1
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: June 30, 2000
--------------------------
Commission File Number 1-13936
--------------------------
BOSTONFED BANCORP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1940834
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 New England Executive Park, Burlington, Massachusetts 01803
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(Address of principal executive offices) (Zip Code)
(781) 273-0300
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(Registrant's telephone number, including area code)
Not Applicable
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(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 July 31, 2000: 4,902,881.
2
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December 31, 1999 2
Consolidated Statements of Operations for the Three
and Six Months ended June 30, 2000 and 1999 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended
June 30, 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2000 and 1999 (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 - 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18 - 19
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(In Thousands)
June 30, December 31,
2000 1999
----------- --------------
Assets (Unaudited)
- ------
Cash and cash equivalents $ 40,679 $ 34,696
Investment securities available for sale
(amortized cost of $67,264 and $55,051 at
June 30, 2000 and December 31, 1999
respectively) 66,019 53,203
Investment securities held to maturity (fair
value of $2,267 and $2,275 at June 30,
2000 and December 31, 1999) 2,304 2,304
Mortgage-backed securities available for sale
(amortized cost of $16,676 and $15,881 at
June 30, 2000 and December 31, 1999) 16,218 15,540
Mortgage-backed securities held to maturity (fair
value of $59,382 and $14,030 at June 30,
2000 and December 31, 1999) 61,275 13,941
Mortgage loans held for sale 23,866 16,174
Loans, net of allowance for loan losses of $10,884
and $10,654 at June 30, 2000 and December 31,
1999 1,014,317 1,032,594
Accrued interest receivable 7,224 6,267
Stock in FHLB of Boston and Federal Reserve Bank 20,649 20,311
Premises and equipment 9,576 8,212
Real estate owned 232 376
Goodwill 19,904 19,519
Other assets 31,820 30,516
---------- ----------
Total assets $1,314,083 $1,253,653
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposit accounts $839,099 $770,049
Federal Home Loan Bank advances and other
Borrowed Money 376,605 387,555
Advance payments by borrowers for taxes
and insurance 2,670 3,298
Other liabilities 6,960 7,047
---------- ----------
Total liabilities 1,225,334 1,167,949
---------- ----------
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 (4,902,881 and
4,973,081 shares outstanding at June 30, 2000
and December 31, 1999, respectively) 66 66
Additional paid-in capital 67,321 67,198
Retained earnings 54,025 50,481
Accumulated other comprehensive income (loss) (1,165) (1,485)
Less treasury stock, (1,686,736 shares and
1,616,536 shares at June 30, 2000
and December 31, 1999, respectively), at cost (29,605) (28,532)
Less unallocated ESOP shares (1,663) (1,663)
Less unearned Stock-Based Incentive Plan (230) (361)
---------- ----------
Total stockholders' equity 88,749 85,704
---------- ----------
Total liabilities and stockholders' equity $1,314,083 $1,253,653
========== ==========
See accompanying condensed notes to consolidated financial statements.
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4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars In Thousands, except per share amount)
Three Months Ended Six Months Ended
------------------ ------------------
6/30/00 6/30/99 6/30/00 6/30/99
------------------ ------------------
(Unaudited) (Unaudited)
Interest income:
Loans $ 19,766 $ 17,951 $ 39,427 $ 35,609
Mortgage-backed securities 1,271 567 1,969 1,183
Investment securities 1,645 1,314 3,032 2,571
-------- --------- -------- ---------
Total interest income 22,682 19,832 44,428 39,363
-------- --------- -------- ---------
Interest expense:
Deposit accounts 7,773 6,281 14,953 12,556
Borrowed funds 5,932 5,214 11,648 10,302
-------- --------- -------- ---------
Total interest expense 13,705 11,495 26,601 22,858
-------- --------- -------- ---------
Net interest income 8,977 8,337 17,827 16,505
Provision for loan losses 249 430 500 860
-------- --------- -------- ---------
Net interest
income after provision 8,728 7,907 17,327 15,645
Non-interest income:
Loan processing and servicing
fees 165 118 340 279
Gain on sale of loans 2,869 932 4,777 1,696
Deposit service fees 473 439 933 848
Income from bank owned life
insurance 320 -- 635 --
Other 378 241 686 454
-------- --------- -------- ---------
Total non-interest income 4,205 1,730 7,371 3,277
-------- --------- -------- ---------
Non-interest expense:
Compensation and benefits 5,114 3,675 10,248 7,301
Occupancy and equipment 1,066 804 2,070 1,601
Federal deposit insurance
premiums 41 89 80 183
Data processing 366 353 721 701
Advertising expense 293 238 537 361
Real estate operations 13 (25) (274) (46)
Amortization of goodwill 354 53 697 106
Other 1,881 1,108 3,276 2,131
-------- --------- -------- ---------
Total non-interest expense 9,128 6,295 17,355 12,338
-------- --------- -------- ---------
Income before income taxes 3,805 3,342 7,343 6,584
Income tax expense 1,318 1,315 2,574 2,553
-------- --------- -------- ---------
Net income $ 2,487 $ 2,027 $ 4,769 $ 4,031
======== ======== ======== ========
Basic earnings per share $ 0.52 $ 0.42 $ 1.00 $ 0.83
Diluted earnings
per share $ 0.52 $ 0.40 $ 0.99 $ 0.80
Basic weighted average shares
outstanding 4,763,082 4,809,697 4,755,787 4,831,764
Common stock equivalents
due to dilutive effect
of stock options 28,329 181,934 41,844 186,976
Diluted total weighted average
shares outstanding 4,791,411 4,991,631 4,797,631 5,018,740
See accompanying condensed notes to consolidated financial statements.
