs to earnings when incurred; major expenditures for
betterments are capitalized and depreciated.
Intangible Assets
Intangible assets pertaining to core deposits acquired are amortized over 15
years on an accelerated basis, based on the expected run-off of the related
deposits. Goodwill is amortized by the straight-line method over periods ranging
from 10 to 15 years.
36
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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.
Stock Compensation Plans
In accordance with provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company has
elected to continue to measure compensation cost for its stock compensation
plans using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," 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 under Option No. 25 no compensation cost
is recognized for them. The Company is required to make pro forma disclosures of
net income and earnings per share and other disclosures, 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. The pro
forma disclosures include the effects of all awards granted on or after January
1, 1995.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share", which requires that earnings per share be
calculated on a basic and a dilutive basis. Basic earnings per share represents
income available to common stock divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would
result from the assumed conversion. Potential common shares that may be issued
by the Company relate solely to outstanding stock options, and are determined
using the treasury stock method. The assumed conversion of outstanding dilutive
stock options would increase the shares outstanding but would not require an
adjustment to income as a result of the conversion. The Statement is effective
for interim and annual periods ending after December 15, 1997, and requires the
restatement of all prior-period earnings per share data presented. Accordingly,
the Company has restated all earnings per share data presented herein.
For the years ended December 31, 1997, 1996 and 1995, options applicable to
27,000 shares, 3,000 shares and 970 shares, respectively, were anti-dilutive and
excluded from the diluted earnings per share computations.
37
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Recent Accounting Pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain FASB statements, however, require entities to
report specific changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Additionally, SFAS No. 130 requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company will adopt these disclosure
requirements beginning in the first quarter of 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
December 31,
---------------------------
1997 1996
----------- -----------
(In thousands)
Federal funds sold $2,802 $4,500
Other interest-bearing deposits 2 29
------ ------
Total short-term investments $2,804 $4,529
====== ======
38
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses at December 31, 1997 and 1996, follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ---------------------------------------------- ------------- ------------ ------------ -------------
(In thousands)
Securities Available for Sale
Debt securities:
Corporate bonds $176,093 $ 1,102 $ (107) $177,088
Mortgage-backed 121,964 641 (158) 122,447
U.S. Government and federal agency 95,277 482 (232) 95,527
-------- -------- -------- --------
Total debt securities 393,334 2,225 (497) 395,062
Marketable equity securities 7,233 482 (54) 7,661
-------- -------- -------- --------
Total securities available
for sale $400,567 $ 2,707 $ (551) $402,723
======== ======== ======== ========
Securities Held to Maturity
U.S. Government and federal agency $ 95,052 $ 326 $ (59) $ 95,319
Corporate bonds 8,771 12 -- 8,783
-------- -------- -------- --------
Total securities held to maturity $103,823 $ 338 $ (59) $104,102
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ---------------------------------------------- ------------- ------------ ------------ -------------
(In thousands)
Securities Available for Sale
Debt securities:
State and municipal $ 88 $ 1 $ -- $ 89
Corporate bonds 150,774 745 (350) 151,169
Mortgage-backed 28,101 82 (369) 27,814
U.S. Government and federal agency 83,301 280 (930) 82,651
-------- -------- -------- --------
Total debt securities 262,264 1,108 (1,649) 261,723
Marketable equity securities 6,538 236 (118) 6,656
-------- -------- -------- --------
Total securities available
for sale $268,802 $ 1,344 $ (1,767) $268,379
======== ======== ======== ========
Securities Held to Maturity
U.S. Government and federal agency $141,868 $ 522 $ (299) $142,091
Corporate bonds 8,723 32 -- 8,755
-------- -------- -------- --------
Total securities held to maturity $150,591 $ 554 $ (299) $150,846
======== ======== ======== ========
39
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES (concluded)
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1997 is as follows:
Available for Sale Held to Maturity
--------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------- -------------
(In thousands)
Within 1 year $ 46,073 $ 46,107 $ 69,689 $ 69,730
After 1 year through 5 years 217,230 218,451 34,134 34,372
After 5 years through 10 years 8,067 8,057 -- --
-------- -------- -------- --------
271,370 272,615 103,823 104,102
Mortgage-backed 121,964 122,447 -- --
-------- -------- -------- --------
$393,334 $395,062 $103,823 $104,102
======== ======== ======== ========
At December 31, 1997, U.S. Government obligations with an amortized cost of
$92,352,000, a fair value of $92,612,000 and accrued interest receivable of
$1,296,000 have been pledged as collateral for securities sold under agreements
to repurchase. In addition, U.S. Government obligations with an amortized cost
of $7,997,000 and a fair value of $8,057,000 have been pledged as collateral for
a line of credit and to secure public funds. (See Note 7.)
