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: March 31, 2001
--------------------------
Commission File Number 1-13936
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BOSTONFED BANCORP INC.
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(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 April 30, 2001: 4,528,481.
2
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements:
Consolidated Balance Sheets as of
March 31, 2001 (unaudited) and December 31, 2000 2
Consolidated Statements of Operations for the Three
Months ended March 31, 2001 and 2000 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended
March 31, 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2001 and 2000 (unaudited) 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Average Balances and Yield / Costs 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
1
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(In Thousands)
March 31, December 31,
2001 2000
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 54,809 $ 50,675
Investment securities available for sale
(amortized cost of $67,383 at March 31, 2001
and $63,361 at December 31, 2000) 67,613 63,421
Investment securities held to maturity (fair
value of $ 1,338 at March 31, 2001 and $2,328
at December 31, 2000) 1,304 2,304
Mortgage-backed securities available for sale
(amortized cost of $39,497 at March 31, 2001
and $15,488 at December 31, 2000) 39,483 15,372
Mortgage-backed securities held to maturity (fair
value of $53,288 at March 31, 2001 and $54,970
at December 31, 2000) 52,825 55,283
Loans held for sale 19,110 12,816
Loans, net of allowance for loan losses of $11,504
and $11,381 at March 31, 2001 and December 31,
2000 1,041,927 1,036,435
Accrued interest receivable 7,404 7,375
Stock in FHLB of Boston and Federal Reserve Bank 20,674 20,649
Premises and equipment 10,244 10,647
Real estate owned 147 145
Goodwill, net of amortization 18,840 19,195
Other assets 34,282 33,465
-------- --------
Total assets $1,368,662 $1,327,782
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $858,310 $849,647
Federal Home Loan Bank advances and other
Borrowed Money 376,500 344,334
Corporation-obligated mandatorily redeemable
capital securities 32,000 32,000
Advance payments by borrowers for taxes
and insurance 3,091 2,864
Other liabilities 9,360 9,024
------- -------
Total liabilities 1,279,261 1,237,869
------- -------
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 (4,555,481
and 4,648,481 shares outstanding at March 31, 2001
and December 31, 2000, respectively) 66 66
Additional paid-in capital 67,706 67,538
Retained earnings 59,102 57,696
Accumulated other comprehensive income 132 88
Less: Treasury stock, at cost (2,052,236 shares
and 1,956,736 shares at March 31, 2001 and
December 31, 2000, respectively at cost) (36,448) (34,281)
Less: Unallocated ESOP shares (1,058) (1,058)
Less: Unearned Stock-Based Incentive Plan (99) (136)
-------- --------
Total stockholders' equity 89,401 89,913
-------- --------
Total liabilities and stockholders' equity $1,368,662 $1,327,782
======== ========
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
------------------
3/31/01 3/31/00
------------------
(Unaudited)
Interest income:
Loans $ 20,890 $ 19,661
Mortgage-backed securities 1,286 698
Investment securities 1,690 1,387
------- -------
Total interest income 23,866 21,746
------- -------
Interest expense:
Deposit accounts 8,224 7,180
Borrowed funds 5,414 5,716
Corporation obligated mandatorily
redeemable capital securities
distributions 880 0
------- -------
Total interest expense 14,518 12,896
------- -------
Net interest income 9,348 8,850
Provision for loan losses 212 251
------- -------
Net interest
income after provision 9,136 8,599
Non-interest income:
Deposit service fees 574 460
Loan processing and servicing
fees 130 175
Gain on sale of loans 1,619 1,908
Income from bank owned life
insurance 306 315
Gain on sale of investments 215 0
Other 356 308
------- -------
Total non-interest income 3,200 3,166
------- -------
Non-interest expense:
Compensation and benefits 5,452 5,134
Occupancy and equipment 1,092 1,004
Data processing 439 355
Advertising expense 220 244
Federal deposit insurance
premiums 44 39
Real estate operations 3 (287)
Amortization of goodwill 354 343
Other 1,622 1,395
------- -------
Total non-interest expense 9,226 8,227
------- -------
Income before income taxes 3,110 3,538
Income tax expense 1,100 1,256
------- -------
Net income $ 2,010 $ 2,282
======= =======
Basic earnings per share $0.45 $0.48
Diluted earnings
per share $0.42 $0.48
Basic weighted average shares
outstanding 4,497,832 4,744,871
Common stock equivalents
due to dilutive effect
of stock options 320,229 55,817
