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, 2001
__________________________
Commission File Number 1-13936
__________________________
BOSTONFED BANCORP INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 52-1940834
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 New England Executive Park, Burlington, Massachusetts 01803
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(781) 273-0300
________________________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Number of shares of common stock, par value $.01 per share,
outstanding as of July 31, 2001: 4,528,303.
2
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 2001 (unaudited) and December 31, 2000 2
Consolidated Statements of Operations for the Three
and Six Months ended June 30, 2001 and 2000 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three and Six Months ended
June 30, 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2001 and 2000 (unaudited) 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Average Balances and Yield / Costs 9 - 10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 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
3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(In Thousands)
June 30, December 31,
2001 2000
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 36,659 $ 50,675
Investment securities available for sale
(amortized cost of $61,840 at June 30, 2001
and $63,361 at December 31, 2000) 61,983 63,421
Investment securities held to maturity (fair
value of $840 at June 30, 2001 and $2,328
at December 31, 2000) 804 2,304
Mortgage-backed securities available for sale
(amortized cost of $88,034 at June 30, 2001
and $15,488 at December 31, 2000) 87,888 15,372
Mortgage-backed securities held to maturity (fair
value of $49,680 at June 30, 2001 and $54,970
at December 31, 2000) 49,174 55,283
Loans held for sale 31,164 12,816
Loans, net of allowance for loan losses of $11,674
and $11,381 at June 30, 2001 and December 31,
2000 1,064,359 1,036,435
Accrued interest receivable 7,397 7,375
Stock in FHLB of Boston and Federal Reserve Bank 22,356 20,649
Premises and equipment 10,355 10,647
Real estate owned 0 145
Goodwill, net of amortization 18,456 19,195
Other assets 35,172 33,465
---------- ----------
Total assets $1,425,767 $1,327,782
========== ==========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $865,796 $849,647
Federal Home Loan Bank advances and other
Borrowed Money 427,405 344,334
Corporation-obligated mandatorily redeemable
capital securities 32,000 32,000
Advance payments by borrowers for taxes
and insurance 2,590 2,864
Other liabilities 8,365 9,024
---------- ----------
Total liabilities 1,336,156 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 (4,556,803
and 4,648,481 shares outstanding at June 30, 2001
and December 31, 2000, respectively) 66 66
Additional paid-in capital 67,726 67,538
Retained earnings 60,927 57,696
Accumulated other comprehensive income (2) 88
Less: Treasury stock, at cost (2,032,814 shares
and 1,941,136 shares at June 30, 2001 and
December 31, 2000, respectively at cost) (37,966) (34,281)
Less: Unallocated ESOP shares (1,058) (1,058)
Less: Unearned Stock-Based Incentive Plan (82) (136)
---------- ----------
Total stockholders' equity 89,611 89,913
---------- ----------
Total liabilities and stockholders' equity $1,425,767 $1,327,782
========== ===========
See accompanying condensed notes to consolidated financial statements.