For the years ended December 31, 1997, 1996 and 1995, proceeds from the sales of
securities available for sale amounted to $19,572,000, $32,602,000 and
$25,363,000, respectively. Gross realized gains amounted to $800,000, $412,000
and $211,000, respectively. There were no gross realized losses in 1997, $56,000
in 1996 and $26,000 in 1995. For the years ended December 31, 1997, 1996 and
1995, proceeds from the sales of securities held to maturity that were sold
within three months of maturity amounted to $12,034,000, $29,973,000 and
$59,782,000, respectively. These sales have been included in the Statement of
Cash Flows as maturities. Gross realized gains on these sales amounted to
$35,000, $61,000 and $4,000, respectively, and gross realized losses amounted to
$4,000 and $93,000 in 1996 and 1995, respectively.
Mortgage-backed investments consist of adjustable-rate collateralized mortgage
obligations and fixed-rate participation certificates guaranteed by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation or the
Government National Mortgage Association.
In November 1995, the FASB issued guidance allowing a one-time reassessment of
an entity's investment classifications during the period November 15, 1995 to
December 31, 1995. As a result, the amortized cost of securities held to
maturity that were transferred to available for sale amounted to $26,987,000 and
the related unrealized loss amounted to $206,000.
40
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS
A summary of the balances of loans follows:
December 31,
--------------------------------
1997 1996
-------------- ---------------
(In thousands)
Mortgage loans on real estate:
Residential 1 - 4 family $ 389,593 $ 380,627
Commercial 124,094 123,158
Construction 21,989 18,155
Second mortgages 1,539 1,928
Equity lines of credit 22,146 21,169
--------- ---------
559,361 545,037
Less: Unadvanced loan funds (10,711) (9,436)
--------- ---------
548,650 535,601
--------- ---------
Other loans:
Commercial 14,941 11,014
Personal 2,432 2,219
Education and other 10,499 18,329
--------- ---------
27,872 31,562
--------- ---------
Add: Net premium on loans acquired 270 354
Net deferred loan origination costs 785 569
--------- ---------
Total loans 577,577 568,086
Less allowance for loan losses (6,733) (7,231)
--------- ---------
Loans, net $ 570,844 $ 560,855
========= =========
41
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS (concluded)
An analysis of the allowance for loan losses follows:
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(In thousands)
Balance at beginning of year $ 7,231 $ 7,466 $ 7,539
Provision for loan losses 125 215 772
------- ------- -------
7,356 7,681 8,311
Recoveries 208 380 233
Loans charged-off (831) (830) (1,078)
------- ------- -------
Balance at end of year $ 6,733 $ 7,231 $ 7,466
======= ======= =======
The following is a summary of the recorded investment in impaired and
non-accrual loans:
December 31,
--------------------------------
1997 1996
------------- -------------
(In thousands)
Impaired loans with no valuation allowance $ 302 $ 870
Impaired loans with a corresponding valuation allowance 1,424 3,154
------ ------
Total impaired loans $1,726 $4,024
====== ======
Corresponding valuation allowance $ 85 $ 968
====== ======
Non-accrual loans $1,726 $3,439
====== ======
No additional funds are committed to be advanced in connection with impaired
loans.
