FORM 10-Q
UNITED STATES
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, 1998
__________________________
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)
(781) 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 April 30, 1998: 5,422,637.
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Balance Sheets as of
March 31, 1998 (unadudited) and December 31, 1997 2
Consolidated Statements of Operations for the Three
Months ended March 31, 19987 and 1997 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended
March 31, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1998 and 1997 (unaudited) 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
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16 - 17
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 Holders 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)
March 31, December 31,
1998 1997
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 27,301 $ 24,690
Investment securities available for sale
(amortized cost of $51,758 and $31,554 at
March 31, 1998 and December 31, 1997
respectively) 51,752 31,767
Investment securities held to maturity (fair
value of $14,013 and $20,630 at March 31, 1998
and December 31, 1997, respectively) 13,987 20,630
Mortgage-backed securities available for sale
(amortized cost of $17,214 and $19,007 at
March 31, 1998 and December 31, 1997,
respectively) 17,256 19,125
Mortgage-backed securities held to maturity (fair
value of $37,127 and $38,903 at March 31, 1998
and December 31, 1997, respectively) 36,548 38,350
Mortgage loans held for sale 32,762 9,817
Loans, net of allowance for loan losses of $7,140
and $6,600 at March 31, 1998 and December 31,
1997, respectively 813,590 791,728
Accrued interest receivable 5,297 5,163
Stock in FHLB of Boston and Federal Reserve Bank 16,613 16,613
Premises and equipment 6,688 6,842
Real estate owned 195 195
Other assets 9,610 9,760
-------- --------
Total assets $1,031,599 $974,680
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $651,032 $619,821
Federal Home Loan Bank advances 284,500 256,500
Securities sold under agreements to repurchase 3,500 7,140
Advance payments by borrowers for taxes
and insurance 3,491 3,133
Other liabilities 7,837 6,475
------- -------
Total liabilities 950,360 893,069
------- -------
Commitments and contingencies
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 (5,422,637 and
5,520,437 shares outstanding, respectively) 66 66
Additional paid-in capital 65,497 65,282
Retained earnings 40,147 38,645
Accumulated other comprehensive income 38 242
Less Treasury Stock, (1,166,980 shares and
1,069,180 shares, respectively), at cost (20,228) (18,146)
Less unallocated ESOP shares (3,174) (3,174)
Less unearned Stock-Based Incentive Plan (1,107) (1,304)
-------- --------
Total stockholders' equity 81,239 81,611
-------- --------
Total liabilities and stockholders' equity $1,031,599 $974,680
======== ========
See accompanying condensed notes to consolidated financial statements.
2
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, except per share amount)
Three Months Ended
------------------
3/31/98 3/31/97
------------------
(Unaudited)
Interest income:
Loans $ 15,849 $ 13,786
Mortgage-backed securities 941 1,131
Investment securities 1,411 1,080
------- -------
Total interest income 18,201 15,997
------- -------
Interest expense:
Deposit accounts 5,694 4,172
Borrowed funds 4,303 4,685
------- -------
Total interest expense 9,997 8,857
------- -------
Net interest income 8,204 7,140
Provision for loan losses 403 425
------- -------
Net interest
income after provision 7,801 6,715
Non-interest income:
Loan processing and servicing
fees 144 299
Gain on sale of loans 655 130
Deposit service fees 409 381
Other 196 185
------- -------
Total non-interest income 1,404 995
------- -------
Non-interest expense:
Compensation and benefits 3,410 3,240
Occupancy and equipment 774 696
Federal deposit insurance
premiums 79 71
Real estate operations (14) (891)
Other 1,731 1,349
------- -------
Total non-interest expense 5,980 4,465
------- -------
Income before income taxes 3,225 3,245
Income tax expense 1,336 1,331
------- -------
Net income $ 1,889 $ 1,914
======= =======
Basic earnings per share $0.37 $0.33
Diluted earnings
per share $0.35 $0.33
Basic weighted average shares
outstanding 5,166,072 5,737,482
Common stock equivalents
due to dilutive effect
of stock options 261,588 123,851
Diluted total weighted average
shares outstanding 5,427,660 5,861,333
See accompanying condensed notes to consolidated financial statements.