2
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars In Thousands, except per share amount)
Three Months Ended Six Months Ended
------------------ ------------------
6/30/01 6/30/00 6/30/01 6/30/00
------------------ ------------------
(Unaudited) (Unaudited)
Interest income:
Loans $ 20,570 $ 19,766 $ 41,460 $ 39,427
Mortgage-backed securities 1,754 1,271 3,040 1,969
Investment securities 1,623 1,645 3,313 3,032
------- ------- ------- -------
Total interest income 23,947 22,682 47,813 44,428
------- ------- ------- -------
Interest expense:
Deposit accounts 7,883 7,773 16,107 14,953
Borrowed funds 5,868 5,932 11,282 11,648
Corporation obligated mandatorily
redeemable capital securities
distributions 881 0 1,761 0
------- ------- ------- -------
Total interest expense 14,632 13,705 29,150 26,601
------- ------- ------- -------
Net interest income 9,315 8,977 18,663 17,827
Provision for loan losses 208 249 420 500
------- ------- ------- -------
Net interest
income after provision 9,107 8,728 18,243 17,327
Non-interest income:
Deposit service fees 608 473 1,182 933
Loan processing and servicing
fees (16) 165 114 340
Gain on sale of loans 3,112 2,869 4,731 4,777
Income from bank owned life
insurance 315 320 621 635
Gain on sale of investments 0 5 215 5
Other 480 373 836 681
------- ------- ------- -------
Total non-interest income 4,499 4,205 7,699 7,371
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 5,200 5,114 10,652 10,248
Occupancy and equipment 1,224 1,066 2,316 2,070
Data processing 402 366 841 721
Advertising expense 282 293 502 537
Federal deposit insurance
premiums 41 41 85 80
Real estate operations 4 13 7 (274)
Amortization of goodwill 355 354 709 697
Other 2,112 1,881 3,734 3,276
------- ------- ------- -------
Total non-interest expense 9,620 9,128 18,846 17,355
------- ------- ------- -------
Income before income taxes 3,986 3,805 7,096 7,343
Income tax expense 1,477 1,318 2,577 2,574
------- ------- ------- -------
Net income $ 2,509 $ 2,487 $ 4,519 $ 4,769
======= ======= ======= =======
Basic earnings per share $0.56 $0.52 $1.01 $1.00
Diluted earnings
per share $0.54 $0.52 $0.96 $0.99
Basic weighted average shares
outstanding 4,423,879 4,763,082 4,460,856 4,755,787
Common stock equivalents
due to dilutive effect
of stock options 251,724 28,329 240,923 41,844
Diluted total weighted average
shares outstanding 4,675,603 4,791,411 4,701,779 4,797,631
See accompanying condensed notes to consolidated financial statements.
3
5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended June 30, 2001
(Dollars In Thousands, Except Per Share Amounts)
(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
(96,000 shares at an average
price of $23.15 per share) - - - - - - (2,211) - - - - - - (2,211)
Stock options exercised - - (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
------- ------- -------- --------- --------- -------- --------- --------
Net income - - - - 2,509 - - - - - - - - 2,509
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $85) - - - - - - - - (134) - - - - (134)
--------
Total comprehensive income - - - - - - - - - - - - - - 2,375
Cash dividends declared and
paid ($0.15 per share) - - - - (684) - - - - - - - - (684)
Common Stock repurchased
(92,000 shares at an average
price of $21.60 per share) - - - - - - (1,977) - - - - - - (1,977)
Stock options exercised - - (136) - - 459 - - - - - - 323
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 17 17
Appreciation in fair value of
shares charged to expense for
compensation plans - - 156 - - - - - - - - - - 156
------- ------- -------- --------- --------- -------- --------- --------
Balance at June 30, 2001 $ 66 67,726 60,927 (37,966) (2) (1,058) (82) 89,611
------- ------- -------- --------- --------- -------- --------- --------
See accompanying condensed notes to consolidated financial statements.
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6
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
2001 2000
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 4,519 $ 4,769
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 1,259 1,308
Earned SIP shares 54 131
Appreciation in fair value of shares
charged to expense for compensation plans 327 136
Income from bank owned life insurance (621) (635)
Provision for loan losses 420 500
Provision for valuation allowance for
real estate owned - 6
Loans originated for sale (246,923) (99,579)
Proceeds from sale of loans 233,306 96,664
Gain on sale of loans (4,731) (4,777)
Gain on sale of real estate
acquired through foreclosure - (4)
Gain on sale of investment securities (215) -
