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: September 30, 1999
__________________________
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 October 31, 1999: 5,009,891.
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998 2
Consolidated Statements of Operations for the Three
and Nine Months ended September 30, 1999 and 1998 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended
September 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1999 and 1998 (unaudited) 5 - 6
Notes to Consolidated Financial Statements 7 - 9
Item 2 Average Balances and Yield / Costs 10 - 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19 - 20
PART II _ OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature Page 22
1
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(In Thousands)
September 30, December 31,
1999 1998
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 50,115 $ 37,201
Investment securities available for sale
(amortized cost of $59,017 and $48,837 at
September 30, 1999 and December 31, 1998,
respectively) 59,985 49,137
Investment securities held to maturity (fair
value of $ 1,992 and $7,371 at September 30,
1999 and December 31, 1998) 2,304 7,302
Mortgage-backed securities available for sale
(amortized cost of $17,728 and $20,935 at
September 30, 1999 and December 31, 1998) 17,479 21,029
Mortgage-backed securities held to maturity (fair
value of $15,063 and $23,333 at September 30,
1999 and December 31, 1998) 14,559 22,913
Mortgage loans held for sale 16,414 17,008
Loans, net of allowance for loan losses of $10,081
and $8,500 at September 30, 1999 and December 31, 997,508 943,662
1998)
Accrued interest receivable 6,243 5,549
Stock in FHLB of Boston and Federal Reserve Bank 20,311 17,802
Premises and equipment 6,715 6,614
Real estate owned 233 47
Other assets 32,511 10,859
-------- --------
Total assets $1,224,377 $1,139,123
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $735,968 $707,144
Federal Home Loan Bank advances 390,500 337,500
Advance payments by borrowers for taxes
and insurance 3,643 3,405
Other liabilities 10,291 9,280
------- -------
Total liabilities 1,140,402 1,057,329
------- -------
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 (5,020,726 and
5,112,441 shares outstanding at September 30, 1999
and December 31, 1998, respectively) 66 66
Additional paid-in capital 66,860 66,417
Retained earnings 48,827 44,256
Accumulated other comprehensive income (loss) (1,107) 312
Less Treasury Stock, (1,568,891 shares and
1,477,176 shares at September 30, 1999
and December 31, 1998, respectively), at cost (27,822) (26,128)
Less unallocated ESOP shares (2,418) (2,418)
Less unearned Stock-Based Incentive Plan (431) (711)
-------- --------
Total stockholders' equity 83,975 81,794
-------- --------
Total liabilities and stockholders' equity $1,224,377 $1,139,123
======== ========
See accompanying condensed notes to consolidated financial statements.
2
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars In Thousands, except per share amount)
Three Months Ended Nine Months Ended
------------------ ------------------
9/30/99 9/30/98 9/30/99 9/30/98
------------------ ------------------
(Unaudited) (Unaudited)
Interest income:
Loans $ 18,543 $ 16,876 $ 54,152 $ 48,772
Mortgage-backed securities 499 781 1,682 2,578
Investment securities 1,393 1,397 3,964 4,198
------- ------- ------- -------
Total interest income 20,435 19,054 59,798 55,548
------- ------- ------- -------
Interest expense:
Deposit accounts 6,490 6,170 19,046 17,786
Borrowed funds 5,474 4,887 15,776 13,670
------- ------- ------- -------
Total interest expense 11,964 11,057 34,822 31,456
------- ------- ------- -------
Net interest income 8,471 7,997 24,976 24,092
Provision for loan losses 390 442 1,250 1,187
------- ------- ------- -------
Net interest
income after provision 8,081 7,555 23,726 22,905
Non-interest income:
Loan processing and servicing
fees 158 191 437 531
Gain on sale of loans 541 704 2,237 2,130
Deposit service fees 445 419 1,293 1,242
Other 548 192 1,002 593
------- ------- ------- -------
Total non-interest income 1,692 1,506 4,969 4,496
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 3,759 3,404 11,060 10,312
Occupancy and equipment 831 808 2,432 2,392
Federal deposit insurance
premiums 94 86 277 245
Other 1,573 1,564 4,826 4,986
------- ------- ------- -------
Total non-interest expense 6,257 5,862 18,595 17,935
------- ------- ------- -------
Income before income taxes 3,516 3,199 10,100 9,466
Income tax expense 1,254 1,281 3,807 3,856
------- ------- ------- -------
Net income $ 2,262 $ 1,918 $ 6,293 $ 5,610
======= ======= ======= =======
Basic earnings per share $0.47 $0.38 $1.30 $1.09
Diluted earnings
per share $0.45 $0.36 $1.25 $1.04
Basic weighted average shares
outstanding 4,820,252 5,099,921 4,827,927 5,124,218
Common stock equivalents
due to dilutive effect
of stock options 166,023 227,953 180,357 272,122
Diluted total weighted average
shares outstanding 4,986,275 5,327,874 5,008,284 5,396,340
See accompanying condensed notes to consolidated financial statements.
3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1999
(In Thousands)
(Unaudited)
Accumulated Unearned
other Stock-
Additional Comprehensive Unallocated Based Total
Common paid-in Retained Treasury income ESOP Incentive stockholders'
stock capital earnings Stock (loss) shares Plan equity
------ -------- --------- -------- ---------- ----------- ---------- ------------
Balance at December 31, 1998 $ 66 66,417 44,256 (26,128) 312 (2,418) (711) 81,794
Net income - - - - 6,293 - - - - - - - - 6,293
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $235) - - - - - - - - (1,419) - - - - (1,419)
--------
Total comprehensive income - - - - - - - - - - - - - - 4,874
Cash dividends declared and
paid - - - - (1,722) - - - - - - - - (1,722)
Common Stock repurchased
(63,570 shares at an average
price of $18.47 per share) - - - - - - (1,694) - - - - - - (1,694)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 280 280
Appreciation in fair value of
shares charged to expense for
compensation plans - - 443 - - - - - - - - - - 443
------- ------- -------- --------- --------- -------- --------- --------
Balance at September 30, 1999 $ 66 66,860 48,827 (27,822) (1,107) (2,418) (431) 83,975
------- ------- -------- --------- --------- -------- --------- --------
See accompanying condensed notes to consolidated financial statements.