Diluted total weighted average
shares outstanding 4,818,061 4,800,688
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
Three Months Ended March 31, 2001
(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, 2000 $ 66 67,538 57,696 (34,281) 88 (1,058) (136) 89,913
Net income - - - - 2,010 - - - - - - - - 2,010
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax of $25) - - - - - - - - 44 - - - - 44
--------
Total comprehensive income - - - - - - - - - - - - - - 2,054
Cash dividends declared and
paid ($0.13 per share) - - - - (604) - - - - - - - - (604)
Common Stock repurchased
(96 shares at an average
price of $23.15 per share) - - - - - - (2,211) - - - - - - (2,211)
Stock option exercised
(3 shares at an average price
$21.38 per share, net of tax
benefit) - - (3) - - 44 - - - - - - 41
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 37 37
Appreciation in fair value of
shares charged to expense for
compensation plans - - 171 - - - - - - - - - - 171
------- ------- -------- --------- --------- -------- --------- --------
Balance at March 31, 2001 $ 66 67,706 59,102 (36,448) 132 (1,058) (99) 89,401
------- ------- -------- --------- --------- -------- --------- --------
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 Three Months Ended
March 31,
2001 2000
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 2,010 $ 2,282
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 599 629
Earned SIP shares 37 69
Appreciation in fair value of shares
charged to expense for compensation plans 171 75
Income from bank owned life insurance (306) (314)
Provision for loan losses 212 251
Provision for valuation allowance for
real state owned - 6
Loans originated for sale (85,066) (61,081)
Proceeds from sale of loan 80,391 62,636
Gain on sale of premises and equipment (60) -
Net gain on sale of investment securities (215) -
Gain on sale of loans (1,619) (1,908)
Increase in accrued interest receivable (29) (237)
Increase in prepaid expenses
and other assets, net (511) (712)
Increase in accrued expenses and
other liabilities, net 108 251
-------- -------
Net cash provided by (used in)
operating activities (4,278) 1,947
-------- -------
Cash flows from investing activities:
Net cash paid for Forward Financial - (994)
Proceeds from sale of investment
securities available for sale 3,113 -
Proceeds from maturities of investment
securities held to maturity 1,000 -
Proceeds from maturities of investment
securities available for sale 16,900 1,000
Purchase of investment securities
available for sale (23,883) (4,311)
Purchase of mortgage-backed securities
available for sale (24,960) -
Purchase of FHLB and Federal Reserve Stock (25) (338)
Principal payments on mortgage-backed
securities available for sale 941 398
Principal payments on mortgage-
backed securities held to maturity 2,454 826
Principal payments on investment
securities available for sale 150 140
Increase in loans, net (5,704) (26,631)
Purchases of premises and equipment (197) (1,131)
Proceeds from sale of premises and equipment 343 -
Additional investment in real estate owned (2) -
------- -------
Net cash used in
investing activities (29,870) (31,041)
------- ---------
-Continued on next page-
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Three Months Ended
March 31,
2001 2000
------- -------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 8,663 38,417
Repayments of Federal Home Loan
Bank advances (63,964) (76,123)
Proceeds from Federal Home Loan
Bank advances 96,130 66,124
Proceeds from other borrowings - 1,945
Cash dividends paid (604) (587)
Common stock repurchased (2,211) (1,073)
Options exercised 41 39
Decrease in advance payments
by borrowers for taxes and insurance 227 78
-------- -------
Net cash provided by
financing activities 38,282 28,820
------- -------
Net decrease(increase)
in cash and cash equivalents 4,134 (274)
Cash and cash equivalents at beginning of quarter 50,675 34,696
------- -------
Cash and cash equivalents at end of quarter $ 54,809 $ 34,422
======= =======
Supplemental disclosure of cash flow
information:
Payments during
the quarter for:
Interest $ 14,837 $ 12,630
======= =======
Taxes $ 138 $ 351
======= =======
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 March 31, 2001 and
December 31, 2000 and for the three-month periods ended March 31, 2001 and 2000
of BostonFed Bancorp, Inc., ("BostonFed" or the "Company") and its wholly-owned
subsidiaries, Boston Federal Savings Bank ("BFS"), Broadway National Bank
("BNB"), BF Funding Corp., BFD Preferred Capital Trust I and BFD Preferred
Capital Trust II presented herein, should be read in conjunction with the
consolidated financial statements of the Company as of and for the year ended
December 31, 2000.
