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, 1996
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, 1996: 5,290,057 shares.
-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, 1996 and October 31, 1995...................................3
Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended April 30, 1996 and 1995....................4
Consolidated Statements of Cash Flows (Unaudited) for the
Three and Six Months Ended April 30, 1996 and 1995....................5
Notes to Consolidated Financial Statements (Unaudited)................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................10
Part II. Other Information
Item 1. Legal Proceedings ...................................................18
Item 2. Changes in Securities................................................18
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
- 2 -
THE BOSTON BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(In thousands)
April 30, 1996 October 31, 1995
(Unaudited)
Assets:
Cash and due from banks............................................... $ 21,976 $ 15,733
Federal funds sold.................................................... 9,825 --
Short-term investments................................................ 153,671 --
Investment securities available for sale at fair value (Note C)....... 446,547 404,397
Mortgage-backed securities available for sale at fair value (Note C).. 606,135 1,041,056
Loans held for sale, net (Notes D and E).............................. 40,154 138,556
Loans, net of allowance for possible loan losses
of $1,989 and $2,121, respectively ................................. 162,148 209,947
Other real estate, net................................................ 1,221 7,540
Federal Home Loan Bank stock.......................................... 11,837 25,675
Land, buildings and equipment, net.................................... 9,148 9,649
Accrued income receivable............................................. 11,118 14,531
Receivable for securities sold........................................ 75,023 11,185
Deferred income taxes................................................. 3,700 --
Other assets.......................................................... 13,116 7,815
------- ------------
Total assets........................................................ $ 1,565,619 $ 1,886,084
============ ============
Liabilities and stockholders' equity:
Deposits.............................................................. 1,351,051 1,339,467
ESOP loan payable..................................................... 2,079 2,520
Notes payable......................................................... 5,550 5,650
Securities sold under agreements to repurchase........................ -- 92,185
Federal Home Loan Bank advances....................................... -- 236,500
Accrued interest payable.............................................. 2,721 4,244
Mortgagors' escrow accounts........................................... 439 840
Deferred income taxes................................................. -- 3,192
Other liabilities..................................................... 5,527 6,856
------ -----
Total liabilities................................................... 1,367,367 1,691,454
---------- ---------
Commitments and contingencies (Note F)................................... -- --
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 5,284,482 and
5,218,193 shares, respectively...................................... 5,284 5,218
Additional paid-in capital............................................ 30,755 28,554
Retained earnings..................................................... 161,244 139,194
Unearned compensation expense - ESOP.................................. (2,079) (2,520)
Net unrealized gain on securities available for sale.................. 3,048 24,184
------ ------
Total stockholders' equity.......................................... 198,252 194,630
-------- -------
Total liabilities and stockholders' equity.......................... $ 1,565,619 $ 1,886,084
============ ============
See accompanying notes to unaudited consolidated financial statements.
- 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,
---------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Interest and dividend income:
Interest on mortgage loans.......................... $ 6,909 $ 8,008 $ 14,566 $16,024
Interest on other loans............................. 255 184 548 476
Interest on mortgage-backed securities.............. 13,381 18,376 29,100 35,336
Interest on investment securities................... 6,067 5,937 11,439 13,825
Dividends on equity securities...................... 1,044 2,216 2,573 4,740
Interest on short-term investments.................. 788 260 1,182 354
-------- -------- -------- -------
Total interest and dividend income................ 28,444 34,981 59,408 70,755
-------- -------- -------- -------
Interest expense:
Deposits............................................ 14,662 13,079 29,807 25,843
Federal Home Loan Bank advances..................... 590 7,430 2,271 14,655
Securities sold under agreements to repurchase...... 170 424 1,250 599
Notes payable....................................... 116 118 233 251
-------- -------- -------- --------
Total interest expense............................ 15,538 21,051 33,561 41,348
-------- -------- -------- --------
Net interest and dividend income....................... 12,906 13,930 25,847 29,407
Provision for possible loan losses..................... -- 500 -- 2,000
-------- -------- -------- --------
Net interest and dividend income after provision for
possible loan losses.............................. 12,906 13,430 25,847 27,407
-------- -------- -------- --------
Other income:
Net realized gains on securities.................... 7,692 533 23,265 560
Gain (loss) on sales of loans....................... 1,783 (618) 1,791 (617)
Fees and service charges on loans................... 365 429 749 850
Other operating income.............................. 390 387 680 791
-------- -------- -------- --------
Total other income................................ 10,230 731 26,485 1,584
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits...................... 2,837 2,802 5,971 6,178
Professional services............................... 458 2,200 1,068 2,825
Occupancy and equipment expense..................... 510 744 1,021 1,425
FDIC deposit insurance assessment................... 107 797 301 1,602