3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands)
Three Months Ended March 31, 1998
(Unaudited)
Unearned
Accumulated Stock-
Additional other Unallocated Based Total
Common paid-in Retained Treasury Comprehensive ESOP Incentive stockholders'
stock capital earnings Stock income shares Plan equity
------ -------- --------- -------- ---------- ----------- ---------- ------------
Balance at December 31, 1997 $ 66 65,282 38,645 (18,146) 242 (3,174) (1,304) 81,611
Net income - - - - 1,889 - - - - - - - - 1,889
Change in net unrealized loss on
investments available for sale
(net of tax benefit of $89) - - - - - - - - (204) - - - - (204)
--------
Total comprehensive income - - - - - - - - - - - - - - 1,685
Cash dividends declared and
paid ($0.07 per share) - - - - (387) - - - - - - - - (387)
Common Stock repurchased
(98,200 shares at an average
price of $21.27 per share) - - - - - - (2,089) - - - - - - (2,089)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 197 197
Options exercised - - (2) - - 7 - - - - - - 5
Appreciation in fair value of
shares charged to expense for
compensation plans - - 217 - - - - - - - - - - 217
------- ------- -------- --------- --------- -------- --------- --------
Balance at March 31, 1998 $ 66 65,497 40,147 (20,228) 38 (3,174) (1,107) 81,239
------- ------- -------- --------- --------- -------- --------- --------
See accompanying condensed notes to consolidated financial statements.
4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Three Months Ended
March 31,
1998 1997
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 1,889 $ 1,914
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 326 261
Earned SIP shares 197 351
Appreciation in fair value of shares
charged to expense for compensation plans 217 207
Provision for loan losses 403 425
Loans originated for sale (103,031) (24,185)
Proceeds from sale of loans 81,241 18,717
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 (16) (154)
Gain on sale of loans (655) (130)
Increase in accrued interest receivable (134) (295)
Decrease in prepaid expenses
and other assets, net 96 1,831
Increase in accrued expenses and
other liabilities, net 1,448 5
-------- -------
Net cash used in
operating activities (18,019) (1,894)
------- -------
Cash flows from investing activities:
Net cash of acquired institution - 11,908
Proceeds from maturities of investment
securities held to maturity 6,150 3,100
Proceeds from maturities of investment
securities available for sale - 1,000
Purchase of investment securities
available for sale (20,187) (16)
Purchase of investment securities
held to maturity - (2,000)
Principal payments on mortgage-backed
securities available for sale 1,776 -
Principal payments on mortgage-
backed securities held to maturity 1,799 1,839
Increase in loans, net (22,265) (4,132)
Purchases of premises and equipment (117) (117)
Proceeds from sale of real estate owned 16 1,025
Additional investment in real estate owned - (2)
Proceeds from sale of real estate held for
development - 2,102
------- -------
Net cash provided by (used in)
investing activities (32,828) 14,707
------- ---------
-Continued on next page-
5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Three Months Ended
March 31,
1998 1997
------- -------
(Unaudited)
Cash flows from financing activities:
Increase (decrease) in deposit accounts 31,211 (9,008)
Repayments of securities sold under
agreement to repurchase (3,640) -
Proceeds from securities sold under
agreements to repurchase - 18,361
Repayments of Federal Home Loan
Bank advances (104,502) (59,000)
Proceeds from Federal Home Loan
Bank advances 132,502 45,000
Cash dividends paid (387) (313)
Common stock repurchased (2,089) (4,722)
Options exercised 5 -
Increase in advance payments by
borrowers for taxes and insurance 358 272
-------- -------
Net cash provided by (used in)
financing activities 53,458 (9,410)
------- -------
Net increase
in cash and cash equivalents 2,611 3,403
Cash and cash equivalents at beginning of quarter 24,690 18,278
------- -------
Cash and cash equivalents at end of quarter $ 27,301 $ 21,681
======= =======
Supplemental disclosure of cash flow
information:
Payments (refunds received) during
the quarter for:
Interest $ 9,008 $ 8,787
======= =======
Taxes $ 1,390 $ 478
======= =======
Supplemental schedule of non-cash
investing activities:
Transfers of mortgage
loans to real estate owned $ - $ 98
======= =======
See accompanying condensed notes to consolidated financial statements.