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-month periods ended
March 31, 2001 and 2000 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 Certain Hedging Activities." In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the Balance sheet at
their respective fair values. The Company adopted SFAS No. 133 and SFAS No. 138
on January 1, 2001. The impact of adoption was not material to the Company.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At March 31, 2001, the Company had commitments of $125.4 million to
originate mortgage loans and $10.6 million to purchase loans from correspondent
lenders. Of these $136.0 million commitments, $112.4 million were adjustable
rate mortgage loans with interest rates ranging from 5.00% to 10.38% and $23.6
million were fixed rate mortgage loans with interest rates ranging from 5.99% to
10.00%. The Company also had commitments to sell $49.4 million of mortgage
loans.
At March 31, 2001, the Company was servicing first mortgage loans of
approximately $884.3 million, which are either partially or wholly-owned by
others.
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., BFD Preferred Capital
Trust I and BFD Preferred Capital Trust II, wholly-owned subsidiaries 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, BF Funding Corp., BFD Preferred Capital
Trust I and BFD Preferred Capital Trust II 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.
7
9
(Dollars In Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
-------- -------- ------------ ------- -------------- ------------
At or for the three-months
ended March 31, 2001:
Interest income $ 21,489 2,362 23,851 1,239 (1,224) 23,866
Interest expense 13,296 657 13,953 1,789 (1,224) 14,518
Provision for loan losses 175 37 212 212
Non-interest income 2,755 276 3,031 214 (45) 3,200
Non-interest expense 7,926 1,166 9,092 179 (45) 9,226
Income tax expense 1,005 265 1,270 (170) 1,100
Net income 1,842 513 2,355 (345) 2,010
Total assets 1,206,745 155,612 1,362,357 160,759 (154,454) 1,368,662
Net interest margin 2.99% 5.27% n.m. n.m. n.m. 3.04%
Return on average assets .63% 1.37% n.m. n.m. n.m. .61%
Return on average equity 8.36% 15.94% n.m. n.m. n.m. 8.70%
At or for the three-months
ended March 31, 2000:
Interest income $ 19,557 2,185 21,742 47 (43) 21,746
Interest expense 12,243 592 12,835 104 (43) 12,896
Provision for loan losses 221 30 251 251
Non-interest income 2,937 276 3,213 (47) 3,166
Non-interest expense 6,909 1,208 8,117 157 (47) 8,227
Income tax expense 1,104 220 1,324 (68) 1,256
Net income 2,017 411 2,428 (146) 2,282
Total assets 1,142,673 141,728 1,284,401 94,187 (92,540) 1,286,048
Net interest margin 2.81% 5.22% n.m. n.m. n.m. 3.04%
Return on average assets .72% 1.18% n.m. n.m. n.m. .73%
Return on average equity 10.30% 13.97% n.m. n.m. n.m. 10.41%
n.m. = not meaningful
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the quarter ended March 31: 2001 2000
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 99,491 $ 1,690 6.79% $ 82,990 $ 1,387 6.69%
Loan, net and loans held for sale (2) 1,051,417 20,890 7.95% 1,039,444 19,661 7.57%
Mortgage-backed securities (3) 78,491 1,286 6.55% 43,234 698 6.46%
---------- --------- --------- ----------
Total interest-earning assets 1,229,399 23,866 7.77% 1,165,668 21,746 7.46%
--------- --------- ---------- ---------
Non-interest-earning assets 97,924 92,905
---------- ---------
Total assets $ 1,327,323 $1,258,573
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 54,949 388 2.82% $ 56,205 398 2.83%
Savings accounts 168,929 1,273 3.01% 149,999 980 2.61%
NOW accounts 124,162 235 0.76% 112,907 216 0.77%
Certificate accounts 416,059 6,328 6.08% 399,253 5,586 5.60%
---------- --------- --------- ----------
Total 764,099 8,224 4.31% 718,364 7,180 4.00%
Borrowed Funds (4) 356,184 5,414 6.08% 387,068 5,716 5.91%
Corporation-obligated mandatorily
redeemable capital securities 32,000 880 11.00% 0 0 0.00%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,152,283 14,518 5.04% 1,105,432 12,896 4.67%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 82,602 65,435