4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
1999 1998
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 6,293 $ 5,610
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 966 1,010
Earned SIP shares 280 468
Appreciation in fair value of shares
charged to expense for compensation plans 443 670
Provision for loan losses 1,250 1,187
Loans originated for sale (270,698) (258,979)
Proceeds from sale of loans 273,529 243,514
Gain on sale of real estate
acquired through foreclosure - (35)
Gain on sale of loans (2,237) (2,130)
Increase in accrued interest receivable (694) (822)
Increase in prepaid expenses
and other assets, net (1,811) (343)
Increase in accrued expenses and
other liabilities, net 1,609 2,299
-------- -------
Net cash provided by
operating activities 8,930 (7,551)
-------- -------
Cash flows from investing activities:
Proceeds from maturities of investment
securities held to maturity 5,000 12,350
Proceeds from maturities of investment
securities available for sale 13,000 5,000
Purchase of investment securities
available for sale (26,063) (24,993)
Purchase of investment securities
held to maturity - (1,000)
Purchase of bank owned life insurance (20,000) -
Principal payments on investment securities
available for sale 506 -
Purchase of mortgage-backed securities
available for sale (2,001) -
Purchase of mortgage-backed securities
held to maturity - (7,392)
Purchase of FHLB and Federal Reserve Stock (2,509) (1,189)
Principal payments on mortgage-backed
securities available for sale 5,167 6,067
Principal payments on mortgage-
backed securities held to maturity 8,378 10,906
Increase in loans, net (55,329) (100,557)
Purchases of premises and equipment (858) (748)
Proceeds from sale of real estate owned 47 172
------- -------
Net cash used in
investing activities (74,662) (101,384)
------- ---------
-Continued on next page-
5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
1999 1998
------- -------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 28,824 56,415
Repayments of securities sold under
agreement to repurchase - (7,140)
Repayments of Federal Home Loan
Bank advances (115,291) (348,948)
Proceeds from Federal Home Loan
Bank advances 168,291 415,916
Cash dividends paid (1,723) (1,466)
Common stock repurchased (1,693) (3,307)
Options exercised - 15
Decrease in advance payments by
borrowers for taxes and insurance 238 371
-------- -------
Net cash provided by
financing activities 78,646 111,856
------- -------
Net increase
in cash and cash equivalents 12,914 2,921
Cash and cash equivalents at January 1 37,201 24,690
------- -------
Cash and cash equivalents at September 30 $ 50,115 $ 27,611
======= =======
Supplemental disclosure of cash flow
information:
Payments during
the quarter for:
Interest $ 33,509 $ 30,204
======= =======
Taxes $ 4,054 $ 3,276
======= =======
Supplemental schedule of non-cash
investing activities:
Transfer of mortgage
loans to real estate owned: $ 233 -
======= =======
See accompanying condensed notes to consolidated financial statements.
6
BOSTONFED BANCORP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements as of September 30, 1999
and December 31, 1998 and for the three- and nine-month periods ended September
30, 1999 and 1998 of BostonFed Bancorp, Inc., ("BostonFed" or the "Company") and
its wholly-owned subsidiaries, Boston Federal Savings Bank ("BFS"), Broadway
National Bank ("BNB") and BF Funding Corporation, presented herein, should be
read in conjunction with the consolidated financial statements of the Company as
of and for the year ended December 31, 1998. In the opinion of management, the
unaudited consolidated financial statements presented herein reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation. Interim results are not necessarily indicative of results to
be expected for the entire year.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments, consisting
only of normal recurring accruals necessary for a fair presentation, have been
included. The results of operations for the three- and nine-month periods ended
September 30, 1999 and 1998 are not necessarily indicative of the results that
may be expected for the entire fiscal year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
"derivatives") and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", which delays the effective date of SFAS No. 133 to fiscal quarters
beginning after June 15, 2000. The adoption of these statements is not
expected to have a material impact on the Company.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At September 30, 1999, the Company had commitments of $79.3 million to
originate mortgage loans and $15.4 million to purchase loans from correspondent
lenders. Of these $94.7 million commitments, $82.6 million were adjustable rate
mortgage loans with interest rates ranging from 6.13% to 10.38% and $12.1
million were fixed rate mortgage loans with interest rates ranging from 6.13% to
9.00%. The Company also had commitments to sell $20.0 million of mortgage loans.
At September 30, 1999, the Company was servicing first mortgage loans of
approximately $775.9 million, which are either partially or wholly-owned by
others.
NOTE 3: LEGISLATIVE MATTERS
Federal Financial Modernization legislation, formally known as the
"Gramm-Leach-Bliley Act" was recently enacted by Congress and signed into law by
the President on November 12, 1999, eliminates many federal and state law
barriers to affiliations among banks and other financial services providers. The
legislation, which takes effect 120 days after the date of enactment,
establishes a statutory framework pursuant to which full affiliations can occur
between banks and securities firms, insurance companies, and other financial
companies. The legislation provides some degree of flexibility in structuring
these new affiliations, although certain activities may only be conducted
through a holding company structure. The legislation, preserves the role of the
Board of Governors of the Federal Reserve System as the umbrella supervisor for
holding companies, but incorporates a system of functional regulation pursuant
to which the various federal and state financial supervisors will continue to
regulate the activities traditionally within their jurisdictions. The
legislation specifies that banks may not participate in the new affiliations
unless the banks are well-capitalized and well-managed or if any bank affiliate
had received a less than "satisfactory" Community Reinvestment Act of 1977
rating as of its most recent examination.