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, 1998 and December 31, 1997 and for the three- month
periods ended March 31, 1998 and 1997, and the accounts of its wholly-owned
subsidiary, Broadway National Bank ("BNB") effective at close of business
February 7, 1997 through March 31, 1998. Broadway Capital Corporation, the
former holding company of Broadway National Bank, was merged into BostonFed
effective May 28, 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, 1998 and 1997 are not necessarily indicative of the results that may
be expected for the entire fiscal year.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At March 31, 1998, the Company had commitments of $60.6 million to
originate mortgage loans and $4.9 million to purchase loans from correspondent
lenders. Of these $65.5 million commitments, $34.8 million were adjustable rate
mortgage loans at rates ranging from 6.00% to 10.00% and $30.7 million were
fixed rate mortgage loans with interest rates ranging from 6.00% to 9.00%. The
Company also had commitments to sell $53.8 million of mortgage loans.
At March 31, 1998, the Company was servicing first mortgage loans of
approximately $565.9 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 Company is
unable to predict whether such legislation will 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, 1997 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 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 2,318
--------
Total liabilities assumed 127,340
--------
Assets in excess of liabilities 18,823
Cash paid to Broadway shareholders 22,000
--------
Goodwill $ 3,177
========
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.
Three Months Ended
3/31/97
------------------
(In thousands except
per share amounts)
Total interest and dividend
income and total
non-interest income $ 17,933
Net income $ 2,065
Basic Earnings per share $ 0.36
Diluted Earnings per share $ 0.35
8
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the three months ended March 31: 1998 1997
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 91,998 $ 1,411 6.13% $ 72,430 $ 1,080 5.96%
Loan, net and mortgage loans held for sale (2) 820,187 15,849 7.73% 722,983 13,786 7.63%
Mortgage-backed securities (3) 56,243 941 6.69% 65,883 1,131 6.87%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 968,428 18,201 7.52% 861,296 15,997 7.43%
--------- --------- ---------- ---------
Non-interest-earning assets 41,397 38,224
---------- ---------
Total assets $ 1,009,825 $ 899,520
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 63,640 470 2.95% $ 57,306 421 2.94%
Savings accounts 117,551 730 2.48% 107,326 657 2.45%
NOW accounts 102,993 296 1.15% 85,425 234 1.10%
Certificate accounts 290,692 4,198 5.78% 206,905 2,860 5.53%
---------- --------- --------- --------- ---------- ---------
Total 574,876 5,694 3.96% 456,962 4,172 3.65%
Borrowed Funds (4) 290,327 4,303 5.93% 319,013 4,685 5.87%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 865,203 9,997 4.62% 775,975 8,857 4.57%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 60,662 35,936
---------- ---------
Total liabilities 925,865 811,911
---------- ---------
Stockholders' equity 83,960 87,609
---------- ---------
Total liabilities and
stockholders' equity $ 1,009,825 $ 899,520
========== =========
Net interest rate spread (5) $ 8,204 2.90% $ 7,140 2.86%
========= ========= ========== =========
Net interest margin (6) 3.39% 3.32%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 111.93% 111.00%
========= =========
<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 5.91% and 5.87% for the three months ended March 31, 1998 and
March 31, 1997, 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
The Company is the holding company for two banking subsidiaries, Boston
Federal Savings Bank, a federally chartered community savings bank and Broadway
National Bank, a nationally chartered commercial bank. On February 7, 1997, the
Company acquired BNB and as a result of the acquisition, the Company became a
bank holding company subject to regulation by the Federal Reserve Bank ("FRB").
