UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended, April 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-13795
THE BOSTON BANCORP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2850710
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
460 West Broadway
South Boston, Massachusetts 02127
(Address of principal executive offices) (Zip Code)
(617) 268-2500
(Registrant's telephone number, including area code)
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 twelve months (or 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 each of the issuer's classes of common
stock, as of the latest practicable date, is:
Class: Common stock, par value $1.00 per share.
Outstanding at May 31, 1995: 5,216,243 shares.
Page 1
THE BOSTON BANCORP
FORM 10-Q
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of
April 30, 1995 and October 31, 1994 . . . . . . . . . . . 3
Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended April 30, 1995 and 1994 . . . 4
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended April 30, 1995 and 1994 . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 9
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security-Holders . . . 18
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 18
Signature Page . . . . . . . . . . . . . . . . . . . . . 19
Page 2
THE BOSTON BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(In thousands)
April 30, 1995 October 31, 1994
Assets:
Cash and due from banks . . . . . . . . $ 17,785 $ 14,884
Investment securities available for
sale, at fair value . . . . . . . . . 503,211 615,210
Mortgage-backed securities available
for sale, at fair value . . . . . . . 1,090,532 953,398
Loans, net . . . . . . . . . . . . . . 345,602 350,205
Other real estate, net . . . . . . . . 13,309 7,786
Loans held for sale, net (market values
of $21,997 and $18,164, respectively). 21,824 18,164
Land, building and equipment, net . . . 8,296 8,254
Accrued income receivable . . . . . . . 14,989 17,015
Other assets . . . . . . . . . . . . . 26,086 48,153
Total assets . . . . . . . . . . . . . $ 2,041,634 $ 2,033,069
Liabilities and stockholders' equity:
Deposits . . . . . . . . . . . . . . . $ 1,340,188 $ 1,398,233
Notes payable . . . . . . . . . . . . . 5,650 7,550
Borrowings. . . . . . . . . . . . . . . 28,238 10,275
Federal Home Loan Bank advances . . . . 482,921 470,000
Accrued interest payable . . . . . . . 5,170 4,557
Mortgagors' escrow accounts . . . . . . 524 939
Other liabilities . . . . . . . . . . 20,653 23,893
Total liabilities . . . . . . . . . . . 1,883,344 1,915,447
Stockholders' equity:
Serial preferred stock, $1.00 par value;
authorized 3,000,000 shares;
issued - 0 - shares . . . . . . . . --- ---
Common stock, $1.00 par value;
authorized 20,000,000 shares;
issued and outstanding 5,190,829 and
5,142,989 shares, respectively . . 5,191 5,143
Additional paid-in capital . . . . . . 25,886 23,400
Retained earnings . . . . . . . . . . 123,496 118,149
Unearned compensation expense - ESOP. . (2,898) (3,276)
Net unrealized gain (loss) on
securities available for sale . . . 6,615 (25,794)
Total stockholders' equity . . . . . . 158,290 117,622
Total liabilities and
stockholders' equity . . . . . . . . $ 2,041,634 $ 2,033,069
See accompanying notes to consolidated financial statements.
Page 3
THE BOSTON BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands except per share data)
Three months ended Six months ended
April 30 April 30
1995 1994 1995 1994
INTEREST AND DIVIDEND INCOME:
Interest on mortgage loans . . . . . $ 8,008 $ 8,276 $ 16,024 $ 16,591
Interest on other loans . . . . . . 184 218 476 513
Interest on investment securities. . 5,937 6,376 13,825 12,443
Dividends on equity securities . . . 2,216 2,049 4,740 4,547
Interest on mortgage-backed
securities . . . . . . . . . . . . 18,376 16,313 35,336 33,557
Interest on short-term investments . 260 108 354 488
Total interest and dividend
income . . . . . . . . . . . . . . 34,981 33,340 70,755 68,139
INTEREST EXPENSE:
Interest on deposits . . . . . . . . 13,079 11,940 25,843 25,281
Interest on notes payable . . . . . 118 164 251 387
Interest on borrowings . . . . . . . 424 0 599 2
Interest on Federal Home Loan
Bank advances . . . . . . . . . . 7,430 5,846 14,655 12,341
Total interest expense . . . . . . 21,051 17,950 41,348 38,011
Net interest and dividend income . . . . 13,930 15,390 29,407 30,128
Provision for possible loan losses . . . 500 1,500 2,000 3,300
Net interest and dividend income
after provision for possible
loan losses . . . . . . . . . . . . 13,430 13,890 27,407 26,828
OTHER INCOME:
Net realized gains on securities . . 533 1,795 560 7,085
Provision for losses on joint
venture advances . . . . . . . . . (142) (159) (284) (327)
Gain (loss) on sales of loans . . . (618) 2 (617) 2
Gain on sale of real estate . . . . 0 157 0 157
Fees and service charges on loans. . 429 359 850 715
Other operating income . . . . . . . 387 827 791 1,312
Total other income . . . . . . . . 589 2,981 1,300 8,944
OTHER EXPENSES:
Salaries and employee benefit. . . . 2,802 3,592 6,178 7,030
Advertising expense . . . . . . . . 185 164 380 519
Occupancy expense . . . . . . . . . 744 710 1,425 1,447
Net cost of other real estate . . . (263) 101 (265) 597
FDIC deposit insurance assessment. . 797 834 1,602 1,660
Professional services . . . . . . . 2,200 735 2,825 1,193
Other operating expenses . . . . . . 1,212 1,537 2,299 2,171
Total operating expenses . . . . . 7,677 7,673 14,444 14,617
Income before income taxes . . . . . . . 6,342 9,198 14,263 21,155
INCOME TAXES:
Federal . . . . . . . . . . . . . . 1,782 2,780 3,976 6,129
State . . . . . . . . . . . . . . . 132 11 350 965
Total income taxes . . . . . . . . 1,914 2,791 4,326 7,094
Net income . . . . . . . . . . . . . . . $ 4,428 $ 6,407 $ 9,937 $ 14,061
Primary earnings per share . . . . . . . $ 0.85 $ 1.19 $ 1.92 $ 2.55
Fully diluted earnings per share . . . . $ 0.84 $ 1.19 $ 1.90 $ 2.55
See accompanying notes to consolidated financial statements.