7
NOTE 4: Business Segments
The Company's wholly-owned bank subsidiaries, BFS and BNB (collectively
"the Banks"), have been identified as reportable operating segments in
accordance with the provisions of SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." BF Funding Corp., a wholly-owned
subsidiary of the Company, and various subsidiaries of the Banks did not meet
the quantitative thresholds for determining reportable segments. The Banks
provide general banking services to their customers, including deposit accounts,
residential, commercial, consumer and business loans. Each Bank also invests in
mortgage-backed securities and other financial instruments. In addition to its
own operations, the Company provides managerial expertise and other professional
services. The results of the Company and BF Funding comprise the "other"
category.
The Company evaluates performance and allocates resources based on the
Banks' net income, net interest margin, return on average assets and return on
average equity. The Banks follow generally accepted accounting principles as
described in the summary of significant accounting policies. The Company and
Banks have inter-company expense and tax allocation agreements. These
inter-company expenditures are allocated at cost. Inter-company asset sales were
accounted for at current market prices at the time of sale and approximated
cost.
Each Bank is managed separately. BNB is managed by a President and CEO, who
reports directly to BNB's Board of Directors. BFS is managed by a CEO, who is
also the Company's CEO, and reports directly to BFS'and the Company's Board of
Directors, as applicable. The following table sets forth certain information
about and the reconciliation of reported net income for each of the reportable
segments.
8
(Dollars In Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
-------- -------- ------------ ------- -------------- ------------
At or for the three-months
ended September 30, 1999:
Interest income $ 18,111 2,202 20,313 215 ( 93) 20,435
Interest expense 11,502 555 12,057 ( 93) 11,964
Provision for loan losses 360 30 390 390
Non-interest income 1,420 262 1,682 10 1,692
Non-interest expense 4,992 1,161 6,153 104 6,257
Income tax expense 953 251 1,204 50 1,254
Net income 1,725 466 2,191 71 2,262
Total assets 1,074,872 139,871 1,214,743 87,290 (77,656) 1,224,377
Net interest margin 2.62% 5.44% n.m. n.m. n.m. 2.97%
Return on average assets .65% 1.36% n.m. n.m. n.m. .75%
Return on average equity 11.62% 15.46% n.m. n.m. n.m. 10.55%
At or for the three-months
ended September 30, 1998:
Interest income $ 16,714 2,123 18,837 359 (142) 19,054
Interest expense 10,727 472 11,199 (142) 11,057
Provision for loan losses 417 25 442 442
Non-interest income 1,329 177 1,506 1,506
Non-interest expense 4,664 1,100 5,764 98 5,862
Income tax expense 897 286 1,183 98 1,281
Net income 1,340 417 1,757 161 1,918
Total assets 955,419 127,246 1,082,665 87,594 (73,818) 1,096,441
Net interest margin 2.65% 5.79% n.m. n.m. n.m. 3.10%
Return on average assets .57% 1.33% n.m. n.m. n.m. .71%
Return on average equity 10.29% 13.48% n.m. n.m. n.m. 8.99%
n.m. = not meaningful
(Dollars in Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
-------- -------- ------------ ------- -------------- ------------
At or for the nine-months
ended September 30, 1999:
Interest income $ 52,877 6,519 59,396 752 (350) 59,798
Interest expense 33,553 1,619 35,172 (350) 34,822
Provision for loan losses 1,160 90 1,250 1,250
Non-interest income 4,311 648 4,959 10 4,969
Non-interest expense 14,898 3,324 18,222 373 18,595
Income tax expense 2,854 796 3,650 157 3,807
Net income 4,723 1,338 6,061 232 6,293
Total assets 1,074,872 139,871 1,214,743 87,290 (77,656) 1,224,377
Net interest margin 2.60% 5.33% n.m. n.m. n.m. 2.96%
Return on average assets .61% 1.31% n.m. n.m. n.m. .71%
Return on average equity 11.14% 14.57% n.m. n.m. n.m. 9.86%
At or for the nine-months
ended September 30, 1998:
Interest income $ 48,519 6,269 54,788 1,157 (397) 55,548
Interest expense 30,358 1,402 31,760 93 (397) 31,456
Provision for loan losses 1,112 75 1,187 1,187
Non-interest income 3,958 528 4,486 10 4,496
Non-interest expense 14,353 3,237 17,590 345 17,935
Income tax expense 2,727 856 3,583 273 3,856
Net income 3,928 1,227 5,155 455 5,610
Total assets 955,419 127,246 1,082,665 87,594 (73,818) 1,096,441
Net interest margin 2.79% 5.73% n.m. n.m. n.m. 3.22%
Return on average assets .58% 1.31% n.m. n.m. n.m. .72%
Return on average equity 10.15% 13.27% n.m. n.m. n.m. 8.88%
n.m. = not meaningful
9
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the quarter ended September 30: 1999 1998
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 96,802 $ 1,393 5.76% $ 91,293 $ 1,397 6.12%
Loan, net and mortgage loans held for sale (2) 1,010,217 18,543 7.34% 894,643 16,876 7.55%
Mortgage-backed securities (3) 31,969 499 6.24% 47,100 781 6.63%
---------- --------- --------- ----------
Total interest-earning assets 1,138,988 20,435 7.18% 1,033,036 19,054 7.38%
--------- --------- ---------- ---------
Non-interest-earning assets 63,145 41,524
---------- ---------
Total assets $ 1,202,133 $1,074,560
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 59,625 431 2.89% $ 62,844 461 2.93%
Savings accounts 149,188 954 2.56% 121,499 782 2.57%
NOW accounts 111,308 207 0.74% 103,625 280 1.08%
Certificate accounts 356,169 4,898 5.50% 320,809 4,647 5.79%
---------- --------- --------- ----------
Total 676,290 6,490 3.84% 608,777 6,170 4.05%
Borrowed Funds (4) 374,830 5,474 5.84% 318,976 4,887 6.13%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,051,120 11,964 4.55% 927,753 11,057 4.77%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 65,261 61,450
---------- ---------
Total liabilities 1,116,381 989,203
---------- ---------
Stockholders' equity 85,752 85,357
---------- ---------
Total liabilities and
stockholders' equity $1,202,133 $1,074,560
========== =========
Net interest rate spread (5) $ 8,471 2.63% $ 7,997 2.61%
========= ========= ========== =========
Net interest margin (6) 2.97% 3.10%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 108.36% 111.35%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold,
net of mark to market adjustments as required by SFAS No. 115.