(Gain) loss on sale of other assets................. (120) -- (120) --
Provision for losses on joint venture advances...... -- 142 -- 284
FHLB advance prepayment penalties................... 70 -- 1,253 --
Advertising expense................................. 174 185 373 380
Net gain on sale of other real estate............... (71) (376) (562) (419)
Merger related expenses............................. 51 -- 228 --
Net cost of other real estate....................... 246 113 288 154
Provision for OREO valuation........................ -- -- 300 --
Other operating expenses............................ 1,455 1,212 2,657 2,299
-------- -------- -------- --------
Total other expenses.............................. 5,717 7,819 12,778 14,728
-------- -------- -------- --------
Income before income taxes............................. 17,419 6,342 39,554 14,263
-------- --------- -------- --------
Income taxes:
Federal............................................. 4,702 1,782 12,267 3,976
State............................................... 2,978 132 3,233 350
-------- -------- -------- --------
Total income taxes................................ 7,680 1,914 15,500 4,326
-------- -------- -------- --------
Net income............................................. $ 9,739 $ 4,428 $ 24,054 $ 9,937
======== ======== ======== ========
Primary earnings per common and common
equivalent share (Note B)........................... $ 1.82 $ 0.85 $ 4.51 $ 1.92
======== ========= ======== ========
Fully diluted earnings per share and common
equivalent share (Note B)........................... $ 1.82 $ 0.84 $ 4.51 $ 1.90
======== ========= ======== ========
Average number of common shares-Primary (Note B)....... 5,349 5,218 5,329 5,174
======== ======== ======== ========
Average number of common shares - Fully Diluted (Note B) 5,349 5,249 5,337 5,228
======== ======== ======== ========
Dividends paid per common share........................ $ .19 $ .19 $ .38 $ .38
======== ========= ======== ========
See accompanying notes to unaudited consolidated financial statements.
- 4 -
THE BOSTON BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
April 30,
-----------------------------------
1996 1995
---- ----
(Unaudited)
Operating activities:
Net income.......................................................... $ 24,054 $ 9,937
Adjustments to reconcile net income to net cash used in
operating activities:
Decrease in accrued income receivable............................... 3,413 2,026
(Decrease) increase in accrued interest payable..................... (1,523) 613
Amortization of loan discounts and premiums, net.................... (586) (233)
Amortization of investment securities available for sale
discounts and premiums, net........................................ (480) (692)
Amortization of mortgage-backed securities available for
sale discounts and premiums, net.................................. 1,105 1,080
Provision for possible loan losses.................................. -- 2,000
Provision for OREO valuation........................................ 300 --
Adjustment to carrying value of other real estate................... 42 --
Net realized gains on investment securities available for sale...... (23,797) (2,681)
Net realized loss on mortgage-backed securities available for sale.. 532 2,121
Net (gain) loss on sale of loans.................................... (1,791) 618
Loans originated for sale........................................... (10,702) (16,357)
Net gains on sale of other real estate.............................. (562) (419)
Increase in reserve for depreciation................................ 550 493
Increase in receivable for securities sold.......................... (63,838) --
Decrease (increase) in deferred tax asset (excluding SFAS No. 115).. 6,087 (2,098)
Gain on sale of other assets........................................ (120) --
(Increase) decrease in other assets................................. (5,181) 24,165
Decrease in other liabilities....................................... (782) (25,591)
---------- ----------
Net cash flow used in operating activities........................ (73,279) (5,018)
---------- ----------
Investing activities:
Loans originated and principal collections, net..................... 28,153 (7,285)
Proceeds from sale of loans......................................... 112,056 142
Proceeds from sale of foreclosed real estate........................ 6,311 5,304
Purchases of mortgage-backed securities available for sale.......... -- (165,677)
Principal collections on mortgage-backed securities available for sale 89,728 51,812
Principal collections on investment securities available for sale... 38 --
Proceeds from sales of mortgage-backed securities available for sale 355,198 21,945
Purchases of investment securities available for sale............... (194,210) (37,410)
Proceeds from sales of investment securities available for sale..... 138,421 166,598
Proceeds from maturities of investment securities available for sale 11,516 5,540
Decrease (increase) in FHLB stock................................... 13,838 (697)
Other real estate expenses.......................................... (96) (287)
Purchases of premises and equipment................................. (50) (535)
---------- ----------
Net cash flow from investing activities........................... 560,903 39,450
---------- ---------
- 5 -
THE BOSTON BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
Six Months Ended
April 30,
-----------------------------------
1996 1995
---- ----
(Unaudited)
Financing activities:
Increase (decrease) in deposit accounts............................. 11,584 (58,045)
Proceeds from Federal Home Loan Bank advances....................... -- 340,483
Payments of Federal Home Loan Bank advances......................... (236,500) (327,562)
Payments of ESOP loan payable....................................... (441) (377)
Net (decrease) increase in securities sold under agreements
to repurchase..................................................... (92,185) 17,963
Decrease in mortgagors' escrow accounts............................. (401) (415)
Cash dividends paid on common stock................................. (1,994) (1,929)
Payments for maturing notes payable................................. (100) (1,900)
Proceeds from exercise of stock options............................. 1,721 2,976
Payments for repurchase of common stock............................. (10) (3,103)
