[GRAPHIC OMITTED]
Medford Bancorp, Inc.
1998 ANNUAL REPORT
[GRAPHIC OMITTED]
Tewksbury
North Reading
Wilmington
Burlington
Medford
Malden
Arlington
Belmont
Waltham
Boston
Arlington
Route 60 & Mystic
Valley Parkway
781.393.6355
Belmont
4 Hill Road, Corner
of Brighton St.
781.393.6320
Burlington
258 Cambridge St.
781.272.5700
Malden
Malden Center
399 Main St.
781.393.6386
Broadway
44 Broadway
781.393.6334
Maplewood
28 Lebanon St.
781.393.6329
Oak Grove
876 Main St.
781.393.6326
West Side
443 Charles St.
781.393.6337
Medford
Main Office
29 High St.
781.395.7700
Loan Center
5 High St.
781.395.7700
Haines Square
257 Spring St.
781.393.6380
South Medford
448 Main St.
781.393.6340
Wellington
499 Riverside Ave.
781.393.6350
West Medford
501 High St.
781.393.6344
North Reading
80 Main St.
978.664.5581
Tewksbury
295 Main St.
978.851.0841
Waltham
695 Main St.
781.647.4848
Wilmington
240 Main St.
978.658.9134
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Medford Bancorp, Inc.
FINANCIAL HIGHLIGHTS
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(dollars in thousands) 1998 1997
Total Assets $1,151,188 $1,135,572
Investment Securities 512,648 513,418
Net Loans 580,665 570,844
Deposits 871,702 821,706
Total Borrowings 170,116 205,779
Net Income 12,252 11,390
Stockholders' Equity 102,267 101,510
Shares Outstanding 8,709,828 9,082,296
Per Common Share:
Basic Earnings $ 1.38 $ 1.25
Diluted Earnings 1.31 1.19
Book Value 11.74 11.18
Cash Dividends Declared 0.50 0.45
Financial Ratios:
Return on Average Assets 1.09% 1.05%
Return on Average Equity 11.99 11.81
Stockholders' Equity to Assets 8.88 8.94
Net Interest Rate Spread 2.72 2.84
Net Yield on Average Earning Assets 3.16 3.26
Employees (at year end), Full-Time Equivalent 252 252
Shareholders of Record 1,158 1,187
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Annual Meeting
The Annual Meeting of Shareholders will be held April 26, 1999 at 10 a.m. at
Medford Bank, 5 High Street, Suite 202, Medford, Massachusetts.
Corporate Information
Medford Bancorp, Inc.
Medford Bank
29 High Street
Medford, MA 02155
781.395.7700
www.medfordbank.com
Accessing Information
Additional copies of this Annual Report and Form 10-K may be obtained without
charge by writing to the Company's Shareholder Relations Department. These
reports are also available to the public on request as required by the
Securities and Exchange Commission (SEC). These statements have not been
reviewed or confirmed for accuracy or relevance by the SEC.
1
[LOGO] shareholders' letter
DEAR SHAREHOLDERS
[PHOTO OMITTED]
Arthur H. Meehan,
Chairman, President and CEO
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We experienced another profitable and successful year for Medford Bancorp, Inc.
As we continue to operate in a competitive environment, our challenge remains to
manage the Company efficiently to produce the optimum return to our
shareholders.
The Board of Directors remains actively involved, as evidenced by their
participation in the strategic planning session with senior management held in
the spring of 1998. Our annual strategic planning sessions and the resulting
plans provide valuable management tools for improved performance.
In 1998, we utilized the holding company structure to exercise greater control
in managing capital with the announcement and completion of a 5% stock
repurchase plan. A total of 453,468 shares of common stock were repurchased. In
addition, we recently announced another stock repurchase plan of up to 5% of
outstanding shares. In the third quarter of 1998 we issued a 2-for-1 stock
split, which was effected in the form of a stock dividend. This makes the price
of the shares of Medford Bancorp, Inc. more attractive and encourages broader
individual ownership.
Our underlying strategy to grow profitably is paramount and factors into all
decisions. Balance sheet size and market share are typical measurements of
growth; however, size alone is not important in achieving stated objectives to
enhance shareholder value. All product offerings are assessed critically as to
risk and contribution to profitability. As a result, we decided to exit the
student loan business, due to changes in government pricing, and sold our $11
million portfolio at a premium.
Understanding the value of our core competencies as a community bank is of vital
importance and a competitive advantage. We will continue to be a low cost
provider of services and we will remain highly focused, not straying far from
the fundamentals of taking deposits and making loans.
