SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to
Commission File Number 0-23435
Medford Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3384928
- ------------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
29 High Street
Medford, Massachusetts 02155
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (781) 395-7700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of Medford Bancorp, Inc.'s common stock, $0.50
par value per share, as of March 31, 2002 was 7,795,152.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets 1
Consolidated Statements of Income 2-3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-18
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 2 - Changes in Securities and Use of Proceeds 19
ITEM 3 - Defaults Upon Senior Securities 19
ITEM 4 - Submission of Matters to a Vote of Security Holders 19
ITEM 5 - Other Information 19
ITEM 6 - Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
----------- ------------
(In thousands)
ASSETS
Cash and due from banks $ 15,739 $ 18,210
Interest-bearing deposits 48,389 28,280
----------- -----------
Cash and cash equivalents 64,128 46,490
Securities available for sale 616,295 588,263
Securities held to maturity 48,678 57,022
Federal Home Loan Bank stock, at cost 11,920 11,920
Loans 679,076 682,263
Less allowance for loan losses (7,391) (7,080)
----------- -----------
Loans, net 671,685 675,183
----------- -----------
Banking premises and equipment, net 11,688 11,578
Accrued interest receivable 9,758 9,596
Intangible assets 1,287 1,532
Other assets 10,728 11,187
----------- -----------
Total assets $ 1,446,167 $ 1,412,771
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,126,799 $ 1,095,947
Short-term borrowings 1,460 10,206
Long-term debt 200,075 190,075
Accrued taxes and expenses 3,715 2,338
Other liabilities 2,612 2,640
----------- -----------
Total liabilities 1,334,661 1,301,206
----------- -----------
Stockholders' equity:
Serial preferred stock, $.50 par value, 5,000,000 shares
authorized; none issued -- --
Common stock, 15,000,000 shares authorized; $.50 par value,
9,122,596 shares issued 4,561 4,561
Additional paid-in capital 21,309 21,985
Retained earnings 106,932 104,275
Accumulated other comprehensive income 2,485 5,627
Treasury stock at cost (1,327,444 and 1,388,948 shares, respectively) (23,781) (24,883)
----------- -----------
Total stockholders' equity 111,506 111,565
----------- -----------
Total liabilities and stockholders' equity $ 1,446,167 $ 1,412,771
=========== ===========
See accompanying notes to consolidated financial statements.
1
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
---------------------------------
2002 2001
------- -------
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $11,698 $12,773
Interest on debt securities 9,504 9,168
Dividends on equity securities 110 227
Interest on short-term investments 151 221
------- -------
Total interest and dividend income 21,463 22,389
------- -------
Interest expense:
Interest on deposits 7,856 9,539
Interest on short-term borrowings 75 390
Interest on long-term debt 2,748 3,250
------- -------
Total interest expense 10,679 13,179
------- -------
Net interest income 10,784 9,210
Other income:
Customer service fees 576 538
Gain on sales of securities, net 96 216
Miscellaneous 279 328
------- -------
Total other income 951 1,082
------- -------
Operating expenses:
Salaries and employee benefits 3,161 2,904
Occupancy and equipment 791 761
Data processing 463 422
Professional fees 142 105
Amortization of intangibles 245 268
Advertising and marketing 162 148
Other general and administrative 708 601
------- -------
Total operating expenses 5,672 5,209
------- -------
Income before income taxes 6,063 5,083
Provision for income taxes 2,237 1,824
------- -------
Net income $ 3,826 $ 3,259
======= =======
(continued)
2
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (Concluded)
Three Months Ended
March 31,
------------------------------------
2002 2001
---------- ----------
(Dollars in thousands, except per share data)
Earnings per share:
Basic $ 0.49 $ 0.41
Diluted $ 0.48 $ 0.40
Cash dividends declared per share $ 0.15 $ 0.13
Weighted averages shares outstanding:
Basic 7,757,466 7,911,732
Diluted 7,958,904 8,108,694
See accompanying notes to consolidated financial statements.