(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 5.82% and 6.01% for the three months ended September 30, 1999 and
September 30, 1998, 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.
10
</FN>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the nine months ended September 30: 1999 1998
------------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 91,691 $ 3,964 5.76 $ 90,626 $ 4,198 6.17%
Loan, net and mortgage loans held for sale (2) 995,428 54,152 7.25% 856,036 48,772 7.59%
Mortgage-backed securities (3) 35,772 1,682 6.27% 51,497 2,578 6.67%
---------- --------- --------- ----------
Total interest-earning assets 1,122,891 59,798 7.10% 998,159 55,548 7.42%
--------- --------- --------- ---------- ---------
Non-interest-earning assets 51,669 41,628
---------- ---------
Total assets $ 1,174,560 $1,039,787
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 59,345 1,276 2.87% $ 63,235 1,398 2.95%
Savings accounts 140,915 2,615 2.47% 118,420 2,230 2.51%
NOW accounts 110,208 680 0.82% 103,983 876 1.12%
Certificate accounts 348,142 14,475 5.54% 305,190 13,282 5.80%
---------- --------- --------- ----------
Total 658,610 19,046 3.85% 590,828 17,786 4.01%
Borrowed Funds (4) 365,495 15,776 5.75% 303,122 13,670 6.01%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,024,105 34,822 4.53% 893,950 31,456 4.69%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 65,383 61,609
---------- ---------
Total liabilities 1,089,488 955,559
---------- ---------
Stockholders' equity 85,072 84,228
---------- ---------
Total liabilities and
stockholders' equity $1,174,560 $1,039,787
========== =========
Net interest rate spread (5) $ 24,976 2.57% $24,092 2.73%
========= ========= ========== =========
Net interest margin (6) 2.96% 3.22%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 109.65% 111.66%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold,
net of mark to market adjustments as required by SFAS No. 115.
(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 5.72% and 5.96% for the nine months ended September 30, 1999 and
September 30, 1998, 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>
11
MANAGEMENTS'S DISCUSSTION AND ANALYSIS OF FINACNCIAL CONDITION
AND RESULTS OF OPERATIONS
A. GENERAL
The Company is the holding company for two banking subsidiaries, Boston
Federal Savings Bank, a federally chartered 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
appropriate. 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 mortgages,
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 investments and
mortgage-backed securities, fees, gains on sale of loans and loan servicing
income. The Company's primary sources of funds are retail deposits, wholesale
brokered deposits, principal and interest payments on loans and mortgage-backed
securities, FHLB advances, and proceeds from the sale of loans.
B. YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act. The following "Year 2000" discussion contains forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believes,"
"expects," "estimates," and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the phases of
the Plan, its estimated costs, and its belief that its statements involve a
number of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources, the ability to identify and remediate
all date sensitive lines of computer code, and the actions of governmental
agencies or other third parties with respect to Year 2000 problems.
Included in other non-interest expenses for the three- and nine-month
periods ended September 30, 1999 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 impact of computer systems ability to process dates beyond 1999, the
Year 2000 issue, creates a significant business challenge for the Company. The
Company is addressing this issue as it affects all of its software, hardware and
other systems to insure the Company is Year 2000 compliant. The Company has
developed a plan that is based upon the Federal Financial Institutions
Examination Council ("FFIEC") recommended phases and time frames for insuring
Year 2000 compliance. These phases include awareness, assessment, renovation,
validation and implementation.
The Company has completed the awareness phase through development of a Year
2000 committee and reporting structure including quarterly project status
reports to the Company's Board. The assessment phase has been completed with a
review of all software, hardware and business systems including an evaluation of
the critical nature and year 2000 business risk that each application presents.
The Company primarily utilizes third-party vendors for the processing of its
critical data processing applications. The Company worked closely with these
critical vendors in monitoring renovation and validation efforts to insure that
the time frames set out in the Company's plan were met. Based upon review of
vendor-provided Year 2000 disclosure statements, review of the applicable
testing process and verification of test results, the Company believes that all
critical applications were renovated at September 30, 1999. The Company will
continue to work with critical application vendors to monitor ongoing status in
maintaining Year 2000 compliance.. The Company has created an internal Year 2000
testing environment and has developed test scripts incorporating typical
transactions in order to validate the modified systems. Testing with critical
application vendors was substantially completed in the fourth quarter of 1998.
Additional testing including follow-up and interface testing was completed by
June 30, 1999, prior to any anticipated impact on operating systems. The
implementation phase is ongoing and incorporates review of replaced or modified
and tested systems, as well as, contingency planning and customer awareness
programs.
