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: March 31, 1997
__________________________
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 March 31, 1997: 5,962,502.
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as
of March 31, 1997 and December 31, 1996 2
Consolidated Statements of Income for the Three and
Nine Months ended March 31, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended March 31, 1997 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1997 and 1996 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Average Balances and Yield / Costs 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 15
PART II _ OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
1
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(Dollars in Thousands, Except Per Share Data)
March 31, December 31,
1997 1996
---------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 21,681 $ 18,278
Investment securities available for sale
(amortized cost of $35,468 and $1,085 at
March 31, 1997 and December 31, 1996
respectively) 35,224 1,085
Investment securities held to maturity (fair
value of $22,418 and $19,045 at March 31, 1997
and December 31, 1996, respectively) 22,716 19,170
Mortgage-backed securities available for sale
(amortized cost of $23,156 and $23,915 at
March 31, 1997 and December 31, 1996,
respectively) 22,940 23,593
Mortgage-backed securities held to maturity (fair
value of $41,746 and $43,033 at March 31, 1997 and
December 31, 1996, respectively) 41,934 43,019
Mortgage loans held for sale 9,568 3,970
Loans, net of allowance for loan losses of $5,409
and $4,400 at March 31, 1997 and December 31, 1996,
respectively 746,372 676,670
Accrued interest receivable 5,218 4,067
Stock in FHLB of Boston and Federal Reserve Bank 16,364 16,295
Premises and equipment 6,830 4,979
Real estate held for sale or development 0 874
Real estate owned 1,840 2,668
Other assets 10,320 5,899
-------- --------
Total assets $941,007 $820,567
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $544,832 $428,818
Federal Home Loan Bank advances 282,500 296,500
Securities sold under agreements to repurchase 21,861 3,500
Advance payments by borrowers for taxes
and insurance 2,721 2,100
Other Liabilities 5,338 3,294
------- -------
Total liabilities 857,252 734,212
------- -------
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 66 66
Additional paid-in capital 64,668 64,461
Retained earnings 34,732 33,131
Unrealized loss on investment securities available
for sale, net (359) (322)
Less Treasury Stock, at cost (9,461) (4,739)
Less unallocated ESOP shares (3,929) (3,929)
Less unearned Stock-Based Incentive Plan (1,962) (2,313)
-------- --------
Total stockholders' equity 83,755 86,355
-------- --------
Total liabilities and stockholders' equity $941,007 $820,567
======== ========
2
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, except per share amount)
Three Months Ended
------------------
3/31/97 3/31/96
------- -------
(Unaudited)
Interest and dividend income:
Loans $ 13,786 $ 9,903
Mortgage-backed securities 1,131 1,033
Investment securities 1,080 449
------- -------
Total interest and
dividend income 15,997 11,385
------- -------
Interest expense:
Deposit accounts 4,172 4,003
Borrowed funds 4,685 1,864
------- -------
Total interest expense 8,857 5,867
------- -------
Net interest and divided income 7,140 5,518
Provision for loan losses 425 438
------- -------
Net interest and dividend
income after provision 6,715 5,080
Non-interest income:
Loan processing and servicing
fees 299 341
Gain on sale of loans 130 254
Other 566 374
------- -------
Total non-interest income 995 969
------- -------
Non-interest expense:
Compensation and benefits 3,240 2,195
Occupancy and equipment 696 620
Federal deposit insurance
premiums 71 239
Real estate operations (891) 24
Other 1,349 1,238
------- -------
Total non-interest expense 4,465 4,316
------- -------
Income before income taxes 3,245 1,733
Income tax expense 1,331 710
------- -------
Net income $ 1,914 $ 1,023
======= =======
EARNINGS PER SHARE $0.33 $0.17
WEIGHTED AVERAGE SHARES
OUTSTANDING 5,737,482 6,136,188
3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands)
Three Months Ended March 31, 1997
(Unaudited)
Net
unrealized Unearned
(loss) on Stock-
Additional investments Unallocated Based Total
Common paid-in Retained Treasury available ESOP Incentive stockholders'
stock capital earnings Stock for sale shares Plan equity
------ -------- --------- -------- ---------- ----------- ---------- ------------
