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: September 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) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Number of shares of common stock, par value $.01 per share,
outstanding as of September 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 September 30, 1996 and December 31, 1995 2
Consolidated Statements of Income for the Three and Nine
Months ended September 30, 1996 and 1995 3
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended September 30, 1996 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1996 and 1995 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Average Balances and Yield / Costs 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)
September 30, December 31,
1996 1995
---------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 12,842 $ 21,225
Investment securities available for sale
(amortized cost of $1,068 and $1,022 at
September 30, 1996 and December 31, 1995
respectively) 1,066 1,022
Investment securities held to maturity (fair
value of $35,316 and $16,804 at September 30, 1996
and December 31, 1995, respectively) 35,665 16,906
Mortgage-backed securities available for sale
(amortized cost of $24,603 and $23,873 at
September 30, 1996 and December 31, 1995,
respectively) 24,120 23,873
Mortgage-backed securities held to maturity (fair
value of $30,630 and $35,647 at September 30, 1996 and
December 31, 1995, respectively) 30,449 35,116
Mortgage loans held for sale 4,953 8,931
Loans, net of allowance for loan losses of $4,200
and $4,275 at September 30, 1996 and December 31, 1995,
respectively 654,238 509,496
Accrued interest receivable 4,384 3,696
Stock in FHLB of Boston, at cost 13,883 8,374
Premises and equipment 5,055 5,246
Real estate held for sale or development 874 874
Real estate owned 2,892 971
Other assets 6,464 5,022
-------- --------
Total assets $796,885 $640,752
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $417,593 $419,104
Federal Home Loan Bank advances 271,642 119,909
Securities sold under agreements to repurchase 9,973 7,000
Advance payments by borrowers for taxes
and insurance 2,267 1,531
Other Liabilities 6,572 2,507
------- -------
Total liabilities 708,047 550,051
------- -------
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 64,193 63,987
Retained earnings 32,250 31,183
Unrealized loss on investment securities available
for sale, net (485) -- --
Less unallocated ESOP shares (4,535) (4,535)
Less unearned Stock-Based Incentive Plan (2,651) -- --
-------- --------
Total stockholders' equity 88,838 90,701
-------- --------
Total liabilities and stockholders' equity $796,885 $640,752
======== ========
2
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, except per share amount)
Three Months Ended Nine Months Ended
-------------------- ------------------
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
(Unaudited)
Interest and dividend income:
Loans $ 12,159 $ 9,551 $ 32,771 $ 28,418
Mortgage-backed securities 1,070 591 3,251 1,794
Investment securities 854 482 2,073 1,428
------- ------- ------- -------
Total interest income 14,083 10,624 38,095 31,640
------- ------- ------- -------
Interest expense:
Deposit accounts 3,896 3,943 11,854 11,167
Borrowed funds 4,041 2,250 8,704 6,838
------- ------- ------- -------
Total interest expense 7,937 6,193 20,558 18,005
------- ------- ------- -------
Net interest income 6,146 4,431 17,537 13,635
Provision for loan losses 390 290 1,126 3,351
------- ------- ------- -------
Net interest income after
provision 5,756 4,141 16,411 10,284
Non-interest income:
Loan processing and servicing
fees 319 340 990 1,009
Gain (Loss) on sale of loans 137 (63) 511 124
Other 383 259 1,163 831
------- ------- ------- -------
Total non-interest income 839 536 2,664 1,964
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 2,542 1,892 7,178 5,716
Occupancy and equipment 599 556 1,854 1,645
Federal deposit insurance
premiums 246 234 724 709
SAIF Special Assessment 2,670 0 2,670 0
Real estate operations 186 77 180 185
Other 1,107 1,010 3,593 2,890
------- ------- ------- -------
Total non-interest expense 7,350 3,769 16,199 11,145
------- ------- ------- -------
Income (loss) before income taxes (755) 908 2,876 1,103
Income tax expense (benefit) (334) 388 1,150 480
------- ------- ------- -------