12
In the event that the Company's third-party vendors are unable to provide
services due to Year 2000 issues, the Company's operations could be adversely
effected. The Company has developed contingency plans in the event that one or
all of these significant vendors fails to meet Year 2000 operating requirements.
Plans for various failure scenarios are developed on an ongoing basis as such
risks are identified and incorporate the Company's business resumption plan.
Contingency plans for unexpected Year 2000 related business interruption were
complete by September 30, 1999. Further, the Company will seek alternative
vendors should one of the critical vendors fail to maintain satisfactory Year
2000 compliance. In the event the Company's current third party data processing
vendors were not Year 2000 compliant and the Company could not engage
alternative vendors in a timely manner, the Company's operations would be
adversely impacted.
Through September 30, 1999 the Company has expensed approximately $150,000
year to date and $400,000 total, toward the Year 2000 remediation effort. The
Company believes that this represents substantially all of the costs required to
achieve the Year 2000 remediation efforts outlined in the Company's Year 2000
Plan. A significant portion of the costs associated with the Year 2000 project
are not incremental to the Company, but rather represent a reprioritization of
existing internal systems technology resources.
Based on the remediation, testing and monitoring efforts to date, the
Company expects that most of its critical systems will operate successfully
through the century date change. Therefore, the Company believes that internal
system failures are not likely to adversely affect the Company's operations or
financial condition. The Company has successfully tested with its critical
application vendors and will continue to monitor and validate the efforts of
other service providers, including the Company's electrical power and
telecommunications providers in 1999. At this time, the Company believes the
most likely "worst case" Year 2000 scenarios are temporary and localized
disruptions in infrastructure services which could disrupt the ability of the
Company to provide services to its customers and/or the ability of external
Service providers to provide services to the Company.
The Company's evaluation of the Year 2000 readiness is based upon
management's best estimates and projections 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.
C. ACQUISITION
On August 4, 1999, the Company entered into an agreement to purchase a
privately-held mortgage company, Diversified Ventures, Inc., d/b/a Forward
Financial Company and Ellsmere Insurance Agency, Inc., both headquartered in
Northborough, Massachusetts. The tax deductible transaction premium will result
in approximately $20 million of goodwill to be amortized over 15 years.
Applications were filed with various federal and state regulators and approvals
have been received from the federal regulators and most of the states. It is
expected that consummation of the transaction will occur shortly after required
approvals are received. See Item 5 "Other Information" for further details.
D. FINANCIAL CONDITION
Total assets at September 30, 1999 were $1.224 billion, compared to $1.139
billion at December 31, 1998, an increase of $85 million or 7.5%. The major
components of asset growth included cash and cash equivalents, investment
securities available for sale, loans, net of allowance for loan losses and other
assets. Cash and cash equivalents increased from a balance of $37.2 million at
December 31, 1998 to $50.1 million at September 30, 1999. This increase in
liquidity was in anticipation for the funding of called advances from the
Federal Home Loan Bank of Boston early in the fourth quarter of 1999. Investment
securities available for sale increased to $60.0 million at September 30, 1999
from $49.1 million at December 31, 1998 as securities purchases exceeded
maturities. Loans, net of allowance for loan losses, increased by $53.8 million,
or 5.7%, from a balance of $943.7 million at December 31, 1998 to $997.5 million
at September 30, 1999 as origination of loans for portfolio exceeded
amortization and prepayments. Other assets increased from a balance of $10.9
million at December 31, 1998 to $32.5 million at September 30, 1999 due
primarily to the purchase of $20 million of Bank Owned Life Insurance ("BOLI").
The BOLI purchase is expected to partially offset employee benefit costs and
provide the Company with increased earnings resulting from the tax advantaged
status of BOLI income. The Company expects to benefit from the BOLI contracts
as a result of the tax-free growth in cash surrender value and death benefits,
which are expected to be generated over time. The Company mitigated interest
rate risk and credit risk by electing to have its cash surrender value of the
policy placed in a separate, redemption value protected account with the
insurance carrier. These asset increases were partially offset by decreases in
investment securities held to maturity, mortgage-backed securities available for
sale and mortgage-backed securities held to maturity amounting to $5.0 million,
$3.6 million and $8.4 million, respectively, compared to the balances at
December 31, 1998.
13
Deposit accounts increased by $28.8 million from a balance of $707.1 million
at December 31, 1998 to a balance of $736.0 million at September 30, 1999.
Approximately $23.9 million of the deposit account balance increase was due to
the Company's acquisition of wholesale brokered certificates of deposit.
Federal Home Loan Bank advances increased by $53.0 million, to a balance of
$390.5 million at September 30, 1999 from a balance of $337.5 million at
December 31, 1998. These advances were used primarily to fund the increase in
loans, net.
E. 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 September 30, 1999 and December
31, 1998 BFS's liquidity ratio was 5.4% and 6.9% 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.
The Company's most liquid assets are cash, overnight federal funds sold,
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 September 30, 1999, BFS' cash, loans and
investments available for sale totaled $53.6 million or 5.0% of BFS's total
assets. While not all of these liquid assets qualify for BFS's regulatory
liquidity requirements, other assets in the held to maturity category qualify
for regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 1999, the Company had $390.5
million in advances outstanding from the FHLB. The Company generally does not
pay the highest deposit rates in its market and accordingly utilizes alternative
sources of funds such as FHLB advances, wholesale brokered deposits and
repurchase agreements to supplement cash flow needs.
At September 30, 1999, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $197.1 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from September 30, 1999, totaled $190.7 million.