Page 4
THE BOSTON BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
April 30
1995 1994
(Unaudited)
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 9,937 $ 14,061
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease in accrued income receivable . . . . . . . . 2,026 422
Increase (decrease) in accrued interest payable . . . 613 (715)
Amortization of loan discounts and premiums, net . . 683 (687)
Amortization of investment securities available
for sale discounts and premiums, net . . . . . . . . (692) (939)
Amortization of mortgage-backed securities
available for sale discounts and premiums, net . . . 1,080 3,455
Provision for possible loan losses . . . . . . . . . 2,000 3,300
Net realized gains on investment securities
available for sale . . . . . . . . . . . . . . . . . (2,681) (6,622)
Net realized (gains) losses on mortgage-backed
securities available for sale . . . . . . . . . . . 2,121 (463)
Net (gain) loss on sale of loans . . . . . . . . . . 618 (2)
Increase in loans held for sale . . . . . . . . . . . (16,739) (28,933)
Increase in reserve for depreciation . . . . . . . . 493 374
Gain on sale of premises and equipment . . . . . . . --- (156)
(Increase) decrease in other assets . . . . . . . . . 22,067 (20,023)
Increase (decrease) in other liabilities . . . . . . (25,968) 12,326
Net cash flow from operating activities . . . . . (4,442) (24,602)
Investing activities:
Loans originated, acquired, proceeds from sales of
loans, and principal collections, net . . . . . . . (7,677) (7,425)
Proceeds from sale of other real estate . . . . . . . 4,885 3,991
Purchases of mortgage-backed securities
available for sale . . . . . . . . . . . . . . . . . (165,677) (66,687)
Principal collections of mortgage-backed
securities available for sale . . . . . . . . . . . 48,729 155,979
Proceeds from sales of mortgage-backed securities
available for sale . . . . . . . . . . . . . . . . . 21,945 10,381
Purchases of investment securities
available for sale . . . . . . . . . . . . . . . . . (38,107) (114,314)
Principal collections of investment securities
available for sale . . . . . . . . . . . . . . . . . 3,083 13,073
Proceeds from sales of investment securities
available for sale . . . . . . . . . . . . . . . . . 166,598 36,279
Proceeds from maturities of investment securities
available for sale . . . . . . . . . . . . . . . . . 5,540 19,879
Capitalized additions to other real estate owned . . . (287) (597)
Purchases of premises and equipment . . . . . . . . . (535) (1,488)
Proceeds from sales of premises and equipment . . . . --- 498
Net cash flow from investing activities . . . . . 38,497 49,569
Page 5
THE BOSTON BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
Six Months Ended
April 30
1995 1994
(Unaudited)
Financing activities:
Net decrease in deposit accounts . . . . . . . . (58,045) (29,286)
Proceeds of Federal Home Loan Bank advances . . . 340,483 206,119
Payments of Federal Home Loan Bank advances . . . (327,562) (251,119)
Increase in borrowings under short-term
reverse repurchase agreements . . . . . . . . . 17,963 ---
Increase (decrease) in mortgagors'
escrow accounts . . . . . . . . . . . . . . . . (415) 81
Cash dividends declared on common stock . . . . . (1,929) (984)
Payments for maturing notes payable . . . . . . . (1,900) (7,500)
Proceeds from exercise of stock options . . . . . 2,976 803
Payments for repurchase of common stock . . . . . (3,103) (20,807)
Unearned compensation expense - ESOP . . . . . . 378 378
Net cash flow from financing activities . . . (31,154) (102,315)
Total increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . 2,901 (77,348)
Cash and cash equivalents at beginning of year. . 14,884 102,794
Cash and cash equivalents at end of year . . . . $ 17,785 $ 25,446
See accompanying notes to consolidated financial statements.
