FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1996
__________________________
Commission File Number 1-13936
__________________________
BOSTONFED BANCORP INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 52-1940834
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 New England Executive Park, Burlington, Massachusetts 01803
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(617) 273-0300
________________________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) hasfiled all reports
required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of
1934 during the preceding 12 months (or for such shorterperiod 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 ( )
Number of shares of common stock, par value $.01 per share,
outstanding as of June 30, 1996: 6,589,617.
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as
of June 30, 1996 and December 31, 1995 2
Consolidated Statements of Income for the Three and Six
Months ended June 30, 1996 and 1995 3
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months ended June 30, 1996 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1996 and 1995 5 - 6
Average Balances and Yield / Costs 7 - 8
Notes to Consolidated Financial Statements 9 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
PART II - OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holder 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
1
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(Dollars in Thousands, Except Per Share Data)
June 30, December 31,
1996 1995
---------- --------------
Assets (Unaudited)
- - ------------
Cash and cash equivalents $ 14,233 $ 21,225
Investment securities available for sale
(amortized cost of $1,052 and $1,022 at
June 30, 1996 and December 31, 1995
respectively) 1,050 1,022
Investment securities held to maturity (fair
value of $36,257 and $16,804 at June 30, 1996
and December 31, 1995, respectively) 36,851 16,906
Mortgage-backed securities available for sale
(amortized cost of $36,413 and $23,873 at
June 30, 1996 and December 31, 1995, respectively) 35,677 23,873
Mortgage-backed securities held to maturity (fair
value of $31,921 and $35,647 at June 30, 1996 and
December 31, 1995, respectively) 31,715 35,116
Mortgage loans held for sale 7,602 8,931
Loans, net of allowance for loan losses of $4,850
and $4,275 at June 30, 1996 and December 31, 1995,
respectively 619,097 509,496
Accrued interest receivable 4,128 3,696
Stock in FHLB of Boston, at cost 12,406 8,374
Premises and equipment 5,131 5,246
Real estate held for sale or development 874 874
Real estate owned 3,427 971
Other assets 5,806 5,022
-------- --------
Total assets $777,997 $640,752
======== ========
Liabilities and Stockholders' Equity
- - ---------------------------------------
Liabilities:
Deposit accounts $432,205 $419,104
Federal Home Loan Bank advances 241,699 119,909
Securities sold under agreements to repurchase 10,016 7,000
Advance payments by borrowers for taxes
and insurance 1,416 1,531
Other Liabilities 3,714 2,507
------- -------
Total liabilities 689,050 550,051
------- -------
Stockholders' equity;
Preferred stock,$.01 par value, 1,000,000 shares
authorized; none issued -- -- -- --
Common stock,$0.01 par value; 17,000,000 shares
authorized; 6,589,617 shares issued and outstanding 66 66
Additional paid-in capital 64,063 63,987
Retained earnings 33,000 31,183
Unrealized loss on investment securities available
for sale, net (667) -- --
Less unallocated ESOP shares (4,535) (4,535)
Less unearned Stock-Based Incentive Plan (2,980) -- --
------- -------
Total stockholders' equity 88,947 90,701
------- -------
Total liabilities and stockholders' equity $777,997 $640,752
======== ========
2
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, except per share amount)
Three Months Ended Six Months Ended
-------------------- ------------------
6/30/96 6/30/95 6/30/96 6/30/95
------- ------- ------- -------
(Unaudited)
Interest and dividend income:
Loans $ 10,709 $ 9,452 $ 20,612 $ 18,867
Mortgage-backed securities 1,174 596 2,181 1,203
Investment securities 744 492 1,219 946
------- ------- ------- -------
Total interest income 12,627 10,540 24,012 21,016
Interest expense:
Deposit accounts 3,955 3,749 7,958 7,224
Borrowed funds 2,799 2,338 4,663 4,588
------- ------- ------- -------
Total interest expense 6,754 6,087 12,621 11,812
------- ------- ------- -------
Net interest income 5,873 4,453 11,391 9,204
Provision for loan losses 298 2,811 736 3,061
------- ------- ------- -------
Net interest income after
provision 5,575 1,642 10,655 6,143
Non-interest income:
Loan processing and servicing
fees 330 340 671 669
Gain on sale of loans 120 167 374 187
Other 406 301 780 572
------- ------- ------- -------
Total non-interest income 856 808 1,825 1,428
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 2,441 1,938 4,636 3,824
Occupancy and equipment 635 549 1,255 1,089
Federal deposit insurance
premiums 239 237 478 475
Real estate operations (30) 2 (6) 108
Other 1,248 982 2,486 1,880
------- ------- ------- -------
Total non-interest expense 4,533 3,708 8,849 7,376
------- ------- ------- -------
Income (loss) before income taxes 1,898 (1,258) 3,631 195
Income tax expense (benefit) 774 (528) 1,484 92
------- ------- ------- -------
Net income (loss) $ 1,124 $ (730) $ 2,147 $ 103
======= ======= ======= =======
EARNINGS PER SHARE $0.18 NA $0.35 NA
3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands)
Six Months Ended June 30, 1996
(Unaudited)
Net
unrealized Unearned
(loss) on Stock-
Additional investments Unallocated Based Total
Common paid-in Retained available ESOP Incentive stockholders'
stock capital earnings for sale shares Plan equity
------- -------- --------- ---------- ----------- ---------- ------------
Balance at December 31, 1995 $ 66 63,987 31,183 - - (4,535) - - 90,701
Net income - - - - 1,023 - - - - - - 1,023
Change in net unrealized loss on
investments available for sale - - - - - - (193) - - - - (193)
Appreciation in fair value of