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. Substantially all of the Company's business is coordinated through its
subsidiary banks and references herein to "Company" include the banks as
approprate. 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. Since the acquisition of BNB was consummated at
the close of business on February 7, 1997, the financial statements of the
Company and the following discussion regarding the Company's financial condition
at March 31, 1998 and December 31, 1997, and the results of operations for the
three-months ended March 31, 1998 and 1997 includes information and data of BNB
from February 8, 1997 through March 31, 1998.
Included in other non-interest expenses for the quarters ended March 31,
1998 and 1997 are charges incurred in connection with the modification or
replacement of software or hardware in order for the Company's computer and
related systems to properly recognize dates beyond December 31, 1999. The
Company has completed its assessment of Year 2000 issues, developed a plan, and
arranged for the required resources to complete the necessary remediation
efforts.
The Company is utilizing both internal and external resources to reprogram,
or replace and test hardware and software for Year 2000 modifications. The
Company plans to complete changes and testing for mission critical systems by
December 31, 1998, a date prior to any impact on its operating systems. Testing
of non-critical applications will continue into 1999 and will be completed prior
to any impact on operating systems. The total cost of the Year 2000 project is
estimated at $300,000 to $500,000. Through March 31, 1998 the Company expensed
approximately $60,000 to date toward the assessment and remediation efforts of
the Year 2000 project. The Company will incur costs through the Year 2000, but
does not anticipate that material incremental costs will be incurred in any
single period.
A significant portion of the costs associated with the Year 2000 project
are not expected to be incremental to the Company, but rather represent a
reprioritization of existing internal systems technology resources.
The Company has initiated formal communications with all of its significant
vendors and service providers to determine the extent to which the Company is
vulnerable to any failure of those third parties to remedy their own Year 2000
issues. The Company's total Year 2000 project costs and estimates include the
estimated costs and time associated with the impact of third-party Year 2000
issues, based on information currently available. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be remediated in a timely manner or that there will be no adverse
effect on the Company's systems. Therefore, the Company could possibly be
negatively impacted to the extent that other entities not affiliated with the
Company are unsuccessful in properly addressing this issue.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based upon management's best estimates,
which are derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
10
B. FINANCIAL CONDITION
Total assets at March 31, 1998 were $1.03 billion, compared to $974.7
million at December 31, 1997, an increase of $56.9 million or 5.8%. The major
components of asset growth included investment securities available for sale,
mortgage loans held for sale and loans, net of allowance for loan losses.
Investment securities available for sale increased to $51.8 million at March 31,
1998 from $31.8 million at December 31, 1997 due to an investment in two mutual
funds that invest primarily in government agency mortgage-backed securities.
Mortgage loans held for sale increased from $9.8 million at December 31, 1997 to
$32.8 million at March 31, 1998 due to the increased activity in the secondary
market resulting from heavy volume of fixed-rate loan originations for sale.
Loans, net of allowance for loan losses, increased by $21.9 million, or 2.8%,
from a balance of $791.7 million at December 31, 1997 to $813.6 million at March
31, 1998, primarily due to growth in BFS's loan portfolio. Deposit accounts
increased by $31.2 million from a balance of $619.8 million at December 31, 1997
to a balance of $651.0 million at March 31, 1998. The increase is mainly
attributable to the successful roll-out of a new 15-month retail certificate of
deposit acquisition program initiated by BFS. BNB's deposits also grew by $3.4
million during the quarter ended March 31, 1998. Federal Home Loan Bank advances
increased by $28.0 million, to a balance of $284.5 million at March 31, 1998
from a balance of $256.5 million at December 31, 1997. These advances were used
to fund the increase in investments available for sale and mortgage loans held
for sale. Other borrowed money (repurchase agreements), which amounted to $7.1
million at December 31, 1997, were reduced to $3.5 million at March 31, 1998.