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5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 2000
(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, 1999 $66 67,198 50,481 (28,532) (1,485) (1,663) (361) 85,704
Net income -- -- 2,282 -- -- -- -- 2,282
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax of $396) -- -- -- -- 501 -- -- 501
-------
Total comprehensive income -- -- -- -- -- -- -- 2,783
Cash dividends declared and
paid ($0.12 per share) -- -- (587) -- -- -- -- (587)
Common Stock repurchased
(69 shares at an average
price of $15.63 per share) -- -- - - (1,073) -- -- -- (1,073)
Stock option exercised
(3 shares at an average price
$14.66 per share, net of tax
benefit) -- (13) -- 52 -- -- -- 39
Allocation relating to earned
portion of Stock-Based
Incentive Plan -- - - -- -- -- -- 69 69
Appreciation in fair value of
shares charged to expense for
compensation plans -- 75 -- -- -- -- -- 75
--- ------- ------- ------- ------ ------ ---- -------
Balance at March 31, 2000 $66 67,260 52,176 (29,553) (984) (1,663) (292) 87,010
--- ------- ------- ------- ------ ------ ---- -------
Net income -- -- 2,487 -- -- -- -- 2,487
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $231) -- -- -- -- (181) -- -- (181)
-------
Total comprehensive income -- -- -- -- -- -- -- 2,306
Cash dividends declared and
paid ($0.13 per share) -- -- (638) -- -- -- -- (638)
Common Stock repurchased
(5 shares at an average
price of $11.42 per share) -- -- -- (52) -- -- -- (52)
Allocation relating to earned
portion of Stock-Based
Incentive Plan -- -- -- -- -- -- 62 62
Appreciation in fair value of
shares charged to expense for
compensation plans -- 61 -- -- -- -- -- 61
--- ------- ------- ------- ------ ------ ---- -------
Balance at June 30, 2000 $66 67,321 54,025 (29,605) (1,165) (1,663) (230) 88,749
--- ------- ------- ------- ------ ------ ---- -------
See accompanying condensed notes to consolidated financial statements.
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
2000 1999
----------- ----------
(Unaudited)
Net cash flows from operating activities:
Net income $ 4,769 $ 4,031
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 1,308 620
Earned SIP shares 131 209
Appreciation in fair value of shares
charged to expense for compensation plans 136 310
Income from bank owned life insurance (635) --
Provision for loan losses 500 860
Provision for valuation allowance for
real state owned 6 --
Loans originated for sale (99,579) (179,686)
Proceeds from sale of loans 96,664 177,110
Gain on sale of loans (4,777) (1,696)
Gain on sale of real estate
acquired through foreclosure (4) --
Increase in accrued interest receivable (957) (780)
Increase in prepaid expenses
and other assets, net (758) (941)
Decrease in accrued expenses and
other liabilities, net (254) (704)
-------- ---------
Net cash used in
operating activities (3,450) (667)
-------- ---------
Cash flows from investing activities:
Net cash paid for Forward Financial (994) --
Proceed from sale of investment
securities available for sale 41
Proceeds from maturities of investment
securities held to maturity -- 5,000
Proceeds from maturities of investment
securities available for sale 2,000 10,268
Purchase of investment securities
available for sale (14,519) (23,892)
Purchase of mortgage-backed securities
available for sale (1,986) --
Purchase of FHLB and Federal Reserve Stock (338) (1,659)
Principal payments on mortgage-backed
securities available for sale 1,171 3,877
Principal payments on mortgage-
backed securities held to maturity 3,635 7,404
Principal payments on investment
securities available for sale 295 --
Increase in loans, net (33,197) (37,322)
Purchases of premises and equipment (1,978) (550)
Proceeds from sale of real estate owned 175 47
Additional investment in real
estate owned (33) --
-------- ---------
Net cash used in
investing activities (45,728) (36,827)
-------- ---------
-Continued on next page-
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
2000 1999
----------- ---------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 69,050 20,825
Repayments of Federal Home Loan
Bank advances (209,810) (67,291)
Proceeds from Federal Home Loan
Bank advances 196,915 103,291
Proceeds from other borrowings 1,945 --
Cash dividends paid (1,225) (1,116)
Common stock repurchased (1,125) (1,610)
Options exercised (39) --
Decrease in advance payments by
borrowers for taxes and insurance (628) (551)
--------- ---------
Net cash provided by
financing activities 55,161 53,548
--------- ---------
Net decrease
in cash and cash equivalents 5,983 16,054
Cash and cash equivalents at beginning of year 34,696 37,201
--------- ---------
Cash and cash equivalents at end of quarter $ 40,679 $ 53,225
========= =========
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest $ 27,166 $ 22,676
========= =========
Taxes $ 401 $ 3,536
========= =========
See accompanying condensed notes to consolidated financial statements.