allocated ESOP shares - - 43 - - - - - - - - 43
------- -------- -------- ---------- ---------- ---------- ------------
Balance at March 31, 1996 $ 66 64,030 32,206 (193) (4,535) - - 91,574
------- -------- -------- ---------- ---------- ---------- ------------
Net income - - - - 1,124 - - - - - - 1,124
Dividends paid: $0.05 per share - - - - (330) - - - - - - (330)
Common stock acquired by
Stock-Based Incentive Plan - - - - - - - - - - (3,230) (3,230)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - 250 250
Change in net unrealized loss on
investments available for sale - - - - - - (474) - - - - (474)
Appreciation in fair value of
allocated ESOP shares - - 33 - - - - - - - - 33
------- ------- -------- --------- -------- --------- --------
Balance at June 30, 1996 $ 66 64,063 33,000 (667) (4,535) (2,980) 88,947
------- ------- -------- --------- -------- --------- --------
4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
1996 1995
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 2,147 $ 103
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation, amortization and
accretion, net 431 652
Appreciation in fair value of ESOP shares 76 -
Provision for loan losses 736 3,061
Loans originated for sale (78,419) (27,634)
Proceeds from sale of loans 80,122 24,307
Write-downs of real estate owned - 43
Gain on sale of real estate
acquired through foreclosure (36) (2)
Gain on sale of loans (374) (187)
Increase in accrued interest receivable (432) (170)
Increase in other assets (784) (1,010)
Earned portion of Stock-Based Incentive Plan 250 -
Increase in other liabilities 1,207 371
------- -------
Net cash provided by (used in)
operating activities 4,924 (466)
------- -------
Cash flows from investing activities:
Proceeds from sale of investment
securities available for sale - 3,059
Proceeds from maturities of
investment securities held to maturity 4,544 -
Purchase of investment securities
available for sale (30) (3,092)
Purchase of mortgage-backed
securities available for sale (14,157) -
Purchase of investment securities
held to maturity (24,529) (2,636)
Principal payments on investment
securities available for sale - 31
Principal payments on mortgage-
backed securities available for sale 1,700 -
Principal payments on investment
securities held to maturity 59 136
Principal payments on mortgage-
backed securities held to maturity 3,367 1,980
Increase in loans, net (112,955) (4,706)
Purchase of FHLB stock (4,032) (743)
Purchases of premises and equipment (326) (579)
Additional investment in real
estate held for sale or development - 47
Proceeds from sale of real estate
owned 237 266
Additional investments in real
estate owned (26) (46)
------- -------
Net cash used in investing
activities (146,148) (6,283)
------- -------
-Continued on next page-
5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
1996 1995
------- -------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 13,101 4,330
Net increase in repurchase agreements 3,016 -
Proceeds from Federal Home Loan
Bank advances (223,827) (256,599)
Proceeds from Federal Home Loan
Bank advances 345,617 260,273
Purchase of stock for Stock-Based
Incentive Plan (3,230) -
Dividends paid (330) -
Decrease in advance payments by
borrowers for taxes and insurance (115) (258)
------- -------
Net cash provided by
financing activities 134,232 7,746
------- -------
Net increase (decrease)
in cash and cash equivalents (6,992) 997
Cash and cash equivalents at January 1 21,225 8,308
------- -------
Cash and cash equivalents at June 30 $ 14,233 $ 9,305
======= =======
Supplemental disclosure of cash flow
information:
Payments for:
Interest $ 12,051 $ 11,798
======= =======
Taxes $ 1,085 $ 1,297
======= =======
Supplemental schedule of non-cash
investing activities:
Transfers of mortgage
loans to real estate owned $ 2,631 $ 132
======= =======
6
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the quarter ended June 30: 1996 1995
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 46,558 $ 744 6.39% $ 28,346 $ 492 6.94%
Loan, net and mortgage loans held for sale (2) 573,697 10,709 7.47% 501,056 9,452 7.55%
Mortgage-backed securities (3) 69,075 1,174 6.80% 38,336 596 6.22%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 689,330 12,627 7.33% 567,738 10,540 7.43%
--------- --------- ---------- ---------
Non-interest-earning assets 28,326 23,647
---------- ---------
Total assets $ 717,656 $ 591,385
========== =========
Liabilities and Stockholders' Equity
Interest-bearing Liabilities:
Money market deposit accounts $ 47,116 354 3.01% $ 49,693 380 3.06%
Savings accounts 91,738 574 2.50% 100,882 630 2.50%
NOW accounts 66,313 217 1.31% 64,498 236 1.46%
Certificate accounts 201,525 2,810 5.58% 187,538 2,503 5.34%
---------- --------- --------- --------- ---------- ---------
Total 406,692 3,955 3.89% 402,611 3,749 3.72%
Borrowed Funds (4) 197,246 2,799 5.68% 144,089 2,338 6.49%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 603,938 6,754 4.47% 546,700 6,087 4.45%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 21,261 14,503
---------- ---------
Total libilities 625,199 561,203
---------- ---------
Stockholders' equity 92,457 30,182
---------- ---------
Total liabilities and
stockholders' equity $ 717,656 $ 591,385
========== =========
Net interest rate spread (5) $ 5,873 2.86% $ 4,453 2.98%
========= ========= ========== =========
Net interest margin (6) 3.41% 3.14%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 114.14% 103.85%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes interest
expense on FNMA deposits held in escrow accounts with the Company related
to the Company's FNMA servicing, which, if such interest expense was
excluded, would result in an average cost of borrowed funds of 5.63% and
6.48% for the three months ended June 30, 1996 and June 30, 1995,
respectively.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
Note: Average balances for 1996 are calculated on a daily basis, for 1995 on
a monthly basis.