3
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2002 and 2001
Accumulated
Common Stock Additional Treasury Stock Other
------------------ Paid-In Retained ---------------------- Comprehensive
Shares Dollars Capital Earnings Shares Dollars Income Total
--------- ------- ---------- --------- ---------- -------- ------------- ---------
(Dollars in thousands)
Balance at December 31, 2001 9,122,596 $4,561 $ 21,985 $ 104,275 (1,388,948) $(24,883) $ 5,627 $ 111,565
---------
Comprehensive income:
Net income -- -- -- 3,826 -- -- -- 3,826
Change in net unrealized gain
(loss) on securities available
for sale, net of
reclassification adjustment
and tax effects -- -- -- -- -- -- (3,142) (3,142)
---------
Total comprehensive income 684
---------
Cash dividends declared ($.15
per share) -- -- -- (1,169) -- -- -- (1,169)
Issuance of common stock
under stock option plan -- -- (676) -- 61,504 1,102 -- 426
--------- ------ -------- --------- ---------- -------- ------- ---------
Balance at March 31, 2002 9,122,596 $4,561 $ 21,309 $ 106,932 (1,327,444) $(23,781) $ 2,485 $ 111,506
========= ====== ======== ========= ========== ======== ======= =========
Balance at December 31, 2000 9,122,596 $4,561 $ 22,705 $ 94,697 (980,048) $(17,422) $ 424 $ 104,965
---------
Comprehensive income:
Net income -- -- -- 3,259 -- -- -- 3,259
Change in net unrealized gain
(loss) on securities available
for sale, net of
reclassification adjustment
and tax effects -- -- -- -- -- -- 3,616 3,616
---------
Total comprehensive income 6,875
---------
Cash dividends declared ($.13
per share) -- -- -- (1,013) -- -- -- (1,013)
Repurchase of treasury stock -- -- -- -- (389,048) (6,852) -- (6,852)
Issuance of common stock
under stock option plan -- -- (377) -- 30,164 533 -- 156
--------- ------ -------- --------- ---------- -------- ------- ---------
Balance at March 31, 2001 9,122,596 $4,561 $ 22,328 $ 96,943 (1,338,932) $(23,741) $ 4,040 $ 104,131
========= ====== ======== ========= ========== ======== ======= =========
See accompanying notes to consolidated financial statements.
4
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
---------------------
2002 2001
--------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 3,826 $ 3,259
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 874 506
Gain on sales of securities (96) (216)
Decrease (increase) in accrued interest receivable and other assets 2,297 (921)
Increase in accrued taxes and expenses and other liabilities 1,340 1,518
--------- --------
Net cash provided by operating activities 8,241 4,146
--------- --------
Cash flows from investing activities:
Activity in securities available for sale:
Maturities 14,419 24,500
Sales 53,180 16,701
Purchases (120,201) (50,691)
Principal amortization of mortgage-backed securities 19,325 12,486
Activity in securities held to maturity:
Purchases -- (500)
Principal amortization of mortgage-backed securities 8,400 --
Loans net of amortization and payoffs 3,362 5,854
Additions to banking premises and equipment, net (460) (634)
--------- --------
Net cash provided by (used in) investing activities (21,975) 7,716
--------- --------
(continued)
5
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Three Months Ended
March 31,
--------------------
2002 2001
-------- --------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 30,852 22,646
Increase (decrease) in borrowings with maturities of
three months or less (8,746) 9,618
Proceeds (repayments) of long-term debt 10,000 (10,000)
Issuance of common stock 426 156
Payments to acquire treasury stock -- (6,852)
Cash dividends paid (1,160) (1,304)
-------- --------
Cash provided by financing activities 31,372 14,264
-------- --------
Net change in cash and cash equivalents 17,638 26,126
Cash and cash equivalents at beginning of period 46,490 22,258
-------- --------
Cash and cash equivalents at end of period $ 64,128 $ 48,384
======== ========
See accompanying notes to consolidated financial statements.
6
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Note 1. Basis of Presentation
The consolidated interim financial statements of Medford Bancorp, Inc. (the
"Company") and its wholly-owned subsidiary, Medford Savings Bank (the "Bank")
presented herein are intended to be read in conjunction with the consolidated
financial statements presented in the Company's annual report for the year ended
December 31, 2001.