Net income (loss) $ (421)$ 520 $ 1,726 $ 623
======= ======= ======= =======
EARNINGS (LOSS) PER SHARE ($0.07) NA $0.28 NA
3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands)
Nine Months Ended September 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
------- ------- -------- --------- -------- --------- --------
Net loss - - - - (421) - - - - - - (421)
Dividends paid: $0.05 per share - - - - (329) - - - - - - (329)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - 329 329
Change in net unrealized loss on
investments available for sale - - - - - - 182 - - - - 182
Appreciation in fair value of
allocated ESOP shares and
1996 Stock-Based Incentive Plan - - 130 - - - - - - - - 130
------- ------- -------- --------- -------- --------- --------
Balance at September 30, 1996 $ 66 64,193 32,250 (485) (4,535) (2,651) 88,838
------- ------- -------- --------- -------- --------- --------
4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
1996 1995
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 1,726 $ 623
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation, amortization and
accretion, net 595 925
Appreciation in fair value of ESOP shares 160 -
Provision for loan losses 1,126 3,351
Loans originated for sale (124,583) (49,748)
Proceeds from sale of loans 129,072 46,751
Write-downs of real estate owned 72 73
Gain on sale of real estate
acquired through foreclosure (52) (15)
Gain on sale of loans (511) (124)
Increase in accrued interest receivable (688) (285)
Increase in other assets (1,442) (1,038)
Earned portion of Stock-Based Incentive Plan 625 -
Increase(decrease) in other liabilities 4,065 (290)
------- -------
Net cash provided by
operating activities 10,165 223
------- -------
Cash flows from investing activities:
Proceeds from sale of mortgage backed
securities available for sale 11,282 -
Proceeds from sale of investment
securities available for sale - 3,059
Proceeds from maturities of
investment securities held to maturity 5,742 1,750
Purchase of investment securities
available for sale (46) (4,098)
Purchase of mortgage-backed
securities available for sale (14,157) -
Purchase of investment securities
held to maturity (24,529) (4,036)
Principal payments on investment
securities available for sale - 31
Principal payments on mortgage-
backed securities available for sale 2,205 -
Principal payments on investment
securities held to maturity 59 189
Principal payments on mortgage-
backed securities held to maturity 4,616 3,315
Increase in loans, net (149,646) (4,055)
Purchase of FHLB stock (5,509) (743)
Purchases of premises and equipment (472) (958)
Additional investment in real
estate held for sale or development - 47
Proceeds from sale of real estate
owned 1,926 515
Additional investments in real
estate owned (61) (47)
------- -------
Net cash used in investing
activities (168,590) (5,031)
------- -------
-Continued on next page-
5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
1996 1995
------- -------
(Unaudited)
Cash flows from financing activities:
Increase(decrease) in deposit accounts (1,511) 6,633
Net increase in repurchase agreements 2,973 -
Net increase in Federal Home Loan
Bank advances 151,733 1,019
Purchase of stock for Stock-Based
Incentive Plan (3,230) -
Dividends paid (659) -
Increase in advance payments by
borrowers for taxes and insurance 736 46
------- -------
Net cash provided by
financing activities 150,042 7,698
------- -------
Net increase (decrease)
in cash and cash equivalents (8,383) 2,890
Cash and cash equivalents at January 1 21,225 8,308
------- -------
Cash and cash equivalents at Sept. 30 $ 12,842 $ 11,198
======= =======
Supplemental disclosure of cash flow
information:
Payments for:
Interest $ 19,825 $ 18,099
======= =======
Taxes $ 1,714 $ 1,297
======= =======
Supplemental schedule of non-cash
investing activities:
Transfers of mortgage
loans to real estate owned $ 3,806 $ 961
======= =======
6
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
September 30, 1996 and December 31, 1995 and for the three- and
nine-month periods ended September 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 nine-month periods
ended September 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 $362,000 and $883,000
before taxes for the three- and nine- month periods ended September 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.