Balance at December 31, 1996 $ 66 64,461 33,131 (4,739) (322) (3,929) (2,313) 86,355
Net income - - - - 1,914 - - - - - - - - 1,914
Cash dividends declared and
paid ($0.05 per share) - - - - (313) - - - - - - - - (313)
Common Stock repurchased
(297,815 shares at an average
price of $15.86 per share) - - - - - - (4,722) - - - - - - (4,722)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 351 351
Change in net unrealized loss on
investments available for sale - - - - - - - - (37) - - - - (37)
Appreciation in fair value of
SIP shares charged to expense - - 110 - - - - - - - - - - 110
Appreciation in fair value of
committed to be released ESOP
shares charged to expense - - 97 - - - - - - - - - - 97
------- ------- -------- --------- --------- -------- --------- --------
Balance at March 31, 1997 $ 66 64,668 34,732 (9,461) (359) (3,929) (1,962) 83,755
------- ------- -------- --------- --------- -------- --------- --------
4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Three Months Ended
March 31,
1997 1996
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 1,914 $ 1,023
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation, amortization and
accretion, net 261 261
Earned SIP shares 351 -
Appreciation in fair value of ESOP shares 97 43
Appreciation in fair value of SIP shares 110 -
Provision for loan losses 425 438
Loans originated for sale (24,185) (45,170)
Proceeds from sale of loans 18,717 45,963
Provision for valuation allowance
for real estate owned 57 -
Gain on sale of real estate held
for development (898) -
Gain on sale of real estate
acquired through foreclosure (154) (28)
Gain on sale of loans (130) (254)
Increase in accrued interest receivable (295) (17)
Decrease (increase) in prepaid expenses
and other assets, net 1,831 (343)
Increase in accrued expenses and
other liabilities, net 5 73
------- -------
Net cash provided by (used in)
operating activities (1,894) 1,989
------- -------
Cash flows from investing activities:
Net cash of acquired institution 11,908 -
Proceeds from maturities of investment
securities held to maturity 3,100 2,346
Proceeds from maturities of investment
securities available for sale 1,000 -
Purchase of investment securities
available for sale (16) (15)
Purchase of mortgage-backed
securities available for sale - (14,157)
Purchase of investment securities
held to maturity (2,000) (20,584)
Principal payments on mortgage-backed
securities available for sale - 813
Principal payments on investment
securities held to maturity - 59
Principal payments on mortgage-
backed securities held to maturity 1,839 1,605
Increase in loans, net (4,132) (20,267)
Purchases of Premises and equipment (117) (146)
Proceeds from sale of real estate owned 1,025 83
Additional investment in real estate owned (2) (8)
Proceeds from sale of real estate held for
development 2,102 -
------- -------
Net cash provided by (used in)
investing activities 14,707 (50,271)
------- --------
-Continued on next page-
5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Three Months Ended
March 31,
1997 1996
------- -------
(Unaudited)
Cash flows from financing activities:
Increase (decrease) in deposit accounts (9,008) 11,612
Proceeds from securities sold under
agreement to repurchase 18,361 -
Repayments of Federal Home Loan
Bank advances (59,000) (65,236)
Proceeds from Federal Home Loan
Bank advances 45,000 89,490
Cash dividends paid (313) -
Common stock repurchased (4,722) -
Increase in advance payments by
borrowers for taxes and insurance 272 198
------- -------
Net cash provided by (used in)
financing activities (9,410) 36,064
------- -------
Net increase (decrease)
in cash and cash equivalents 3,403 (12,218)
Cash and cash equivalents at beginning of quarter 18,278 21,225
------- -------
Cash and cash equivalents at end of quarter $ 21,681 $ 9,007
======= =======
Supplemental disclosure of cash flow
information:
Payments (refunds received) during
the quarter for:
Interest $ 8,787 $ 5,738
======= =======
Taxes $ 478 $ 197
======= =======
Supplemental schedule of non-cash
investing activities:
Transfers of mortgage
loans to real estate owned $ 98 $ 1,857
======= =======
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 ("BFS") and BF Funding Corporation as of
March 31, 1997 and December 31, 1996 and for the three-month periods ended
March 31, 1997 and 1996 and the accounts of its wholly-owned subsidiary,
Broadway Capital Corporation, the holding company of Broadway National Bank
(hereafter, collectively "BNB") effective at close of business February 7, 1997
through March 31, 1997.