Page 6
THE BOSTON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A) Basis of Presentation
The Boston Bancorp ("Bancorp" or the "Company") was formed in October 1984
and, effective March 1, 1985, acquired all of the outstanding shares of the
South Boston Savings Bank ("South Boston" or the "Bank") in exchange on a one-
for-one basis for Bancorp common stock. Bancorp thereby became the holding
company for the Bank.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or all footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements, notes, and other information
included in Bancorp's Form 10-K for its fiscal year ended October 31, 1994.
The financial information included herein reflects all adjustments
(consisting solely of normal recurring adjustments) that are, in the opinion of
management, necessary to present fairly the consolidated financial condition as
of April 30, 1995 and October 31, 1994 and the consolidated results of
operations for the three and six month periods ended April 30, 1995 and 1994
and the consolidated statements of cash flows for the six-month periods ended
April 30, 1995 and 1994.
The results of operations for the three and six months ended April 30,
1995 are not necessarily indicative of results that may be expected for the
entire year.
Note B) Earnings Per Share
Primary earnings per share for the three and six months ended April 30,
1995 and 1994 were calculated by adding the common stock equivalents, which
would arise from the exercise of outstanding stock options granted under the
stock option plans, to the weighted average number of shares outstanding during
the quarters. The number of shares used for calculating primary earnings per
share for the three and six months ended April 30, 1995 were 5,218,019 and
5,174,341, respectively, and for the three and six months ended April 30, 1994,
5,375,699 and 5,504,391, respectively. The weighted average number of shares
outstanding during the three and six months ended April 30, 1995 were
5,127,340 and 5,106,289, respectively, and for the three and six months ended
April 30, 1994 were 5,189,708 and 5,311,343, respectively.
The calculation of the common stock equivalent under primary earnings per
share is based, in part, on an average stock price for the period. The
calculation of the common stock equivalent under fully diluted earnings per
share is based, in part, on the price of the stock at the end of the period, if
higher than the average price during the period. Fully diluted earnings per
share for the three and six months ended April 30, 1995 were based on 5,249,442
and 5,228,391 shares, respectively, and for the three and six months ended
April 30, 1994 were based on 5,375,699 and 5,504,391 shares, respectively.
Note C) Investment and Mortgage-Backed Securities Available for Sale
At October 31, 1993 the Company reclassified its investment and mortgage-
backed securities portfolios as available for sale. As a result of the
reclassifications, all investments and mortgage-backed securities are carried
at fair value. Any after-tax net unrealized gain or loss on these securities
will be recognized as a credit or charge to stockholders' equity. Securities
Page 7
classified as available for sale include securities that management intends to
use as part of its asset/liability management strategy or that may be sold in
response to changes in interest rates, significant prepayment risk and similar
economic factors.
Note D) Loans Held for Sale
Loans originated by the Bank, including education, certain commercial
loans, and residential loans which conform to specific underwriting standards
outlined by FNMA and FHLMC, are classified as held for sale and recorded at the
lower of aggregated cost or estimated market value. The amount by which cost
exceeds market value, if any, is accounted for as a valuation allowance.
Changes in the valuation allowances are included in the determination of net
income of the period in which such a change occurs.
Gains and losses on loan sales are determined using the specific
identification method. Interest income on loans held for sale is accrued
currently and classified as interest on loans.
Note E) Subsequent Event - Dividend Payment
On May 18, 1995, the Board of Directors of Bancorp voted a quarterly
dividend of $.19 per share on each outstanding share of Bancorp common stock.
Such dividend is payable on June 15, 1995 to stockholders of record on May 31,
1995.
Page 8
THE BOSTON BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The total assets of The Boston Bancorp increased to $2.042 billion at
April 30, 1995 from $2.033 billion at October 31, 1994, primarily as a result
of an increase in the Company s investment portfolio. The increase in assets
was financed with borrowings and Federal Home Loan Bank advances, offset in
part by a reduction in the Bank's deposits to $1.340 billion at April 30, 1995
from $1.398 billion at October 31, 1994.
At April 30, 1995, the Company's investment portfolio, which is comprised
of investment securities and mortgage-backed securities, totaled $1.594 billion
compared to $1.569 billion at October 31, 1994. The average life of the
investment portfolio, including mortgage-backed securities, declined to 5.7
years at April 30, 1995 compared to 6.0 years at October 31, 1994. This
decline is the result of portfolio restructuring designed to reduce interest
rate risk on the Company s balance sheet. Despite these changes, the Company's
investment portfolio remains sensitive to changes in interest rates, and the
value of the portfolio would be favorably affected by a decline in prevailing
rates and adversely affected by an increase in prevailing rates.