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (SFAS No. 125"). SFAS
No. 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial components approach that focuses
on control. Under this approach, an entity, subsequent to a transfer of
financial assets, must recognize the financial and servicing assets it
controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. Standards for distinguishing transfers of financial assets
that are sales from those that are secured borrowings are provided in SFAS
No. 125. A transfer not meeting the criteria for a sale must be accounted
for as a secured borrowing with pledge of collateral.
SFAS No. 125 requires that liabilities and derivatives incurred or obtained
by transferors as part of a transfer of financial assets be initially measured
at fair value, if practicable. It additionally requires that servicing assets
and other retained interests in transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Servicing assets and liabilities must be subsequently measured by
amortization in proportion to and over the period of estimated net
servicing income or loss and assessed for asset impairment, or increased
obligation, based on their fair value.
This Statement supersedes the FASB's Statement of Financial Accounting
Standards No. 76, "Extinguishment of Debt" and Statement of Financial
Accounting Standards No. 77, "Reporting by Transferors for Transfers
of Receivables with Recourse." SFAS No. 125 amends Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities, ("SFAS No. 115") to
prohibit the classification of a debt security as held to maturity if it
can be prepaid or otherwise settled in such a way that the holder of the
security would not recover substantially all of its recorded investment.
It further requires that loans and other assets that can be prepaid or
otherwise settled in such a way that the holder would not recover
substantially all of its recorded investment shall be subsequently
measured like debt securities classified as available for sale or trading
under SFAS No. 115, as amended by SFAS No. 125. SFAS No. 125
also amends and extends to all servicing assets and liabilities the accounting
standards for mortgage servicing rights now in Statement of Financial
Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities," and supersedes Statement of Financial Accounting Standards
No. 122, " Accounting for Mortgage Servicing Rights."
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. The Company is currently reviewing the impact of the
implementation of SFAS No. 125 on its consolidated financial statements.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At September 30, 1996, the Company had commitments of $13.8
million to originate mortgage loans and $6.6 million to purchase
loans from correspondent lenders. Of these $20.4 million
commitments, $14.3 million were adjustable rate mortgage loans at
rates ranging from 5.625% to 10.25% and $6.1 million were fixed
rate mortgage loans with interest rates ranging from 6.875% to
9.50%.
At September 30, 1996, the Company was servicing first mortgage
loans of approximately $537.5 million, which are either partially
or wholly-owned by others.
7
NOTE 3: LEGISLATIVE MATTERS
Congress passed legislation, which the President signed
on September 30,1996, that will, among other things, mitigate the effect of
the Bank Insurance Fund ("BIF")/Savings Association Insurance Fund
("SAIF") premium disparity. The legislation provided for a special
assessment imposed on the amount of deposits held by SAIF-
member institutions, including the Bank, to recapitalize the SAIF.
The amount of the special assessment, which was accrued at September
30, 1996 and will be paid to the FDIC on November 27, 1996 was
calculated at 65.7 basis points of insured deposits as of March 31, 1995
and resulted in a charge to earnings totaling $2.7 million or approximately
$1.6 million after taxes. As a result of this non-recurring special assessment
to recapitalize the SAIF, it is anticipated that future deposit insurance
premiums will be reduced. Effective January 1, 1997, The FDIC has
proposed that SAIF members be assessed the same risk-based assessment
schedule as BIF members, a range of 0 to 27 basis points of assessable
deposits. However, the FDIC estimates that the Financing
Corporation ("FICO") assessments of 6.4 and 1.3 basis points will be
added to the regular assessment for the SAIF insured and BIF insured
assessable bases, respectively, until December 31, 1999. Thereafter,
2.4 basis points will be added to each regular assessment for all insured
depositories, achieving full pro rata FICO sharing. The legislation also
provides for pro rata FICO sharing by January 1, 1999, if BIF and SAIF
are merged by that date.