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-month periods
ended March 31, 1997 and 1996 are not necessarily indicative
of the results that may be expected for the entire fiscal year.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125
establishes, among other things, new criteria for determining whether a transfer
of financial assets in exchange for cash or other consideration should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
SFAS 125 also establishes new accounting requirements for pledged collateral.
SFAS 125 is effective for most transactions occurring after December 31, 1996
and must be applied prospectively. However, SFAS 127, "Deferral of the
Effective Date of Certain Provisions of SFAS 125", requires the deferral of
implementation as it relates to repurchase agreements, dollar-rolls, securities
lending and similar transactions until the years beginning after December 31,
1997. The Company has determined that the adoption of SFAS 125 will not have a
material impact on its consolidated financial statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). The Statement is
effective for periods ending after December 15, 1997, and will require
restatement of all prior-period earnings per share ("EPS") data presented. The
Statement establishes standards for computing and presenting EPS, and requires
dual presentation of basic and diluted EPS on the face of the income statement.
Basic EPS is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock. Based on its review of the Statement, management believes the
adoption of SFAS 128 will have no material effect on diluted earnings per share
of the Company.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At March 31, 1997, the Company had commitments of $38.4 million to
originate mortgage loans and $3.9 million to purchase loans from
correspondent lenders. Of these $42.3 million commitments,
$26.3 million were adjustable rate mortgage loans at rates ranging from
6.375% to 9.00% and $16.0 million were fixed rate mortgage loans with interest
rates ranging from 6.75% to 9.125%.
At March 31, 1997, the Company was servicing first mortgage
loans of approximately $544.1 million, which are either partially
or wholly-owned by others.
7
NOTE 3: LEGISLATIVE MATTERS
The proposed legislation regarding elimination of the federal thrift
charter and related issues remains pending before Congress. The Bank is unable
to predict whether such legislation would be enacted, the extent to which the
legislation would restrict or disrupt its operations or whether the BIF and SAIF
funds will eventually merge. See Form 10-K for the fiscal year ended December
31, 1996, for a discussion of the proposed legislation.
NOTE 4: ACQUISITIONS (Unaudited)
On February 7, 1997 the Company acquired BNB, headquartered in Chelsea,
Massachusetts. The purchase price was $22 million and was accounted for using
the purchase method of accounting. The results of operations include the effect
of the purchase for the 52 day period beginning February 8, 1997. In connection
with the acquisition, the fair value of assets acquired and liabilities assumed
were as follows:
February 7, 1997
----------------
(in thousands)
Assets acquired:
Cash and cash equivalents $ 5,758
Fed Funds 28,150
Investments available for sale 35,352
Investment securities 4,646
Loans, net 66,093
Premises and equipment 1,972
Other assets 4,192
---------
Total assets acquired 146,163
Liabilities assumed:
Deposits 125,022
Borrowed funds -
Other Liabilities 2,058
--------
Total liabilities assumed 127,080
--------
Assets in excess of liabilities $ 19,083
Cash paid to Broadway shareholders 22,000
--------
Goodwill $ 2,917
The following condensed consolidated pro-forma results of the Company were
prepared as if the acquisition had taken place on January 1 of the respective
year. The pro-forma results are not necessarily indicative of the actual
results of operations had the Company's acquisition of BNB actually
occurred on January 1 of the respective year.