At April 30, 1995, $185.9 million of the mortgage-backed securities
portfolio was represented by Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), or Government National
Mortgage Association ("GNMA") adjustable-rate mortgages. The Bank's continued
use of GNMA, FNMA and FHLMC 15-year mortgage-backed securities, both seasoned
as well as newly issued FNMA and FHLMC 5 and 7-year balloon payment mortgage-
backed issues, 30-year seasoned shorter weighted average maturity obligations
issued by the above mentioned entities, and one and three year adjustable-rate
mortgage-backed securities, has resulted in a mortgage-backed securities
portfolio with an average life at April 30, 1995 of approximately 5.5 years.
At April 30, 1995, the pretax amortized cost of the Company's mortgage-backed
securities portfolio exceeded its fair value by $27.6 million, as compared with
an excess of pretax amortized cost over fair value at October 31, 1994, of
$61.0 million.
The fair value of the Company's equities portfolio decreased to $185.4
million at April 30, 1995 from $187.5 million at October 31, 1994. These
amounts reflect SFAS 115 which requires that certain investment securities be
recorded at fair value. The fair value of preferred stock issues held by the
Company totaled $15.9 million at April 30, 1995 compared to $17.4 million at
October 31, 1994. The fair value of the common equity portfolio totaled $169.5
million at April 30, 1995, compared to $145.1 million at October 31, 1994. The
common stock portfolio continues to be yield oriented and weighted towards
public utility, telephone, bank, and other high quality dividend paying issues.
At April 30, 1995, the fair value, net of tax, of the Company's investment
portfolio, including mortgage-backed securities, was in excess of its amortized
cost by $6.6 million, which under SFAS 115 is included as a separate component
of stockholders' equity in the Company's consolidated statements of financial
condition as of April 30, 1995. At October 31, 1994, the fair value, net of
tax benefit, of the investment portfolio had been $25.8 million less than its
amortized cost. Subsequent to April 30, 1995, the U.S. Financial markets
experienced a very strong rally which had a positive effect on the Company s
investment portfolio. At May 31, 1995, the Company s investment portfolio had
a pretax appreciation of $49.2 million over amortized cost, and a $31.5 million
after-tax appreciation.
Loans, net, including loans held for sale, decreased to $367.4 million at
April 30, 1995 from $368.4 million at October 31, 1994. Mortgage loan
originations for the three months ended April 30, 1995 decreased to $16.4
million from $36.9 million for the comparable period ended April 30, 1994. Of
the $16.4 million in mortgage loans originated during the three months ended
April 30, 1995, $14.5 million were residential mortgage loans, of which $9.5
Page 9
million were adjustable rate loans and $5.0 million were fixed rate loans. The
remaining $1.9 million represents commercial first mortgage loans totaling $1.2
million and loans secured by multi-family residential properties totaling $.7
million.
Commercial and multi-family real estate loans are generally written on
three or five year notes with interest rates fixed at the time of origination
for three or five years with amortization periods of up to thirty years.
Thereafter, interest rates are subject to adjustment at the discretion of the
bank. Loan commitments outstanding as of April 30, 1995 totaled $4.4 million
and were comprised of fixed and variable rate residential mortgage loans
totaling $.8 million and $.2 million, respectively, and commercial and multi-
family mortgage loan commitments totaling $3.4 million.
Page 10
Non-performing Assets and Renegotiated Loans: The following table
summarizes nonperforming assets and renegotiated loans at the dates shown. The
Company ceases accruing interest on all loans delinquent 90 or more days.
April 30, 1995 October 31, 1994
(Dollars in thousands)
Mortgages delinquent for 90 or more days:
Conventional . . . . . . . . . . . . $ 2,855 $ 1,222
Commercial . . . . . . . . . . . . . 3,478 3,360
FHA/VA . . . . . . . . . . . . . . . 519 511
Total . . . . . . . . . . . . . . . 6,852 5,093
Loans arising from sales of previously
designated other real estate (FAS 66) (a):
Conventional . . . . . . . . . . . . -- 2,900
Commercial . . . . . . . . . . . . . -- 7,234
Total . . . . . . . . . . . . . . . -- 10,134
Mortgages substantively foreclosed
and in foreclosure (b):
Conventional . . . . . . . . . . . . 3,659 3,756
Commercial . . . . . . . . . . . . . 9,650 3,913
FHA/VA . . . . . . . . . . . . . . . -- 117
Total . . . . . . . . . . . . . . . . . . 13,309 7,786
Total mortgages loans delinquent for
90 or more days, FAS 66 loans,
mortgages substantively foreclosed
and in foreclosure . . . . . . . . . . 20,161 23,013
Other loans delinquent for 90 or more days:
Secured . . . . . . . . . . . . . . 3 9
Unsecured . . . . . . . . . . . . . 49 --
52 9
Total loans delinquent for 90 or more days,
FAS 66 loans, mortgages substantively
foreclosed and in foreclosure . . . . . $ 20,213 $ 23,022
Percent delinquent for 90 or more days,
FAS 66 loans, substantively foreclosed
and in foreclosure to total loans,
including mortgage loans held for sale
(before net items) . . . . . . . . . . . 5.10% 5.95%
Percent delinquent for 90 or more days,
FAS 66 loans, substantively foreclosed
and in foreclosure to total assets . . . 99% 1.13%
Renegotiated loans, net . . . . . . . . . $ 2,720 $ 2,998
___________________________
Page 11
(a) Loans arising from sales of previously designated other real estate are
included as mortgages in foreclosure at April 30, 1995.