At September 30, 1999, the consolidated stockholders' equity to total
assets ratio was 6.9%. As of September 30, 1999, the Company, BFS and BNB
exceeded all of their regulatory capital requirements. The Company's
consolidated tier 1 capital, total capital and Tier 1 leverage ratios were
11.3%, 12.6% and 6.8%, respectively. BFS's tier 1, total risk-based, tier 1
risk-based and tangible equity capital ratios were 5.4%, 10.1%, 8.9% and 5.4%,
respectively. BNB's total risk-based, tier 1 risk-based and tier 1 leverage
capital ratios were 15.3%, 14.3%, and 7.1%, respectively.
14
F. COMPARISON OF THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
General
Earnings for the quarter ended September 30, 1999 were $2.3 million, or
$.47 basic earnings per share, $.45 per share on a diluted basis, compared to
earnings of $1.9 million, or $.38 basic and $.36 diluted earnings per share for
the third quarter of 1998. The current quarter's earnings amount to a 24%
increase in basic earnings per share and a 25% increase in diluted earnings per
share compared to last year's third quarter. Earnings for the nine-months ended
September 30, 1999 amounted to $6.3 million, or $1.30 basic and $1.25 diluted
earnings per share, compared to $5.6 million, or $1.09 basic and $1.04 diluted
earnings per share for the comparable 1998 period. The Company's annualized
return on average assets was .71% and the annualized return on average
stockholders' equity was 9.86% during the nine-months ended September 30, 1999,
compared to .72% and 8.88%, respectively, for the nine-months ended September
30, 1998 (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
September 30, 1999 increased by $1.4 million, or 7.2%, to $20.4 million,
compared to the quarter ended September 30, 1998. The increase in interest
income was primarily attributable to a $106.0 million increase in average
interest-earning assets, offset by a 20 basis point decrease in the average
yield. The average yield on interest-earning assets decreased to 7.18% for the
three months ended September 30, 1999 from 7.38% for the three months ended
September 30, 1998. For the nine-months ended September 30, 1999, total interest
income was $59.8 million, compared to $55.5 million for the comparable period in
1998. The major reason for the increase was also the increased average balances
of interest-earning assets, which were $1.123 billion during the nine-months
ended September 30, 1999, compared to $998.2 million during the comparable
period in 1998. Partially offsetting the benefits of higher average balances in
interest-earning assets was a decline in average yields, which declined from an
average of 7.42% during the nine-months ended September 30, 1998 to an average
of 7.10% during the nine-months ended September 30, 1999.
Interest income on loans, net, for the quarter ended September 30, 1999
increased by $1.7 million, or 9.9%, to $18.5 million compared to $16.9 million
for the comparable quarter in 1998. On a year to date basis, interest income on
loans, net, increased $5.4 million to $54.2 million from the $48.8 million
earned during the nine-months ended September 30, 1998. The increase in interest
income from loans, net, for the three- and nine-months ended September 30, 1999,
compared to the same periods last year, was primarily attributable to increases
in average balances of $115.6 million and $139.4 million, respectively. The
earnings impact of higher balances of loans, net was partially offset by a
decline in the average yield on loans, net, which decreased by 21 basis points
to 7.34% during the quarter ended September 30, 1999, compared to 7.55% during
the quarter ended September 30, 1998. On a year to date basis, the yield on
loans, net, decreased from 7.59% for the nine-months ended September 30, 1998 to
7.25% during the current year period.
Interest on mortgage-backed securities for the quarter ended September 30,
1999 decreased by $282,000 to $499,000, compared to $781,000 for the same
quarter in 1998. This decrease in income was due primarily to the $15.1 million
lower average balance during the quarter ended September 30, 1999, compared to
the quarter ended September 30, 1998. Additionally, the average yield declined
by 39 basis points to an average of 6.24% during the September 30, 1999 quarter,
compared to the same quarter last year. On a year to date basis, interest on
mortgage-backed securities was $1.7 million, compared to last year's comparable
period total of $2.6 million. The decrease was also due to declines in average
balances and yields. The average balance of mortgage-backed securities declined
by $15.7 million to an average balance of $35.8 million for the nine-months
ended September 30, 1999 compared to the prior year period average balance of
$51.5 million. Average yields declined by 40 basis points during the current
period.
Income from investment securities was $1.4 million for the quarters ended
September 30, 1999 and 1998. On a year to date basis, income from investment
securities was $4.0 million and $4.2 million, respectively, for the nine-months
ended September 30, 1999 and 1998. The average yield on investment securities
decreased by 36 basis points and 41 basis points, respectively, in the current
three- and nine-month periods, compared to last year's periods due to overall
declines in market interest rates. The average balance increased by $5.5 million
to an average of $96.8 million during the quarter ended September 30, 1999,
compared to an average balance of $91.3 million for the quarter ended September
30, 1998. On a year to date basis, the average balance of investment securities
increased by $1.1 million to an average balance of $91.7 million during the
nine-months ended September 30, 1999, compared to an average balance of $90.6
million for the comparable prior year period.
15
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended September 30, 1999 increased by $907,000 or 8.2%, to $12.0 million
compared to the quarter ended September 30, 1998. The increase in interest
expense for the quarter ended September 30, 1999 was due primarily to an
increase of $123.4 million in the average balance of interest-bearing
liabilities, which averaged $1.051 billion during the current quarter, compared
to an average balance of $927.8 million during the quarter ended September 30,
1998. The increase in interest expense was partially offset by a decrease of 22
basis points in the average cost of interest-bearing liabilities during the
quarter ended September 30, 1999. The average cost of interest-bearing
liabilities decreased to 4.55% during the quarter ended September 30, 1999,
compared to 4.77% for last year's comparable quarter. The decrease was due to
generally lower market rates. On a year to date basis, interest expense on
interest-bearing liabilities totaled $34.8 million, compared to last year's to
date total of $31.5 million, an increase of 10.7%. The increase is attributable
to the higher average balance of interest-bearing liabilities, which averaged
$1.024 billion during the nine-months ended September 30, 1999, compared to an
average balance of $894.0 million during the nine-months ended September 30,
1998. Partially offsetting the impact of higher average balances, was a 16 basis
point decline in the cost of interest-bearing liabilities during the nine-months
ended September 30, 1999.