---------- ---------
Total liabilities 1,234,885 1,170,867
---------- ---------
Stockholders' equity 92,438 87,706
---------- ---------
Total liabilities and
stockholders' equity $1,327,323 $1,258,573
========== =========
Net interest rate spread (5) $ 9,348 2.73% $ 8,850 2.79%
========= ========= ========== =========
Net interest margin (6) 3.04% 3.04%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 106.69% 105.45%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 6.07% and 5.90% for the three months ended March 31, 2001 and
March 31, 2000, 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>
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MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A. 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,
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, headquartered in Burlington, Massachusetts, was organized in
1995 under Delaware law as the holding company for BFS, in connection with the
conversion of BFS from a mutual to a stock form of ownership. The Company later
acquired BNB, a nationally-chartered commercial bank, as its wholly-owned
subsidiary in February 1997. In December 1999, the Company acquired Diversified
Ventures, Inc., d/b/a Forward Financial Company ("Forward Financial") and
Ellsmere Insurance Agency, Inc. ("Ellsmere"). Forward Financial operates as a
subsidiary of BFS and Ellsmere has limited operations as a subsidiary of BNB.
The Company's business has been conducted primarily through its
wholly-owned subsidiaries of BFS and BNB (collectively, the "Banks"). BFS
operates its administrative/bank branch office located in Burlington,
Massachusetts and its eight other bank branch offices located in Arlington,
Bedford, Billerica, Boston, Lexington, Peabody, Wellesley and Woburn, all of
which are located in the greater Boston metropolitan area. BFS' subsidiary,
Forward Financial, maintains its headquarters in Northborough, Massachusetts and
operates in approximately 26 states across the U.S. BNB operates two banking
offices in Chelsea and Revere, both of which are also in the greater Boston
metropolitan area. Through its subsidiaries, the Company attracts retail
deposits from the general public and invests those deposits and other borrowed
funds in loans, mortgage-backed securities, U.S. Government and federal agency
securities and other securities. The Company originates mortgage loans for its
investment portfolio and for sale and generally retains the servicing rights of
loans it sells. Additionally, the Company originates chattel mortgage loans,
substantially all of which are sold in the secondary market, 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 loans, and to a lesser
extent, interest and dividends on its investment and mortgage-backed securities,
gains on sale of loans, fees and loan servicing income. The Company's primary
sources of funds are deposits, principal and interest payments on loans,
investments, mortgage-backed securities, Federal Home Loan Bank of Boston
("FHLB") advances and proceeds from the sale of loans.
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The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses, real estate operations expense, investment
and loan sale activities and loan servicing. The Company's non-interest expense
principally consists of compensation and benefits, occupancy and equipment
expense, advertising, data processing expense, goodwill amortization, and other
expenses. Results of operations of the Company are also significantly affected
by general economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities.
Each of the Banks is considered a business segment and accordingly, the
Company has complied with the segment reporting requirement in Note 3 of this
document and in discussion herein as appropriate. As a result of the acquisition
of BNB, the Company became a bank holding company subject to regulation by the
Federal Reserve Bank ("FRB"). BFS is regulated by the Office of Thrift
Supervision ("OTS") and BNB is regulated by the Office of the Comptroller of the
Currency ("OCC").