Gain on sale of premises (217) -
Increase in accrued interest receivable (22) (957)
Increase in prepaid expenses
and other assets, net (1,056) (758)
Increase in accrued expenses and
other liabilities, net (803) (254)
-------- -------
Net cash used in
operating activities (14,703) (3,450)
======== =======
Cash flows from investing activities:
Net cash paid for Forward Financial - (994)
Proceeds from sale of investment
securities available for sale 3,113 41
Proceeds from maturities of investment
securities held to maturity 1,500 -
Proceeds from maturities of investment
securities available for sale 24,400 2,000
Purchase of investment securities
available for sale (25,981) (14,519)
Purchase of mortgage-backed securities
available for sale (77,453) (1,986)
Purchase of FHLB and Federal Reserve Stock (1,707) (338)
Principal payments on mortgage-backed
securities available for sale 4,883 1,171
Principal payments on mortgage-
backed securities held to maturity 6,099 3,635
Principal payments on investment
securities available for sale 339 295
Increase in loans, net (28,344) (33,197)
Purchases of premises and equipment (931) (1,978)
Proceeds from sale of real estate owned 147 175
Proceeds from sale of premises 790 -
Additional investment in real estate owned (2) (33)
------- -------
Net cash used in
investing activities (93,147) (45,728)
======== ========
-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,
2001 2000
------- -------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 16,149 69,050
Repayments of Federal Home Loan
Bank advances (259,977) (209,810)
Proceeds from Federal Home Loan
Bank advances 343,048 196,915
Proceeds from other borrowings - 1,945
Cash dividends paid (1,288) (1,225)
Common stock repurchased (4,188) (1,125)
Options exercised, net of taxes 364 39
Decrease in advance payments
by borrowers for taxes and insurance (274) (628)
-------- -------
Net cash provided by
financing activities 93,834 55,161
------- -------
Net (decrease)increase
in cash and cash equivalents (14,016) 5,983
Cash and cash equivalents at beginning of period 50,675 34,696
------- -------
Cash and cash equivalents at end of period $ 36,659 $ 40,679
======= =======
Supplemental disclosure of cash flow
information:
Payments during
the period for:
Interest $ 28,987 $ 27,166
======= =======
Taxes $ 2,376 $ 2,301
======= =======
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, 2001 and
for the three- and six-month periods ended June 30, 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 audited 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- and six-month periods ended
June 30, 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.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets." SFAS 142 requires that upon the adoption of the Statement, any goodwill
recorded on an entity's balance sheet would no longer be amortized. This would
include existing goodwill (i.e., recorded goodwill at the date the financial
statement is issued), as well as goodwill arising subsequent to the effective
date of the Statement. Goodwill will no be amortized but will be reviewed for
impairment periodically or upon occurrence of certain triggering events. This
statement is effective for fiscal years beginning after December 15, 2001. At
June 30, 2001, the Company had $18.5 million of goodwill on its balance sheet
that was being amortized at a rate of approximately $1.4 million annually. The
adoption of this Statement is expected to increase basic earnings per share by
approximately $.21 and diluted earnings per share by approximately $.20, based
on outstanding weighted average share data at June 30, 2001.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At June 30, 2001, the Company had commitments of $143.0 million to
originate mortgage loans and $6.6 million to purchase loans from correspondent
lenders. Of these $149.6 million commitments, $110.7 million were adjustable
rate mortgage loans with interest rates ranging from 5.00% to 9.50% and $38.9
million were fixed rate mortgage loans with interest rates ranging from 6.25% to
9.63%. The Company also had commitments to sell $63.4 million of mortgage loans.
At June 30, 2001, the Company was servicing first mortgage loans of
approximately $908.4 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 to its various subsidiaries. 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 the Company's CEO and 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.
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The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable segments.