Unearned compensation expense - ESOP................................ 441 378
----------- ----------
Net cash flow used in financing activities........................ (317,885) (31,531)
----------- -----------
Total increase (decrease) in cash and cash equivalents.............. 169,739 2,901
Cash and cash equivalents at beginning of period.................... 15,733 14,884
----------- ----------
Cash and cash equivalents at end of period.......................... $ 185,472 $ 17,785
=========== ==========
Supplemental cash flow disclosures:
Six Months Ended
April 30,
-----------------------------------
1996 1995
---- ----
(Unaudited)
Non-cash transactions:
Transfer of other real estate to loans................................. 959 --
Transfer of loans to other real estate................................. 657 10,121
Conversion of real estate loans to FHLMC and FNMA mortgage-backed
securities.......................................................... 19,395 11,937
Net transfers of loans to loans held for sale.......................... 39,605 --
Tax benefit of stock options exercised................................. 547 --
SFAS No. 115:
Increase in stockholders' equity.................................. (21,136) 32,409
Decrease (increase) in investment securities...................... 26,361 (21,742)
Increase in mortgage-backed securities............................ 7,753 (33,395)
Increase in deferred tax liability................................ (12,978) 22,728
Cash transactions:
Interest on deposits................................................... 30,015 25,742
Interest on borrowings................................................. 4,835 14,710
Interest on notes payable.............................................. 235 283
State taxes............................................................ 568 213
Federal taxes.......................................................... 16,672 2,400
See accompanying notes to unaudited consolidated financial statements.
- 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 consolidated financial statements, notes, and other
information included in Bancorp's Form 10-K for its fiscal year ended October
31, 1995 and the Proxy Statement dated March 8, 1996.
The unaudited interim 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, 1996 and the consolidated results of
operations for the three and six month periods ended April 30, 1996 and 1995 and
the consolidated statements of cash flows for the six-month periods ended April
30, 1996 and 1995.
The consolidated results of operations for the three and six months
ended April 30, 1996 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,
1996 and 1995 were calculated by adding the common stock equivalents, which
would arise from the exercise of outstanding stock options granted under the
Company's stock option plans, to the weighted average number of shares
outstanding during such quarters. The number of shares used for calculating
primary earnings per share for the three and six months ended April 30, 1996
were 5,349,371 and 5,328,810 , respectively, and for the three and six months
ended April 30, 1995 were 5,218,019 and 5,174,341, respectively. The weighted
average number of shares outstanding during the three and six months ended April
30, 1996 were 5,271,031 and 5,251,759, respectively, and for the three and six
months ended April 30, 1995 were 5,127,340 and 5,106,289, respectively
The calculation of the common stock equivalents 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, 1996 were based on 5,349,371
and 5,337,058 shares, respectively, and for the three and six months ended April
30, 1995 were 5,249,442 and 5,228,391, respectively.
Note C) Investment and Mortgage-Backed Securities Available for Sale
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 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 other similar
economic factors.
- 7 -
Note D) Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or
market, based upon commitments from investors to purchase such loans or upon
prevailing market conditions. Deferred origination fees collected, net of
commitment fees paid, are included in the lower of cost or market determination
and are adjustments to gains or losses on sales of loans.
As of April 30, 1996 and October 31, 1995, management has identified
certain loans which, depending on market conditions and other factors, may be
offered for sale in the secondary market or converted to mortgage-backed
securities which the Bank may then hold as mortgage-backed securities available
for sale. Pursuant to the Agreement and Plan of Reorganization with Bank of
Boston Corporation, the Bank's entire portfolio of commercial and multifamily
real estate loans was classified as held for sale as of October 31, 1995 and was
sold to BlackRock Capital Finance L.P. on April 22, 1996. A gain in the amount
of $1.8 million was realized at the time of the sale. BlackRock is entitled to
certain remedies in the event that certain loan-specific representations and
warranties made by the Bank are breached. At the present time, Bancorp is not
aware that any of these representations and warranties are incorrect.
See the Proxy Statement for Bancorp's 1996 Annual Meeting of Stockholders.
As of April 30, 1996 $36.4 million of loans previously purchased from
other financial institutions were classified as held for sale as the Bank had
entered into an agreement to sell such loans. See Note E (subsequent events) for
information regarding the sale of these loans.
Note E) Subsequent Events
On May 24, 1996, the Bank sold $36.4 million of loans previously
purchased from and serviced by other financial institutions which resulted in a
pre-tax gain of $3.6 million.
On May 30, 1996, the Bank sold servicing rights on $164.3 million of
FNMA loans upon converting said loans from recourse to nonrecourse for a pre-tax
gain of $1.4 million.
On May 30, 1996, the Bank defeased its outstanding Medium-Term
Mortgage-Backed Notes.
Note F) Commitments and Contingencies
In the normal course of business, there are outstanding various legal
proceedings, claims and commitments and contingent liabilities, such as
commitments to extend credit which are not reflected in the accompanying
consolidated financial statements. After reviewing such matters, Bancorp
believes that resolution of these matters will not materially affect its
consolidated results of operations or financial position.