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BOSTONFED BANCORP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements as of June 30, 2000 and
December 31, 1999 and for the three- and six-month periods ended June 30, 2000
and 1999 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, 1999.
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 six-month periods ended
June 30, 2000 and 1999 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 June 30, 2000, the Company had commitments of $85.3 million to originate
mortgage loans and $10.0 million to purchase loans from correspondent lenders.
Of these $95.3 million commitments, $81.1 million were adjustable rate mortgage
loans with interest rates ranging from 6.13% to 11.25% and $14.2 million were
fixed rate mortgage loans with interest rates ranging from 7.38% to 10.50%. The
Company also had commitments to sell $33.8 million of mortgage loans.
At June 30, 2000, the Company was servicing first mortgage loans of
approximately $870.4 million, which are either partially or wholly-owned by
others.
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9
NOTE 3: 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. Asset sales between the Banks
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' Board of Directors.
The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable segments.
8
10
(Dollars In Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
---------- ------- ---------- ------ ------------ ------------
At or for the three-months
ended June 30, 2000:
Interest income $ 20,421 2,239 22,660 66 (44) 22,682
Interest expense 13,023 600 13,623 126 (44) 13,705
Provision for loan losses 159 90 249 249
Non-interest income 3,942 308 4,250 5 (50) 4,205
Non-interest expense 7,766 1,245 9,011 167 (50) 9,128
Income tax expense 1,182 210 1,392 (74) 1,318
Net income 2,233 402 2,635 (148) 2,487
Total assets 1,165,070 147,167 1,312,237 95,643 (93,797) 1,314,083
Net interest margin 2.76% 5.28% n.m. n.m. n.m. 2.99%
Return on average assets .77% 1.12% n.m. n.m. n.m. .77%
Return on average equity 11.01% 13.52% n.m. n.m. n.m. 11.03%
At or for the three-months
ended June 30, 1999:
Interest income $ 17,526 2,165 19,691 253 (112) 19,832
Interest expense 11,067 540 11,607 (112) 11,495
Provision for loan losses 400 30 430 430
Non-interest income 1,525 205 1,730 1,730
Non-interest expense 5,051 1,077 6,128 167 6,295
Income tax expense 1,008 272 1,280 35 1,315
Net income 1,524 452 1,976 51 2,027
Total assets 1,046,968 137,348 1,184,316 86,035 (75,481) 1,194,870
Net interest margin 2.61% 5.21% n.m. n.m. n.m. 2.97%
Return on average assets .59% 1.33% n.m. n.m. n.m. .69%
Return on average equity 10.90% 14.78% n.m. n.m. n.m. 9.55%
n.m. = not meaningful
(Dollars in Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
---------- ------- ---------- ------ ------------ ------------
At or for the six-months
ended June 30, 2000:
Interest income $ 39,978 4,424 44,402 113 (87) 44,428
Interest expense 25,266 1,192 26,458 230 (87) 26,601
Provision for loan losses 380 120 500 500
Non-interest income 6,879 584 7,463 5 (97) 7,371
Non-interest expense 14,675 2,453 17,128 324 (97) 17,355
Income tax expense 2,286 430 2,716 (142) 2,574
Net income 4,250 813 5,063 (294) 4,769
Total assets 1,165,070 147,167 1,312,237 95,643 (93,797) 1,314,083
Net interest margin 2.78% 5.25% n.m. n.m. n.m. 3.01%
Return on average assets .75% 1.15% n.m. n.m. n.m. .75%
Return on average equity 10.66% 13.74% n.m. n.m. n.m. 10.72%
At or for the six-months
ended June 30, 1999:
Interest income $ 34,766 4,317 39,083 537 (257) 39,363
Interest expense 22,051 1,064 23,115 (257) 22,858
Provision for loan losses 800 60 860 860
Non-interest income 2,891 386 3,277 3,277
Non-interest expense 9,906 2,163 12,069 269 12,338
Income tax expense 1,901 545 2,446 107 2,553
Net income 2,998 872 3,870 161 4,031
Total assets 1,046,968 137,348 1,184,316 86,035 (75,481) 1,194,870
Net interest margin 2.60% 5.27% n.m. n.m. n.m. 2.96%
Return on average assets .59% 1.29% n.m. n.m. n.m. .69%
Return on average equity 10.88% 14.14% n.m. n.m. n.m. 9.51%
n.m. = not meaningful
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the quarter ended June 30: 2000 1999
----------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- --------- --------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 96,902 $ 1,645 6.79% $ 91,191 $ 1,314 5.76%
Loan, net and mortgage loans held for sale (2) 1,026,354 19,766 7.70% 998,231 17,951 7.19%
Mortgage-backed securities (3) 79,185 1,271 6.42% 34,511 567 6.57%
---------- ------- ---------- -------
Total interest-earning assets 1,202,441 22,682 7.55% 1,123,933 19,832 7.06%
------- ---- ------- ----
Non-interest-earning assets 95,924 46,573
---------- ----------