We continue to be a customer-friendly, deposit-driven institution. Our deposits
grew by a respectable $50 million, or 6%, to $872 million at year-end. Believing
that a community presence is essential in establishing, maintaining and growing
core deposit relationships, we successfully opened our 17th branch office in
Tewksbury. We will continue to prudently evaluate other possible de novo sites
with desirable characteristics in selected targeted markets in accordance with
our strategic plans. We also reopened our North Reading office after extensive
renovations were made to the plaza and new anchor tenants brought in.
2
1998 annual report [LOGO]
PEOPLE YOU KNOW
EXPERIENCE YOU TRUST
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Other factors that attributed to the growth in deposits were our product
offerings and the introduction of a municipal call program. Our ComboPlus
combined savings and checking packaged account grew by over $33 million in 1998.
Also, our new municipal calling program generated over $15 million by assisting
town treasurers in managing short term deposit needs. Our deposit market share
remains a dominant 49% in Medford and 42% in Malden, while increasing in the
other communities where we have branches.
Lending activities were strongest within our residential lending division. A
heated real estate market was fueled by attractive interest rates, strong
employment, and the stock market. Our lenders were able to capitalize on this
and generated $178.6 million in new mortgage loans, a 71% increase compared to
1997 levels. The net result was a portfolio gain of $32 million after adjusting
for amortizations, sales and prepayments.
Year 2000 planning efforts, beginning in 1997, accelerated in 1998. Members of
our senior management team serve on our Y2K task force, along with other key
management staff. During the year the task force directed preparation activities
in accordance with our plan, making steady progress toward Y2K compliance. This
work is now substantially near completion, and we remain diligent in our efforts
to keep Year 2000 compliance a top priority.
I am pleased to announce new members to our senior management team with the
promotions of Vincent Gargano, David Korp and Anthony Visco to senior vice
presidents. Mr. Gargano is responsible for risk management and strategic
planning, Mr. Korp heads our deposit operations and systems departments, and Mr.
Visco heads our residential mortgage division. I offer my personal
congratulations for their individual accomplishments and also extend my
appreciation to all employees in recognition of their talents and contributions
to our success.
In closing, I would like to thank you, our shareholders, for your confidence and
support.
/s/ Arthur H. Meehan
Arthur H. Meehan
Chairman of the Board
President and Chief Executive Officer
[The following information was depicted as bar charts in the printed material.]
Stock Price (year end)
1996 1997 1998
$12.87 $19.62 $16.75
Book Value (year end)
1996 1997 1998
$10.20 $11.18 $11.74
Basic Earnings per Share
1996 1997 1998
$1.15 $1.25 $1.38
Cash Dividends Declared
1996 1997 1998
$0.42 $0.45 $0.50
3
[LOGO] the year in review
Deposit Mix as of
December 31, 1998
(in thousands)
[The following information was depicted a pie chart in the printed material.]
Term CDs $403,831 46.33%
Demand & Official Checks $116,824 13.40%
Savings $279,191 32.03%
Money Market $71,856 8.24%
THE YEAR IN REVIEW
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Financial Performance
We continue to focus on enhancing financial performance as measured by
improvement in earnings per share and continued earnings growth from year to
year. For the year ended December 31, 1998, we reported consolidated net income
of $12,252,000 and basic earnings per share of $1.38 ($1.31 on a diluted basis)
compared with net income of $11,390,000 and basic earnings per share of $1.25
($1.19 on a diluted basis) for 1997. Diluted earnings per share increased $.12,
or 10%, with an $862,000, or 7.6%, increase in net income from the previous
year.
We were especially pleased with the declaration of our sixth consecutive special
dividend in December and total dividends of $.50 per share in 1998, an 11%
increase from the prior year. Even with the Company's strong dividend policy and
stock repurchase program in 1998, book value per share grew to $11.74 on
December 31, 1998, as compared to $11.18 on December 31, 1997, a 5% increase.
Shareholders' equity exceeds $100 million, at $102.3 million, and the
equity-to-assets ratio remains strong at 8.88%.
The improvement in net income for 1998 when compared to 1997 reflects a $206,000
increase in net interest income driven by higher average earning assets and an
increase in net gains on the sale of securities and loans amounting to $899,000.
Non-interest expenses increased modestly in 1998 when compared with 1997. An
increase of $468,000 in salaries and employee benefits during 1998 was offset by
the elimination of one-time expenses of approximately $460,000 related to the
formation of the holding company and tax filing matters recorded in 1997.