Year to date
March 31,
1997 1996
______________________
(In thousands except
per share amounts)
Total interest and dividend income and total
non-interest income $ 17,933 $ 14,607
Net income $ 2,065 $ 1,416
Net income per share $ 0.36 $ 0.24
8
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the quarter ended March 31: 1997 1996
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 72,430 $ 1,080 5.96% $ 27,865 $ 449 6.45%
Loan, net and mortgage loans held for sale (2) 722,983 13,786 7.63% 523,320 9,903 7.57%
Mortgage-backed securities (3) 65,883 1,131 6.87% 64,196 1,033 6.44%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 861,296 15,997 7.43% 615,381 11,385 7.40%
--------- --------- ---------- ---------
Non-interest-earning assets 38,224 25,522
---------- ---------
Total assets $ 899,520 $ 640,903
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 57,306 421 2.94% $ 47,744 358 3.00%
Savings accounts 107,326 657 2.45% 91,618 570 2.49%
NOW accounts 85,425 234 1.10% 63,505 241 1.52%
Certificate accounts 206,905 2,860 5.53% 200,177 2,834 5.66%
---------- --------- --------- --------- ---------- ---------
Total 456,962 4,172 3.65% 403,044 4,003 3.97%
Borrowed Funds (4) 319,013 4,685 5.87% 126,101 1,864 5.91%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 775,975 8,857 4.57% 529,145 5,867 4.43%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 35,936 19,239
---------- ---------
Total liabilities 811,911 548,384
---------- ---------
Stockholders' equity 87,609 92,519
---------- ---------
Total liabilities and
stockholders' equity $ 899,520 $ 640,903
========== =========
Net interest rate spread (5) $ 7,140 2.86% $ 5,518 2.97%
========= ========= ========== =========
Net interest margin (6) 3.32% 3.59%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 111.00% 116.30%
========= =========
<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 5.87% and 5.81% for the three months ended March 31, 1997 and
March 31, 1996, 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>
9
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
A. GENERAL
On February 7, 1997, the Company acquired BNB, a national chartered
commercial bank. As a result of the acquisition, the Company became a bank
holding company subject to regulation by the Federal Reserve Bank ("FRB").
Since the acquisition was consummated during the current quarter, the financial
statements of the Company and the following discussion regarding the Company's
financial condition at March 31, 1997 and the results of operations for the
three-months ended March 31, 1997 includes information and data of BNB from
February 8, 1997 through March 31, 1997. The financial statements of the
Company at December 31, 1996 and the results of operations for the three-months
ended March 31, 1996 do not include information and data related to BNB.
The Company, through its subsidiaries, Boston Federal Savings Bank and Broadway
National Bank operates as a federally-chartered community savings bank and a
national chartered commercial bank, respectively. Boston Federal Savings Bank
is regulated by the Office of Thrift Supervision and Broadway National Bank is
regulated by the Office of the Comptroller of the Currency. 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, business 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 March 31, 1997 were $941.0 million, compared to $820.6
million at December 31, 1996, an increase of $120.4 million or 14.7%. Asset
growth was primarily attributable to the acquisition of BNB which was recorded
using the purchase method of accounting. The major components of asset growth
included investment securities available for sale which increased to $35.2
million at March 31, 1997 from $1.1 million at December 31, 1996 due to the
addition of BNB's investment portfolio. Loans, net of allowance for loan losses
increased by $69.7 million, or 10.3%, from a balance of $676.7 million at
December 31, 1996 to $746.4 million at March 31, 1997, also primarily due to
the acquisition of BNB's portfolio. Mortgage loans held for sale increased from
$4.0 million at year-end 1996 to $9.6 million at March 31, 1997 due to increased
lending activity in mortgage loans held for sale during the current quarter
end. Deposit accounts increased by $116.0 million from a balance of $428.8
million at December 31, 1996 to a balance of $544.8 million at March 31, 1997.
Of the increase, $104.5 million is attributable to the acquisition of BNB while
the balance represents growth in BFS' deposit balances. Federal Home Loan Bank
advances were reduced by $14.0 million, to a balance of $282.5 million at
March 31, 1997 from a balance of $296.5 million at December 31, 1996. This
reduction was more than offset by an increase in other borrowed money
(repurchase agreements) which amounted to $21.9 million at March 31, 1997,
compared to $3.5 million at December 31, 1996. Approximately one half the
increase in repurchase agreements during the quarter ended March 31, 1997 were
used to fund the acquisition.