Bancorp may be party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to originate loans and loans
sold with recourse. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized on the
consolidated statements of financial condition. The contract amounts of those
instruments reflect the extent of involvement Bancorp has in particular classes
of financial instruments.
Bancorp's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and recourse
arrangements is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
- 8 -
Financial instruments with off-balance sheet risk are as follows:
Contract Amount
April 30, 1996 October 31, 1995
(In thousands)
Commitments to originate loans....................... $ 1,296 $ 8,326
Loans sold with recourse............................. 222,752 221,898
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitment is expected
to expire without being drawn upon, the total commitments do not necessarily
represent future cash requirements. Bancorp evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by Bancorp for the extension of credit, is based upon
management's credit evaluation of the borrower. Collateral held includes, but is
not limited to, residential and commercial real estate. The fair value of
commitments to originate loans does not differ materially from the recorded
balance.
Bancorp has retained credit risk on certain residential mortgage loans
it has converted into FNMA and FHLMC mortgage-backed securities. Accordingly,
Bancorp has retained the risk of loss resulting from any foreclosures on such
loans. The credit risk associated with the Bank's loans sold with recourse is
considered in establishing the allowance for possible loan losses. Some of these
loans were converted from recourse to nonrecourse after April 30, 1996, and the
servicing rights with respect to such loans were sold. See Note E.
As a nonmember of the Federal Reserve System, the Bank is required to
maintain certain reserve requirements of vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement, included
in "Cash and due from banks," was $7.8 million and $6.5 million at April 30,
1996 and October 31, 1995, respectively. The Bank is permitted to borrow from
the Federal Reserve Bank "discount window" under certain conditions. Any such
borrowings must be fully secured by pledges of collateral satisfactory to the
Federal Reserve Bank.
- 9 -
THE BOSTON BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Acquisition by Bank of Boston Corporation
Bancorp and Bank of Boston Corporation ("Bank of Boston") entered into
an Agreement and Plan of Reorganization (as amended, the "Merger Agreement") on
October 10, 1995 pursuant to which Bancorp will become a wholly-owned subsidiary
of Bank of Boston. The Merger, approved by the stockholders of Bancorp on April
11, 1996, remains subject to the receipt of various regulatory approvals and the
satisfaction of certain other closing conditions. It is expected that the
closing will occur in June, 1996 and that the Measurement Date will be May 31,
1996. See the Proxy Statement for Bancorp's 1996 Annual Meeting of Stockholders.
As a condition to the Merger, Bancorp is required to effect certain
mandatory pre-closing transactions. These transactions are described in detail
in the Proxy Statement for Bancorp's 1996 Annual Meeting. Some of these
transactions will have a significant impact on Bancorp's operations in fiscal
1996 and on the value of the consideration to be received by stockholders in the
Merger, including the liquidation of approximately two-thirds of its investment
portfolio (including all of its equity securities), the liquidation of all
properties held as real estate owned, the repayment of all FHLB advances
(including all associated prepayment penalties), the defeasance of the Bank's
medium-term notes, and the accrual of contracted severance costs and certain
expenses related to the proposed acquisition. Bancorp's net income during the
six months ended April 30, 1996 was favorably affected by a high level of gains
on the sale of investment securities. Bancorp expects its net income to continue
to be materially affected by gains and losses on the sale of loans, investment
securities and other assets and by the investment of the proceeds of such sales
in short-term securities which can be expected to have lower yields than the
assets they replace. The Proxy Statement for Bancorp's 1996 Annual Meeting of
stockholders contains a detailed description of the terms of the Merger
Agreement.
Financial Condition
The Company's total assets declined to $1.6 billion at April 30, 1996
from $1.9 billion at October 31, 1995, primarily as a result of the sale of
portions of the Bank's investment and mortgage-backed securities portfolios and
the use of the sales proceeds to retire the Bank's indebtedness. Management
expects to continue the process of liquidating its entire equity portfolio and a
significant portion of its debt and mortgage-backed securities portfolio
pursuant to the Merger Agreement with Bank of Boston.
At April 30, 1996, the Company's investment portfolio, which is
comprised of short-term investments, investment securities and mortgage-backed
securities, totaled $1.2 billion compared to $1.5 billion at October 31, 1995.
At April 30, 1996, $160.0 million of the mortgage-backed securities
portfolio was represented by either Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") or Government
National Mortgage Association ("GNMA") adjustable-rate issues. The pretax net
unrealized gain on the Company's mortgage-backed securities portfolio decreased
by $7.8 million during the six months ended April 30, 1996.
The fair value of the Company's equity portfolio totaled $32.7 million
at April 30, 1996 compared to $104.2 million at October 31, 1995. The decrease
resulted primarily from sales of equity securities. The equity portfolio
includes high quality, yield-oriented common and preferred stocks. The fair
value of common equity investments totaled $30.6 million at April 30, 1996,
compared to $94.9 million at October 31, 1995. The fair value of preferred stock
issues held by the Company totaled $2.1 million at April 30, 1996 compared to
$9.3 million at October 31, 1995. These amounts include the effects of Statement
of Financial Accounting Standards ("SFAS") No. 115 which requires that certain
investment securities be recorded at fair value.