Legislation regarding bad debt recapture was also enacted into law on
August 20, 1996. The legislation requires recapture of reserves
accumulated after 1987 and suspends recapture of reserves
established before 1988 in most cases. The Company had no bad debt
reserves accumulated after 1987 requiring recapture as it had used the
specific charge-off method in its tax returns. Recapture of pre-1988
bad debt reserves will still be required under IRS Code Section 593(e) in
cases involving certain excess distributions of earnings and profits by the
Bank to its shareholder, the Company, regardless of whether the Bank
converts to a commercial bank or remains a thrift institution.
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 $375,000 expense for the earned portion
of the Plan during the quarter and $625,000 for the nine months ended
September 30, 1996.
NOTE 5: PROPOSED ACQUISITION OF BROADWAY CAPITAL CORP.
On September 23, 1996, the Company announced the signing of a
definitive agreement to acquire Broadway Capital Corporation and
its subsidiary, Broadway National Bank. Under the terms of the agreement,
holders of Broadway common stock will receive $369.31 in cash for each
of their shares, which equates to an aggregate purchase price of
approximately $22.0 million. It is anticipated that the transaction
will close in the first quarter of 1997. Broadway Capital Corporation
had assets of approximately $121 million and equity of approximately
$15.3 million on June 30, 1996.
8
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the quarter ended September 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) $ 52,792 $ 854 6.47% $ 28,320 $ 482 6.81%
Loan, net and mortgage loans held for sale (2) 646,869 12,159 7.52% 502,507 9,551 7.60%
Mortgage-backed securities (3) 63,195 1,070 6.77% 37,103 591 6.37%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 762,856 14,083 7.38% 567,930 10,624 7.48%
--------- --------- ---------- ---------
Non-interest-earning assets 28,946 24,777
---------- ---------
Total assets $ 791,802 $ 592,707
========== =========
Liabilities and Stockholders' Equity
Interest-bearing Liabilities:
Money market deposit accounts $ 45,919 292 2.54% $ 48,270 295 2.44%
Savings accounts 90,893 559 2.46% 95,934 591 2.46%
NOW accounts 67,098 210 1.25% 66,833 228 1.36%
Certificate accounts 199,246 2,835 5.69% 196,322 2,829 5.76%
---------- --------- --------- --------- ---------- ---------
Total 403,156 3,896 3.87% 407,359 3,943 3.87%
Borrowed Funds (4) 276,603 4,041 5.84% 138,519 2,250 6.50%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 679,759 7,937 4.67% 545,878 6,193 4.54%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 20,819 16,443
---------- ---------
Total liabilities 700,578 562,321
---------- ---------
Stockholders' equity 91,224 30,386
---------- ---------
Total liabilities and
stockholders' equity $ 791,802 $ 592,707
========== =========
Net interest rate spread (5) $ 6,146 2.71% $ 4,431 2.94%
========= ========= ========== =========
Net interest margin (6) 3.22% 3.12%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 112.22% 104.04%
========= =========
<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 5.83% and 6.46% for the three months ended September 30, 1996 and
September 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.