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B. FINANCIAL CONDITION
Total assets at March 31, 2001 were $1.369 billion, compared to $1.328
billion at December 31, 2000, an increase of $40.9 million or 3.1%. Asset growth
was primarily attributable to a $24.1 million increase in mortgage-backed
securities available for sale, a $6.3 million increase in loans held for sale
and a$5.5 million increase in loans, net. Mortgage-backed securities available
for sale increased from $15.4 million at December 31, 2000 to $39.5 million at
March 31, 2001 due primarily to the purchase of various collateralized mortgage
obligations, ("CMO's") Deposit accounts increased by $8.7 million, from a
balance of $849.6 million at December 31, 2000 to a balance of $858.3 million at
March 31, 2001. The increase in deposits is net of $13.8 million reduction in
wholesale brokered certificates of deposit. Thus, retail deposit growth was
$22.5 million during the current quarter. Federal Home Loan Bank advances and
other borrowings increased by $32.2 million, to a balance of $376.5 million at
March 31, 2001 from a balance of $344.3 million at December 31, 2000.
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 reasonable and prudent levels of liquid assets at BFS and
BNB in accordance with OTS and OCC regulations, respectively.
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 March 31, 2001, the Company's cash and
loans, investments, and mortgage-backed securities available for sale totaled
$181.0 million or 13.2% of the Company's total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At March 31, 2001, the Company had $376.5
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 March 31, 2001, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $249.9 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from March 31, 2001, totaled $259.3 million.
At March 31, 2001, the consolidated stockholders' equity to total assets
ratio was 6.5%. As of March 31, 2001, 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 12.0%, 13.6% and 7.7%,
respectively. BFS's tier 1, total risk-based, tier 1 risk-based and tangible
equity capital ratios were 6.0%, 10.8%, 9.6% and 6.0%, respectively. BNB's total
risk-based, tier 1 risk-based and tier 1 leverage capital ratios were 13.2%,
12.3%, and 6.4%, respectively.
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D. COMPARISON OF THREE-MONTHS ENDED MARCH 31, 2001 AND 2000
GENERAL
Earnings for the quarter ended March 31, 2001 were $2.0 million, or $.45
basic and $.42 diluted earnings per share, compared to earnings of $2.3 million,
or $.48 basic and diluted earnings per share for the first quarter of 2000. The
Company's annualized return on average assets was .61% and the annualized return
on average stockholders' equity was 8.70% during the three-months ended March
31, 2001, compared to .73% and 10.41%, respectively, for the three-months ended
March 31, 2000 (annualized). Comments regarding the components of net income are
detailed in the following paragraphs.
Interest Income
Total interest income on interest-earning assets for the quarter ended
March 31, 2001 increased by $2.1 million, or 9.7%, to $23.9 million, compared to
the quarter ended March 31, 2000. The increase in interest income was due to the
combined effects of an increase of $63.7 million in average interest-earning
assets and an increase of 31 basis points in the average yield. The average
yield on interest-earning assets increased to 7.77% for the three months ended
March 31, 2001 from 7.46% for the three months ended March 31, 2000.
Interest income on loans, net, for the quarter ended March 31, 2001
increased by $1.2 million, or 6.3%, to $20.9 million compared to $19.7 million
for the same quarter in 2000. The increase in interest income from loans, net,
for the three-months ended March 31, 2001, compared to the same period last
year, was primarily attributable to increases in average yields of 38 basis
points. The average yield on loans, net for the quarter ended March 31, 2001 was
7.95%, compared to an average yield of 7.57% for the three months ended March
31, 2000. Interest income on loans, net was also positively impacted in the
current quarter by an increase in average interest earning balance of $12.0
million, compared to the same quarter last year.
Interest on mortgage-backed securities for the quarter ended March 31, 2001
increased by $588,000 to $1.3 million, compared to $698,000 for the same quarter
in 2000. This increase in income was due primarily to the $35.3 million higher
average balance during the quarter ended March 31, 2001, compared to the quarter
ended March 31, 2000. A 9 basis point increase in the average yield during the
current quarter, compared to the quarter ended March 31, 2000, also contributed
to the increased income. The average yield during the current quarter was 6.55%,
compared to 6.46% for the quarter ended March 31, 2000.
Income from investment securities was $1.7 million for the quarter ended
March 31, 2001 compared to $1.4 million for the prior year quarter. The average
yield on investment securities increased by 10 basis points in the current
quarter, compared to the first quarter of 2000. The average balance increased by
$16.5 million to an average of $99.5 million during the quarter ended March 31,
2001, compared to an average balance of $83.0 million for the quarter ended
March 31, 2000.