- 10 -
At April 30, 1996, the fair value, after taxes, of the Company's
investment portfolio, including mortgage-backed securities, was greater than its
amortized cost by $3.0 million, which under SFAS 115 is included as a separate
component of stockholders' equity in the Company's consolidated statements of
financial condition. At October 31, 1995, the fair value, after taxes, of the
investment portfolio had been $24.2 million greater than its amortized cost.
Loans, net, including loans held for sale, decreased to $202.3 million
at April 30, 1996 from $348.5 million at October 31, 1995. Mortgage loan
originations for the three months ended April 30, 1996 decreased to $4.1 million
from $16.4 million for the comparable period ended April 30, 1995. All mortgage
loans originated during the three months ended April 30, 1996 were residential
mortgage loans, of which $600,000 were adjustable rate loans and $3.5 million
were fixed rate loans. The Company does not expect to originate additional
commercial real estate and multi-family residential mortgage loans because it is
required to dispose of all such loans prior to the Merger.
Total deposits remained relatively constant during the six months ended
April 30, 1996, increasing $11.6 million to $1.4 billion. Before interest
credited of $29.8 million, deposits declined by $18.2 million from October 31,
1995 through April 30, 1996.
All FHLB advances and securities sold under agreements to repurchase
were paid off as of April 30, 1996. Other borrowings, including the ESOP loan
payable and notes payable declined by $541,000 from October 31, 1995 through
April 30, 1996. The Merger Agreement required the Bank to repay all FHLB
advances, including prepayment penalties thereon, and all securities sold under
agreement to repurchase prior to the Merger. The Bank is also required to
defease the notes payable prior to the Merger. The ESOP loan will be repaid in
conjunction with the Merger.
Stockholders' equity increased by $3.6 million to $198.2 million at
April 30, 1996 from $194.6 million at October 31, 1995. The increase is the
result of net income for the six months ended April 30, 1996 of $24.1 million,
proceeds from the exercise of stock options of $1.7 million, a tax benefit for
non-qualifying stock options exercised of $.5 million and a reduction in the
unearned compensation expense attributable to the ESOP loan of $.4 million. The
increase in stockholders' equity was reduced by dividends paid to stockholders
of $2.0 million, as well as a decrease in the unrealized gain on securities
available for sale of $21.1 million.
- 11 -
Nonperforming Assets
The following table summarizes the composition of nonperforming assets
(including nonperforming loans held for sale) at the dates shown:
April 30, 1996 October 31, 1995
-------------- -----------------
(Dollars in thousands)
Nonaccrual loans....................................... $ 1,807 $ 5,828
Other real estate...................................... 1,221 7,540
----------- ------------
Total nonperforming assets........................ $ 3,028 $ 13,368
=========== ============
Nonperforming assets as a
percentage of total assets .19% .71%
Nonperforming assets as a
percentage of total loans, including
loans held for sale (before net items) 1.47% 3.76%
Nonaccrual and Restructured Loans
The following table summarizes nonaccrual and restructured loans at the
dates shown. Nonaccrual loans are those on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or when
payments of principal or interest have become contractually past due 90 days.
April 30, 1996 October 31, 1995
-------------- ----------------
(In thousands)
Real estate loans:
Residential:
Conventional........................................ $ 1,025 $ 2,221
FHA/VA.............................................. 44 531
Commercial.......................................... 695 3,029
----------- -----------
1,764 5,781
----------- -----------
Consumer loans:
Secured................................................ 4 4
Unsecured.............................................. 39 43
----------- -----------
43 47
----------- -----------
Total nonaccrual loans............................ $ 1,807 $ 5,828
=========== ===========
Restructured loans..................................... $ 59 $ 590
=========== ===========
Restructured loans, net, decreased to $59,000 at April 30, 1996 from
$590,000 at October 31, 1995. Specific reserves established for restructured
loans totaled $0 at April 30, 1996 and $143,000 at October 31, 1995.
Restructured loans, net, at April 30, 1996, were comprised of one 1-4 family
residential loan. This loan has an interest rate of 7.0%.
- 12 -
Potential Problem Loans
Potential problem loans are loans which cause management to have serious
doubts as to the ability of borrowers to comply with present loan repayment
terms and are not already classified as nonaccrual or restructured. At April 30,
1996, potential problem loans, net totaled approximately $1.4 million.
Other Real Estate
Properties acquired through foreclosure or in settlement of loans are
classified as other real estate, as are loans classified as such in accordance
with SFAS No. 66. The following table summarizes other real estate at the dates
shown.