The consolidated financial information as of and for the three months ended
March 31, 2002 and March 31, 2001 is unaudited. In the opinion of management,
however, the consolidated financial information reflects all adjustments
(consisting solely of normal recurring accruals) necessary for a fair
presentation in accordance with accounting principles generally accepted in the
United States of America. Interim results are not necessarily indicative of
results to be expected for the entire year.
Note 2. Commitments
At March 31, 2002, the Company had outstanding commitments to originate new
residential and commercial real estate mortgage loans totaling approximately
$21.8 million, which are not reflected on the consolidated balance sheet.
Unadvanced funds on equity lines were $28.8 million, unadvanced construction
loan funds were $8.6 million, and unadvanced funds on commercial lines of credit
were $13.0 million at March 31, 2002.
Note 3. Earnings per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed conversion.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
The assumed conversion of outstanding dilutive stock options would increase the
shares outstanding but would not require an adjustment to income as a result of
the conversion.
Note 4. Accounting Change
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for business combinations initiated after
June 30,2001. SFAS No. 142, effective for the Company on January 1, 2002,
changes the accounting for goodwill from an amortization method to an
impairment-only approach. In addition, this Statement requires that acquired
identifiable intangible assets, as defined, be amortized over their useful
lives. All of the Company's intangible assets pertain to acquisitions of banking
or thrift institutions, where fair value of liabilities assumed exceeded the
fair value of assets acquired and will continue to be amortized, as such
transactions are outside the scope of SFAS No. 142. Thus the adoption of these
Statements did not have an impact on the consolidated financial statements.
7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation
GENERAL
The discussions set forth below, elsewhere herein, in our press releases and in
oral statements we make by or with the approval of our authorized executives
contain certain statements that may be considered forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1937, as amended. The Company
may make written or oral forward-looking statements in other documents we file
with the SEC and in our annual reports to stockholders. You can identify
forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "will," "should," and other
expression which predict or indicate future events or trends and which do not
relate to historical matters. You should exercise caution in interpreting and
relying on forward-looking statements, because they involve known and unknown
risks, uncertainties and other factors, some of which are beyond the control of
the Company. These risks, uncertainties and other factors may cause the actual
results of the Company to be materially different from the anticipated future
results expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following:
changes in general, national or regional economic conditions including changes
that adversely affect borrowers ability to service and repay loans; changes in
loan default and charge-off rates; reductions in deposit levels necessitating
increased borrowing to fund loans and investments; changes in interest rates;
changes in laws and regulations; changes in size and nature of the Company's
competition; and changes in the assumptions used in making such forward-looking
statements. You should carefully review all of these factors, and you should be
aware that there may be other factors that could cause these differences,
including, among others, the factors listed under "Risk Factors and Factors
Affecting Forward Looking Statements," as found in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001. Readers should
carefully review the factors described under "Risk Factors and Factors Affecting
Forward Looking Statements" and should not place undue reliance on our
forward-looking statements.
These forward-looking statements reflect our good faith beliefs based on
information, plans and estimates at the date of this report, and we expressly
disclaim any duty to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
Consolidated net income was $3,826,000, or basic earnings per share of $0.49
($0.48 diluted basis), for the three months ended March 31, 2002, compared to
$3,259,000, or basic earnings per share of $0.41 ($0.40 diluted basis), for the
comparable prior year period.
Net interest income was $10,784,000 for the quarter ended March 31, 2002, up
$1,574,000 or 17.1% from the comparable 2001 period, and represented a net
interest margin of 3.10%, as compared to 2.86% for the comparable 2001 period.
The net gain on sales of assets totaled $96,000 for the first quarter of 2002
compared to $216,000 for the same quarter of 2001.
Total operating expenses were $5,672,000 for the quarter ended March 31, 2002,
up $463,000 or 8.9% from $5,209,000 during the comparable period in 2001. There
was no provision for loan losses recorded for either of the three-month periods
ended March 31, 2002 or March 31, 2001.