11
C. LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, investments,
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. The
Company has maintained in excess of the required minimum levels of liquid assets
at BFS as defined by 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 4%. At March 31, 1998 and December 31,
1997 BFS's liquidity ratio was 6.8% and 5.7% 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 OCC does not have
specific guidance for liquidity ratios for BNB, but does require banks to
maintain reasonable and prudent liquidity levels. Management believes such
levels have been maintained since the acquisition date.
The Company's most liquid assets are cash, overnight federal funds sold,
short-term investments and loans 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, 1998, BFS' cash,
short-term investments and loans and investments available for sale totaled
$51.3 million or 5.8% of BFS's total assets. Additional investments were
available which qualified for BFS's regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At March 31, 1998, BFS had $284.5 million in
advances outstanding from the FHLB. The Company has also borrowed $3.5 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, 1998, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $131.0 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 March 31, 1998, totaled $123.3 million.
At March 31, 1998, the consolidated stockholders' equity to total assets
ratio was 7.9%. As of March 31, 1998, the Company, BFS and BNB exceeded all of
their regulatory capital requirements. BFS's tier 1, total risk-based, and tier
1 risk-based capital ratios were 5.5%, 11.2% and 9.9%, respectively. BNB's
respective capital ratios were 7.8%, 16.2% and 15.1%.
12
D. COMPARISON OF THREE-MONTHS ENDED MARCH 31, 1998 AND 1997
General
Earnings for the quarter ended March 31, 1998 were $1.9 million, or $.37
basic earnings per share, $.35 per share on a diluted basis, compared to
earnings of $1.9 million, or $.33 basic and diluted earnings per share for the
first quarter of 1997. The first quarter of 1997 included increased earnings
from real estate operations, totaling $891,000 (before income taxes), resulting
primarily from the sale of a land sub-division owned by a subsidiary of BFS. The
current quarter was positively impacted by increased gain on the sale of
loans of $655,000 (before income taxes) compared to last year's comparable
quarter gain on sale of loans totaling $130,000 (before income tax). The
Company's annualized return on average assets was .75% and the annualized return
on average stockholders' equity was 9.00% during the quarter ended March 31,
1998, compared to .85% and 8.74%, respectively, for the quarter ended March 31,
1997 (annualized). 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, 1998 increased by $2.2 million, or 13.8%, to $18.2 million, compared
to the quarter ended March 31, 1997. The increase in interest income was
primarily attributable to a $107.1 million increase in average interest-earning
assets and a nine basis point increase in the average yield. The average yield
on interest-earning assets increased to 7.52% for the three months ended March
31, 1998 from 7.43% for the three months ended March 31, 1997.
Interest income on loans, net, for the quarter ended March 31, 1998
increased by $2.1 million, or 15.2%, to $15.8 million compared to $13.8 million
for the same quarter in 1997. This increase was primarily attributable to an
increase in average balances of $97.2 million. Additionally, the average yield
on loans, net increased by ten basis points to 7.73% during the quarter ended
March 31, 1998, compared to 7.63% during the quarter ended March 31, 1997.
Interest on mortgage-backed securities for the quarter ended March 31, 1998
decreased by $190,000 to $941,000, compared to $1.1 million for the same quarter
in 1997. This decrease in income was due primarily to the $9.6 million lower
average balance during the quarter ended March 31, 1998, compared to the quarter
ended March 31, 1997. Additionally, the average yield declined by 18 basis
points to an average of 6.69% during the quarter ended March 31, 1998, compared
to the same quarter last year. Interest income from investment securities was
$1.4 million during the first quarter of 1998, compared to $1.1 million for the
comparable quarter in 1997. The average yield on investment securities increased
by 17 basis points due to the high yields received by BFS on the two mutual
funds it invested in during the quarter ended March 31, 1998. The average
balance increased by $19.6 million to an average of $92.0 million during the
quarter ended March 31, 1998, compared to an average balance of $72.4 million
for the quarter ended March 31, 1997. The increase in the average balance also
is primarily due to BFS's investment in these mutual funds.