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
10
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 March 31, 1997, the Company's one year gap was a positive 9.0% of total
assets, compared to a positive 5.3% of total assets at December 31, 1996. The
change in the gap was caused by the addition of BNB which, like most commercial
banks, has a larger portion of its assets, compared to liabilities, repricing
in the one year horizon.
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.
11
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, BFS 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 BFS's
deposits and short-term borrowings. BFS's current required liquidity
ratio is 5%. At March 31, 1997 and December 31, 1996 BFS's
liquidity ratio was 6.7% and 8.0% 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
March 31, 1997, BFS' cash, short-term investments and investment
securities available for sale totaled $15.7 million or 2.0% of
BFS's total assets. Additional investments were available which qualified
for BFS's regulatory liquidity requirements. Under OCC regulations, BNB does
not have specific liquidity requirements, but must maintain a reasonable and
prudent level in order to operate in a safe and sound manner.
The Company has other sources of liquidity if a need for
additional funds arises, including FHLB advances. At March 31,
1997, BFS had $282.5 million in advances outstanding from the
FHLB. The Company also borrowed $21.9 million through repurchase
agreements. The Company generally does not pay 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 March 31, 1997, the Company had commitments to
originate loans and unused outstanding lines of credit totalling
$98.9 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 March 31, 1997, totalled $143.0 million.
At March 31, 1997, the consolidated stockholders' equity to
total assets ratio was 8.9%. As of March 31, 1997,the Company, BFS and BNB
exceeded all of their regulatory capital requirements, BFS's tangible,
core and risk-based capital ratios were 6.9%, 6.9% and 13.3%, respectively,
whereas BNB's were 14.7%, 14.7% and 33.2% respectively. Additionally, BFS'
retained earnings at March 31, 1997 includes approximately $13.2 million of
tax bad debt reserves for which no federal income tax liability has been
recognized. Under the Small Business Job Protection Act of 1996 (the "1996
Act") if BFS makes "non-dividend distributions" to the Company, such
distributions will be considered to have been made from BFS's unrecaptured tax
bad debt reserves. Non-dividend distributions include distributions in excess
of BFS' current and accumulated earnings and profits, as calculated for federal
income tax purposes, distributions in redemption of stock, and distributions in
partial or complete liquidation. Dividends paid out of BFS's current or
accumulated earnings and profits will not be so included in BFS's income.
12
E. COMPARISON OF THREE-MONTHS ENDED MARCH 31, 1997 AND 1996
General
Earnings for the quarter ended March 31, 1997 were $1.9 million, or $.33
per share, compared to $1.0 million, or $.17 per share for the first quarter of
1996. A significant contribution to the increased earnings was due to the real
estate operations income of $891,000 (before income taxes) during the first
quarter of this year, compared to an expenditure of $24,000 (before income
taxes) during the comparable quarter of last year. The real estate operations
income resulted primarily from the sale of a land sub-division owned by a
subsidiary of BFS. The improved earnings increased the return on average assets
to .85% and the return on average stockholders' equity to 8.74% during the
quarter ended March 31, 1997, compared to .64% and 4.42%, respectively, for the
quarter ended March 31, 1996. Comments regarding the components of net income
are detailed in the following paragraphs.
Interest Income
Total interest income on interest-earning assets for the
quarter ended March 31, 1997 increased by $4.6 million, or 40.4%,
to $16.0 million, compared to the quarter ended March 31, 1996.
The increase in interest income is primarily attributable to a
$245.9 million increase in average interest-earning assets and a three basis
point increase in the average yield. The average yield on interest-earning
assets increased to 7.43% for the three months ended March 31, 1997 from 7.40%
for the three months ended March 31, 1996.