7
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the six months ended June 30: 1996 1995
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 39,452 $ 1,219 6.18% $ 27,951 $ 946 6.77%
Loan, net and mortgage loans held for sale (2) 548,508 20,612 7.52% 500,890 18,867 7.53%
Mortgage-backed securities (3) 64,395 2,181 6.77% 38,830 1,203 6.20%
---------- --------- ------ -------- --------- ------
Total interest-earning assets 652,355 24,012 7.36% 567,671 21,016 7.40%
--------- ------ --------- ------
Non-interest-earning assets 26,924 22,526
---------- --------
Total assets $679,279 $590,197
========== ========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 47,430 712 3.00% $ 51,022 759 2.98%
Savings accounts 91,678 1,144 2.50% 104,408 1,304 2.50%
NOW accounts 64,871 458 1.41% 63,693 460 1.44%
Certificate accounts 200,851 5,644 5.62% 182,802 4,701 5.14%
---------- -------- ------- ------- ---------- ------
Total 404,830 7,958 3.93% 401,925 7,224 3.59%
Borrowed Funds (4) 161,674 4,663 5.77% 143,916 4,588 6.38%
---------- -------- ------- ------- ---------- ------
Total interest-bearing liabilities 566,504 12,621 4.46% 545,841 11,812 4.33%
-------- ------- ---------- ------
Non-interest-bearing liabilities 20,287 14,088
---------- -------
Total libilities 586,791 559,929
---------- -------
Stockholders' equity 92,488 30,268
---------- -------
Total liabilities and
stockholders' equity $679,279 $590,197
========== ========
Net interest rate spread (5) $ 11,391 2.90% $ 9,204 3.07%
======== ======== ======== ========
Net interest margin (6) 3.49% 3.24%
======== ========
Ratio of interest-earning assets to
interest-bearing liabilities 115.15% 104.00%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 5.70% and 6.36% for the six months ended June 30, 1996 and
June 30, 1995, respectively.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
Note: Average balances for 1996 are calculated on a daily basis, for 1995 on a
monthly basis.
8
BOSTONFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
include the accounts of BostonFed Bancorp, Inc., ("BostonFed" or
the "Company") and its wholly-owned subsidiaries, Boston Federal
Savings Bank (the "Bank") and BF Funding Corporation as of June
30, 1996 and December 31, 1995 and for the three- and six-month
periods ended June 30, 1996 and 1995.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management all
necessary adjustments, consisting only of normal recurring
accruals necessary for a fair presentation, have been included.
The results of operations for the three- and six-month periods
ended June 30, 1996 and 1995 are not necessarily indicative of the
results that may be expected for the entire fiscal year.
In May 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No. 122, Accounting for Mortgage Servicing
Rights which amends SFAS No. 65, Accounting for Certain Mortgage
Banking Activities. The Statement is effective for fiscal years
beginning after December 15, 1995; however, early adoption is
permitted. The Statement requires that a mortgage banking
enterprise recognize as separate assets, rights to service
mortgage loans for others, regardless of how those servicing
rights are acquired. Additionally, the Statement requires that
the capitalized mortgage servicing rights be assessed for
impairment based on the fair value of those rights, and that
impairment be recognized through a valuation allowance. The
Company adopted this Statement on January 1, 1996. The impact of
adoption resulted in increased income of $224,000 and $521,000
before taxes for the three- and six- month periods ended June 30,
1996, respectively. Greater earnings volatility in future periods
may result as the volume of loans originated for sale increases or
decreases and mortgage servicing rights may be amortized at a more
rapid pace if loan pre-payments accelerate.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At June 30, 1996, the Company had commitments of $24.5
million to originate mortgage loans and $10.3 million to purchase
loans from correspondent lenders. Of these $34.8 million
commitments, $24.2 million were adjustable rate mortgage loans at
rates ranging from 5.375% to 10.50% and $10.6 million were fixed
rate mortgage loans with interest rates ranging from 6.875% to
9.00%.
At June 30, 1996, the Company was servicing first mortgage
loans of approximately $514.2 million, which are either partially
or wholly-owned by others.