Total assets $1,298,365 $1,170,506
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 54,636 389 2.85% $ 58,577 419 2.86%
Savings accounts 161,897 1,111 2.74% 141,185 882 2.50%
NOW accounts 119,869 225 0.75% 110,749 212 0.77%
Certificate accounts 419,349 6,048 5.77% 346,860 4,768 5.50%
---------- ------- --------- -------
Total 755,751 7,773 4.11% 657,371 6,281 3.82%
Borrowed Funds (4) 382,259 5,932 6.21% 364,089 5,214 5.73%
---------- ------- --------- -------
Total interest-bearing liabilities 1,138,010 13,705 4.82% 1,021,460 11,495 4.50%
------- ---- ------- ----
Non-interest-bearing liabilities 70,162 64,153
---------- ---------
Total liabilities 1,208,172 1,085,613
---------- ---------
Stockholders' equity 90,193 84,893
---------- ---------
Total liabilities and
stockholders' equity $1,298,365 $1,170,506
========== ==========
Net interest rate spread (5) $ 8,977 2.73% $ 8,337 2.56%
======= ==== ======= ====
Net interest margin (6) 2.99% 2.97%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 105.66% 110.03%
========== ==========
(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 6.20% and
5.70% for the three months ended June 30, 2000 and June 30, 1999,
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.
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields/Costs
(Unaudited)
For the six months ended June 30: 2000 1999
------------------------------------ -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ---------- ------- ---------- -------- ------
(Dollars in thousands)
Assets:
Interest-earning
assets:
Investment securities (1) $ 92,103 $ 3,032 6.58% $ 89,135 $ 2,571 5.77%
Loan, net and mortgage loans held for sale (2) 1,032,899 39,427 7.63% 988,033 35,609 7.21%
Mortgage-backed securities (3) 61,209 1,969 6.43% 37,675 1,183 6.28%
----------- -------- ---------- -------
Total interest-earning assets 1,186,211 44,428 7.49% 1,114,843 39,363 7.06%
-------- ---- ---------- ------- ----
Non-interest-earning assets 92,258 45,932
----------- ----------
Total assets $ 1,278,469 $1,160,775
=========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 55,421 787 2.84% $ 59,205 845 2.85%
Savings accounts 155,948 2,091 2.68% 136,779 1,661 2.43%
NOW accounts 116,388 441 0.76% 109,659 473 0.86%
Certificate accounts 409,301 11,634 5.68% 344,129 9,577 5.57%
----------- -------- ---------- -------
Total 737,058 14,953 4.06% 649,772 12,556 3.86%
Borrowed Funds (4) 384,663 11,648 6.06% 360,827 10,302 5.71%
----------- -------- ---------- -------
Total interest-bearing liabilities 1,121,721 26,601 4.74% 1,010,599 22,858 4.52%
-------- ---- ------- ----
Non-interest-bearing liabilities 67,799 65,444
---------- ----------
Total liabilities 1,189,520 1,076,043
---------- ----------
Stockholders' equity 88,949 84,732
---------- ----------
Total liabilities and
stockholders' equity $ 1,278,469 $1,160,775
=========== ==========
Net interest rate spread (5) $ 17,827 2.75% $16,505 2.54%
======== ==== ======= ====
Net interest margin (6) 3.01% 2.96%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 105.75% 110.32%
=========== ==========
(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 6.05% and
5.67% for the six months ended June 30, 2000 and June 30, 1999,
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.
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13
A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS GENERAL
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's loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors 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.
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. Each is considered a
business segment and accordingly, the Company has complied with the segment
reporting requirement in Note 4 of this document and in discussion herein as
appropriate. 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 ("OCC"). On August 4, 1999, the
Company entered into a Purchase and Sale Agreement by and among the Company,
Diversified Ventures, Inc., d/b/a Forward Financial Company ("Forward
Financial"), Ellsmere Insurance Agency, Inc., ("Ellsmere") and Gene J. DeFeudis,
pursuant to which BFS purchased all of the outstanding capital stock of Forward
Financial and BNB purchased all of the outstanding capital stock of Ellsmere in
a cash transaction for approximately $38.3 million. The transaction was
consummated at the close of business on December 6, 1999 and was recorded by the
use of the purchase method of accounting. During March 2000, an additional
$975,000 was paid by BFS to Mr. DeFeudis in order to satisfy the remaining
payments due Mr. DeFeudis in connection with the acquisition, which payment was
based on certain performance agreed to by the parties. 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.