For the years ended December 31, 1997, 1996 and 1995, the average recorded
investment in impaired loans amounted to $3,806,000, $4,751,000 and $3,827,000,
respectively. The Bank recognized interest income on impaired loans, on a cash
basis, of $74,000 in 1997, $153,000 in 1996 and $167,000 in 1995 during the
periods that they were impaired.
42
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment and their estimated useful lives follows:
December 31,
-------------------------- Estimated
1997 1996 Useful Lives
----------- ----------- -------------------
(In thousands)
Banking Premises:
Land $ 1,249 $ 782 --
Buildings 9,355 9,634 5 - 50 years
Equipment 5,652 6,780 3 - 25 years
-------- --------
16,256 17,196
Less accumulated depreciation (5,518) (6,300)
-------- --------
$ 10,738 $ 10,896
======== ========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
amounted to $1,024,000, $772,000 and $713,000, respectively.
6. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31,
-------------------------------
1997 1996
------------- -------------
(In thousands)
Demand $ 44,196 $ 40,124
NOW 59,368 60,839
Regular savings 254,741 245,891
Money market deposits 70,599 69,880
-------- --------
Total non-certificate accounts 428,904 416,734
-------- --------
Term certificates ($100,000 or more) 53,794 46,564
Other term certificates 339,008 328,843
-------- --------
Total term certificates 392,802 375,407
-------- --------
Total deposits $821,706 $792,141
======== ========
43
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEPOSITS (concluded)
A summary of term certificate accounts, by maturity, is as follows:
December 31, 1997 December 31, 1996
------------------------------ ------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- ------------- ------------- -------------
(Dollars in thousands)
Within 1 year $265,321 5.28% $247,599 5.17%
Over 1 year to 3 years 114,071 5.93 113,220 5.64
Over 3 years to 5 years 13,276 5.94 14,579 6.18
Over 5 years 134 5.59 9 6.08
-------- --------
$392,802 5.48% $375,407 5.35%
======== ========
7. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
December 31, 1997 December 31, 1996
---------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- ------------- ----------- -------------
(Dollars in thousands)
Securities sold under agreements to repurchase $93,611 5.73% $49,584 5.99%
Federal Reserve Bank of Boston advances 2,059 5.29 1,233 5.00
Federal Home Loan Bank of Boston ("FHLBB") advances -- -- 30,000 5.56
------- -------
$95,670 5.72% $80,817 5.82%
======= =======
Securities sold under agreements to repurchase are borrowings that mature within
one year and are secured by U.S. Government obligations. (See Note 3.) The
amount of securities collateralizing the agreements to repurchase remains in
investment securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets.
The Company has a $2,000,000 line of credit (treasury, tax and loan) with the
Federal Reserve Bank of Boston, all of which was advanced at December 31, 1997.
The interest rate adjusts weekly and certain U.S. Government obligations have
been pledged as collateral for the line of credit. (See Note 3.)
The Company also has an available line of credit with the FHLBB at an interest
rate that adjusts daily. Borrowings under the line are limited to 2% of the
Bank's total assets. All borrowings from the FHLBB are secured by a blanket lien
on qualified collateral, defined principally as 75% of the carrying value of
first mortgage loans on owner-occupied residential property and 90% of the
market value of U.S. Government and federal agency securities.