April 30, 1996 October 31, 1995
-------------- ----------------
(In thousands)
Conventional........................................... $ 765 $ 1,125
Commercial............................................. 456 6,415
----------- -----------
Total other real estate................................ $ 1,221 $ 7,540
=========== ===========
Allowance for Possible Loans Losses
The allowance for possible loan losses is maintained at a level
believed by management to be adequate to meet reasonably foreseeable loan losses
on the basis of many factors, including the risk characteristics of the
portfolio, underlying collateral, current and anticipated economic conditions
that may affect the borrowers' ability to pay, specific problem loans, and
trends in loan delinquencies and charge-offs. The allowance is increased by
provisions charged to earnings and reduced by loan charge-offs, net of
recoveries. Loans are charged off in whole or in part when, in management's
opinion, collectibility is not considered probable.
While management uses available information to establish the allowance
for possible loan losses, future additions to the allowance may be necessary if
economic conditions 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.
- 13 -
An analysis of the allowance for possible loan losses is as follows:
Six Months Ended
April 30,
---------------------
1996 1995
---- ----
(In thousands)
Balance at beginning of period.................................... $ 2,121 $ 9,471
Charge-offs:
Commercial real estate....................................... -- 1,169
Residential real estate...................................... 152 580
Consumer..................................................... 7 72
----------- -----------
159 1,821
----------- -----------
Recoveries:
Commercial real estate....................................... -- 699
Residential real estate...................................... 20 124
Consumer..................................................... 7 5
----------- -----------
27 828
----------- -----------
Net Charge-offs................................................ 132 993
----------- -----------
Provisions charged to operations:
Commercial real estate....................................... -- 1,480
Residential real estate...................................... -- 480
Consumer..................................................... -- 40
----------- -----------
-- 2,000
----------- -----------
Balance at end of period....................................... $ 1,989 $ 10,478
=========== ===========
The Bank is subject to the capital adequacy regulations adopted by the
FDIC. The Bank's ability to pay dividends to the Company and expand its business
can be restricted if the Bank's capital falls below levels established by the
FDIC. Under the leverage capital requirement adopted by the FDIC, state
nonmember banks must maintain "core" or "Tier 1" capital of at least 3% of total
assets. For all but the most highly rated banks, the minimum leverage
requirement is 4% to 5% of total assets. The FDIC's risk-based capital
guidelines require state nonmember banks to have a ratio of total capital to
total risk-weighted assets of 8% and a ratio of core capital to total
risk-weighted assets of 4%.
Capital requirements higher than the generally applicable minimum
requirements may be established for a particular bank if the FDIC determines
that the bank's capital was or may become inadequate in view of its particular
circumstances. Individual minimum capital requirements may be appropriate where
a bank is receiving special supervisory attention, has a high degree of exposure
to interest rate risk, or poses other safety or soundness concerns. Effective
January 17, 1994, the FDIC revised its risk-based capital standards to provide
that a bank's concentration of credit risk and nontraditional activities also
would be considered in determining whether a higher individual capital
requirement should be imposed. No such requirement has been established for the
Bank.
At April 30, 1996, the Bank had a ratio of Tier 1 or core capital to
total assets of 11.42%. At April 30, 1996, South Boston's ratio of total
risk-based capital to total risk-weighted assets was 36.56% and its ratio of
Tier 1 capital to total risk-weighted assets was 36.15%. Neither regulatory
capital measure includes any SFAS No. 115 adjustment for securities available
for sale. At April 30, 1996, the Bank met the requirements for a
"well-capitalized" institution based on its capital ratios as of such date.
- 14 -
Result of Operations
For the fiscal quarter ended April 30, 1996, net income increased to
$9.7 million or $1.82 per share on a fully diluted basis from $4.4 million or
$.84 per share for the fiscal quarter ended April 30, 1995. Net income for the
six months ended April 30, 1996, increased to $24.1 million or $4.51 per share
on a fully diluted basis from $9.9 million or $1.90 per share for the six months
ended April 30, 1995. The increase in net income was due primarily to
substantially higher net realized gains on securities and a lower provision for
possible loan losses, offset in part by an increase in income taxes, prepayment
penalties on FHLB advances, and lower net interest and dividend income.
Net interest and dividend income for the three and six months ended
April 30, 1996 decreased to $12.9 million and $25.8 million, respectively, as
compared to $13.9 million and $29.4 million for the three and six months ended
April 30, 1995, respectively. This decrease primarily reflects the decrease in
investment income due to the decline in the average investment portfolio
balance, as well as the increase in the weighted average rate paid on deposit
accounts. The increase in the cost of deposits was offset by the decline in
interest paid on FHLB advances, primarily due to the repayment of FHLB advances.
Interest income on the loan portfolio for the fiscal quarter ended
April 30, 1996 decreased to $7.2 million from $8.2 million for the fiscal
quarter ended April 30, 1995, and decreased to $15.1 million for the six months
ended April 30, 1996 from $16.5 million for the six months ended April 30, 1995.
This decline is primarily due to the decrease in the average loan portfolio
balance outstanding. The decrease in average balances of loans outstanding was a
result of lower loan originations, as well as the conversion of $19.3 million of
loans to mortgage-backed securities during the fiscal quarter ended January 31,
1996, as well as the sale of the commercial loan portfolio on April 22, 1996.