9
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the nine months ended September 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) $ 43,899 $ 2,073 6.29% $ 28,273 $ 1,428 6.73%
Loan, net and mortgage loans held for sale (2) 581,295 32,771 7.51% 501,210 28,418 7.56%
Mortgage-backed securities (3) 63,995 3,251 6.77% 38,246 1,794 6.25%
---------- --------- ------ -------- --------- ------
Total interest-earning assets 689,189 38,095 7.37% 567,729 31,640 7.43%
--------- ------ --------- ------
Non-interest-earning assets 27,598 23,314
---------- --------
Total assets $716,787 $591,043
========== ========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 46,926 1,004 2.85% $ 50,194 1,054 2.80%
Savings accounts 91,416 1,703 2.48% 101,654 1,895 2.48%
NOW accounts 65,625 668 1.36% 64,720 688 1.42%
Certificate accounts 200,316 8,479 5.64% 187,068 7,530 5.37%
---------- -------- ------- ------- ---------- ------
Total 404,283 11,854 3.91% 403,636 11,167 3.69%
Borrowed Funds (4) 199,984 8,704 5.80% 142,278 6,838 6.41%
---------- -------- ------- ------- ---------- ------
Total interest-bearing liabilities 604,267 20,558 4.54% 545,914 18,005 4.40%
-------- ------- ---------- ------
Non-interest-bearing liabilities 20,453 14,802
---------- -------
Total liabilities 624,720 560,716
---------- -------
Stockholders' equity 92,067 30,327
---------- -------
Total liabilities and
stockholders' equity $716,787 $591,043
========== ========
Net interest rate spread (5) $ 17,537 2.83% $ 13,635 3.03%
======== ======== ======== ========
Net interest margin (6) 3.39% 3.20%
======== ========
Ratio of interest-earning assets to
interest-bearing liabilities 114.05% 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 5.76% and 6.39% for the nine months ended September 30, 1996 and
September 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.
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") and the Federal Deposit Insurance Corporation (FDIC").
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, and 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
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 September 30, 1996 were $796.9 million, compared
to $640.8 million at December 31, 1995, an increase of $156.1
million or 24.4%. Asset growth was primarily attributable to increased
portfolio lending. Increases in investment securities held to
maturity also contributed to asset growth. These increases were funded
primarily with Federal Home Loan Bank of Boston ("FHLB of Boston")
advances. During the nine-months ended September 30, 1996, investment
securities held to maturity increased by $18.8 million to a balance of $35.7
million due to the purchase of $14 million of Collateralized Mortgage
Obligations ("CMOs") and the purchase of various U.S. Government Agency
securities. Loans, net of allowance for loan losses increased by $144.7
million to a balance of $654.2 million as the increase in interest rates in
early 1996, created a greater demand for adjustable rate mortgages which the
Company originates primarily for its portfolio. These increases were funded
primarily by FHLB advances, which total $271.6 million at September 30,
1996 compared to $119.9 million at December 31, 1995, an increase of
$151.7 million. Deposit accounts declined by $1.5 million to a balance of
$417.6 at September 30, 1996, compared to $419.1 at December 31, 1995.
A $3.0 million increase in repurchase agreements and a
reduction of $8.4 million in cash and cash equivalents were also used to fund
loan growth. Stock in the FHLB of Boston, a required investment, the amount
of which is based on the level of advances and other criteria, increased by $5.5
million to a balance of $13.9 million at September 30, 1996 from $8.4 million at
December 31, 1995. Real estate owned ("REO") increased to $2.9 million at
September 30, 1996 from $1.0 million at December 31, 1995 due primarily
to the classification of four borrowers' non-performing commercial and
multi-family loans as substantively repossessed (real estate owned)
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 which 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 September 30, 1996, the Company's one year gap was essentially
matched, 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 and is based upon data submitted on the
Bank only quarterly Thrift Financial Reports, the results of which
may vary from the Company's consolidated 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, deposit decay rates and the amount and nature
of investments held in the Company. For purposes of the internally
calculated 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 calculated by the OTS using June 30, 1996
12
data resulted in a decline of $18.2 million, or (19.7)%, 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 the 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 September 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
September 30, 1996, cash, short-term investments and investment
securities available for sale totaled $13.9 million or 1.7% 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 September 30,
1996, the Bank had $271.6 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 September 30, 1996, the Company had commitments to
originate loans and unused outstanding lines of credit totaling
$58.0 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 September 30, 1996, totaled $134.6 million.
At September 30, 1996, the consolidated stockholders' equity to
total assets ratio was 11.1%. As of September 30, 1996, the Bank
exceeded all of its regulatory capital requirements with tangible,
core and risk-based capital ratios of 8.6%, 8.6% and 16.3%,
respectively. The respective minimum regulatory requirements were
1.5%, 3.0% and 8.0%. Additionally, retained earnings at September 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 - "Legislative Matters" for further
discussion on the tax bad debt reserve.