44
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt consists of FHLBB advances secured by a blanket lien on qualified
collateral (see Note 7), as follows:
December 31, 1997 December 31, 1996
---------------------------- ---------------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
- --------------------- ----------- ----------- ----------- -----------
(Dollars in thousands)
1997 $ -- --% $ 25,047 6.23%
1998 46,992 5.91 32,200 5.86
1999 50,000 6.02 5,000 5.87
2000 12,717 6.41 5,000 7.22
2005 400 5.61 400 5.61
--------- --------
$ 110,109 6.02% $ 67,647 6.10%
========= ========
9. INCOME TAXES
Allocation of the provision for federal and state income taxes between current
and deferred portions is as follows:
Years Ended December 31,
------------------------------------
1997 1996 1995
--------- ---------- ---------
(In thousands)
Current tax provision:
Federal $ 6,672 $ 5,774 $ 5,206
State 1,194 1,366 1,659
------- ------- -------
7,866 7,140 6,865
------- ------- -------
Deferred tax benefit:
Federal (525) (240) (306)
State (85) (55) (96)
------- ------- -------
(610) (295) (402)
------- ------- -------
$ 7,256 $ 6,845 $ 6,463
======= ======= =======
45
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
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,
---------------------------------
1997 1996 1995
--------- --------- ---------
Statutory rates 35.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal tax benefit 3.9 5.0 6.6
Other, net -- .6 .1
---- ---- ----
Effective tax rates 38.9% 39.6% 40.7%
==== ==== ====
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31,
-------------------------
1997 1996
---------- -----------
(In thousands)
Deferred tax assets:
Federal $ 4,215 $ 4,175
State 1,537 1,629
------- -------
5,752 5,804
------- -------
Deferred tax liabilities:
Federal (2,098) (1,774)
State (642) (601)
------- -------
(2,740) (2,375)
------- -------
Net deferred tax asset $ 3,012 $ 3,429
======= =======
46
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (concluded)
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
December 31,
-----------------------
1997 1996
---------- ---------
(In thousands)
Cash basis of accounting $ 124 $ 55
Investments:
Net unrealized (gain) loss on securities available for sale (832) 195
Other (284) (193)
Depreciation (980) (901)
Deferred loan origination fees 100 (231)
Allowance for loan losses 2,482 2,465
Employee benefit plans 1,614 1,128
Other 788 911
------- -------
Net deferred tax asset $ 3,012 $ 3,429
======= =======
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
Balance at beginning of year $ 3,429 $ 2,151 $ 3,915
Deferred tax effect of the change in net unrealized
gains and losses on securities available for sale (1,027) 983 (2,166)
Deferred tax benefit for the year 610 295 402
------- ------- -------
Balance at end of year $ 3,012 $ 3,429 $ 2,151
======= ======= =======
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 established, approximately 150% of the amount
actually used (limited to the amount of the reserve) would be subject to
taxation in the fiscal 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.
47
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 has 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.
The following financial instruments were outstanding whose contract amounts
represent credit risk:
Contract Amount
at December 31,
------------------------------
1997 1996
----------- -----------
(In thousands)
Commitments to grant loans $ 14,918 $ 13,607
Unadvanced funds on equity lines of credit 24,848 20,479
Unadvanced funds on commercial lines of credit 8,407 6,884
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.
48
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (concluded)
Operating Lease Commitments
Pursuant to the terms of noncancelable lease agreements in effect at December
31, 1997, pertaining to banking premises and equipment, future minimum rent
commitments aggregate $540,000 through the year 2002. In addition, the leases
contain options to extend for periods up to fifteen years. Total rent expense
for the years ended December 31, 1997, 1996 and 1995 amounted to $290,000,
$282,000 and $270,000, respectively.
Other Commitments and 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.
11. 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/or the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Holding companies 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
average assets (as defined). Management believes, as of December 31, 1997 and
1996, that the Company and the Bank met all capital adequacy requirements to
which they are subject.
49
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY (continued)
Minimum regulatory capital requirements (continued)
As of December 31, 1997, the Company and the Bank were well capitalized under
the applicable regulatory framework. To be categorized as well capitalized, the
Company and the Bank must maintain minimum total risk-based and Tier 1
risk-based ratios as set forth in the following tables. In addition, the Bank
must maintain a minimum Tier 1 capital to average assets to be categorized as
well capitalized. As well capitalized entities, the Company and the Bank are
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 Company's or Bank's category. The Company's
and the Bank's actual capital amounts and ratios as of December 31, 1997, and
the Bank's actual capital amounts and ratios as of December 31, 1996, are also
presented in the tables.