(b) Substantive foreclosure is a circumstance in which a loan has reached such
a status that it is economically the same as if the loan collateral is
foreclosed. There are several criteria used to determine if a property has
been substantively foreclosed. These criteria are: the borrower has little
or no equity in the collateral, proceeds for repayment of the loan can be
expected to come only from the operation or sale of the collateral and the
borrower has either formally or effectively abandoned control of the
collateral or retained control of the collateral, but, because of the
current financial condition of the borrower or the economic prospects for
the borrower and/or the collateral in the foreseeable future, it is doubtful
that the borrower will be able to rebuild equity in the collateral or
otherwise repay the loan in the foreseeable future.
Total loans 90 or more days delinquent, FAS 66 loans, and mortgages
substantively foreclosed and in foreclosure decreased to $20.2 million at April
30, 1995 from $23.0 million at October 31, 1994. This change is largely
attributable to a decrease in FAS 66 loans to $8.0 million at April 30, 1995
from $10.1 million at October 31, 1994 reflecting the borrowers increased
investments in these properties. Mortgage loans relating to FAS 66 or in
foreclosure at April 30, 1995 were comprised of $3.7 million of loans secured
by 1-4 family residential property (27 loans) and $9.6 million of loans secured
by commercial real estate (14 loans).
As of April 30, 1995, the Bank's allowance for possible loan losses totaled
$10.5 million compared to $9.5 million at October 31, 1994. The provision for
possible loan losses totaled $.5 million for the fiscal 1995 second quarter.
Charge-offs, net of recoveries, for the quarter ended April 30, 1995 totaled
$829,000, including $494,000 of net recoveries on commercial real estate loans
and $267,000 of net charge-offs on residential and multi-family real estate
loans.
The loan loss provision charged to operations and the related balance in the
allowance for possible loan losses is based upon periodic evaluations of the
loan portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loss experience and management's estimation of future
potential losses. While management uses available information to establish the
allowance for possible loan losses, future additions to the allowance may be
necessary if economic developments differ substantially from the assumptions
used in making the evaluation. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for possible loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management.
An allocation of the allowance for possible loan losses by type of loan is
as follows:
Six Months Ended
April 30,
1995 1994
(Dollars in thousands)
Balance at beginning of period . . . . . . $ 9,471 $ 9,325
Additions to reserve:
Commercial real estate . . . . . . . . . 1,480 2,640
Residential/multi-family real estate . . 480 644
Consumer . . . . . . . . . . . . . . . 40 16
. . . . . . . . . . . . . . . . . . . . 2,000 3,300
Charge-offs (net of recoveries):
Commercial real estate (a) . . . . . . . 470 3,188
Residential/multi-family real
estate (b) . . . . . . . . . . . . . . 456 404
Consumer . . . . . . . . . . . . . . . 67 (2)
. . . . . . . . . . . . . . . . . . . . 993 3,590
Balance at end of period . . . . . . . . . $ 10,478 $ 9,035
____________________
Page 12
(a) Includes reserve allocations in the amounts of $519,000 on two performing
loans and $242,000 on two performing loans for the six months ended April
30, 1995 and 1994, respectively.
(b) Includes reserve allocations in the amounts of $332,000 on one performing
loan and $340,000 on two performing loans for the six months ended April
30, 1995 and 1994, respectively.
Renegotiated loans, net, decreased to $2.7 million at April 30, 1995 from
$3.0 million at October 31, 1994. These loans were restructured as a result of
increased vacancies and reduced rental rates. Specific reserves established
for renegotiated loans totaled $953,000 at April 30, 1995 and $550,000 at
October 31, 1994. Renegotiated loans at April 30, 1995 were comprised of
$484,000 of first mortgage loans secured by 1-4 family residential property (2
loans), $2.0 million of first mortgage loans secured by 5 or more family
residential property (2 loans), and $222,000 of first mortgage loans secured by
commercial real estate (1 loan). These loans have interest rates ranging from
7.5% - 10.0% with a weighted average interest rate of 9.20%.