9
NOTE 3: PROPOSED LEGISLATIVE MATTERS
Legislation is pending in Congress to mitigate the effect of
the Bank Insurance Fund ("BIF")/Savings Association Insurance Fund
("SAIF") premium disparity. Under current legislation a special
assessment would be imposed on the amount of deposits held by SAIF-
member institutions, including the Bank, to recapitalize the SAIF.
The amount of the special assessment would be left to the
discretion of the FDIC but is generally estimated at approximately
68 basis points of insured deposits as of a specified date, which
in the original legislation was March 31, 1995 although it may be
changed. The legislation may also require that the BIF and the
SAIF be merged by January 1, 1998, provided that federal savings
associations become either national banks or state chartered banks
or thrifts. The Financing Insurance Company ("FICO") payments may
be spread across all BIF and SAIF members, although a current
House Banking Committee draft delays pro rata FICO sharing until
the year 2000. Until then, BIF insured institutions will pay 1.3
basis points in deposit insurance premiums to be applied towards
FICO obligations, while SAIF insured institutions will pay 6.4
basis points, assuming a regular deposit insurance assessment rate
of zero. The payment of the special assessment would have the
effect of immediately reducing the capital of SAIF-member
institutions, net of any tax effect; however, it would not affect
the Bank's ability to comply with its regulatory capital
requirements. Management cannot predict whether legislation
imposing such assessment will be enacted, or, if enacted, the
specific terms of such legislation, including the amount of any
special assessment and whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums. Management can
also not predict whether or when the BIF and SAIF will merge. A
significant increase in SAIF insurance premiums or a significant
special assessment to recapitalize the SAIF would likely have an
adverse effect on the operating expenses of the Company. The
assessment of a 68 basis point fee to recapitalize the SAIF would
result in an approximately $1.6 million expense on an after-tax
basis. The benefit of future lower insurance premiums cannot be
determined at this time.
Legislation regarding bad debt recapture has been passed by
Congress and sent to the President for his signature. The
legislation requires recapture of reserves accumulated after 1987
and suspends recapture of reserves established before 1988 in most
cases. If the bill is not signed and future legislation requires
the Company to recapture, under certain conditions, the
accumulated federal and state bad debt reserves, the Company could
have a one-time charge to future earnings of approximately $5.0
million on an after tax basis.
No assurance can be given as to whether legislation as
discussed above will be enacted or, if enacted,
what the terms of such legislation would be.
NOTE 4: THE 1996 STOCK-BASED INCENTIVE PLAN
At the Stockholders' Annual Meeting held on April 30, 1996,
the Company's 1996 Stock-Based Incentive Plan (the "Plan") was
approved. Among the provisions of the Plan, was the establishment
of a trust for the purpose of purchasing 4% of the Company's
outstanding common stock to be awarded to certain individuals based
on criteria under the provisions of the Plan. During the second
quarter of 1996, the Company contributed $3.2 million to the plan
trust for the trust's purchase of 263,584 shares at an average cost
of $12.26 per share. This contribution represents deferred compensation
which is initially recorded as a reduction of stockholders' equity and
ratably charged to compensation expense over the vesting period of five
years. The Company recorded a $250,000 expense for the earned portion
of the Plan during the quarter.
10
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
A. GENERAL
BostonFed Bancorp, Inc. is a savings and loan holding company
and is subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation (FDIC") and the
Securities and Exchange Commission (SEC"). The Company, through
its subsidiary, Boston Federal Savings Bank operates as a
federally-chartered community savings bank. The Company's
principal business has been and continues to be attracting retail
deposits from the general public in the areas surrounding its
branch offices and investing those deposits, together with funds
generated from operations and borrowings, primarily in one- to
four-family residential mortgage loans. To a lesser extent, the
Company invests in multi-family mortgage, commercial real estate,
construction and land, consumer loans and investment securities.
The Company originates loans for investment and loans for sale in
the secondary market, generally retaining the servicing rights for
all loans sold. Loan sales are made from loans held in the
Company's portfolio designated as being held for sale or
originated for sale during the period. The Company's revenues are
derived principally from interest on its mortgage loans, and to a
lesser extent, interest and dividends on its investment and
mortgage-backed securities, fees and loan servicing income. The
Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, FHLB
advances, repurchase agreements and proceeds from the sale of
loans.
B. FINANCIAL POSITION
Total assets at June 30, 1996 were $778.0 million, compared
to $640.8 million at December 31, 1995, an increase of $137.2
million or 21.4% due primarily to higher loan portfolio
origination volume, increases in investment securities held to
maturity and mortgage-backed securities held for sale. These
increases were funded primarily with Federal Home Loan Bank of
Boston ("FHLB of Boston") advances. During the six-months ended
June 30, 1996, investment securities held to maturity, increased
by $19.9 million to a balance of $36.9 million due to the purchase
of $14 million of Collateralized Mortgage Obligations ("CMOs") and
the purchase of various U.S. Government Agency securities.