December 31, 1997
-----------------------------------------------------------------------------------
Minimum
Minimum To Be Categorized
Capital as Well
Actual Requirement Capitalized
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------- ------------- -------- ------------- --------
(Dollars in thousands)
Total Capital to Risk-Weighted Assets:
Consolidated $100,938 15.8% $ 51,267 8.0% $ 64,080 10.0%
Bank 93,910 14.7 51,267 8.0 64,080 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 94,205 14.7 25,633 4.0 38,450 6.0
Bank 87,177 13.6 25,633 4.0 38,450 6.0
Tier 1 Capital to Average Assets:
Consolidated 94,205 8.5 43,334 4.0 N/A N/A
54,167 5.0
Bank 87,177 7.8 43,334 4.0 54,167 5.0
54,167 5.0
50
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY (concluded)
Minimum regulatory requirements (concluded)
December 31, 1996
------------------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------- ------------- --------- ------------- ---------
(Dollars in thousands)
Total Capital to risk $ 92,796 16.0% $ 46,409 8.0% $ 58,012 10.0%
weighted assets - Bank
Tier 1 Capital to risk 85,565 14.8 23,205 4.0 34,807 6.0
weighted assets - Bank
Tier 1 Capital to average 85,565 8.4 40,752 4.0 50,940 5.0
assets - Bank 50,940 5.0
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. The total amount of
dividends which may be paid at any date under Massachusetts law is generally
limited to the retained earnings of the Bank, and 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, 1997, $51,267,000 of the Company's equity in the Bank was
restricted and funds available for loans or advances amounted to $8,717,000.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan which distributed one preferred stock
purchase right 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 of $90,
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
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, (ii) the tenth
day following public announcement that a 15% position has been acquired, or
(iii) the expiration date of the Company's Amended and Restated Shareholder
Rights Agreement. The rights will expire on September 22, 2003.
51
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS
Pension Plan
The Bank provides 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 becomes a participant in
the pension plan. Participants are fully vested after three years of such
service.
Net periodic pension expense for the plan years ended October 31, 1997, 1996 and
1995 consisted of the following:
1997 1996 1995
--------- ---------- ---------
(In thousands)
Service cost - benefits earned during the year $ 511 $ 514 $ 395
Interest cost on projected benefits 313 305 283
Actual return on plan assets (603) (503) (544)
Net amortization and deferral (19) (19) (19)
Net loss 224 218 292
----- ----- -----
Net periodic pension expense $ 426 $ 515 $ 407
===== ===== =====
Total pension expense for the years ended December 31, 1997, 1996 and 1995
amounted to $426,000, $540,000 and $402,000, respectively.
According to the Association's actuary, a reconciliation of the funded status of
the plan is as follows:
October 31,
--------------------------
1997 1996
----------- -----------
(In thousands)
Plan assets at fair value $ 4,830 $ 3,994
Projected benefit obligation 4,965 4,180
------- -------
Excess of projected benefit obligation over plan assets (135) (186)
Unamortized net surplus since adoption of SFAS No. 87 (265) (284)
Unrecognized net gain (1,577) (1,431)
------- -------
Accrued pension liability $(1,977) $(1,901)
======= =======
The accumulated benefit obligation (substantially all vested) at October 31,
1997 amounted to $2,924,000, which was less than the fair value of plan assets
at that date.
For the plan years ended October 31, 1997, 1996 and 1995, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.25%, 7.50% and
7.00%, respectively, and an expected long-term rate of return on plan assets of
8.00% for all years. An annual salary increase of 5% was utilized for all years.
52
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS (concluded)
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. 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, becomes eligible to participate in the plan. The Bank
may choose to match a portion of the employees' contributions. During the years
ended December 31, 1997, 1996 and 1995, the Bank made matching contributions
equal to twenty-five percent (25%) of the first six percent (6%) of annual
compensation contributed to the plan. For the years ended December 31, 1997,
1996 and 1995, expense attributable to the Plan amounted to $77,000, $69,000 and
$75,000, respectively.