For the first quarter of 2002, the annualized return on assets was 1.09% and the
annualized return on equity was 13.68%, compared to 1.01% and 12.75%,
respectively, for the comparable period in 2001.
8
Total non-performing assets were $548,000 or 0.04% of total assets at March 31,
2002 compared to $976,000 or 0.07% at December 31, 2001. The allowance for loan
losses at March 31, 2002 was $7,391,000, representing 1.09% of total loans. At
December 31, 2001, the allowance for loan losses was $7,080,000, representing
1.04% of total loans. The Company had no foreclosed real estate at March 31,
2002 or December 31, 2001.
The Company had total assets of $1.45 billion and capital of $111.5 million at
March 31, 2002, representing a capital to assets ratio of 7.71%, exceeding all
regulatory requirements. When compared to December 31, 2001, securities
increased $19.7 million or 3.0% to $676.9 million, total gross loans decreased
$3.2 million or 0.47% to $679.1 million, deposits increased $30.9 million or
2.8% to $1.13 billion, and borrowings increased $1.3 million or 0.63% to $201.5
million.
A more detailed discussion and analysis of the Company's financial condition and
results of operations follows.
SECURITIES
The amortized cost and fair value of investment securities, excluding restricted
equity securities, at March 31, 2002 and December 31, 2001 with gross unrealized
gains and losses, follows:
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2002 Cost Gains Losses Value
- --------------------------------------------- --------- ---------- ---------- --------
(In thousands)
Securities Available for Sale
Corporate bonds $280,539 $5,597 $(1,176) $284,960
Mortgage-backed 268,354 1,778 (1,494) 268,638
U. S. Gov't and federal agency obligations 63,468 59 (830) 62,697
-------- ------ ------- --------
Total securities available for sale $612,361 $7,434 $(3,500) $616,295
======== ====== ======= ========
Securities Held to Maturity
Federal agency obligations $ 4,903 $ 244 $ -- $ 5,147
Mortgage-backed 43,775 1,030 (132) 44,673
-------- ------ ------- --------
Total securities held to maturity $ 48,678 $1,274 $ (132) $ 49,820
======== ====== ======= ========
9
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
- --------------------------------------------- --------- ---------- ---------- --------
(In thousands)
Securities Available for Sale
Corporate bonds $251,531 $ 7,760 $ (333) $258,958
Mortgage-backed 253,323 2,397 (863) 254,857
U.S. Gov't and federal agency obligations 73,458 334 (224) 73,568
-------- ------- ------- --------
Total debt securities 578,312 10,491 (1,420) 587,383
Marketable equity securities 874 98 (92) 880
-------- ------- ------- --------
Total securities available for sale $579,186 $10,589 $(1,512) $588,263
======== ======= ======= ========
Securities Held to Maturity
Federal agency obligations $ 4,884 $ 335 $ -- $ 5,219
Mortgage-backed 52,138 1,217 (93) 53,262
-------- ------- ------- --------
Total securities held to maturity $ 57,022 $ 1,552 $ (93) $ 58,481
======== ======= ======= ========
The amortized cost and fair value of debt securities by contractual maturity at
March 31, 2002 are as follows:
Available for Sale Held to Maturity
---------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
(In thousands)
Within 1 year $ 71,689 $ 72,678 $ -- $ --
After 1 year through 5 years 263,818 266,568 4,903 5,147
After 5 years through 10 years 8,500 8,411 -- --
-------- -------- ------- -------
344,007 347,657 4,903 5,147
Mortgage-backed securities 268,354 268,638 43,775 44,673
-------- -------- ------- -------
$612,361 $616,295 $48,678 $49,820
======== ======== ======= =======
Securities increased $19.7 million from $657.2 million at December 31, 2001 to
$676.9 million at March 31, 2002. At March 31, 2002, the securities portfolio
classified as "available for sale" reflected a $3.9 million appreciation in
market value as a result of the ongoing changes in market interest rates as
compared to a $9.1 million appreciation in market value at December 31, 2001. In
accordance with the Company's asset-liability strategies, purchases of
mortgage-backed securities are primarily in fifteen-year mortgages with
weighted-average lives of six years and other securities are generally
short-term with maturities of five years or less.