Interest expense on deposit accounts was $6.5 million for the quarter ended
September 30, 1999, an increase of $320,000 from the $6.2 million for the
quarter ended September 30, 1998. The increase in the expense was due to an
increase in the deposit account balances of $67.5 million, partially offset by a
21 basis point decrease in the average cost of funds during the quarter ended
September 30, 1999, compared to the quarter ended September 30, 1998. The cost
of funds declined due to lower rates paid on most types of deposit accounts. The
average balance of deposit accounts increased from $608.8 million for the
quarter ending September 30, 1998, to an average balance of $676.3 million for
the current quarter. Most of the increase is attributable to the odd-month
retail certificate of deposit acquisition program and a special "money market"
savings account initiated by BFS during 1998. For the nine-months ended
September 30, 1999, interest expense on deposit accounts was $19.0 million,
compared to $17.8 million for the prior year period, an increase of $1.2
million, or 7.1%. The increase was due to the effects of higher average deposit
account balances, which averaged $658.6 million during the nine-months ended
September 30, 1999, compared to $590.8 million in the prior year period,
partially offset by the effects of a decrease of 16 basis points in the total
cost of deposit accounts during the current period.
Interest expense on borrowed funds increased from $4.9 million for the
quarter ended September 30, 1998 to $5.5 million for the current quarter. The
average cost of borrowed funds decreased from 6.13% during the quarter ended
September 30, 1998 to an average of 5.84% during the current quarter. The
average balance increased from $319.0 million during the quarter ended September
30, 1998 to an average balance of $374.8 million during the current quarter. For
the nine-months ended September 30, 1999 interest expense on borrowed funds was
$15.8 million, compared to $13.7 million for the nine-months ended September 30,
1998. The increase in interest expense on borrowed funds was caused by a $62.4
million increase in the average balances from $303.1 million for the nine-months
ended September 30, 1998 to $365.5 million during the current period. The
increase was partially offset by a reduction of 26 basis points in the cost of
borrowed money during the nine-months ended September 30, 1999.
Net Interest Income
Net interest income during the third quarters of 1999 and 1998 was $8.5
million and $8.0 million, respectively, as industry-wide margin shrinkage was
offset by net interest income earned from asset growth. The net interest margin,
at 2.97% for the quarter ended September 30, 1999 was 13 basis points lower than
last year's comparable quarter. On a year to date basis, net interest income was
$25.0 million, compared to $24.1 million for the prior year to date. The net
interest margin was 2.96% for the nine-months ended September 30, 1999, compared
to 3.22% for the prior year comparable period. The net interest margin was
compressed due to the continuing effects of a relatively flat interest rate
yield curve.
16
Provision for Loan Losses
The Company's provision for loan losses amounted to $390,000 for the
quarter ended September 30, 1999, compared to the $442,000 loan loss provision
for the comparable quarter last year. For the nine-months ended September 30,
1999 and 1998, the provision was $1.3 million and $1.2 million, respectively.
The allowance for loan losses increased from $8.5 million at December 31, 1998
to $10.1 million at September 30, 1999 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 size and type of loans and 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 September 30, 1999, the Company
classified $3.8 million of loans ($2.9 million at BFS and $877,000 at BNB) as
sub-standard compared to $4.2 million ($3.4 million of BFS and $770,000 of BNB)
at December 31, 1998. 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 September 30, 1999 was sufficient to provide
for anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at September 30, 1999 was $10.1
million, which represented 1,273% of non-performing loans or .98% of total
loans, compared to $8.5 million at December 31, 1998, or 1,029% of
non-performing loans and .88% of total loans. Management believes this coverage
ratio is prudent due to the balance increase in the combined total of
construction and land, commercial real estate, multi-family, home equity and
improvement, consumer and business loans. These combined total balances
increased from $153.8 at December 31, 1998 to $197.2 million at September 30,
1999.
Non-performing loans at September 30, 1999 amounted to $792,000 or .08% of
total loans, compared to $826,000, or .09% of total loans, at December 31, 1998.
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 $52,000 and $69,000 for the nine-month periods ended September 30, 1999 and
1998, respectively. The amount of interest income that was recorded on these
loans was $37,000 and $33,000 for the nine-month periods ended September 30,
1999 and 1998, respectively.
At September 30, 1999, loans characterized as impaired, pursuant to SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan", and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure", totaled $25,000. All of the impaired loans have been measured using
the fair value of the collateral method. During the nine-months ended September
30, 1999, the average recorded value of impaired loans was $310,000, no interest
income was recognized and $2,000 of interest income would have been recognized
under the loans' original terms.
At September 30, 1999 and at December 31, 1998, the Company had $233,000
and $47,000 in real estate owned, respectively. Further, at September 30, 1999,
the Company also had restructured real estate loans amounting to $235,000 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.