Through Forward Financial, the Company also originates consumer loans primarily
with customers purchasing or refinancing manufactured homes, recreational
vehicles, marine and leased equipment and subsequently sells substantially all
of such loans, servicing released. 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, other borrowings and proceeds
from the sale of loans.
B. FINANCIAL CONDITION
Total assets at June 30, 2000 were $1.314 billion, compared to $1.254
billion at December 31, 1999, an increase of $60 million or 4.8%. Asset growth
was primarily attributable to a $47.3 million increase in mortgage-backed
securities held to maturity, partially offset by a $18.3 million decrease in
loans, net of allowance for loan losses. Mortgage-backed securities held to
maturity increased from $13.9 million at December 31, 1999 to $61.3 million at
June 30, 2000 due to the securitization of $51.0 million of loans into Federal
Home Loan Mortgage Corporation ("FHLMC") securities during the first quarter of
2000. The securitization of loans into mortgage-backed securities caused loans,
net, to decline despite new loan portfolio volume. Other components of asset
growth included cash and cash equivalents, up $6.0 million to a balance of $40.7
million at June 30,2000, compared to $34.7 million at December 31, 1999,
14
investment securities available for sale, up $12.8 million to a balance of $66.0
million at June 30, 2000, compared to $53.2 million at December 31, 1999 and
mortgage loans held for sale, up $7.7 million to a balance of $23.9 million at
June 30, 2000, compared to $16.2 million at December 31, 1999. Deposit accounts
increased by $69.1 million, or 9.0%, from a balance of $770.0 million at
December 31, 1999 to a balance of $839.1 million at June 30, 2000. The Company
believes some of the deposit growth was the result of run-off from other
financial institutions caused by the disruptive effects of consolidation in the
Company's market area. The increase also includes the Company's acquisition of a
net of $16.5 million of wholesale brokered certificates of deposit and $8.0
million of deposits from its new Woburn Office. Federal Home Loan Bank advances
and other borrowings decreased by $11.0 million, to a balance of $376.6 million
at June 30, 2000 from a balance of $387.6 million at December 31, 1999.
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15
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 June 30, 2000 and
December 31, 1999, BFS's liquidity ratio was 13.7% and 6.9%, respectively.
Management has maintained liquidity fairly close 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,
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 June 30, 2000, BFS's cash and loans,
investments, and mortgage-backed securities available for sale totaled $100.8
million or 8.7% 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 June 30, 2000, the Company had $376.6
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 June 30, 2000, the Company had commitments to originate loans and unused
outstanding lines of credit totaling $211.4 million. The Company anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts which are scheduled to mature in
less than one year from June 30, 2000, totaled $271.1 million.
At June 30, 2000, the consolidated stockholders' equity to total assets
ratio was 6.8%. As of June 30, 2000, 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 9.0%, 10.2% and 5.4%,
respectively. BFS's tier 1, total risk-based, tier 1 risk-based and tangible
equity capital ratios were 5.5%, 10.2%, 9.1% and 5.5%, respectively. BNB's total
risk-based, tier 1 risk-based and tier 1 leverage capital ratios were 12.9%,
12.1%, and 6.3%, respectively.
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16
D. COMPARISON OF THREE- AND SIX-MONTHS ENDED JUNE 30, 2000 AND 1999 GENERAL
Earnings for the quarter ended June 30, 2000 were $2.5 million, or $.52
basic and diluted earnings per share, compared to earnings of $2.0 million, or
$.42 basic and $.40 diluted earnings per share for the second quarter of 1999.
The three and six months ended June 30, 2000 includes the results of Diversified
Ventures, Inc., d/b/a Forward Financial Company and the results of Ellsmere
Insurance Agency, Inc. (collectively "Forward Financial") whereas the three and
six months ended June 30, 1999 do not. The current quarter's earnings amount to
an 30% improvement in diluted earnings per share compared to last year's second
quarter. Earnings for the six-months ended June 30, 2000 amounted to $4.8
million, or $1.00 basic and $.99 diluted earnings per share, compared to $4.0
million, or $.83 basic and $.80 diluted earnings per share for the comparable
1999 period. The Company's annualized return on average assets was .75% and the
annualized return on average stockholders' equity was 10.72% during the
six-months ended June 30, 2000, compared to .69% and 9.51%, respectively, for
the six-months ended June 30, 1999 (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 June
30, 2000 increased by $2.9 million, or 14.6%, to $22.7 million, compared to the
quarter ended June 30, 1999. The increase in interest income was due to the
combined effects of an increase of $78.5 million in average interest-earning
assets and an increase of 49 basis points in the average yield. The average
yield on interest-earning assets increased to 7.55% for the three months ended
June 30, 2000 from 7.06% for the three months ended June 30, 1999. For the first
half of 2000, total interest income was $44.4 million, compared to $39.4 million
for the comparable period in 1999. The reason for the increase was also due to
the combined effects of increased average balances of interest-earning assets,
which were $1.186 billion during the six-months ended June 30, 2000, compared to
$1.115 billion during the comparable period in 1999 and an increase of 43 basis
points in the average yield for the six months ended June 30, 2000, compared to
the six months ended June 30, 1999.