13
E. COMPARISON OF THREE- AND NINE-MONTHS ENDED SEPTEMBER 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 incurred a loss of $421,000 for the
quarter ended September 30, 1996, or $.07 per share, after giving effect
to the one time $2.7 million (approximately $1.6 million after tax) special
assessment for the recapitalization of the SAIF. See Note 3 - "Legislative
Matters" for further discussion. Excluding such non recurring
special assessment, net income for the third quarter of 1996 would have
been $1.1 million or $.18 per share compared to $520,000 (with earnings per
share not applicable) for the quarter ended September 30, 1995. For the
nine-months ended September 30, 1996, net income was $1.7 million, or
$.28 per share, after giving the effect of the SAIF recapitalization
assessment, compared to $623,000, 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 September 30, 1996 increased by $3.5 million, or 32.7%,
to $14.1 million, compared to the quarter ended September 30, 1995.
The increase in interest income is primarily attributable to a
$194.9 million increase in average interest-earning assets, offset
somewhat by a 10 basis point decrease in yield. For the nine months
ended September 30, 1996, total interest income was $38.1 million compared to
$31.6 million for the same period in 1995. The major contributor
to this increase was higher average balances of interest-earning assets,
amounting to $689.2 million, during the nine months ended September 30, 1996,
compared to average balances of $567.7 in the first nine months of 1995.
The average yield on interest-earning assets decreased to 7.37% for the nine
months ended September 30, 1996 from 7.43% for the nine months ended
September 30, 1995.
Interest income on loans, net, for the quarter ended September 30,
1996 increased by $2.6 million, or 27.2%, to $12.2 million
compared to $9.6 million for the same quarter in 1995. For the nine-months
ended September 30, 1996, interest income on loans, net, was $32.8 million,
compared to same period last year of $28.4 million, an increase of $4.4
million or 15.5%. The increase in income from loans, net, for the quarter
ended September 30, 1996 was primarily attributable to an increase of
$144.4 million in the average loan balance, 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 five basis point decline from 7.56%
for the nine-months ended September 30, 1995 to 7.51% for this year to
date. Interest on mortgage-backed securities for the quarter
ended September 30, 1996 increased by $479,000 to $1.1 million,
compared to $591,000 for the same quarter in 1995. On a year to
date basis, the increase in interest income on mortgage-backed securities
was $1.5 million, or 83.3%, from last year's to date total of $1.8 million.
This increase in income was due to the combined effects of an increase
in the average balance of $25.7 million for the nine-month period and an
increase in average yield of 52 basis points. Interest income from
investment securities was $854,000 during the third quarter of 1996,
compared to $482,000 for the comparable quarter in 1995. For the
nine-months ended September 30, 1996, interest income on investment
securities was $2.1 million compared to $1.4 million during the nine-months
ended September 30, 1995. The average yield on investment securities
declined by 44 basis points, but the average balance increased by $15.6
million to an average of $43.9 million during the nine-months ending
September 30, 1996.
Interest Expense
Total interest expense on interest-bearing liabilities for
the quarter ended September 30, 1996 increased by $1.7 million
or 27.4%, to $7.9 million compared to the quarter ended
September 30, 1995. The increase in interest expense for the
quarter ended September 30, 1996 was due primarily to an increase
of $133.9 million in the average balance on interest-bearing liabilities
which averaged $679.8 million during the quarter, compared to an
average balance of $545.9 million during the quarter ended September 30,
1995. A 13 basis point increase in the average cost of interest-bearing
liabilities also contributed to the increase in interest expense during the
third quarter of 1996, compared to the same quarter last year. The average
cost of interest-bearing liabilities increased to 4.67%, during the quarter
ended September 30, 1996, compared to 4.54% for last year's comparable
period. For the nine-months ended September 30,1996, interest expense
on interest-bearing liabilities totaled $20.6 million, compared to the
nine-months ended September 30, 1995 total of $18.0 million, a 14.4%
increase. The increase was caused by the combined effects of a 14 basis
points increase in the cost of funds and an increase of $58.4 million in
average balances of interest-bearing liabilities, which were $604.3 million
during the nine months ended September 30, 1996.