13
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended March 31, 1998 increased by $1.1 million or 12.4%, to $10.0 million
compared to the quarter ended March 31, 1997. The increase in interest expense
for the quarter ended March 31, 1998 was due primarily to an increase of $89.2
million in the average balance of interest-bearing liabilities which averaged
$865.2 million during the current quarter, compared to an average balance of
$776.0 million during the quarter ended March 31, 1997. A five basis point
increase in the average cost of interest-bearing liabilities also contributed to
the increase in interest expense. The average cost of interest-bearing
liabilities increased to 4.62% during the quarter ended March 31, 1998, compared
to 4.57% for last year's comparable quarter.
Interest expense on deposit accounts was $5.7 million for the quarter ended
March 31, 1998, an increase of $1.5 million from the $4.2 million for the
quarter ended March 31, 1997. The increase in the expense was due to higher
average deposit account balances of $117.9 million and a 31 basis point increase
in the average cost of funds during the quarter ended March 31, 1998, compared
to the quarter ended March 31, 1997. The average balance of deposit accounts
increased from $457.0 million for the quarter ending March 31, 1997 to an
average balance of $574.9 million for the quarter ending March 31, 1998, mostly
due to the successful roll-out of a new 15 month retail certificate of deposit
acquisition program initiated by BFS during the first quarter of 1998. Interest
expense on borrowed funds decreased from $4.7 million for the quarter ended
March 31, 1997 to $4.3 million for the current quarter. The average cost of
borrowed funds increased from 5.87% during the quarter ended March 31, 1997 to
an average of 5.93% during the current quarter. The average balances decreased
from $319.0 million during the first quarter of 1997 to an average balance of
$290.3 million during the first quarter of 1998.
Net Interest Income
Net interest income increased by $1.1 million during the first quarter of
1998, compared to the same quarter last year, due primarily to asset growth and
an improvement in the net interest rate spread. The net interest rate spread of
2.90% for the quarter ended March 31, 1998 was four basis points higher than the
2.86% for the comparable quarter last year. The primary reason for the
improvement in the net interest rate spread is the inclusion of BNB for a full
quarter during the current quarter, whereas BNB is only included from February
8, 1997 forward during the quarter ended March 31, 1997. Commercial banks
typically earn wider spreads. The net interest margin was similarly impacted
and improved from 3.32% for the quarter ended March 31, 1997 to 3.39% for the
first quarter of 1998.
Provision for Loan Losses
The Company's provision for loan losses amounted to $403,000 for the
quarter ended March 31, 1998, compared to the $425,000 loan loss provision for
the comparable quarter last year. The allowance for loan losses increased from
$6.6 million at December 31, 1997 to $7.1 million at March 31, 1998 due to the
year-to-date provision and net recoveries.
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. In addition various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to make additional provisions for estimated loan losses based upon judgements
different from those of management. 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, 1998, the Company classified $6.0 million of
loans ($4.5 million of BFS and $1.5 million of BNB) as sub-standard compared to
$5.8 million ($4.3 million of BFS and $1.5 million of BNB) at December 31, 1997.
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, cash flow values and state of the real estate
economy. Utilizing these procedures, management believes that the allowance for
loan losses at March 31, 1998 was sufficient to provide for anticipated losses
inherent in the loan portfolio.
14
The Company's allowance for loan losses at March 31, 1998 was $7.1 million,
which represented 546.7% of non-performing loans or .84% of total loans,
compared to $6.6 million at December 31, 1997, or 469.8% of non-performing loans
and .82% of total loans.
Non-performing loans at March 31, 1998 amounted to $1.3 million or .15% of
total loans, compared to $1.4 million, or .17% of total loans, at December 31,
1997.
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 $50,000 and $46,000 for the three-month periods ended March 31, 1998 and
1997, respectively. The amount of interest income that was recorded on these
loans was $7,000 and $1,000 for the three-month periods ended March 31, 1998
and 1997, respectively.