Incentive Plan
The Bank has an executive incentive plan whereby all management executives are
eligible to receive a bonus, proportionate to their respective salary, if the
Bank meets or exceeds certain base standards. The structure of the plan is
reviewed on an annual basis by a designated committee, and performance goals are
then established. Incentive compensation expense amounted to $166,000, $101,000
and $181,000 for the years ended December 31, 1997, 1996 and 1995, 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, 1997, 1996 and 1995 amounted to
$99,000, $36,000 and $42,000, respectively.
13. STOCK OPTION PLANS
The Company has stock option plans, for the benefit of directors, officers and
full-time employees, covering 736,000 shares of common stock under the Medford
Savings Bank 1986 Stock Option Plan (the options under which have all been
granted) and 200,000 shares of common stock under the Medford Bancorp, Inc.
Stock Option Plan. 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
Company applies APB Opinion 25 and related interpretations in accounting for the
plans. (See Note 1.) 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.
53
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS (continued)
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -------------
(In thousands, except per share data)
Net income:
As reported $ 11,390 $ 10,429 $ 9,423
Pro forma 11,044 10,351 9,391
Basic earnings per share:
As reported $ 2.51 $ 2.31 $ 2.14
Pro forma 2.43 2.29 2.13
Diluted earnings per share:
As reported $ 2.39 $ 2.21 $ 2.02
Pro forma 2.32 2.19 2.02
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Dividend yield 3.7% 3.7% 3.7%
Expected life 10 years 10 years 10 years
Expected volatility 59% 66% 66%
Risk-free interest rate 5.7% 6.6% 6.9%
54
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS (concluded)
Stock option activity under the plans is as follows:
Years Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Amount Price Amount Price Amount Price
----------- ------------ ------------ ------------ ------------- -------------
Shares under option:
Outstanding at beginning of year $ 354,176 $ 10.42 $ 453,634 $ 8.90 $ 482,034 $ 8.71
Granted 33,000 36.76 12,000 22.13 6,000 18.09
Cancelled -- -- -- -- (7,000) 17.38
Exercised (6,500) 5.19 (111,458) 5.48 (27,400) 5.47
--------- --------- ---------
Outstanding at end of year 380,676 12.81 354,176 10.42 453,634 8.90
========= ========= =========
Exercisable at end of year 344,076 9.78 315,299 9.33 377,980 7.35
========= ========= =========
Weighted average fair value of
options granted during the year $ 17.48 $ 10.72 $ 8.79
========= ========= =========
Information pertaining to options outstanding at December 31, 1997 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
--------------- --------------- ------------- ----------- -------------- -----------
$5.19 - $6.13 148,200 3.1 years $ 5.26 148,200 $ 5.26
$7.63 - $10.88 90,886 4.7 9.50 90,886 9.50
$12.25 - $14.44 16,000 6.1 13.99 15,100 13.96
$17.25 - $19.44 77,590 6.6 18.83 77,590 18.83
$20.75 - $24.88 18,000 8.6 22.38 12,300 21.98
$25.75 - $39.50 30,000 9.9 38.13 -- --
------- -------
Outstanding at end of year 380,676 5.1 years $12.81 344,076 $ 9.78
======= =======
14. 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, 1997, the ESOP held 250,245 shares, all of
which have been allocated to participants. 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, 1997, 1996 or 1995.
55
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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.
Investment securities: Fair values for investment securities, excluding Federal
Home Loan Bank of Boston stock, are based on quoted market prices. The carrying
values of restricted equity securities approximate fair value based on the
redemption provisions of the Federal Home Loan Bank of Boston.
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 90
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.