14
Interest expense on deposit accounts was $3.9 million for both
quarters ending September 30, 1996 and 1995. The average cost of funds
was also the same for both quarters, averaging 3.87%. The average balance
of deposit accounts declined slightly from $407.4 million for the quarter
ending September 30, 1995 to an average balance of $403.2 million for
the quarter ending September 30, 1996. Interest expense on borrowed funds
increased from $2.3 million for the quarter ended September 30, 1995 to
$4.0 million for the quarter ended September 30, 1996. While the average cost
of borrowed money declined from 6.50% during the quarter ended September
30, 1995 to an average of 5.84% during the third quarter of 1996, the
average balances increased from $138.5 million during the third
quarter of 1995 to an average balance of $276.6 million during the
third quarter of 1996. On a year to date basis, average deposit balances
increased from $403.6 million during the nine-months ended
September 30, 1995 to an average balance of $404.3 million during the
nine-months ended September 30, 1996. The average cost of funds on
deposits increased 22 basis points to 3.91% for the nine-months ended
September 30, 1996 compared to 3.69% for the nine-months ended
September 30, 1995.
Although net interest income improved, net interest rate
spread declined during the third quarter and for the nine-
months ended September 30, 1996 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. Additionally,
the majority of these mortgages were funded by wholesale funding
sources, primarily FHLB advances, which generally carry higher
rates than savings deposits. The net interest rate spread declined
from 2.94% for the quarter ended September 30, 1995 to 2.71% for
the quarter ended September 30, 1996 and from 3.03% for the
nine-months ended September 30, 1995 to 2.83% for the nine-months
ended September 30, 1996. The net interest margin, however,
increased from 3.12% for the quarter ended September 30, 1995
to 3.22% for the quarter ending September 30, 1996. The net interest
margin also improved from 3.20% for the nine-months ended
September 30, 1995 to 3.39% for the 1996 comparable period.
The net interest margin improvements were 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 $390,000
for the quarter ended September 30, 1996, compared to a provision of
$290,000 for the comparable quarter in 1995. On a year to
date basis, the provision was $1.1 million compared to last year's to
date total of $3.4 million The increased 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 activity has resulted in a
decrease in the allowance for loan losses from $4.3 million at
December 31, 1995 to $4.2 million at September 30, 1996. Management
has determined that this decrease in the allowance for loan loss was
appropriate in part due to the decrease in non-performing loans.
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 September 30, 1996, the Company classified $6.5 million of assets
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 September 30, 1996 is sufficient
to cover anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at September 30, 1996 was
$4.2 million, which represented 456.3% of non performing loans or .63%
of total loans, compared to $4.3 million at December 31, 1995, or
81.4% of non performing loans and .82% of total loans.
15
Non performing loans at September 30, 1996 amounted to $920,000,
or .14% of total loans, compared to $5.3 million, or 1.00% of
total loans, at December 31, 1995. The decrease in non performing
loans primarily resulted from the reclassification of $3.8 million
of non performing loans to real estate owned.
The amount of interest income on non performing loans that would
have been recorded had these loans been current in accordance with
their original terms, was $110,000 and $382,000 for the nine-month
periods ended September 30, 1996 and 1995, respectively. The amount
of interest income that was recorded on these loans was $41,000 and
$278,000 for the nine-month periods ended September 30, 1996 and 1995,
respectively.