Interest income on loans, net, for the quarter ended March 31, 1997
increased by $3.9 million, or 39.4%, to $13.8 million compared to $9.9 million
for the same quarter in 1996. The increase in interest income from loans, net,
for the quarter ended March 31, 1997 was primarily attributable to an increase
of $199.7 million in the average loan balance and a six basis point increase in
yield on loans, net. The yield on loans, net, increased from 7.57% for the
three-months ended March 31, 1996 to 7.63% for the current year quarter to
date. Interest on mortgage-backed securities for the quarter ended
March 31, 1997 increased by $98,000 to $1.1 million, compared to $1.0 million
for the same quarter in 1996. This increase in income was due to the combined
effects of a $1.7 million increase in the average balance and an increase in
average yield of 43 basis points during the quarter ended March 31, 1997,
compared to the quarter ended March 31, 1996. The increase in the yield was the
result of purchasing a higher yielding mortgage-backed security near the end of
the first quarter of 1996, whereas the security was outstanding for the entire
first quarter of 1997. Interest income from investment securities was
$1.1 million during the first quarter of 1997, compared to $449,000 for the
comparable quarter in 1996. The average yield on investment securities
declined by 49 basis points due to BNB's portfolio which was comprised of mostly
U.S. Treasury securities. The average balance increased by $44.6 million to an
average of $72.4 million during the three-months ending March 31, 1997. A
majority of the balance increases in interest earnings assets was the result of
the Company's acquisition of BNB, effective the close of business on February
7, 1997.
Interest Expense
Total interest expense on interest-bearing liabilities for
the quarter ended March 31, 1997 increased by $3.0 million
or 50.8%, to $8.9 million compared to the quarter ended
March 31, 1996. The increase in interest expense for the
quarter ended March 31, 1997 was due primarily to an increase
of $246.8 million in the average balance on interest-bearing liabilities
which averaged $776.0 million during the quarter, compared to an
average balance of $529.1 million during the quarter ended March 31, 1996. A
14 basis point increase in the average cost of interest-bearing liabilities
also contributed to the increase in interest expense during the first quarter
of 1997, compared to the quarter ended March 31, 1996. The average
cost of interest-bearing liabilities increased to 4.57% during the quarter
ended March 31, 1997, compared to 4.43% for last year's comparable quarter.
13
Interest expense on deposit accounts was $4.2 million for the quarter
ending March 31, 1997, an increase of $169,000 from the $4.0 for the
quarter ended March 31, 1996. The increase in the expense was due to the
combined effects of a $53.9 million increase in the average balance,
partially offset by a 32 basis point decrease in the average cost of funds
during the quarter ended March 31, 1997, compared to the quarter ended
March 31, 1996. The average balance of deposit accounts increased from
$403.0 million for the quarter ending March 31, 1996 to an average balance of
$457.0 million for the quarter ending March 31, 1997. Interest expense on
borrowed funds increased from $1.9 million for the quarter ended March 31, 1996
to $4.7 million for the current quarter. While the average cost of borrowed
money declined from 5.91% during the quarter ended March 31, 1996 to an average
of 5.87% during the current quarter, the average balances increased from $126.1
million during the first quarter of 1996 to an average balance of $319.0 million
during the first quarter of 1997.
Net interest income increased by $1.6 million during the first quarter of
1997, compared to the same quarter last year, due primarily to asset growth by
BFS and the acquisition of BNB. While net interest income improved, the net
interest rate spread of 2.86% for the quarter ended March 31, 1997 was lower
than the 2.97% for the comparable period last year. The net interest rate
spread continues to be impacted by the combined effects of asset growth in the
form of adjustable-rate mortgages, which are generally originated at discounted
rates for the initial term, and the funding of such growth by wholesale funding
sources, primarily FHLB advances, which generally carry higher rates than
savings deposits. The net interest margin was similarly impacted and declined
to 3.32% during the current quarter from 3.59% for the quarter ended
March 31, 1996.
Provision for Loan Losses
The Company's provision for loan losses amounted to $425,000
for the quarter ended March 31, 1997, slightly less than the $438,000 loan
loss provision for the comparable quarter last year. The allowance for loan
losses increased from $4.4 million at December 31, 1996 to $5.4 million at
March 31, 1997, after consolidation of BNB's allowance for loan losses of
$605,000 with the Company's current quarter provision of $425,000.