Sales of debt securities produced gains of $86,000 during the 2002 first quarter
and gains of $156,000 for the three months ended March 31, 2001. Sales of
equities produced gains of $10,000 during the three months ended March 31, 2002
compared to gains of $60,000 for the three months ended March 31, 2001.
10
LOANS
A summary of the Company's outstanding loan balances as of the dates indicated
follows:
March 31, December 31,
2002 2001
---------- ------------
(In thousands)
Mortgage loans on real estate:
Residential 1 - 4 family $ 486,136 $ 487,331
Commercial 130,763 130,207
Construction 15,406 17,228
Second mortgages 368 444
Equity lines of credit 26,817 25,199
--------- ---------
659,490 660,409
Other loans:
Commercial 15,725 17,954
Personal 2,582 2,652
--------- ---------
18,307 20,606
--------- ---------
Net deferred loan origination costs 1,279 1,248
--------- ---------
Total loans 679,076 682,263
Less allowance for loan losses (7,391) (7,080)
--------- ---------
Loans, net $ 671,685 $ 675,183
========= =========
Total gross loans outstanding at March 31, 2002 decreased $3.2 million to $679.1
million when compared to the December 31, 2001 level. As residential mortgage
refinancing activity continued during the first quarter of 2002, it contributed
to the decline in residential 1-4 family real estate mortgage loans of $1.2
million. Construction real estate and commercial and industrial loans also
declined by $1.8 million and $2.2 million, respectively, from December 31, 2001
levels.
NON-PERFORMING ASSETS
Total non-performing assets were $548,000 and $976,000 at March 31, 2002 and
December 31, 2001, respectively. There were no foreclosed assets at March 31,
2002 or December 31, 2001. As a percentage of total assets, nonperforming assets
equaled 0.04% at March 31, 2002 and 0.07% at December 31, 2001. Fluctuations in
total nonperforming assets occur from quarter to quarter but remain at
historically low levels. It is the Company's general policy to place loans on a
non-accrual status when such loans become 90 days contractually delinquent or
when the collectibility of principal or interest payments becomes doubtful. When
a loan is placed on non-accrual status, its interest income accrual ceases and
all income previously accrued but unpaid is reversed.
In accordance with SFAS No. 114, a loan is considered impaired when, based on
current information and events, it is probable that the borrower will be unable
to meet principal or interest payments as agreed in the original loan contract.
The principal balance of impaired loans at March 31, 2002 was $667,000 of which
$548,000 was included in the non-performing assets referenced in the preceding
paragraph.
11
ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses follows:
Three Months Ended
March 31,
--------------------
2002 2001
------- -------
(In thousands)
Balance at beginning of period $ 7,080 $ 6,950
Recoveries 326 45
Loans charged-off (15) (34)
------- -------
Balance at end of period $ 7,391 $ 6,961
======= =======
The allowance for loan losses is established through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the collectibility of the loan balance is unlikely.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, known inherent risks in the nature and volume of
the loan portfolio, levels of non-performing loans, adverse situations that may
affect the borrowers' ability to repay, trends in delinquencies and charge-offs,
estimated value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective, as it requires estimates
that are susceptible to significant revision, as more information becomes
available. Ultimate losses may vary from current estimates and future additions
to the allowance may be necessary.
The allowance for loan losses was $7.4 million at March 31, 2002, representing a
reserve coverage of 1.09% of total loans. At December 31, 2001, the allowance
for loan losses was $7.1 million, representing 1.04% of total loans.
DEPOSITS
Total deposits increased $30.9 million from December 31, 2001 to $1.13 billion
at March 31, 2002. Demand deposits and NOW accounts increased $1.6 million and
$1.9 million, respectively, from year-end levels. For core deposit growth the
Company emphasizes its "ComboPlus" account, which combines both a high rate
savings account and a demand checking account. During the first quarter of 2002,
savings and money market accounts increased $29.9 million as retail depositors
shifted funds into "ComboPlus" accounts.
12
The following table indicates the balances in various deposit accounts at the
dates indicated.