At September 30, 1996, loans characterized as
impaired, (which include all non-performing loans and some sub-standard
assets), 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 $2.1 million. All of the
impaired loans have been measured using the fair value of the
collateral method. During the nine-months ended September 30, 1996,
the average recorded value of impaired loans was $5.7 million,
$239,000 of interest income was recognized and $387,000 of
interest income would have been recognized under the loans'
original terms.
At September 30, 1996, the Company had $2.9 million
in real estate owned compared to $1.0 million at December 31,
1995. Further, at September 30, 1996 the Company also had restructured
real estate loans amounting to $475,000 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.
Non-Interest Income
Total non-interest income in the third quarter of 1996 increased by
$303,000, or 57%, to $839,000 from $536,000 for the three months
ended September 30, 1995 due mostly to $137,000 in gains on the sale
of loans during the third quarter of 1996, compared to a loss of $63,000
during comparable quarter in 1995. Additionally, other income increased
by $124,000 primarily due to higher transaction account service fees.
Total non-interest income was $2.7 million for the nine months ended
September 30, 1996, compared to $2.0 million for the same period last
year. The $511,000 gain on sale of loans during the current nine month
period exceeded the $124,000 for the same period last year mostly due
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 $1.2 million
for the nine months ended September 30, 1996 compared to $831,000
for the same period last year due to higher transaction account service fees.
Non-Interest Expense
Total non-interest expense was $7.4 million for the quarter ended
September 30, 1996 compared to $3.8 million for the same quarter
in 1995. The primary cause of this increase was the accrual of $2.7
million for the special one-time assessment to recapitalize the SAIF
insurance fund as mandated by Congress. See Note 3 - "Legislative
Matters" for additional information. Compensation and benefits
also contributed to the increase in total non-interest expense in the
current quarter due in part to the cost of the ESOP and amortization
of the 1996 Stock-Based Incentive Plan, which totaled $572,000 combined,
and were not incurred during the quarter ended September 30, 1995.
Real estate operations also increased to $186,000 during the current
quarter from $77,000 during the comparable quarter last year as
additional losses were incurred for the disposition of REO properties
during the current quarter. For the nine months ended September 30,
1996 total non-interest expense increased to $16.2 million, compared
to $11.1 million for the same period last year. The largest component
of this increase was the $2.7 million SAIF recapitalization assessment.
Additionally, compensation expense increased by $1.5 million for the
nine-months ended September 30, 1996 compared to the same period
last year. The cost of the ESOP and amortization of the 1996 Stock-Based
Incentive Plan, which combined, totaled $1.3 million comprise the majority
of the increase in compensation and benefits. Increased sales incentives
due to record lending volumes during the nine-months ended September 30,
1996 account for most of the balance of the increase in compensation and
benefits. Other non-interest expense also contributed to the increase in
total non-interest expense. Other non-interest expense increased to $3.6
million for the nine months ended September 30, 1996 from $2.9 million
for the same period last year due to increased costs of advertising, temporary
help, stationery (due to high lending volumes) and other operating expenses.
Income Tax Expense
The Company's loss before income taxes was $755,000 and resulted
in the recording of an income tax benefit of $334,000 for an effective tax
benefit rate of 44.2% during the current quarter, compared to income
before income taxes of $908,000 resulting in a tax provision of
$388,000 for an effective rate of 42.7% for the comparable quarter
in 1995. On a year to date basis, taxes were being provided at a rate
of 40.0%, resulting in an expense of $1.2 million compared to 1995
year to date rate of 43.5%, resulting in an expense of $480,000. 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
None
17
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Agreement and Plan of Merger
11 Statements re: computation of per share earnings
27 Financial Data Schedule
(b) On September 25, 1996, a Form 8-K was filed with a copy
of the press release announcing the signing of a definitive
agreement to acquire Broadway Capital Corporation and its
subsidiary, Broadway National Bank.
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: November 14, 1996 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: November 14, 1996 By: /s/ John A. Simas
__________________________________
John A. Simas
Senior Vice President,
Chief Financial Officer,
Treasurer and
Corporate Secretary
19