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 loans
depending on risk of loss characteristics. The most severe
classification before a charge-off is required is "sub-standard."
At March 31, 1997, the Company classified $4.8 million of loans ($4.2 million
of BFS and $.6 million of BNB) as sub-standard compared to $3.8 million (BFS
only) at December 31, 1996. 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 March 31, 1997 was sufficient
to cover anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at March 31, 1997 was
$5.4 million, which represented 330.6% of non performing loans or .71%
of total loans, compared to $4.4 million at December 31, 1996, or
293.0% of non performing loans and .64% of total loans.
14
Non performing loans at March 31, 1997 amounted to $1.6 million
or .22% of total loans, compared to $1.5 million, or .22% of
total loans, at December 31, 1996.
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 $46,000 and $148,000 for the three-month
periods ended March 31, 1997 and 1996, respectively. The amount
of interest income that was recorded on these loans was $1,000 and
$14,000 for the three-month periods ended March 31, 1997 and 1996,
respectively.
At March 31, 1997, 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 $4.5 million. All of the
impaired loans have been measured using the fair value of the
collateral method. During the three-months ended March 31, 1997,
the average recorded value of impaired loans was $4.4 million,
$63,000 interest income was recognized and $116,000 of
interest income would have been recognized under the loans'
original terms.
At March 31, 1997, the Company had $1.8 million
in real estate owned compared to $2.7 million at December 31,
1996. Further, at March 31, 1997 the Company also had restructured
real estate loans amounting to $2.4 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.
Non-Interest Income
Total non-interest income in the first quarter of 1997 increased by
$26,000, or 2.7%, to $995,000 from $969,000 for the three months ended
March 31, 1996 due to a $192,000 increase in other non-interest income
(primarily transaction account fees), offset by declines in loan processing
fees resulting from the implimentation of SFAS 122,"Accounting for Mortgage
Servicing Rights" which requires amortization of previously capitalized
mortgage servicing rights and a reduction in gains on sale of loans due to
decreased volume of sales during the first quarter of 1997.
Non-Interest Expense
Total non-interest expense was $4.5 million for the quarter ended
March 31, 1997 compared to $4.3 million for the comparable quarter
in 1996. Compensation and benefits increased by $1.0 million from $2.2
million for the quarter ended March 31, 1996 to $3.2 million for the quarter
ended March 31, 1997. The major reasons for this increase were due to the
$462,000 expense related to the 1996 Stock-Based Incentive Plan and the addition
of BNB compensation and benefits expense of $343,000 from the date of
acquisition. Neither expense was included in the quarter ending March 31, 1996.
Real estate operations provided $891,000 of income during the current
quarter, compared to an expense of $24,000 during the comparable quarter last
year. The current quarter real estate operations income resulted primarily from
the sale of a land sub-division owned by a subsidiary of BFS. Federal deposit
insurance premiums expense declined from $239,000 during the quarter ended
March 31, 1996 to $71,000 for the quarter ended March 31, 1997 due to the
reduced premiums as a result of the Savings Association Insurance Fund
recapitalization during the third quarter of 1996.
Income Tax Expense
Income tax expense nearly doubled in the quarter ended March 31, 1997 to
$1.3 million compared to the income tax expense of $710,000 for the quarter
ended March 31, 1996. The increase was due almost entirely to increased income
before tax. The effective income tax rate was 41% for both quarters.
15
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
16
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) On February 21, 1997, a Form 8-K dated February 7, 1997 was filed with
a copy of the press release issued on February 14, 1997 announcing the
completion of the acquisition of Broadway Capital Corporation and its
subsidiary, Broadway National Bank effective at the close of business on
February 7, 1997.
(c) On April 18, 1997, a Form 8-K/A dated February 7, 1997 was filed which
included financial statements of business acquired and pro forma financial
information.
17
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: May 15, 1997 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: May 15, 1997 By: /s/ John A. Simas
__________________________________
John A. Simas
Senior Vice President,
Chief Financial Officer,
Treasurer and
Corporate Secretary
18