Interest income on loans, net, for the quarter ended June 30, 2000
increased by $1.8 million, or 10.0%, to $19.8 million compared to $18.0 million
for the same quarter in 1999. On a year to date basis, interest income on loans,
net, increased $3.8 million to $39.4 million from the $35.6 million earned
during the first half of 1999. The increase in interest income from loans, net,
for the three- and six-months ended June 30, 2000, compared to the same periods
last year, was primarily attributable to increases in average yields of 51 basis
points and 42 basis points, respectively. The average yield on loans, net for
the quarter ended June 30, 2000 was 7.70%, compared to an average yield of 7.19%
for the three months ended June 30, 1999. The average yield on loans, net for
the six months ended June 30,2000 was 7.63%, compared to 7.21% for the prior
year period. Interest income on loans, net was also positively impacted in the
current year periods by increases in interest earnings balances of $28.1 million
and $34.9 million for the three and six month periods ended June 30, 2000,
compared to the same periods last year.
Interest on mortgage-backed securities for the quarter ended June 30, 2000
increased by $704,000 to $1.3 million, compared to $567,000 for the same quarter
in 1999. This increase in income was due primarily to the $44.7 million higher
average balance during the quarter ended June 30, 2000, compared to the quarter
ended June 30, 1999. The increase was partially offset by a 15 basis point
decline in the average yield which declined to an average of 6.42% during the
June 30, 2000 quarter, compared to the same quarter last year. On a year to date
basis, interest on mortgage-backed securities was $2.0 million, compared to last
year's comparable period total of $1.2 million. The average balance of
mortgage-backed securities increased by $23.5 million to an average balance of
$61.2 million for the six-months ended June 30, 2000 compared to the prior year
period average balance of $37.7 million due to the securitizing of loans into
mortgage-backed securities. Average yields improved by 15 basis points during
the current year-to-date period.
Income from investment securities was $1.6 million for the quarter ended
June 30, 2000 compared to $1.3 million for the prior year quarter. On a year to
date basis, income from investment securities was $3.0 million and $2.6 million,
respectively, for the six-months ended June 30, 2000 and 1999. The average yield
on investment securities increased by 103 basis points and 81 basis points,
respectively, in the current three- and six-month periods, compared to last
year's periods due to overall increases in market interest rates. The average
balance increased by $5.7 million to an average of $96.9 million during the
quarter ended June 30, 2000, compared to an average balance of $91.2 million for
the quarter ended June 30, 1999. On a year to date basis, the average balance of
investment securities increased by $3.0 million to an average balance of $92.1
million during the six-months ended June 30, 2000, compared to an average
balance of $89.1 million for the comparable prior year period.
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17
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended June 30, 2000 increased by $2.2 million or 19.1%, to $13.7 million
compared to the quarter ended June 30, 1999. The increase in interest expense
for the quarter ended June 30, 2000 was due primarily to an increase of $116.6
million in the average balance of interest-bearing liabilities, which averaged
$1.138 billion during the current quarter, compared to an average balance of
$1.021 billion during the quarter ended June 30, 1999. An increase of 32 basis
points in the average cost of interest-bearing liabilities during the current
quarter also contributed to the increase in interest expense. The average cost
of interest-bearing liabilities increased to 4.82% during the quarter ended June
30, 2000, compared to 4.50% for last year's comparable quarter. The increase was
due to generally higher market interest rates. On a year to date basis, interest
expense on interest-bearing liabilities totaled $26.6 million, compared to last
year's to date total of $22.9 million, an increase of $3.7 million or 16.2%. The
increase is attributable to the higher average balance of interest-bearing
liabilities, which averaged $1.122 billion during the six-months ended June 30,
2000, compared to an average balance of $1,011 million during the six-months
ended June 30, 1999. Also contributing to the higher interest expense on
interest-bearing liabilities for the six months ended June 30, 2000 was a 22
basis point increase in the average cost of interest-bearing liabilities. For
the six months ended June 30, 2000 and 1999, the average cost of interest-
bearing liabilities was 4.74% and 4.52%, respectively.