Total deposits decreased 4.1% to $1.340 billion at April 30, 1995 from
$1.398 billion at October 31, 1994. The rates paid on the Bank's short term
deposits did not rise as rapidly as comparable market rates primarily in the
first fiscal quarter, consequently monies flowed into more competitive accounts
including bond and equity mutual funds.
Federal Home Loan Bank advances increased to $482.9 million at April 30,
1995 from $470.0 million at October 31, 1994. Borrowings, comprised of reverse
repurchase agreements, increased to $28.2 million at April 30, 1995 from $10.3
million at October 31, 1994. These increases in advances and borrowings were
utilized, in part, to offset deposit outflows.
Stockholders' equity increased to $158.3 million at April 30, 1995 from
$117.6 million at October 31, 1994. The increase in stockholders equity
reflects a $32.4 million increase in net unrealized gain on securities
available for sale, net of tax, from a net unrealized loss of $25.8 million to
a net unrealized gain of $6.6 million, and $9.9 million of earnings during the
first six months of fiscal 1995 offset, in part, by $2.1 million utilized to
repurchase shares of the Company s common stock under a stock repurchase
program which was terminated in December 1994 and dividends.
Under current regulations of the FDIC, BIF-insured banks, including South
Boston, are required to maintain minimum levels of Tier 1 capital. Highly
rated banks (i.e., those with a composite rating of 1 under the CAMEL rating
system and that are not experiencing or anticipating significant growth) are
required to maintain Tier 1 capital of at least 3% of their total assets. For
all other banks, the minimum ratio of Tier 1 capital to total assets is 4% to
5%. The FDIC has authority to impose higher requirements for individual banks.
The Bank is also required to maintain a minimum level of risk-based capital.
Under the risk-based standards, BIF-insured institutions are required to have a
ratio of risk-based capital to risk-weighted assets ratio of at least 8%. The
Bank had ratios of Tier 1 capital to total assets of 6.66% and risk-based
capital to risk weighted assets of 19.18% at April 30, 1995. Based on its
capital ratios as of April 30, 1995, the Bank believes it was "well
capitalized" at such date under the FDIC's prompt corrective action
regulations, assuming the absence of alternative classification by the FDIC
based on other factors.
Page 13
Result of Operations
Net income for the three months ended April 30, 1995 decreased to $4.4
million, or $.84 per share (fully diluted), from $6.4 million, or $1.19 per
share (fully diluted), for the three months ended April 30, 1994. Net income
for the six months ended April 30,1995 decreased to $9.9 million, or $1.90 per
share (fully diluted), from $14.1 million, or $2.55 per share (fully diluted)
for the six months ended April 30, 1994. The decrease in net income for the
three and six months ended April 30,1995 reflects lower net realized gains on
securities and loans, lower net interest and dividend income resulting from
higher interest rates, and lower salaries and employee benefit expenses,
offset, in part, by higher professional fees and a decrease in income taxes.
Net interest and dividend income for the three and six months ended April
30, 1995 decreased 9.5% to $13.9 million and 2.4% to $29.4 million,
respectively, as compared to $15.4 million and $30.1 million for the three and
six months ended April 30, 1994. The decreases primarily reflect higher rates
of interest paid on all major categories of interest-bearing liabilities and a
shift in the mix of liabilities, offset, in part, by higher rates of interest
earned on investment securities.
Interest earned on the investment portfolio totaled $26.8 million for the
three month period ended April 30, 1995, compared with $24.9 million for the
comparable period of 1994, and increased 6.5% to $54.3 million for the six
months ended April 30, 1995 from $51.0 for the six months ended April 30, 1994.
This increase reflects higher rates of interest earned and average balances
outstanding during the six months ended April 30, 1995 as compared with the
same period in fiscal 1994.
Interest income on the loan portfolio for the three and six months ended
April 30, 1995 decreased 3.5% to $8.2 million and $16.5 million, respectively,
as compared to $8.5 million and $17.1 million for the three and six months
ended April 30, 1994. The effective yield earned on the loan portfolio during
the quarter ended April 30, 1995 was lower than in the second quarter of 1994,
reflecting a decrease in interest rates, offset, in part, by higher average
balances outstanding during this quarter as compared with the same period in
fiscal 1994. The effective yield and average balances outstanding were lower
during the six months ended April 30, 1995 as compared with the same period in
fiscal 1994, as a result of lower loan originations, decreasing mortgage rates
and the conversion of $11.9 million of loans to mortgage-backed securities
during the quarter ended January 31, 1995. The decrease in average balances of
loans outstanding was also affected by the Bank's conversion totaling $99.3
million of loans to mortgage-backed securities during the fiscal year ended
October 31, 1994.
The following table sets forth the weighted average yields on the loan and
investment portfolios, the weighted average rate paid on deposits, borrowings,
medium-term notes and advances and the interest rate spread between yields
earned on loans and investments and rates paid for funds during the periods
indicated.