Mortgage-backed securities available for sale increased by $11.8
million to a balance of $35.7 million due primarily to the
purchase of Government National Mortgage Association ("GNMA")
adjustable-rate mortgages ("ARMs"). Loans, net of allowance for
loan losses increased by $109.6 million to a balance of $619.1
million as the recent increase in interest rates created a greater
demand for adjustable rate mortgages which the Company originates
primarily for portfolio. These increases were funded primarily by
FHLB advances, which increased from $119.9 million at December 31,
1995 to $241.7 million at June 30, 1996. To a lesser degree,
growth in deposit accounts, which increased from $419.1 million to
$432.2 million during the period, repurchase agreements, which
increased by $3.0 million and a reduction of $7.0 million in cash
and cash equivalents were also used to fund loan growth. Stock in
the FHLB of Boston increased by $4.0 million to a balance of $12.4
million from $8.4 million at December 31, 1995. This is a required
investment, the amount of which is based on the level of advances
and other criteria. Real estate owned ("REO") increased to $3.4 million
at June 30, 1996 from $1.0 million at December 31, 1995 due primarily to
the classification of four non-performing loans as substantively
repossessed during the period.
C ASSET/LIABILITY MANAGEMENT
The principal objective of the Company's interest rate risk
management function is to evaluate the interest rate risk included
in certain balance sheet accounts, determine the level of risk
appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of
11
Directors' approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest
rates. The Company monitors its interest rate risk as such risk relates
to its operating strategies. The Company's Board of Directors has
established an Asset/Liability Committee of Management. It is responsible
for reviewing the Company's asset/liability policies and interest
rate risk position. The Committee reports trends and interest rate risk
position to the Board of Directors on a quarterly basis. The Board has
established certain risk tolerance levels within which the Company can
operate. The extent and direction of the movement of interest rates is an
uncertainty that could have a negative impact on the earnings of the Company.
In recent years, the Company has utilized the following
strategies to manage interest rate risk: (1) emphasizing the
origination and retention of adjustable-rate, one- to four-family
mortgage loans; (2) selling in the secondary market substantially
all fixed-rate mortgage loans originated with terms greater than
10 years while generally retaining the servicing rights thereof;
(3) primarily investing in investment securities or mortgage-
backed securities with adjustable interest rates; and (4)
attempting to reduce the overall interest rate sensitivity of
liabilities by emphasizing longer-term deposits and utilizing FHLB
advances to replace rate sensitive deposits.
The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring the Company's interest
rate sensitivity "gap." An asset or liability is said to be
interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate
sensitive assets. Accordingly, during a period of rising interest
rates, an institution with a positive gap position would be in a
better position to invest in higher yielding assets which,
consequently, may result in the yield on its assets increasing at
a pace more closely matching the increase in the cost of its
interest-bearing liabilities than if it had a negative gap.
During a period of falling interest rates, an institution with a
positive gap would tend to have its assets repricing at a faster
rate than one with a negative gap which, consequently, may tend to
restrain the growth of its net interest income.
Certain shortcomings are inherent in gap analysis. For
example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-
term basis and over the life of the asset. Further, in the event
of change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to
service their adjustable-rate loans may decrease in the event of
an interest rate increase.
At June 30, 1996, the Company's one year gap was a negative
1.8% of total assets, compared to a positive 13.2% of total assets
at December 31, 1995. The change in the gap was caused by the
large increase in assets which do not reprice within the first
year combined with the effects of a large portion of FHLB advances
maturing within the first year.
The Company's interest rate sensitivity is also monitored by
management through the use of a model which internally generates
estimates of the change in net portfolio value (NPV") over a range
of interest rate change scenarios. NPV is the present value of
expected cash flows from assets, liabilities, and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario,
is defined as the NPV in that scenario divided by the market value
of assets in the same scenario. The OTS also produces a similar
analysis using its own model, based upon data submitted on the
Company's quarterly Thrift Financial Reports, the results of which
may vary from the Company's internal model primarily due to
differences in assumptions utilized between the Company's internal
model and the OTS model, including estimated loan prepayment
rates, reinvestment rates and deposit decay rates. For purposes
of NPV, prepayment speeds similar to those used in the gap
analysis are used, reinvestment rates are those in effect for
similar products currently being offered and rates on core
deposits are modified to reflect recent trends. The NPV
12
calculated using March 31, 1996 data results in a decline of $7.2
million, or (6.1)%, in net portfolio value assuming an
instantaneous interest rate increase of 200 basis points.
As in the case with the gap analysis, certain shortcomings
are inherent in the methodology used in the above interest rate
risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in
which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model used assumes that
the composition of the Company's interest sensitive assets and
liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV
measurements and net interest income models provide an indication
of the Company's interest rate risk exposure at a particular point
in time, such measurements are not intended to and do not provide
a precise forecast of the effect of changes in market interest
rates on the Company's net interest income and will differ from
actual results.
D. LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits,
principal and interest payments on loans, mortgage-backed and
related securities and loan sales, FHLB advances and repurchase
agreements. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates,
economic conditions and competition. However, the Company has
maintained in excess of the required minimum levels of liquid
assets as defined by Office of Thrift Supervision ("OTS")
regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of the Bank's deposits
and short-term borrowings. The Bank's current required liquidity
ratio is 5%. At June 30, 1996 and December 31, 1995 the Bank's
liquidity ratio was 5.8% and 5.3% respectively. Management has
maintained liquidity as close as possible to the minimum
requirement so that it may invest any excess liquidity in higher
yielding interest-earning assets or use such funds to repay higher
cost FHLB advances.
The Company's most liquid assets are cash, daily federal
funds sold, Federal Home Loan Bank Overnight Deposits, short-term
investments and investments available for sale. The levels of
these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At June
30, 1996, cash, short-term investments and investment securities
available for sale totaled $15.3 million or 2.0% of total assets.
Additional investments were available which qualified for
regulatory liquidity requirements.
The Company has other sources of liquidity if a need for
additional funds arises, including FHLB advances. At June 30,
1996, the Bank had $241.7 million in advances outstanding from the
FHLB. The Company also borrowed $10.0 million through repurchase
agreements. The Company generally avoids paying the highest
deposit rates in its market and accordingly utilizes alternative
sources of funds such as FHLB advances and repurchase agreements
to supplement cash flow needs.
At June 30, 1996, the Company had commitments to originate
loans and unused outstanding lines of credit totaling $65.8
million. The Company anticipates that it will have sufficient
funds available to meet its current loan origination commitments.
Certificate accounts which are scheduled to mature in less than
one year from June 30, 1996, totaled $139.7 million.
At June 30, 1996, the consolidated stockholders' equity to
total assets ratio was 11.4%. As of June 30, 1996, the Bank
exceeded all of its regulatory capital requirements with tangible,
core and risk-based capital ratios of 9.0%, 9.0% and 17.5%,
respectively. The respective minimum regulatory requirements were
1.5%, 3.0% and 8.0%. Additionally, retained earnings at June 30,
1996 includes approximately $13.2 million of tax bad debt reserves
for which no federal income tax liability has been recognized.
Reduction of this allocated amount for anything other than to
absorb tax bad debt losses would create income, for tax purposes
only, which would be subject to the then current corporate income
tax rate. See Note 3 - "Proposed Legislative Matters" for further
discussion on the tax bad debt reserve.
13
E. COMPARISON OF THREE- AND SIX-MONTHS ENDED JUNE 30, 1996 AND 1995
General
The Company had no operations prior to October 24, 1995 and,
accordingly, the results of operations and other data discussed
below occurring prior to that date reflect only those of the Bank
and its subsidiaries. The Company's net income for the quarter
ended June 30, 1996 was $1.1 million, or $.18 per share compared
to a net loss of $730,000 with loss per share not applicable for
the quarter ended June 30, 1995. For the six-months period ended
June 30, 1996 net income was $2.1 million, or $.35 per share,
compared to $103,000 with earnings per share not applicable for
the comparable 1995 period. Comments regarding the components of
net income or loss are detailed in the following paragraphs.
Interest Income
Total interest income on interest-earning assets for the
quarter ended June 30, 1996 increased by $2.1 million, or 19.8%,
to $12.6 million, compared to the quarter ended June 30, 1995.
The increase in interest income is primarily attributable to a
$121.6 million increase in average interest-earning assets, offset
somewhat by a 10 basis point decrease in yield. For the first
half of 1996, total interest income was $24.0 million compared to
$21.0 million for the same period in 1995. The major contributor
to this increase was higher average balances amounting to $652.4
million during the first half of 1996, compared to average
balances of $567.7 in the first half of 1995. Average yields on
interest-earning assets declined from 7.40% for the first half of
1995 to 7.36% for the first half of this year.
Interest income on loans, net, for the quarter ended June 30,
1996 increased by $1.3 million, or 13.3%, to $10.7 million
compared to $9.5 million for the same quarter in 1995. The year
to date interest income on loans, net, is $20.6 million, compared
to last year's to date total of $18.9 million, an increase of $1.7
million or 9.0%. The current quarter's increase in income from
loans, net, reflects a $72.6 million increase in the average loan
balance to $573.7 million, offset somewhat by an 8 basis point
decrease in yield on loans, net. A comparison of the year to date
yields on loans, net, reveals a one basis point decline from 7.53%
for the six-months ended June 30, 1995 to 7.52% for this year to
date. Interest on mortgage-backed securities for the quarter
ended June 30, 1996 increased by $578,000 to $1.2 million,
compared to $596,000 for the same quarter in 1995. On a year to
date basis, the increase is $978,000 or 81.3% from last year's to
date total of $1.2 million. This increase in income is due to the
combined effects of an increase in the average balance of $25.6
million for the six-month period and an increase in average yield
of 57 basis points. Interest income from investment securities
was $744,000 during the current quarter compared to $492,000 for
the comparable period in 1995. For the six-months ended June 30,
1996, interest income on investment securities was $1.2 million
compared to $946,000 during the first half of 1995. The average
yield on investment securities declined by 59 basis points, but
the average balance increased by $11.5 million to an average of
$39.5 million during the six- months ending June 30, 1996.