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Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended March 31, 2001 increased by $1.6 million or 12.6%, to $14.5 million
compared to $12.9 million for the quarter ended March 31, 2000. The increase in
interest expense for the quarter ended March 31, 2001 was due in part to an
increase of $46.9 million in the average balance of interest-bearing
liabilities, which averaged $1.152 billion during the current quarter, compared
to an average balance of $1.105 billion during the quarter ended March 31, 2000.
An increase of 37 basis points in the average cost of interest-bearing
liabilities during the current quarter contributed to the remaining increase in
interest expense. The average cost of interest-bearing liabilities increased to
5.04% during the quarter ended March 31, 2001, compared to 4.67% for last year's
comparable quarter. The increase was due to generally higher market interest
rates and the inclusion of the $32.0 million corporation-obligated mandatorily
redeemable capital securities ("trust preferreds"), which bear an average cost
of 11.0%.
Interest expense on deposit accounts was $8.2 million for the quarter ended
March 31, 2001, an increase of $1.0 million from the $7.2 million for the
quarter ended March 31, 2000. Slightly more than one-half the increase in
interest expense on deposit accounts resulted from an increase in the average
cost of funds, which increased to 4.31% in the current quarter, compared to
4.00% for last year's comparable quarter. The cost of funds increased due to
higher rates paid on various types of deposit accounts due to rising market
interest rates. The remaining increase in the expense was due to higher average
deposit account balances of $764.1 million for the three-months ended March 31,
2001, compared to average deposit account balances of $718.4 million, an
increase of $45.7 million compared to the quarter ended March 31, 2000.
Interest expense on borrowed funds decreased from $5.7 million for the
quarter ended March 31, 2000 to $5.4 million for the current quarter. The
decline in interest expense on borrowed funds was the result of a decrease in
the average balance, which decreased from an average balance of $387.1 million
during the first quarter of 2000 to an average balance of $356.2 million during
the first quarter of 2001. The impact of the decrease in the interest expense
caused by lower average balances was somewhat offset by an increase in the
average cost of borrowed funds, which increased from 5.91% during the quarter
ended March 31, 2000 to an average of 6.08% during the current quarter.
Net Interest Income
Net interest income during the first quarters of 2001 and 2000 was $9.3
million and $8.9 million, respectively, as increases in interest-earning assets
contributed to the improvement in net interest income. The net interest rate
spread declined from 2.79% for the quarter ended March 31, 2000, to 2.73% for
the current quarter. The net interest margin for the quarter ended March 31,
2001 was 3.04%, the same as the prior year's first quarter, despite the
inclusion of the trust preferreds at an average cost of 11.0% in the current
quarter's calculation. Excluding the trust preferreds, the net interest margin
would have 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 $212,000 for the quarter ended
March 31, 2001, compared to $251,000 for the comparable quarter last year. The
allowance for loan losses increased from $11.4 million at December 31, 2000 to
$11.5 million at March 31, 2001 due to this quarter's provision, net of
charge-offs. The provision decreased for the three-months ended March 31, 2001,
compared to the same period 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 maintains an allowance for losses that are inherent in
the Company's loan portfolio. The allowance for loan losses is established
through a provision for loan losses charged to operations. Loan losses are
charged against the allowance when management determines that the collectibility
of the loan principal is unlikely. Recoveries on loans previously charged off
are credited to the allowance.
Management believes the allowance is adequate to absorb probable loan
losses. Management's methodology to estimate loss exposure inherent in the
portfolio includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience and an unallocated allowance that is maintained based on management's
assessment of many factors including trends in loan delinquencies and
charge-offs, current economic conditions and their effect on borrowers' ability
to pay, underwriting standards by loan type, mix and balance of the portfolio,
and the performance of individual loans in relation to contract terms. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance based on their judgments
about information available to them at the time of their examination.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. Accordingly, the ultimate collectibility of a substantial portion of
the Company's loan portfolio is affected by changes in market conditions.