Weighted Average Yields Three Months Ended Six Months Ended
and Cost of Funds April 30 April 30
1995 1994 1995 1994
Weighted average yield earned on:
Loans (a) . . . . . . . . . . . . . . 8.42% 8.76% 8.49% 8.76%
Investments (b) . . . . . . . . . . . 6.70 6.31 6.77 6.36
Combined . . . . . . . . . . . . . . 7.03 6.79 7.10 6.84
Weighted average rate paid on:
Deposit accounts . . . . . . . . . . 4.01 3.45 3.85 3.54
Borrowings . . . . . . . . . . . . . 6.39 -- 6.06 6.25
Medium-term notes . . . . . . . . . . 8.38 8.34 8.46 8.34
Federal Home Loan Bank advances . . . 6.32 5.50 6.11 5.53
Cost of funds . . . . . . . . . . . 4.66 3.95 4.48 4.04
Interest rate spread . . . . . . . . 2.37 2.84 2.62 2.80
Page 14
____________________
(a) Excludes loan fees (except that portion considered an adjustment to
yield); includes effects of non-accrual loans.
(b) Includes mortgage-backed securities. The yields on available for sale
securities are calculated in the same manner as the yield for held to
maturity securities (interest income annualized divided by weighted average
amortized historical cost).
The effect on net interest income of changes in weighted average interest
rates and the weighted average amounts of interest-earning assets and interest-
bearing deposits, borrowings, medium-term notes and advances outstanding during
the periods is shown on the following page for the periods indicated.
Increase (Decrease) Due To
Three Months Ended Total Rate/
April 30, Current Prior Increase Rate Volume Volume
1995 vs. 1994 Period Period (Decrease) (1)(4) (2)(4) (3)(4)
Income from interest-
earning assets:
Loan portfolio(e) . . . . $ 8,192 $ 8,494 $ (302) $ (319) $ 18 $ (1)
Investment portfolio(f) . 26,789 24,846 1,943 1,513 405 25
Total . . . . . . . 34,981 33,340 1,641 1,194 423 24
Expense from interest-
bearing liabilities:
Deposit accounts . . . . 13,079 11,940 1,139 1,876 (628) (109)
Borrowings . . . . . . . 424 0 424 0 0 424
Medium term notes . . . . 118 164 (46) 1 (47) 0
Federal Home Loan Bank
advances . . . . . . . . 7,430 5,846 1,584 856 634 94
Total . . . . . . 21,051 17,950 3,101 2,733 (41) 409
Net interest income . . . . 13,930 $15,390 $(1,460) $(1,539) $ 464 $ (385)
Page 15
Increase (Decrease) Due To
Six Months Ended Total Rate/
April 30, Current Prior Increase Rate Volume Volume
1995 vs. 1994 Period Period (Decrease) (a)(d) (b)(d) (c)(d)
Income from interest-
earning assets:
Loan portfolio(e) . . . $ 16,500 $ 17,104 $ (604) $ (550) $ (56) $ 2
Investment portfolio(f). 54,255 51,035 3,220 3,197 22 1
Total . . . . . . 70,755 68,139 2,616 2,647 (34) 3
Expense from interest-
bearing liabilities:
Deposit accounts . . . 25,843 25,281 562 1,802 (1,128) (112)
Borrowings . . . . . . 599 2 597 (14) 616 (5)
Medium term notes . . . 251 387 (136) 0 (136) 0
Federal Home Loan
Bank advances . . . . 14,655 12,341 2,314 1,295 916 103
Total . . . . . 41,348 38,011 3,337 3,083 268 (14)
Net interest income . . . $ 29,407 $ 30,128 $ (721) $ (436) $ (302) $ 17
_________________________
(a) Determined by multiplying the change in the weighted average
interest rate between the periods shown by the prior period average
portfolio balance.
(b) Determined by multiplying the change in average portfolio balance
between periods shown by the weighted average interest rate for the
prior period.
(c) Determined by multiplying the change in the weighted average rate
between periods shown by the change in the average portfolio balance
between periods shown.
(d) The increases and decreases in income and expense not accounted
for in the calculations described above (arising primarily due to
actual monthly rate and volume variances differing from the averages
used in the calculations) are allocated pro forma to the three
statistics.
(e) Includes loans held for sale.
(f) Includes mortgage-backed securities.
The average yield on the loan portfolio decreased to 8.42% and 8.49% for
the three and six months ended April 30, 1995, respectively, as compared to
8.76% for the three and six months ended April 30, 1994, reflecting the
continued customer demand for lower rate adjustable rate mortgages and short-
term fixed rate mortgages. The average yield on the investment portfolio
increased to 6.70% and 6.77% for the three and six months ended April 30, 1995,
respectively, as compared to 6.31% and 6.36% for the same periods in fiscal
1994, due primarily to rising interest rates.