Interest Expense
Total interest expense on interest-bearing liabilities for
the quarter ended June 30, 1996 increased by $667,000 or 11.0%, to
$6.8 million compared to the quarter ended June 30, 1995. The
increase in interest expense for the current quarter is due
primarily to an increase of $57.2 million in the average balance
during the quarter ended June 30, 1996, compared to the average
balance of $546.7 million during the quarter ended June 30, 1995.
A two basis point increase in the average cost of interest-bearing
liabilities also contributed to the increase in interest expense
during the current quarter compared to the same quarter last year.
The average cost of interest-bearing liabilities increased to
4.47%, during the quarter ended June 30, 1996, compared to 4.45%
for last year's comparable period. On a year to date basis
interest expense on interest-bearing liabilities totaled $12.6
million, compared to last year's to date total of $11.8 million, a
6.8% increase. The increase was caused by the combined effects of
a 13 basis points increase in the cost of funds and an increase of
$20.7 million in average balances.
14
Interest expense on deposit accounts was $4.0 million for the
current quarter compared to $3.7 million for the quarter ended
June 30, 1995. Most of this increase was attributable to the
higher rates paid on certificate accounts which averaged 5.58%
during the quarter ended June 30, 1996 compared to 5.34% for the
quarter ended June 30, 1995. Interest expense on borrowed funds
increased from $2.3 million for the quarter ended June 30, 1995 to
$2.8 million for the current quarter. While the average cost of
borrowed money declined from 6.49% during the quarter ended June
30, 1995 to an average of 5.68% during the current quarter, the
average balances increased from $144.1 million during the second
quarter of 1995 to an average balance of $197.2 million during the
current quarter. On a year to date basis average deposit balances
increased from $402.0 million during last year's first half to an
average of $404.8 million during the first half of this year. The
average cost of funds on deposits increased 34 basis points to
3.93% for the period ended June 30, 1996 compared to last year's
to date average of 3.59%.
Although net interest income improved, net interest rate
spreads and margins declined during the second quarter as most of
the asset growth was in the form of adjustable-rate mortgages
which are generally originated at discounted rates for the initial
term. The net interest rate spread declined from 2.97% for the
quarter ended March 31, 1996 to 2.86% for the current quarter.
The net interest margin increased to 3.41% for the current quarter
compared to 3.14% for the quarter ended June 30, 1995. On a year
to date basis, the net interest margin is 3.49% compared to 3.24%
for the six-months ended June 30, 1995 due primarily to the
utilization of the capital raised during the conversion to stock
on October 24, 1995.
Provision for Loan Losses
The Company's provision for loan losses amounted to $298,000
for the quarter ended June 30, 1996, compared to a provision of
$2.8 million for the comparable quarter in 1995. On a year to
date basis, the provision is $736,000 compared to last year's to
date total of $3.1 million The provision in 1995 was needed
primarily to replenish the allowance for loan losses due to charge-
offs on eight commercial and multi-family loans associated with
four borrowers. The current year's provision has resulted in an
increase in the allowance for loan losses from $4.3 million at
December 31, 1995 to $4.9 million at June 30, 1996 as charge-offs
during the current year to date have been somewhat offset by
recoveries. Management determined that an increase in the
allowance for loan losses was appropriate in part due to loan
growth.
At June 30, 1996, loans which were characterized as impaired
pursuant to SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan", ("SFAS 114") and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and
Disclosure", ("SFAS 118") totaled $5.9 million. All of the
impaired loans have been measured using the fair value of the
collateral method. During the six-months ended June 30, 1996, the
average recorded value of impaired loans was $6.9 million,
$152,000 of interest income was recognized and $279,000 of
interest income would have been recognized under the loans'
original terms.
The Company establishes provisions for loan losses, which are
charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed to be appropriate based upon
management's assessment of the risk inherent in its loan portfolio
in light of current economic conditions, actual loss experience,
industry trends and other factors which may affect the real estate
values in the Company's market area. While management believes
the current allowance for loan losses is adequate, actual losses
are dependent upon future events, and as such, future provisions
for loan losses may be necessary. As part of the Company's
determination of the adequacy of the allowance for loan losses,
the Company monitors its loan portfolio through its Asset
Classification Committee. The Committee classifies assets
depending on risk of loss characteristics. The most severe
classification before a charge-off is required is "sub-standard."
At June 30, 1996, the Company classified $8.7 million as sub-
standard compared to $9.3 million at December 31, 1995. The Asset
Classification Committee which meets quarterly, determines the
adequacy of the allowance for loan losses through ongoing analysis
of historical loss experience, the composition of the loan
portfolios, delinquency levels, underlying collateral values and
cash flow values. Utilizing these procedures, management believes
that the allowance for loan losses at June 30, 1996 is sufficient
to cover anticipated losses inherent in the loan portfolio.
15
Non accrual loans at June 30, 1996 amounted to $2.8 million,
or .44% of total loans, compared to $5.3 million, or 1.00% of
total loans, at December 31, 1995. The decrease in non accrual
loans primarily resulted from the reclassification of $2.6 million
of non accrual loans to real estate owned.