As part of the Company's determination of the adequacy of the allowance for
loan losses, the Company monitors its loan portfolio through its Asset
Classification Committee. The Committee classifies loans depending on risk of
loss characteristics. The most severe classification before a charge-off is
required is "sub-standard." At March 31, 2001, the Company classified $3.3
million of loans ($2.5 million at BFS and $836,000 at BNB) as sub-standard
compared to $3.1 million ($2.5 million of BFS and $563,000 of BNB) at December
31, 2000. The Asset Classification Committee, which meets quarterly, determines
the adequacy of the allowance for loan losses through ongoing analysis of
historical loss experience, the composition of the loan portfolios, delinquency
levels, underlying collateral values, cash flow values and state of the real
estate economy. Utilizing these procedures, management believes that the
allowance for loan losses at March 31, 2001 was sufficient to provide for
anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at March 31, 2001 was $11.5
million, which represented 1,267% of non-performing loans or 1.07% of total
loans, compared to $11.4 million at December 31, 2000, or 1,190% of
non-performing loans and 1.07% 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 $286.5 million at December 31, 2000 to
approximately $287.7 million at March 31, 2001.
Non-performing loans at March 31, 2001 amounted to $908,000 or .08% of
total loans, compared to $956,000 or .09% of total loans, at December 31, 2000.
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 $18,000 and $21,000 for the three-month periods ended March 31, 2001 and
2000, respectively. The amount of interest income that was recorded on these
loans was $5,000 and $7,000 for the three-month periods ended March 31, 2001 and
2000, respectively.
At March 31, 2001, loans characterized as impaired totaled $49,000. During
the three-months ended March 31, 2001, the average recorded value of impaired
loans was $181,000, $4,000 interest income was recognized and $4,000 of interest
income would have been recognized under the loans' original terms.
At March 31, 2001 and at December 31, 2000, the Company had $147,000 and
$145,000 in real estate owned, respectively. Further, at March 31, 2001, the
Company also had restructured real estate loans amounting to $205,000 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 was $3.2 million for the quarters ended March 31,
2001 and 2000. Deposit service fees increased from $460,000 in the quarter ended
March 31, 2000, to $574,000 in the current quarter. This increase was primarily
due to higher levels of deposit accounts. Gain on sale of loans was $1.6 million
for the quarter ended March 31, 2001, compared to $1.9 million for last year's
comparable quarter. The decline in gain on sale of loans was due to the negative
effects of the severe winter and general market conditions on Forward
Financial's loan sales, which amounted to $1.1 million in the quarter ended
March 31, 2001, compared to $1.6 million in the quarter ended March 31, 2000.
Somewhat offsetting was an increase in the gain on sale of loans recognized by
BFS totaling $508,000 during the quarter ended March 31, 2001, compared to
$291,000 for the quarter ended March 31, 2000. Gain on sale of investments
totaled $215,000 in the current quarter as the Company sold a portion of its
equity securities portfolio.
Non-Interest Expense
Total non-interest expenses increased to $9.2 million for the quarter ended
March 31, 2001 from $8.2 million for the quarter ended March 31, 2000. The
current quarter's non-interest expenses are higher primarily due to a 6.2%
increase in compensation and benefits, reflecting normal annual increases and
slight increases in staff levels and an increase in other expenses due in part
to the write-off of uncollectable accounts. Additionally, non-operating expenses
for the three-months ended March 31, 2000 was lower due to the inclusion of real
estate operations income recognized in the dissolution of a real estate
subsidiary of BFS.
Income Tax Expense
Income tax expense for the quarters ended March 31, 2001 and 2000 was $1.1
million and $1.3 million, respectively. The effective income tax rate was 35.4%
during the current quarter, compared to 35.5% for the quarter ended March 31,
2000.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
One of the principal market risks 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 March 31, 2001, the Company's one year gap was a positive 7.3%
of total assets, compared to a positive 8.4% of total assets at December 31,
2000.
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.
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, 2000 for a
detail of the GAP and NPV tables. There have been no material changes in the net
portfolio value since December 31, 2000.
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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
None
Item 5. Other Information
None
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**
* 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
** Incorporated herein by reference into this document from Exhibit 3.2 to
the Annual Report on Form 10-K filed on March 30, 2001.
(b) Reports on Form 8-k Previously reported on Form 10-k for the period
ending December 31, 2000.
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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: May 14, 2001
----------------------------------
David F. Holland
President and
Chief Executive Officer
Date: May 14, 2001
----------------------------------
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
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