Total interest expense increased to $21.1 million and $41.3 million for
the three and six months ended April 30, 1995, respectively, as compared to
$18.0 million and $38.0 million for the same periods in 1994, primarily due to
higher interest rates resulting in an increase in all major categories of
interest expense and an increase in FHLB advances offset, in part, by lower
average balances in deposits. The weighted average cost of funds increased to
4.66% and 4.48% for the three and six months ended April 30, 1995,
respectively, as compared to 3.95% and 4.04% for the same periods in 1994.
Total other income decreased to $589,000 and $1.3 million for the three
and six months ended April 30, 1995, respectively, as compared to $3.0 million
and $8.9 million for the same periods in 1994, due primarily to lower net
realized gains on securities which totaled $533,000 and $560,000 for the three
and six months ended April 30, 1995, respectively, as compared to $1.8 million
and $7.1 million for the same periods in 1994. Gross realized gains on the
sale of securities totaled $4.1 million and $5.1 million for the three and six
Page 16
months ended April 30, 1995, respectively. Gross realized losses on the sale
of securities during such periods totaled $3.6 million and $4.6 million,
respectively.
Other operating income for the three and six months ended April 30, 1995
decreased 53.2% to $387,000 and 39.7% to $791,000, respectively, as compared to
$827,000 and $1.3 million for the three and six months ended April 30, 1994.
Other operating income was higher during the prior fiscal year due to the
receipt of a state tax refund in the amount of $510,000 received by the Bank in
February 1994, which reduced state tax expense, and accrued interest totaling
$474,000 which is included in other operating income for the three and six
months ended April 30, 1994.
During the second fiscal quarter, a charge to income was taken in the
amount of $1.0 million to writedown the value of a real estate loan held for
sale, resulting in a loss on sales of loans in the amount of $618,000 and
$617,000 for the three and six months ended April 30, 1995, respectively, from
a gain of $2,000 for the comparable periods in 1994.
Gain on sale of real estate reflects a gain of $157,000 during the second
quarter of fiscal 1994 resulting from the sale of a bank owned facility.
Total other expenses totaled $7.7 million for both three month periods
ended April 30, 1995 and 1994, and decreased to $14.4 million for the six month
period ended April 30, 1995 from $14.6 million for the same period in 1994.
Fees for professional services increased $1.5 million and $1.6 million,
respectively, for the three and six months ended April 30, 1995, as compared to
the same period in 1994. These increases were offset, in part, by decreases
in salary and employee benefit expense of $790,000 and $852,000 to $2.2 million
and $2.8 million, respectively, reflecting a reduction in the Company's profit
sharing provision for the three and six months ended April 30, 1995 of $406,000
and $662,000, respectively, as compared to the same period in fiscal 1994. The
additional professional services are being incurred in connection with
resolutions previously adopted by the Board of Directors in response to
regulatory examinations of the Bank and Company. Expenses associated with
other real estate for the three and six months ended April 30, 1995 decreased
$364,000 and $862,000, to ($263 million) and ($265 million), respectively, as
compared to the same periods in 1994, reflecting increased rental income
received through the operation of other real estate owned.
The provision for federal and state taxes decreased to $1.9 million and
$4.3 million for the three and six months ended April 30, 1995, respectively,
as compared to $2.8 million and $7.1 million for the three and six months ended
April 30, 1994, respectively, reflecting lower effective tax rates and pretax
income resulting from lower net realized gains on the sale of securities during
the current periods. The combined federal and state income tax rate decreased
to approximately 30% from 36% for the three and six months ended April 30, 1995
and 1994, respectively. This decrease stems from the fact that a larger
percentage of pretax income for the three and six months ended April 30, 1995,
as compared to the same periods in 1994, is taxed at a lower rate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
Page 17
Item 3. Defaults Upon Senior Securities
(a) Not applicable.
(b) Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
The Company's 1995 annual meeting of stockholders was held on April
4, 1995. At the 1995 annual meeting, W. Randle Mitchell, Jr. and
Richard L. McDowell were elected as directors of the Company for new
three-year terms. Of the 5,070,089 eligible votes, 4,267,721 votes
were cast in favor of the election of Mr. Mitchell and 4,265,773
were cast in favor of the election of Mr. McDowell. A total of
65,738 votes were withheld as to the election of Mr. Mitchell and
67,686 votes were withheld as to the election of Mr. McDowell. In
addition to Messrs. Mitchell and McDowell, the directors whose
terms of office will continue after the annual meeting include
Peter H. Hersey, Frank G. Neal Jr., Roger H. Doggett and Robert E.
Lee who was elected to fill the vacancy on the Board of Directors
resulting from the resignation of Richard R. Laine.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable.
(b) Not applicable.
Page 18
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 hereunto duly authorized.
THE BOSTON BANCORP
Date: June 14, 1995 By: /s/Peter H. Hersey
Peter H. Hersey
Chairman, Acting Chief
Executive Officer and President
Date: June 14, 1995 By: /s/David L. Smart
David L. Smart
Treasurer and Chief Financial
Officer
Page 19