The amount of interest income on non accrual loans that would
have been recorded had these loans been current in accordance with
their original terms, was $117,000 and $432,000 for the six-month
periods ended June 30, 1996 and 1995, respectively. The amount of
interest income that was recorded on these loans was $18,000 and
$105,000 for the six-month periods ended June 30, 1996 and 1995,
respectively.
Additionally, at June 30, 1996, the Company had $3.4 million
in real estate owned as compared to $1.0 million at December 31,
1995. Further, at June 30, 1996 the Company also had restructured
real estate loans amounting to $2.7 million for which interest is
being recorded in accordance with the loans' restructured terms.
The amount of the interest income lost on these restructured loans
is not material to the Company's financial statements.
The Company's allowance for loan losses at June 30, 1996 was
$4.9 million, which represented 174.08% of non accrual loans or
.77% of total loans, compared to $4.3 million at December 31,
1995, or 81.40% of non accrual loans and .82% of total loans.
Non-Interest Income
Total non-interest income in the second quarter of 1996 increased
by $48,000 compared to the second quarter of 1995, due mostly to an increase
in other income (transaction account fees), offset somewhat by a reduction
in gains on the sale of loans. Rising interest rates during the quarter
ended June 30, 1996 negatively impacted prices received on loans sold. On a
year to date basis, however, gains on sale of loans were $374,000 during the
six months ended June 30, 1996 compared to $187,000 during the prior year's
comparable period. This year's improvement is mostly attributable to the
implementation of Statement of Financial Accounting Standards ("SFAS")
No. 122, "Accounting for Mortgage Servicing Rights," as of January 1, 1996.
Other non-interest income improved to $780,000 for the six months ended
June 30, 1996 compared to $572,000 for the same period last year also due
primarily to higher transaction account service fees.
Non-Interest Expense
Total non-interest expense was $4.5 million for the quarter ended
June 30, 1996 compared to $3.7 million for the quarter ended June 30, 1995.
The increase was primarily the result of increased compensation expense
attributable to the Employee Stock Ownership Plan (the "ESOP") and the earned
portion of the 1996 Stock-Based Incentive Plan. These expenses amounted to
$222,000 and $250,000, respectively. On a year to date basis, total non-
interest expenses increased from $7.4 million for the six months ended
June 30, 1995 to $8.8 million for the current year to date. In addition to
higher ESOP expense of $453,000 and the earned portion of the 1996 Stock-Based
Incentive Plan of $250,000, sales incentive expenses and other expenses
contributed to the increase. Other non-interest expense increased from
$982,000 for the quarter ended June 30, 1995 to $1.2 million for the current
quarter and from $1.9 million for the six months ended June 30, 1995 to
$2.5 million for the six months ended June 30, 1996 due primarily to increased
costs of advertising, temporary help and printing expenses.
Income Tax Expense
Income before income taxes was $1.9 million and resulted in
income tax expense of $774,000 for an effective tax rate of 40.8%
during the current quarter, compared to a loss before income taxes
of $1.3 million resulting in a tax benefit of $528,000, for an
effective rate of (40.6%) in the comparable quarter in 1995. On a
year to date basis, taxes are being provided at a rate of 40.9%
resulting in an expense of $1.5 million compared to 1995 year to
date rate of 47.2%, resulting in an expense of $92,000. The
higher effective rate in 1995 was due to higher state taxes as a
result of losses incurred in non bank entities not receiving state
tax benefits.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending material legal
proceedings other than routine legal proceedings occurring in the
ordinary course of business. Such routine legal proceedings, in
the aggregate, are believed by management to be immaterial to the
Company's financial condition or results of operations.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(A) The Annual Meeting of Stockholders of the Corporation
was held on April 30, 1996.
(B) Directors elected at Annual Meeting:
(1) Election of Directors
Nominee Total Votes For Total Votes Withheld
David P. Conley 5,535,780 53,568
W. Robert Mill 5,538,480 50,868
(2) Continuing Directors
Edward P. Callahan
Richard J. Dennis, Sr.
David F. Holland
Charles R. Kent
Irwin W. Sizer
(C) Other matters submitted to a vote of the Stockholders of
the Corporation:
(1) Proposal to establish 1996 Stock-Based Incentive Plan
Votes for Votes Against Abstentions Broker Non Votes
3,454,155 579,375 50,313 1,505,505
(2) Proposal to authorize the Board of Directors to amend
the 1996 Stock-Based Incentive Plan
Votes for Votes Against Abstentions Broker Non Votes
3,434,653 605,468 43,722 1,505,505
17
(3) Selection of Independent Auditors
Votes for Votes Against Abstentions Broker Non Votes
5,546,708 32,977 9,664 -0-
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statements re: computation of per share earnings
27 Financial Data Schedule
(b) On April 29, 1996 a Form 8-K was filed with a copy of a First
Quarter Earnings Release.
(c) On June 20, 1996 a Form 8-K was filed with a copy of press
release announcing OTS approval of 5% stock repurchase program.
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 thereunto duly authorized.
BOSTONFED BANCORP, INC.
(Registrant)
Date: August 14, 1996 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: August 14, 1996 By: /s/ John A. Simas
__________________________________
John A. Simas
Senior Vice President,
Chief Financial Officer,
Treasurer and
Corporate Secretary
19