This decline was offset, in part, by an increase in the weighted average yield
on loans over the comparable period for the prior fiscal year. The Company's
gross interest income is likely to continue to decline due to the reinvestment
of the commercial real estate loan sale proceeds in short-term investments.
The following table shows the Company's weighted average yields earned
and rates paid, as well as the spread between the combined weighted average
yields earned on interest-earning assets and weighted average rates paid on
interest-bearing liabilities for the periods indicated. The weighted average
yield earned on loans includes income earned on loans held for sale, as well as
the effects of non-accrual loans outstanding.
Three Months Ended Six Months Ended
April 30, April 30,
---------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
Weighted average yield earned on:
Loans 9.13% 8.48% 9.00% 8.55%
Investments (a) 7.04 6.69 6.98 6.77
Combined.................................. 7.47 7.04 7.40 7.11
Weighted average rate paid on:
Deposits.................................. 4.38 4.00 4.43 3.84
Other Borrowings.......................... 4.46 6.24 5.61 6.04
Medium-term notes......................... 8.35 8.35 8.35 8.47
Federal Home Loan Bank advances........... 5.32 6.30 5.54 6.09
Overall Cost of funds..................... 4.43 4.65 4.54 4.46
Interest rate spread........... 3.04% 2.39% 2.86% 2.65%
(a) Includes mortgage-backed securities and Federal Home Loan Bank stock; excludes the effects of SFAS No. 115.
- 15 -
Rate/Volume Analysis
The effect on net interest income due to changes in weighted average
interest rates earned and paid and the weighted average amounts of
interest-earning assets and interest-bearing liabilities is shown in the
following table.
Increase(Decrease) Due To
------------------------------------
Three Months Ended Total Rate/
April 30, Current Prior Increase Rate Volume Volume
1996 vs. 1995 Period Period (Decrease) (a) (b) (c)
-------------------------- ------- ------- -------- --------- ------ -------
(In thousands)
Income from interest-earning assets:
Loan portfolio(d)...................... $ 7,164 $ 8,192 $ (1,028) $ 631 $ (1,540) $ (119)
Investment portfolio(e) (f)............ 21,280 26,789 (5,509) 1,386 (6,556) (339)
-------- ------- --------- ------- --------- --------
Total................................ 28,444 34,981 (6,537) 2,017 (8,096) (458)
-------- ------- --------- ------- --------- --------
Expense from interest-bearing liabilities:
Deposit accounts....................... 14,662 13,079 1,583 1,345 217 21
Borrowings............................. 170 424 (254) (120) (187) 53
Medium term notes...................... 116 118 (2) -- (2) --
Federal Home Loan Bank advances........ 590 7,430 (6,840) (1,159) (6,723) 1,042
-------- ------- --------- ------- --------- -------
Total................................ 15,538 21,051 (5,513) 66 (6,695) 1,116
-------- ------- --------- ------ --------- -------
Net interest income....................... $ 12,906 $13,930 $ (1,024) $1,951 $ (1,401) $(1,574)
======== ======= ========= ======= ========= ========
Increase(Decrease) Due To
------------------------------------
Six Months Ended Total Rate/
April 30, Current Prior Increase Rate Volume Volume
1996 vs. 1995 Period Period (Decrease) (a) (b) (c)
------------------------------------ -------- ------- --------- ------ ------- --------
(In thousands)
Income from interest-earning assets:
Loan portfolio(d)...................... $ 15,114 $16,500 $ (1,386) $ 881 $ (2,152) $ (115)
Investment portfolio(e) (f)............ 44,294 54,255 (9,961) 1,727 (11,327) (361)
-------- ------- --------- ------- --------- --------
Total................................ 59,408 70,755 (11,347) 2,608 (13,479) (476)
-------- ------- --------- ------- --------- --------
Expense from interest-bearing liabilities:
Deposit accounts....................... 29,807 25,843 3,964 4,049 (74) (11)
Borrowings............................. 1,250 599 651 (43) 747 (53)
Medium term notes...................... 233 251 (18) (3) (15) --
Federal Home Loan Bank advances........ 2,271 14,655 (12,384) (1,344) (12,152) 1,112
-------- ------- --------- ------- --------- -------
Total................................ 33,561 41,348 (7,787) 2,659 (11,494) 1,048
-------- ------- --------- ------- --------- -------
Net interest income....................... $ 25,847 $29,407 $ (3,560) $ (51) $ (1,985) $(1,524)
======== ======= ========= ======= ========= ========
- -------------------------
(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) Includes loans held for sale.
(e) Includes mortgage-backed securities and Federal Home Loan Bank stock.
(f) Excludes the effect of SFAS No. 115.