March 31, December 31,
2002 2001
---------- ------------
(In thousands)
Demand $ 76,227 $ 74,602
NOW 66,599 64,686
Savings and money market accounts 561,915 532,031
Term certificates 422,058 424,628
---------- ----------
Total deposits $1,126,799 $1,095,947
========== ==========
BORROWED FUNDS
At March 31, 2002, the Company's long-term borrowings increased by $10.0 million
to $200.1 million from $190.1 million at December 31, 2001. Short-term
borrowings decreased by $8.7 million to $1.5 million from $10.2 million at
year-end. At March 31, 2002, borrowed funds totaled $201.5 million, increasing
$1.3 million from the $200.3 million reported at December 31, 2001.
STOCKHOLDERS' EQUITY
The Company's capital to assets ratio was 7.71% and 7.90% at March 31, 2002 and
December 31, 2001, respectively.
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and/or the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Holding companies, such as the Company, are not subject to prompt
corrective action provisions. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined) to average assets (as defined). As of December
31, 2001, the Bank met all capital adequacy requirements to be categorized as
well capitalized. No conditions or events occurred during the first three months
of 2002 that management believes have changed the Bank's category. Management
believes as of March 31, 2002 that the Company and the Bank met all capital
adequacy requirements to continue to be categorized as well capitalized.
The Company's book value at March 31, 2002 was $14.30 per share, compared with
$14.43 per share at December 31, 2001.
13
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2002 VS QUARTER ENDED MARCH 31, 2001
NET INTEREST INCOME
Interest and dividend income from loans and investments decreased $926,000 or
4.1% to $21.5 million for the 2002 first quarter when compared to the same
quarter in 2001. For the 2002 first quarter, average earning assets totaled $1.4
billion, an increase of $110.4 million or 8.7% over the comparable average for
2001, with $104.3 million of that increase attributed to short and long-term
securities and $6.1 million attributed to loans. The annualized yields on
earning assets were 6.22% and 7.06% for the first quarters in 2002 and 2001,
respectively. The yield on securities was 5.78% for the first quarter 2002 as
compared to 6.47% for the first quarter 2001. Short and long-term investments
contributed $149,000 of additional interest and dividend income when comparing
the first quarter of 2002 to the first quarter of 2001, primarily as a result of
higher average balances. The interest income from the increase in the average
balance on loans was more than offset by a decrease in the yield, from 7.60% to
6.90%, causing interest income on loans to decrease by $1.1 million from its
2001 first quarter level.
Total interest expense for the three months ended March 31, 2002 was $10.7
million, reflecting a decrease of $2.5 million or 19.0% over the same period in
2001. At March 31, 2002, average interest-bearing liabilities were $1.24
billion, an increase of $95.9 million or 8.4% over the comparable prior year
period. This period-to-period increase can be attributed to average deposit
growth of $120.0 million offset by average borrowed funds decreasing $24.1
million. Overall, interest expense on deposits decreased $1.7 million to $7.9
million primarily as a result of the decrease in rates paid from 4.26% to 3.10%
for the quarters ended March 31, 2001 and 2002, respectively. Interest expense
on borrowed funds decreased $817,000 as the average balances decreased and the
rates paid on borrowed funds decreased 84 basis points to 5.42% in the first
quarter of 2002 compared to the first quarter in 2001. The overall cost of
interest-bearing liabilities decreased to 3.49% from 4.67% when comparing the
two quarters.
Net interest income increased 17.1% or $1.6 million to $10.8 million when
comparing the first quarter in 2002 to the same quarter in 2001 as the weighted
average rate spread increased by 34 basis points to 2.73% and the net interest
margin increased 24 basis points to 3.10%. The increase in net interest income
is primarily due to an increase in average earning assets as well as an
improvement in both spread and margin. The yield on earning assets decreased 84
basis points to 6.22% in the first quarter 2002 as compared to the same quarter
in 2001, while the cost of interest-bearing liabilities also decreased by 118
basis points to 3.49%. This resulted in an interest rate spread and a net
interest margin of 2.73% and 3.10%, respectively, for the three months ended
March 31, 2002.