56
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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,
-----------------------------------------------------
1997 1996
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(In thousands)
Financial assets:
Cash and cash equivalents $ 16,180 $ 16,180 $ 16,429 $ 16,429
Investment securities available for sale 402,723 402,723 268,379 268,379
Investment securities held to maturity 103,823 104,102 150,591 150,846
Restricted equity securities 6,782 6,782 5,996 5,996
Loans, net 570,844 575,045 560,855 558,971
Accrued interest receivable 9,472 9,472 9,291 9,291
Financial liabilities:
Deposits 821,706 822,449 792,141 791,875
Short-term borrowings 95,670 95,670 80,817 80,817
Long-term debt 110,109 110,293 67,647 67,997
Accrued interest payable 995 995 851 851
57
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Medford Bancorp, Inc. is as follows:
BALANCE SHEET
December 31,
1997
------------------
(In thousands)
Assets
Short-term investments with Medford Savings Bank $ 7,028
Investment in common stock of Medford Savings Bank 94,481
Due from Medford Savings Bank 1,650
--------
Total assets $103,159
========
Liabilities and Stockholders' Equity
Accrued expenses $ 14
Other liabilities 1,635
--------
Total liabilities 1,649
--------
Stockholders' equity:
Serial preferred stock --
Common stock 2,271
Additional paid-in capital 28,977
Retained earnings 70,262
--------
Total stockholders' equity 101,510
--------
Total liabilities and stockholders' equity $103,159
========
58
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued)
STATEMENT OF INCOME
Year Ended
December 31, 1997
-------------------
(In thousands)
Interest on short-term investments with Medford Savings Bank $ 30
Operating expenses 6
-------
Income before income taxes and equity in
undistributed net income of Medford Savings Bank 24
Applicable income tax provision 10
-------
14
Equity in undistributed net income of Medford Savings Bank 11,376
-------
Net income $11,390
=======
STATEMENT OF CASH FLOWS
Year Ended
December 31, 1997
-------------------
(In thousands)
Cash flows from operating activities:
Net income $ 11,390
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Medford Savings Bank (11,376)
Increase in accrued expenses 14
--------
Net cash provided by operating activities 28
--------
Cash flows from financing activities:
Dividend from Medford Savings Bank at date of reorganization 7,000
--------
Net cash provided by financing activities 7,000
--------
Net increase in cash and cash equivalents 7,028
Cash and cash equivalents, beginning of period --
--------
Cash and cash equivalents, end of period $ 7,028
========
59
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY DATA (UNAUDITED)
A summary of consolidated operating results on a quarterly basis is as follows:
Year Ended December 31, 1997
--------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(In thousands, except per share data)
Interest and dividend income $ 19,464 $ 19,114 $ 18,586 $ 18,168
Interest expense (10,883) (10,585) (10,133) (9,748)
-------- -------- -------- --------
Net interest income 8,581 8,529 8,453 8,420
Provision for loan losses -- -- (50) (75)
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,581 8,529 8,403 8,345
Other income 789 764 1,288 1,001
Operating expenses (5,068) (4,797) (4,567) (4,622)
-------- -------- -------- --------
Income before income taxes 4,302 4,496 5,124 4,724
Provision for income taxes (1,545) (1,786) (2,032) (1,893)
-------- -------- -------- --------
Net income $ 2,757 $ 2,710 $ 3,092 $ 2,831
======== ======== ======== ========
Earnings per share:
Basic $ 0.61 $ 0.60 $ 0.68 $ 0.62
======== ======== ======== ========
Diluted $ 0.58 $ 0.57 $ 0.65 $ 0.60
======== ======== ======== ========
Year Ended December 31, 1996
--------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(In thousands, except per share data)
Interest and dividend income $ 17,764 $ 17,139 $ 16,992 $ 16,816
Interest expense (9,598) (9,091) (8,979) (8,794)
-------- -------- -------- --------
Net interest income 8,166 8,048 8,013 8,022
Provision for loan losses (20) (45) (90) (60)
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,146 8,003 7,923 7,962
Other income 920 742 759 894
Operating expenses (4,549) (4,595) (4,514) (4,417)
-------- -------- -------- --------
Income before income taxes 4,517 4,150 4,168 4,439
Provision for income taxes (1,825) (1,646) (1,632) (1,742)
-------- -------- -------- --------
Net income $ 2,692 $ 2,504 $ 2,536 $ 2,697
======== ======== ======== ========
Earnings per share:
Basic $ 0.59 $ 0.55 $ 0.56 $ 0.60
======== ======== ======== ========
Diluted $ 0.57 $ 0.53 $ 0.54 $ 0.57
======== ======== ======== ========
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
With the exception of certain information regarding the executive officers of
the Company and the Bank, the response to this item is incorporated by reference
from the discussion under the captions "Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on April 27, 1998 (the "Proxy
Statement"), to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act Rules.