Net interest income for 1998 improved by a modest $206,000 from last year due to
higher average earning assets partially offset by interest rate margin
compression. In 1998, net interest margin declined to 3.16%, or 10 basis points,
from last year, due to intense pricing competition for loans and deposits. In
1998, long term rates continued to decline as short term rates remained
unchanged, resulting in a flattening of the yield curve. Although the Company
achieved record residential loan originations, it also experienced unusually
high residential and commercial real estate loan prepayments and refinancing
related to the steep decline in interest rates, placing pressure on net interest
margin. This, coupled with our decisions to originate certain loans on a
correspondent basis only and to exit the student loan business due to
profitability concerns, resulted in gross loans of $587.5 million at December
31, 1998, an increase of only $10 million from the prior year.
Asset quality remains strong with total non- performing assets at $1,932,000, or
0.17%, of total assets at December 31, 1998, a modest increase from $1,774,000,
or 0.16%, of total assets at December 31, 1997. The allowance for loan losses
stood at $6,876,000 and $6,733,000, representing 1.17% of total loans at
December 31, 1998 and 1997, respectively.
The Company had total assets of $1.15 billion and deposits of $872 million at
December 31, 1998. When comparing period-end balances, growth in loans and
investments was modest while deposits grew by a stronger level of $50 million,
or 6%. This deposit growth allows for a corresponding reduction in the level of
borrowings, aiding in the maintaining of the net interest margin.
Community Banking
Our Retail Branch Network
With the opening of our 17th office in Tewksbury, we now operate in nine
communities. The branch is the key to community banking, and we constantly
evaluate our branches to improve customer service. For example, we upgraded
teller software, reduced transaction processing time and adjusted staffing
schedules to better service customers. We continually monitor our service
quality levels through an outside vendor and consistently measure above our
peer group.
During the year we also enhanced our Main Office by building a customer parking
lot on our property which connects our Main Office and Loan Center.
4
1998 annual report [LOGO]
[PHOTO OMITTED]
Our branch management team with Art Meehan, Chairman, President and CEO.
This improves customer convenience and access to our downtown Medford
operations. Our Malden Center location will also benefit with a new municipal
parking lot adjacent to it, which will accommodate approximately 50 cars.
As mentioned earlier, we are benefiting greatly at our North Reading office
where substantial development of the plaza by the owner attracted new tenants.
Our retention strategies to preserve accounts and deposits during the
seven-month closure were very successful. The shopping center now is a
destination of many local residents who frequent our new neighbors, Wal-Mart and
Marshalls. With higher visibility, increased traffic, and a new ATM machine, we
have confidence that this location will prove even more advantageous in building
the customer base.
While the branch office remains an important delivery channel, we continue to
strengthen our non-branch banking operations. Further development of alternative
delivery channels to augment the branch network and increase customer
convenience is essential in remaining competitive. Our Call Center provides
toll-free access and allows customers to open accounts from the comfort of home.
Our web site at www.medfordbank.com provides instant access to current deposit
and loan rates, as well as other product information and employment
opportunities. InfoLine, our 24-hour automated telephone banking service,
currently handles more than 23,000 calls monthly. By joining SUM, the
surcharge-free ATM alliance of over 200 community banks, our ATM customers have
access to more than 1,000 ATMs surcharge-free. Additionally, the debit card has
been gaining popularity and is becoming the card of choice for many customers.
Special programs help us to retain relationships, grow deposits and,
importantly, continue to distinguish us as a community bank. Our Freedom 55
mature market program offers free and discounted banking services as well as
group-travel opportunities. The highlight for 1998 was a cruise to Hawaii. With
over 3,200 members in Our Club for Kids, we have expanded this program to
include several in-school savings programs. In 1998, we introduced a new
program, Workplace Partner. This program affords employees of member companies
an exclusive package of services, ranging from higher CD rates to discounted
loans. All of these programs, along with our emphasis on quality service,
illustrate our commitment to community banking.
[PHOTO OMITTED]
We opened our Tewksbury Office in September of 1998.
(From left to right):
Barbara Purcell, Maplewood Office
Linda A. Iacono, Main Office
Andree Brulhart, Wilmington Office
Catherine Masiello, Belmont Office
Judith A. Gilligan, Wellington Office
Christine Santapaola, Haines Square Office
Stephanie M. Tiernan, Broadway Office
Arthur H. Meehan, Chairman, President and CEO
Deborah White, North Reading Office
Cheryl A. Cannon, Oak Grove Office
Kelly Hannify, West Medford Office
Teresa Cunha, Malden Center Office
Lea Hamel, South Medford Office
Kathleen M. Beasley, West Side Office
Heather Owen, Waltham Office
Kathleen Pasquale, Tewksbury Office
Not present:
Linda Kane, Arlington Office
Karla Lucas, Burlington Office
5
[LOGO] the year in review
Loan Mix as of
December 31, 1998
(in thousands)
[The following information was depicted a pie chart in the printed material.]