- 16 -
The average yield on the loan portfolio increased to 9.13% and 9.00%
for the three and six months ended April 30, 1996, respectively, as compared to
8.48% and 8.55% for the same periods in fiscal 1995, reflecting the decrease in
the average loan portfolio as a result of both charge-offs and provisions for
losses on loans held for sale related to the reclassification and recent sale of
the Commercial Real Estate portfolio. The average yield on the investment
portfolio increased to 7.04% and 6.98% for the three months and six months ended
April 30, 1996, respectively, as compared to the 6.69% and 6.77% for the same
periods in fiscal 1995, due primarily to the sale of a significant portion of
the common and preferred stock portfolio, during the three and six months ended
April 30,1996, which typically earns a lower yield than fixed income securities.
Total interest expense decreased to $15.5 million and $33.6 million for
the three and six months ended April 30, 1996 from $21.1 million and $41.3
million for the same periods in fiscal 1995, primarily due to the significant
reduction in average borrowings outstanding, offset in part by the increase in
cost of deposits. The weighted average cost of funds decreased to 4.43% for the
three months ended April 30, 1996 and increased to 4.54% for the six months
ended April 30, 1996 from 4.65% and 4.46% for the same periods ended April 30,
1995.
Total other income increased to $10.2 million and $26.5 million for the
three and six months ended April 30, 1996 from $731,000 and $1.6 million for the
same periods in fiscal 1995, due primarily to higher net realized gains on
securities which totaled $7.7 million and $23.3 million for the three and six
months ended April 30, 1996 as compared to $533,000 and $560,000 for the same
periods in fiscal 1995. The increase in other income was also due to the
increase in the net realized gains on the sale of loans of $2.4 million for the
three and six month periods ended April 30, 1996. Gross realized gains on the
sale of securities totaled $10.8 million and $28.4 million for the three months
and six months ended April 30, 1996. Gross realized losses on the sale of
securities during the same periods totaled $3.1 million and $5.1 million. The
Company will continue to sell investment securities, as required by the Merger
Agreement.
Total other expenses decreased 26.9% to $5.7 million and 13.2% to $12.8
million for the three and six months ended April 30, 1996 from $7.8 million and
$14.7 million for the corresponding periods ended April 30, 1995. The decrease
in other expenses is primarily attributable to a decrease in fees for
professional services of $1.7 million and $1.8 million, respectively, for the
three and six months ended April 30, 1996 as compared to the same periods in
1995. A significant reduction in FDIC insurance assessments also contributed to
the reduction in other expenses.
These decreases were offset in part by prepayment penalties on FHLB advances.
The provision for federal and state taxes increased to $7.7 million and
$15.5 million for the three and six months ended April 30, 1996, respectively,
as compared to $1.9 million and $4.3 million for the three and six months ended
April 30, 1995, respectively, reflecting higher effective tax rates resulting
from significantly increased pretax income, a significant reduction in the
amount of dividend income qualifying for the dividends received deduction, and
unused state tax losses at the Bank. The combined federal and state income tax
rate increased to approximately 44% and 39% for the three and six months ended
April 30, 1996, respectively.
- 17 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
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 1996 annual meeting of stockholders was held on
April 11, 1996. At the 1996 annual meeting it was voted to
approve and adopt the Agreement and Plan of Reorganization,
dated as of October 10, 1995, as amended by a letter agreement
dated March 7, 1996 (the "Merger Agreement"), by and between
Bank of Boston Corporation and Bancorp, and the transactions
contemplated thereby, including, the sale from time to time of
certain assets of Bancorp and its subsidiaries as contemplated
by the Merger Agreement. Of the 5,252,899 eligible votes,
3,726,882 were cast in favor of the Merger Agreement and
436,213 against the Merger Agreement. There were 28,329
abstentions, 558,247 broker no-votes, and 503,228 shares that
were not voted.
In addition, Robert E. Lee and Frank G. Neal, Jr., were
elected as directors of the Company for new three-year terms
or, if earlier, until the effective time of the merger. Of the
5,252,899 eligible votes, 4,469,066 were cast in favor of the
election of each of Mr. Lee and Mr. Neal, Jr. With respect to
each nominee, 166,100 votes were withheld, 114,505 were cast
with exceptions, and 503,228 shares were not voted.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule
(b) A Form 8-K was filed on February 21, 1996 reporting
the agreement the Bank entered into with BlackRock
Capital Finance L.P., ("BlackRock") pursuant to which
BlackRock agreed to purchase the Bank's commercial
real estate and multi-family loan portfolio. No
financial statements were filed relating to this Form
8-K.
(c) A Form 8-K was filed on April 12, 1996 reporting the
results of the votes taken at the Company's 1996
Annual Meeting of Stockholders. No financial
statements were filed relating to this Form 8-K.
- 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, 1996 By: /s/Robert E. Lee
------------- ------------------------------------
Robert E. Lee
Chairman of the Board and President
and Chief Executive Officer
(Principal Executive Officer)
Date: June 14, 1996 By: /s/David L. Smart
------------- ---------------------------------------
David L. Smart
Vice President and Treasurer
(Principal Financial and Accounting Officer)
- 19 -