17
Non-Interest Income
Total non-interest income in the third quarter of 1999 increased by
$186,000, or 12.4%, to $1.7 million from $1.5 million for the three months ended
September 30, 1998. The largest component of non-interest income was other
non-interest income, which increased to $548,000 for the quarter ended September
30, 1999 from $192,000 for the quarter ended September 30, 1998. The primary
reason for this increase was due to the Company's purchase of a $20 million BOLI
policy at the beginning of the current quarter. The increase in the cash
surrender value of the policy is recorded as non-interest income. On a
year-to-date basis, other non-interest income increased to $1.0 million, also
due primarily to the BOLI purchase, from $600,000 for the nine-months ended
September 30, 1998. Gain on sale of loans declined to $541,000 during the
quarter ended September 30, 1999, from $704,000 for the comparable quarter last
year, despite an increase in the volume of loans sold, as market conditions
reduced profit margins on loans sold. The Company sold $86.7 million of loans
during the quarter ended September 30, 1999 compared to $78.0 million during
last year's comparable quarter. On a year to date basis, gain on sale of loans
amounted to $2.2 million, compared to $2.1 million for the comparable period
last year, also due to increased volume of loans sold. The Company sells the
vast majority of fixed-rate loans it originates. The continuation of a strong
housing market and economy has contributed to increased volume for financing of
home purchases.
Non-Interest Expense
Total non-interest expense was $6.3 million and $5.9 million, respectively,
for the quarters ended September 30, 1999 and 1998. On a year to date basis,
total non-interest expense increased from $17.9 million for the nine-months
ended September 30, 1998 to $18.6 million for the nine-months ended September
30, 1999. Compensation and benefits increased by $355,000 and $748,000 for the
three- and nine-months ended September 30, 1999, respectively, compared to the
prior year totals. The increases were due to additional staff hired to expand
the Company's corporate lending department and normal year over year salary
increases. On a year to date basis, other non-interest expense declined to $4.8
million for the nine-months ended September 30, 1999, compared to $5.0 million
for the nine-months ended September 30, 1998, as the prior year's period
included consulting and legal costs incurred to assist in establishing the
Company's tax saving strategies. These strategies included the formation of real
estate investment trusts and securities subsidiaries in early 1998.
Income Tax Expense
Income tax expense for the quarters ended September 30, 1999 and 1998 was
$1.3 million. The effective income tax rate was 35.7% during the current
quarter, compared to 40.0% for the quarter ended September 30, 1998. On a year
to date basis, the current period income tax expense was $3.8 million, for an
effective rate of 37.7%, compared to $3.9 million, for an effective rate of
40.7% for the nine-months ended September 30, 1998. The lower effective rate
during the current periods is due to the full implementation of the tax saving
strategies.
18
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
retail and wholesale deposits and utilizing longer-term 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. 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 September 30, 1999, the Company's one year gap was a negative 2.19% of
total assets, compared to a positive 6.6% of total assets at December 31, 1998.
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.
19
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, 1998 for a
detail of the GAP and NPV tables. There have been no material changes in the net
portfolio value since December 31, 1998.
In addition to historical information, this 10-Q includes certain
forward-looking statements based on current management expectations. Generally,
verbs in the future tense and the words, "believe", "expect", "anticipate",
"intends", "opinion", "potential", and similar expressions identify
forward-looking statements. Examples of this forward-looking information can be
found in, but are not limited to, the allowance for losses discussion, Year 2000
issues, subsequent events and any quantitative and qualitative disclosure about
market risk. The Company's actual results could differ materially from those
management expectations. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company' loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors (including Year 2000 problems) affecting the Company's
operations, markets, products, services and prices. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions, which may be made to any
forward-looking statements, to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, 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. Broadway National Bank, a national bank subsidiary of
the Company, was named a defendant in the Superior Court for Suffolk County,
Massachusetts, civil action No. SUCV 99-018F served on April 12, 1999 in a
matter captioned "Glyptal, Inc. v. John Hetherton, Jr., Fleet Bank, NA and
Broadway National Bank of Chelsea." The suit alleges that an officer of the
Plaintiff, Glyptal, embezzled funds from Plaintiff, by making unauthorized
transfers from Plaintiff's corporate accounts and subsequently deposited checks
drawn on such account into an account at Broadway National Bank. Plaintiff
alleges that Broadway National Bank knew or should have known of the alleged
fraudulent actions of Plaintiff's Officer, and that Broadway National Bank owed
a duty to Plaintiff to investigate the transactions and protect Plaintiff from
the alleged fraudulent actions. The Plaintiff is seeking damages for the alleged
breach of duty by the defendants. Broadway National Bank intends to deny the
allegations that it owed or breached any duty to Plaintiff or that it is liable
for any losses incurred by Plaintiff. Broadway National Bank intends to
vigorously defend the action and believes the action is not likely to result in
any material loss or adverse effect on the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On August 4, 1999, the Company entered into a definitive purchase and Sale
Agreement ("Purchase Agreement") with Diversified Ventures, Inc., d/b/a/ Forward
Financial Company ("Forward Financial"), Ellsmere Insurance Agency, Inc.
("Ellsmere"), and Gene J. DeFeudis. Pursuant to the Purchase Agreement, the
Company will purchase all of the outstanding capital stock of Forward Financial
and Ellsmere in a cash transaction. Consummation of the sale is subject to
various conditions, including regulatory approval, and the Company anticipates
the transaction will close in the fourth quarter of 1999. In connection with the
transaction, the Company filed a Current Report of Form 8-K on August 6, 1999.
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,
as amended, (SEC No. 33-94860) originally filed on July 21, 1995
(b) Form 8-K filed on August 6, 1999 regarding the anticipated acquisition
of Diversified Ventures, Inc., Ellsmere Insurance Agency, Inc. and Gene J.
DeFeudis.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTONFED BANCORP, INC.
(Registrant)
Date: November 15, 1999 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: November 15, 1999 By: /s/ John A. Simas
__________________________________
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
22