Residential Mortgages $422,657 71.94%
Commercial Mortgages $109,561 18.65%
Second Mortgages/Equity Lines $21,733 3.70%
Consumer Loans $3,145 0.53%
Commercial Loans $17,372 2.96%
Construction Mortgages $13,073 2.22%
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Lending Activities
Our Residential Lending Division enjoyed another successful year generating
record-level mortgage loan originations. The prior year's achievement of $104
million in one to four family mortgage loans was surpassed in 1998 with an
impressive $178.6 million.
The higher origination volume is the result of an active real estate market and
the effectiveness of our mortgage originators in capturing business. Included in
this volume were originations on behalf of correspondents, consisting of 30-year
fixed rate mortgage loans. This enhanced fee income and more effectively managed
interest rate risk. Our residential mortgage loan portfolio now exceeds $422
million, representing 71.94% of total loans.
We continue to be a top residential mortgage provider within our market area,
and our market share rankings reflect this strength. We hold the number one
position for mortgage loan volume in the cities of Malden and Medford, and we
rank third overall in our primary market area. Our lending area includes the
primary market area where branches are located and extends to cover more than
100 cities and towns. With a substantial increase in mortgage originations
during 1998, we added an in-house mortgage originator to better manage the
growth. This addition to staff allows our team of "on-the-road" originators to
concentrate their efforts within defined territories of the lending area.
We have earned a reputation as a leading lender in local communities with our
broad range of mortgage options. Competitive pricing and special programs that
make home ownership easier and more affordable have contributed to our success.
As examples, our Mortgage Preapproval Program provides an optional rate lock of
up to 120 days, giving consumers more flexibility in securing their new home,
and our Affordable Housing Program features reduced pricing, no points and no
closing costs. During 1998 we also introduced a successful "No PMI" program for
a limited period. Moreover, our participation in the Malden Redevelopment
Authority's first- and second-time home buying program illustrates our strong
commitment to affordable housing. We committed $1.7 million to this program
during 1998.
Our Commercial Lending Division specializes in serving small to mid-size
businesses with annual sales of up to $10 million with commercial & industrial,
asset-based and commercial real estate loans. Our knowledge of the local area
and our responsiveness to business owners give us an advantage. As an approved
SBA lender, and by offering a range of commercial services, we are
well-positioned to meet the lending needs of this market.
With seasoned commercial lenders, our capabilities range from providing term
loans for equipment purchases to financing multimillion-dollar developments.
Beacon Woods, a $3.2 million dollar land acquisition and construction loan, will
bring a community of 26 luxury townhomes to Burlington. In North Reading, we
have provided financing for Fairway Acres, a 10-lot subdivision. As part of the
lending relationship, we provide support to businesses in managing their growth
or helping them operate more efficiently. Several of the companies that rely
upon Medford Bank include Joyce Chen, a cookware company in Billerica; The
Universal Group, Inc., a wholesale frozen fish distributor based in Burlington;
and Lifestyle Transportation, an Everett-based limousine company.
In 1998, we experienced modest growth in the commercial and industrial portfolio
of $2.4 million, mostly attributable to increases in asset-based lending
activities. With challenges in managing the commercial real estate portfolio in
a fiercely competitive lending market and low rate environment, we were very
selective in developing new business. Our strategy is to build this portfolio
profitably without sacrificing credit or rate standards. We will continue to
actively look for opportunities to develop new business.
6
Directors
Arthur H. Meehan*
Chairman of the Board,
President and Chief Executive
Officer Medford Bank
Edward D. Brickley
Manager of Corporate International
Accounting at Polaroid Corporation
Cambridge, MA (Retired)
David L. Burke
President and Treasurer, Boston
Steel & Manufacturing Co.
Malden, MA
Paul J. Crowley*
President, CSC Consulting Group
Cambridge, MA (Retired)
Mary Lou Doherty
Assistant Principal,
Medford School System (Retired)
Edward J. Gaffey*
President, Country Way Associates
Belmont, MA
Andrew D. Guthrie, Jr., M.D.