14
MEDFORD BANCORP, INC.
INTEREST RATE SPREAD
Three Months Ended
March 31,
----------------------
2002 2001
------- -------
Weighted average yield earned on:
Short-term investments 1.68% 5.40%
Securities 5.78 6.47
Loans 6.90 7.60
------- -------
All earning assets 6.22% 7.06%
------- -------
Weighted average rate paid on:
Deposits 3.10% 4.26%
Borrowed funds 5.42 6.26
------- -------
All interest-bearing liabilities 3.49% 4.67%
------- -------
Weighted average rate spread 2.73% 2.39%
======= =======
Net interest margin 3.10% 2.86%
======= =======
15
PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision is determined by
management on the basis of many factors, including the quality of specific
loans, risk characteristics of the loan portfolio generally, the level of
non-performing loans, current economic conditions, trends in delinquency and
charge-offs, and value of the underlying collateral. Management considers the
allowance for loan losses to be adequate at March 31, 2002, although there can
be no assurance that the allowance is adequate or that additional provisions to
the allowance for loan losses will not be necessary.
The Bank recorded no provisions for loan losses for the first quarter of 2002
and 2001. The Company recorded net loan recoveries of $311,000 and $11,000 for
the three months ended March 31, 2002 and 2001, respectively.
OTHER INCOME
Other income, including customer service fees and gains and losses on sales of
assets equaled $951,000 for the first quarter of 2002 as compared to $1,082,000
in the first quarter of 2001, representing a decrease of $131,000 or 12.1%. This
decrease is primarily due to a decrease in securities gains of $120,000. See
related discussions under "Securities" included in "Management's Discussion and
Analysis" in Item 2 of Part 1 of this report.
OPERATING EXPENSES
Operating expenses increased $463,000 or 8.9% to $5,672,000 for the three months
ended March 31, 2002 when compared to the same period in 2001. Salaries and
employee benefits increased $257,000 and other general and administrative
expenses increased $107,000, when comparing the first quarter of 2002 to the
first quarter of 2001. The Company's annualized expense ratio, which is the
ratio of non-interest expense to average assets, was 1.61% for the three months
ended March 31, 2002 and 2001. The Company continues to focus on cost
containment with the intent to be a low cost provider of high quality banking
products.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for three months ended March 31, 2002 of 36.9%
is comparable to 35.9% for the period ended March 31, 2001.
16
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 Federal Home Loan Bank of
Boston ("FHLBB"), and as such may take advantage of the FHLBB's borrowing
programs to enhance liquidity and leverage its favorable capital position. The
Bank also may draw on lines of credit at the FHLBB and a large commercial bank,
and it may pledge U.S. Government securities to borrow from certain investment
firms and the Mutual Savings Central Fund of Massachusetts. These various
sources of liquidity are used to fund withdrawals, new loans, and investments.
Management seeks to promote deposit growth while controlling the 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 that will assist retention of the Bank's base
of lower-costing deposits.
Maturities and sales of securities provide significant liquidity to the Bank.
The Bank's policy of purchasing shorter-term debt securities reduces market risk
in the bond portfolio while providing significant cash flow. For the three
months ended March 31, 2002, cash flow from maturities and sales of securities
was $67.6 million compared to $41.2 million for the three months ended March 31,
2001. Principal payments received on mortgage-backed securities during the three
months ended March 31, 2002 and 2001 totaled $19.3 million and $12.5 million,
respectively.
Amortization and payoffs of the loan portfolio also contribute significant
liquidity to the Bank. Traditionally, the amortization and payoffs have been
reinvested into loans. When payoff rates exceed origination rates, excess
liquidity from loan payoffs is shifted into the investment portfolio.
The Bank also uses borrowed funds as a source of liquidity. These borrowings
generally contribute toward funding over-all loan growth as well as purchases of
mortgage-backed securities. The Bank's outstanding borrowings from the FHLBB
were $200.1 million at March 31, 2002 and December 31, 2001, respectively. The
Bank also utilizes repurchase agreements as a source of funding when management
deems market conditions to be conducive to such activities.