Interest expense on deposit accounts was $7.8 million for the quarter ended
June 30, 2000, an increase of $1.5 million from the $6.3 million for the quarter
ended June 30, 1999. The increase in the expense was primarily due to higher
average deposit account balances of $755.8 million for the three months ended
June 30, 2000, compared to average deposit account balances of $657.4 million,
an increase of $98.4 million. A major reason for the higher average deposit
account balances is due to the Company's acquisition of brokered wholesale
certificates of deposit which totaled $152.9 million as of June 30, 2000,
compared to a balance of $92.7 million at June 30, 1999. Average deposit account
balances have also increased due to the benefits of deposit run-off from other
financial institutions caused by the disruptive effects of consolidation. The
average cost of funds increased to 4.11% in the current quarter, compared to
3.82% for last year's comparable quarter. The cost of funds increased due to
higher rates paid on all types of deposit accounts due to rising market interest
rates. For the six-months ended June 30, 2000, interest expense on deposit
accounts was $15.0 million, compared to $12.6 million for the prior year period,
an increase of $2.4 million. The increase was due to the effects of higher
average deposit account balances, which averaged $737.1 million during the
six-months ended June 30, 2000, compared to $649.8 million in the prior year
period. Additionally, an increase of 20 basis points in the total cost of
deposit accounts during the current period contributed to the increase in the
interest expense on deposit accounts. The average cost of funds for the six
months ended June 30, 2000 and 1999 was 4.06% and 3.86%, respectively.
Interest expense on borrowed funds increased from $5.2 million for the
quarter ended June 30, 1999 to $5.9 million for the current quarter. The average
cost of borrowed funds increased from 5.73% during the quarter ended June 30,
1999 to an average of 6.21% during the current quarter. The average balance
increased from $364.1 million during the second quarter of 1999 to an average
balance of $382.3 million during the second quarter of 2000. For the six-months
ended June 30, 2000 interest expense on borrowed funds was $11.6 million,
compared to $10.3 million for the six-months ended June 30, 1999. The increase
in interest expense on borrowed funds was caused by the combined effects of a
$23.9 million increase in the average balances and a 35 basis point increase in
the average cost of borrowed funds. The average balance of borrowed funds was
$384.7 million for the six months ended June 30, 2000, compared to $360.8
million for the six months ended June 30, 1999. The average cost of borrowed
funds increased to 6.06% for the six months ended June 30, 2000, compared to
5.71% average cost for the six months ended June 30, 1999. This increase was
attributable to rising market interest rates.
Net Interest Income
Net interest income during the second quarters of 2000 and 1999 was $9.0
million and $8.3 million, respectively, as increased net interest rate spreads
and margins combined with increases in interest-earning assets contributed to
the improvement in net interest income. The net interest margin and spread, at
2.99% and 2.73%, respectively, were two and 17 basis points higher than the
comparable ratios for the quarter ended June 30, 1999. On a year to date basis,
net interest income was $17.8 million, compared to $16.5 million for the prior
year to date. The net interest margin was 3.01% for the six months ended June
30, 2000, compared to 2.96% for the prior year comparable period. The net
interest margin improved due to the gradual shift to higher yielding commercial
and construction loans, equity lines and business loans. These loans also carry
a higher degree of credit risk than residential mortgage loans.
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Provision for Loan Losses
The Company's provision for loan losses was $249,000 for the quarter ended
June 30, 2000, compared to $430,000 for the comparable quarter last year. For
the six-months ended June 30, 2000 and 1999, the provision was $500,000 and
$860,000, respectively. The allowance for loan losses increased from $10.7
million at December 31, 1999 to $10.9 million at June 30, 2000 due to the year
to date provision and net charge-offs. The provision decreased for the three and
six months ended June 30, 2000, compared to the same periods last year, due to
the Company's belief that the allowance for loan losses is at a reasonable level
based on its current evaluation.
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 June 30, 2000, the Company
classified $3.8 million of loans ($3.2 million at BFS and $590,000 at BNB) as
sub-standard compared to $3.6 million ($3.0 million of BFS and $579,000 of BNB)
at December 31, 1999. 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 June 30, 2000 was sufficient to provide for
anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at June 30, 2000 was $10.9 million,
which represented 1,664% of non-performing loans or 1.04% of total loans,
compared to $10.7 million at December 31, 1999, or 1,428% of non-performing
loans and 1.01% 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
approximately $236 million at December 31, 1999 to approximately $241 million at
June 30, 2000.
Non-performing loans at June 30, 2000 amounted to $654,000 or .06% of total
loans, compared to $746,000 or .07% of total loans, at December 31, 1999.
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 $26,000 and $55,000 for the six-month periods ended June 30, 2000 and 1999,
respectively. The amount of interest income that was recorded on these loans was
$18,000 and $21,000 for the six-month periods ended June 30, 2000 and 1999,
respectively.
At June 30, 2000, loans characterized as impaired totaled $233,000. During
the six-months ended June 30, 2000, the average recorded value of impaired loans
was $234,000, $7,000 interest income was recognized and $8,000 of interest
income would have been recognized under the loans' original terms.
At June 30, 2000 and at December 31, 1999, the Company had $232,000 and
$376,000 in real estate owned, respectively. Further, at June 30, 2000, the
Company also had restructured real estate loans amounting to $233,000 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.