At March 31, 1998, loans characterized as impaired, (which include all
non-performing loans and some other 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
three-months ended March 31, 1998, the average recorded value of impaired loans
was $2.0 million, $46,000 interest income was recognized and $74,000 of
interest income would have been recognized under the loans' original terms.
At March 31, 1998 and at December 31, 1997, the Company had $195,000 in
real estate owned. Further, at March 31, 1998 the Company also had restructured
real estate loans amounting to $368,000 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 first quarter of 1998 increased by
$409,000, or 41.1%, to $1.4 million from $995,000 for the three months ended
March 31, 1997. The increase is mainly due to a $525,000 increase in gain on
sale of loans resulting from favorable secondary market conditions, offset
somewhat by lower loan processing and servicing fees due to an adjustment to
reduce the valuation of originated mortgage servicing rights of $136,000 that
was necessitated by faster loan prepayment speeds during the current quarter.
Non-Interest Expense
Total non-interest expense was $6.0 million for the quarter ended March 31,
1998 compared to $4.5 million for the comparable quarter in 1997. Compensation
and benefits increased by $170,000, or 5.2%, from $3.2 million for the quarter
ended March 31, 1997 to $3.4 million for the quarter ended March 31, 1998. The
major reasons for this increase were due to inclusion of $547,000 of BNB's
compensation and benefits expense for the current quarter, whereas BNB's
compensation and benefits of $343,000 for the comparable quarter last year were
only for the period of February 8, 1997 through March 31, 1997. Additionally,
normal year-end salary increases became effective during the current quarter,
higher incentive pay was incurred for loan originators and the ESOP expense was
also higher due to the increase in the Company's stock price. These increases
were partially offset by a $261,000 decrease in the cost of the stock-based
incentive plan. Increases in the market value of ESOP shares, charged to
compensation expense, are credited to Additional Paid in Capital in accordance
with generally accepted accounting principles. Real estate operations provided
income of $14,000 during the quarter ended March 31, 1998 due to gains on the
sale of real estate owned properties. Income of $891,000 was recognized during
the prior year's comparable quarter due primarily to the sale of a sub-division
owned by a subsidiary of BFS. Other non-interest expenses increased to $1.7
million during the quarter ended March 31, 1998 from $1.3 million during the
comparable quarter last year. The major reasons for the increase were consulting
and legal costs incurred to assist in the implementation of certain tax planning
strategies, and the inclusion of a full quarter of BNB's expenses for the
current quarter.
Income Tax Expense
Income tax expense for the quarters ended March 31, 1998 and 1997 amounted
to $1.3 million each quarter. The effective income tax rates were 41% for both
quarters.
15
Item 3. MARKET RISK AND MANAGEMENT OF INTEREST RATE RISK
The principal market risk affecting the Company is interest rate risk. The
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 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 a management Asset/Liability Committee that 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 extent 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) generally selling in
the secondary market substantially all fixed-rate mortgage loans originated with
terms greater than 15 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
volatile and generally rising rate environment of 1996 allowed the Company to
originate record loan volume, the majority of loans originated were
adjustable-rate loans, which were primarily retained for BFS's portfolio. Many
of these loans, however, do not reprice until the third or fifth year of their
term. As interest rates generally fell during the second half of 1997 and the
first quarter of 1998, customer preference shifted to longer-term fixed rate
mortgages, many of which were sold in the secondary market. 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. These differences are
a primary component of the risk to net interest income. 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, 1998, the Company's one year gap was a positive 6.2% of total
assets, compared to a positive 10.2% of total assets at December 31, 1997.
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.
16
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. See the Company's Form 10-K for the year ended December 31, 1997 for a
detail of the GAP and NPV tables.
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
3.1 Certificate of Incorporation*
3.2 Bylaws*
27 Financial Data Schedule
* Incorporated herein to the Company's Registration Statement on Form S-1
(SEC No. 33-94860) originally filed on July 21, 1995
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: May 14, 1998 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: May 14, 1998 By: /s/ John A. Simas
__________________________________
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
19