Commitments to originate residential and commercial real estate mortgage loans
at March 31, 2002, excluding unadvanced construction funds of $8.6 million, were
$21.8 million. Management believes that adequate liquidity is available to fund
loan commitments utilizing deposits, loan amortization, maturities of
securities, or borrowings.
Purchases of securities during the three months ended March 31, 2002 totaled
$120.2 million, consisting of debt instruments generally maturing in less than
five years. This compares with purchases of $51.2 million for the three months
ended March 31, 2001.
Residential and commercial real estate mortgage loan originations for the three
months ended March 31, 2002 totaled $67.1 million, compared with $20.4 million
for the three months ended March 31, 2001.
The Bank's capital position (total stockholders' equity) was $111.5 million
or 7.7% of total assets at March 31, 2002 compared with $111.6 million or 7.9%
of total assets at December 31, 2001. The Bank's capital position exceeds all
regulatory requirements
17
ASSET-LIABILITY MANAGEMENT
Through the Bank's Asset-Liability Management Committee ("ALCO"), which is
comprised of certain senior and middle management personnel, the Bank monitors
the level and general mix of interest rate-sensitive assets and liabilities. The
primary objective of the ALCO is to manage the assets and liabilities of the
Bank to provide for optimum profitability and capital at prudent levels of
liquidity and interest rate, credit, and market risk.
It is ALCO's general policy to closely match the maturity or rate sensitivity of
its assets and liabilities. In accordance with this policy, certain strategies
have been implemented to improve the match between interest rate sensitive
assets and liabilities. These strategies include, but are not limited to: daily
monitoring of the Bank's changing cash requirements, with particular
concentration on investment in short term securities; originating adjustable and
fixed rate mortgage loans for the Bank's own portfolio; managing the cost and
structure of deposits; and generally using matched borrowings to fund specific
purchases of loan packages and large loan origination. Occasionally, management
may choose to deviate from specific matching of maturities of assets and
liabilities, if an attractive opportunity to enhance yields becomes available.
The Bank actively manages its liability portfolio in order to effectively plan
and manage growth and maturities of deposits. Management recognizes the need for
strict attention to all deposits. Accordingly, plans for growth of all deposit
types are reviewed regularly. Programs are in place which are designed to build
multiple relationships with customers and to enhance the Bank's ability to
retain deposits at controlled rates of interest, and management has adopted a
policy of reviewing interest rates on an ongoing basis on all deposit accounts
in order to control deposit growth and interest costs
In addition to attracting deposits, the Bank has selectively borrowed funds
using advances from the FHLBB and, upon occasion, reverse repurchase agreements.
These funds have generally been used to fund loans typically having a matched
repricing date as well as purchases of mortgage-backed securities.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and results of operations in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary effect of inflation on the
operations of the Bank is reflected in increased operating costs. Unlike most
industrial companies, virtually all assets of a financial institution are
monetary in nature. As a result, interest rates have a more significant effect
on a financial institution's performance than the effect of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the Company's management of market risk exposure, see
"Asset-Liability Management" in Item 2 of Part I of this report and Item 7A of
Part II of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (the "2001 Annual Report").
For quantitative information about market risk, see Item 7A of Part II of the
Company's 2001 Annual Report.
There have been no material changes in the quantitative and qualitative
disclosures about market risk as of March 31, 2002 from those presented in the
Company's 2001 Annual Report.
18
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
There are no material legal proceedings to which the Company is a
party or to which any of its property is subject, although the
Company is a party to ordinary routine litigation incidental to its
business. In the opinion of management, final disposition of these
proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 2 - Changes in Securities and Use of Proceeds Not applicable.
ITEM 3 - Defaults Upon Senior Securities
Not applicable.
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three-month period ended March 31, 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDFORD BANCORP, INC.
Date: May 15, 2002
/s/ Arthur H. Meehan
-----------------------------------------------
Arthur H. Meehan
Chairman, President and Chief Executive Officer
Date: May 15, 2002
/s/ Phillip W. Wong
-----------------------------------------------
Phillip W. Wong
Executive Vice President, Treasurer and Chief Financial Officer
20