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Non-Interest Income
Total non-interest income in the second quarter of 2000 increased by $2.5
million, or 147.1%, to $4.2 million from $1.7 million for the three months ended
June 30, 1999. The largest component of non-interest income was gain on sale of
loans, which increased to $2.9 million during the quarter ended June 30, 2000,
from $932,000 for the quarter ended June 30, 1999. The gain on sale of loans was
higher due to the inclusion of $2.6 million of gain on sale of loans by Forward
Financial. The gains on sale of mortgage loans that BFS recorded in the quarter
ended June 30, 2000 were lower than last year's comparable quarter as the volume
of mortgage loans sold declined. Additionally, a higher percentage of mortgage
loans sold have been adjustable-rate loans, which generally are sold at lower
profit margins. BFS sold $49.2 million of mortgage loans during the quarter
ended June 30, 2000, compared to $100.2 million during last year's comparable
quarter. For the six months ended June 30, 2000 and 1999, total non-interest
income amounted to $7.4 million and $3.3 million, respectively. The vast
majority of the increase is attributable to the increase in gain on sale of
loans which increased to $4.8 million in the current period from $1.7 million
in the prior year period. The primary reason for the increase in the gain on
sale of loans was due to the inclusion of $4.2 million of gains on sale of loans
from Forward Financial. The three and six months ended June 30, 2000 also
included $320,000 and $635,000, respectively, in income from bank owned life
insurance which the Company purchased in July of 1999.
Non-Interest Expense
Total non-interest expenses increased to $9.1 million for the quarter ended
June 30, 2000 from $6.3 million for the quarter ended June 30, 1999, primarily
due to the inclusion of Forward Financial's expenses in the current year's
quarter. Compensation and benefits expense increased from $3.7 million for the
second quarter of 1999, to $5.1 million for the current quarter due to Forward
Financial's compensation and benefits expenses and normal salary increases. For
these same reasons, compensation and benefits increased to $10.2 million for the
six months ended June 30, 2000, from $7.3 million for last year's comparable
period. Occupancy and equipment expenses increased from $804,000 for the quarter
ended June 30, 1999 to $1.1 million for the current quarter, primarily due also
to the inclusion of Forward Financial's expenses. Real estate operations
provided income of $274,000 in the six months ended June 30, 2000, compared to
income of $46,000 in the first six months of 1999. The current period's income
is larger due to income recognized in the dissolution of a real estate
subsidiary of BFS. Other non-interest expenses were $1.9 million for the quarter
ended June 30, 2000, compared to $1.1 million for the quarter ended June 30,
1999. The increase was primarily due to the inclusion of Forward Financial's
non-interest expenses during the current quarter.
Income Tax Expense
Income tax expense for the quarters ended June 30, 2000 and 1999 was $1.3
million. The effective income tax rate was 34.7% during the current quarter,
compared to 39.3% for the quarter ended June 30, 1999. The effective tax rate
was lower during the current quarter due to the effects of income from bank
owned life insurance and lower non-deductible Employee Stock Ownership Plan
("ESOP") expense. Income tax expense was $2.6 million for each of the six-month
periods ended June 30, 2000 and 1999. The effective tax rates were 35.1% and
38.8%, respectively.
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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 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 June 30, 2000, the Company's one year gap was a negative 2.04% of total
assets, compared to a positive 8.5% of total assets at December 31, 1999.
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.
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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, 1999 for a
detail of the GAP and NPV tables. There have been no material changes in the net
portfolio value since December 31, 1999.
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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
(A) The Annual Meeting of Stockholders of the Corporation was held on April 26,
2000.
(B) Directors elected at Annual Meeting:
(1) Election of Directors to a three-year term
Nominee Total Votes For Total Votes Withheld
Edward P. Callahan 3,872,982 212,970
Richard J. Dennis, Sr. 3,871,667 214,284
Patricia M. Flynn 3,870,105 215,846
Charles R. Kent 3,872,923 213,028
(2) Continuing Directors Year Term Expires
David P. Conley 2002
Gene J. DeFeudis 2002
Richard J. Fahey 2001
David F. Holland 2001
W. Robert Mill 2002
Irwin W. Sizer 2001
(C) Other Matters submitted to a vote of the Stockholders of the Corporation:
Selection of Independent Auditors
Votes For Votes Against
4,072,429 11,157
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation*
3.2 Amended and Restated Bylaws as of February 23, 2000*
27 Financial Data Schedule
* Incorporated herein by reference into this document from Exhibits 3.1,
4.0 and 10.5 to the Form S-1, Registration Statement, and any amendments
thereto, originally filed on July 21, 1995, as amended and declared effective on
September 11, 1995. Registration No. 333-94860
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTONFED BANCORP, INC.
(Registrant)
Date: August 14, 2000 By: /s/ David F. Holland
----------------------------------
David F. Holland
President and
Chief Executive Officer
Date: August 14, 2000 By: /s/ John A. Simas
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John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
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