Information regarding the executive officers of the Company and the Bank is
contained in Item I of Part I to this Report under the caption "Executive
Officers of the Registrant."
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.
61
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 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 November
26, 1997, and incorporated herein by reference)
3.2 Amended and Restated By-laws of the Company
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 Articles of Organization of
the Company (see Exhibit 3. 1)
4.3 Articles II and V of the 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
10.2 Amended and Restated Special Termination Agreement with Arthur H.
Meehan
10.3 Amended and Restated Special Termination Agreement with Phillip W.
Wong
10.4 Amended and Restated Special Termination Agreement with George A.
Bargamian
10.5 Amended and Restated Special Termination Agreement with Eric B. Loth
10.6 Amended and Restated Special Termination Agreement with William F.
Rivers
10.7 Supplemental Executive Retirement Plan and Corresponding Adoption
Agreement with Arthur H. Meehan
10.8 Executive Supplemental Benefit Agreement with Arthur H. Meehan
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)
62
10.11 Medford Savings Bank 1986 Stock Option Plan (filed as Exhibit 4.4 to
the Company's Registration Statement on Form S-8 filed with the SEC
on November 26, 1997, and incorporated herein by reference)
10.12 Medford Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-8 filed with the SEC on
November 26, 1997, and incorporated herein by reference)
10.13 Discretionary Bonus Plan (not set forth in a formal document -- a
description of the plan is contained in both the Proxy Statement to
be filed with the SEC, and incorporated herein by reference, under
the caption "Compensation Committee Report on Executive
Compensation" and in the "Notes to Consolidated Financial
Statements" under the caption "Employee Benefit Plans -- Incentive
Plan" in Item 8 to this Report)
11 Statement Regarding Computation of Per Share Earnings -- As the
Company does not have any debt securities registered under Section
12 of the Securities and Exchange Act of 1934, no ratio of earnings
to fixed charges appears in this Report.
12 Statement Regarding Computation of Ratios -- Such computation can
be clearly determined from the material contained in this Report.
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
27 Financial Data Schedule
(b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K with
the SEC on November 26, 1997, in connection with the Reorganization.
63
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, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Arthur H. Meehan Chairman, President, Chief March 5, 1998
- ---------------------------- Executive Officer and Director
Arthur H. Meehan
/s/ Phillip W. Wong Senior Vice President March 5, 1998
- ---------------------------- and Chief Financial Officer
Phillip W. Wong
/s/ Edward D. Brickley Director March 5, 1998
- ----------------------------
Edward D. Brickley
- ---------------------------- Director March 5, 1998
David L. Burke
- ---------------------------- Director March 5, 1998
Paul J. Crowley
- ---------------------------- Director March 5, 1998
Mary L. Doherty
/s/ Edward J. Gaffey Director March 5, 1998
- ----------------------------
Edward J. Gaffey
/s/ Andrew D. Guthrie, Jr. Director March 5, 1998
- ----------------------------
Andrew D. Guthrie, Jr.
/s/ Robert A. Havern, III Director March 5, 1998
- ----------------------------
Robert A. Havern, III
- ---------------------------- Clerk and Director March 5, 1998
Eugene R. Murray
/s/ Francis D. Pizzella Director March 5, 1998
- ----------------------------
Francis D. Pizzella
64