Physician, President of
Mistick Pediatrics Associates (Retired)
Robert A. Havern, III
Attorney, Arlington, MA
Member of State Legislature
of Commonwealth of Massachusetts
Eugene R. Murray*
Underwriting Manager of the
Boston Office of Cigna
Special Risk Facility (Retired)
Francis D. Pizzella*
Attorney and President of The
Savings Bank Life Insurance
Company of Massachusetts,
President of The Savings Bank
Employees Retirement Association (Retired)
Officers of Medford Bank
Arthur H. Meehan**
Chairman, President and
Chief Executive Officer
Vincent Gargano
Senior Vice President,
Strategic Planning
and Risk Management
Paula M. McNabb
Assistant Vice President,
CRA/Compliance Officer
Administration
William F. Rivers
Senior Vice President
David L. Korp
Senior Vice President,
Operations Officer
Joan P. Cronholm
Vice President,
Loan Operations Officer
Jane M. Griffin
Vice President,
Director of Human Resources
Lorraine Lucia
EFT Services Officer
Charles E. Samour
Security Officer
Joanne Teixeira
Deposit Operations Officer
Alan Collopy
Systems Officer
Finance
Phillip W. Wong**
Executive Vice President,
Chief Financial Officer
Jane E. Cybulski
Vice President,
Investment/ALCO Officer
John Searles
Vice President,
Controller
Mary E. Auterio
Assistant Vice President,
Assistant Controller
Martin J. Heneghan
Assistant Vice President
Senior Audit Officer
Christine Panno-West
Finance Officer
Lending
Eric B. Loth
Senior Vice President
Anthony R. Visco
Senior Vice President,
Residential Lending
Donald L. Cullen
Vice President,
Collections Officer
Mary Ann Devlin
Vice President,
Commercial Real Estate
Kim S. Foster
Vice President,
Commercial Loan Officer
Richard P. Lane
Vice President,
Commercial Loan Officer
Michael D. MacDonald
Vice President,
Commercial Loan Officer
Anne M. Barry
Assistant Vice President,
Mortgage Representative
Joanne M. Franco
Assistant Vice President,
Senior Credit Officer
Harold L. Goldsmith
Assistant Vice President,
Mortgage Representative
Deborah Sousa
Assistant Vice President,
Mortgage and Loan
Origination Manager
Charles M. Byron
Mortgage Loan Officer
Retail
George A. Bargamian
Senior Vice President
Kenneth E. Peterson
Vice President,
Branch Administrator
Elizabeth J. Stodolski
Vice President,
Marketing Director
Theresa Barile
Assistant Vice President,
Pension Officer
Kathleen M. Beasley
Assistant Vice President,
Regional Manager
Anna Beaudoin
Assistant Vice President,
Retail Systems Administrator
Cheryl A. Cannon
Assistant Vice President,
Regional Manager
Linda A. Iacono
Assistant Vice President,
Regional Manager
Rosanna Natola
Assistant Vice President,
Retail Training/Support
Teresa Cunha
Branch Officer
Judith A. Gilligan
Branch Officer
Lea Hamel
Branch Officer
Kathleen Pasquale
Branch Officer
Christine Santapaola
Branch Officer
Stephanie M. Tiernan
Branch Officer
Dana Mann
Municipal Officer
* Member of Executive Committee
** Officer of Medford Bancorp, Inc.
[LOGO]
Medford Bancorp, Inc.
[LOGO]
Medford Bancorp, Inc.
People you know. Experience you trust.
781.395.7700
Shareholder Information
The Company's common stock trades on the Nasdaq Stock Market under the symbol
MDBK. The stock is listed under various abbreviations in the Wall Street Journal
and other newspapers. There were 1,158 shareholders of record as of December 31,
1998.
Quarterly Stock Performance
The following tabulation shows the range of price quotations per share as
reported by Nasdaq for the periods indicated: (Adjusted for stock split).
1998 High Low
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First Quarter $22.00 $17.75
Second Quarter $22.13 $20.25
Third Quarter $21.25 $16.13
Fourth Quarter $18.75 $13.50
Dividend Reinvestment And Stock Purchase Plan
Stockholders may obtain a detailed brochure of the plan by writing to the
Company's Shareholder Relations Department.
Transfer Agent
Contact our stock transfer agent directly for assistance regarding: change of
address; transfer of stock certificates; replacement of lost, stolen, or
destroyed certificates or dividend checks; elimination of duplicate mailing.
Boston EquiServe
P.O. Box 8200
Boston, MA 02266-8200
800.426.5523
Legal Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
617.570.1000
Independent Certified
Public Accountant
Wolf & Company, P.C.
One International Place
Boston, MA 02110
617.439.9700