(Dollars In Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
-------- -------- ------------ ------- -------------- ------------
At or for the three-months
ended June 30, 2001:
Interest income $ 21,449 2,417 23,866 1,218 (1,137) 23,947
Interest expense 13,293 688 13,981 1,788 (1,137) 14,632
Provision for loan losses 170 38 208 208
Non-interest income 4,156 297 4,453 1 45 4,499
Non-interest expense 8,056 1,189 9,245 330 45 9,620
Income tax expense 1,489 284 1,773 (296) 1,477
Net income 2,597 515 3,112 (603) 2,509
Total assets 1,262,138 156,491 1,418,629 158,909 (151,771) 1,425,767
Net interest margin 2.86% 5.04% n.m. n.m. n.m. 2.90%
Return on average assets .85% 1.32% n.m. n.m. n.m. .72%
Return on average equity 11.47% 16.19% n.m. n.m. n.m. 10.88%
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%
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, 2001:
Interest income $ 42,938 4,779 47,717 2,457 (2,361) 47,813
Interest expense 26,589 1,345 27,934 3,577 (2,361) 29,150
Provision for loan losses 345 75 420 420
Non-interest income 6,911 573 7,484 215 7,699
Non-interest expense 15,982 2,355 18,337 509 18,846
Income tax expense 2,494 549 3,043 (466) 2,577
Net income 4,439 1,028 5,467 (948) 4,519
Total assets 1,262,138 156,491 1,418,629 158,909 (151,771) 1,425,767
Net interest margin 2.92% 5.15% n.m. n.m. n.m. 2.97%
Return on average assets .74% 1.34% n.m. n.m. n.m. .67%
Return on average equity 9.92% 16.07% n.m. n.m. n.m. 9.79%
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%
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: 2001 2000
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 100,737 $ 1,623 6.44% $ 96,902 $ 1,645 6.79%
Loan, net and loans held for sale (2) 1,075,850 20,570 7.65% 1,026,354 19,766 7.70%
Mortgage-backed securities (3) 108,016 1,754 6.50% 79,185 1,271 6.42%
---------- --------- --------- ----------
Total interest-earning assets 1,284,603 23,947 7.46% 1,202,441 22,682 7.55%
--------- --------- ---------- ---------
Non-interest-earning assets 102,283 95,924
---------- ---------
Total assets $ 1,386,886 $1,298,365
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 54,159 372 2.75% $ 54,636 389 2.85%
Savings accounts 171,712 1,005 2.34% 161,897 1,111 2.74%
NOW accounts 128,441 199 0.62% 119,869 225 0.75%
Certificate accounts 412,011 6,307 6.12% 419,349 6,048 5.77%
---------- --------- --------- ----------
Total 766,323 7,883 4.11% 755,751 7,773 4.11%
Borrowed Funds (4) 403,950 5,868 5.81% 382,259 5,932 6.21%
Corporation-obligated mandatorily
redeemable capital securities 32,000 881 11.00% 0 0 0.00%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,202,273 14,632 4.87% 1,138,010 13,705 4.82%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 92,401 70,162
---------- ---------
Total liabilities 1,294,674 1,208,172
---------- ---------
Stockholders' equity 92,212 90,193
---------- ---------
Total liabilities and
stockholders' equity $1,386,886 $1,298,365
========== =========
Net interest rate spread (5) $ 9,315 2.59% $ 8,977 2.73%
========= ========= ========== =========
Net interest margin (6) 2.90% 2.99%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 106.85% 105.66%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 5.80% and 6.20% for the three months ended June 30, 2001 and
June 30, 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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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the six months ended June 30: 2001 2000
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Investment securities (1) $ 100,114 $ 3,313 6.62% $ 92,103 $ 3,032 6.58%
Loan, net and loans held for sale (2) 1,063,634 41,460 7.80% 1,032,899 39,427 7.63%
Mortgage-backed securities (3) 93,254 3,040 6.52% 61,209 1,969 6.43%
---------- --------- --------- ----------
Total interest-earning assets 1,257,002 47,813 7.61% 1,186,211 44,428 7.49%
--------- --------- ---------- ---------
Non-interest-earning assets 100,102 92,258
---------- ---------
Total assets $ 1,357,104 $1,278,469
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 54,554 760 2.79% $ 55,421 787 2.84%
Savings accounts 170,321 2,278 2.67% 155,948 2,091 2.68%
NOW accounts 126,302 434 0.69% 116,388 441 0.76%
Certificate accounts 414,035 12,635 6.10% 409,301 11,634 5.68%
---------- --------- --------- ----------
Total 765,211 16,107 4.21% 737,058 14,953 4.06%
Borrowed Funds (4) 380,067 11,282 5.94% 384,663 11,648 6.06%
Corporation-obligated mandatorily
redeemable capital securities 32,000 1,761 11.00% 0 0 0.00%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,177,278 29,150 4.95% 1,121,721 26,601 4.74%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 87,501 67,799
---------- ---------
Total liabilities 1,264,779 1,189,520
---------- ---------
Stockholders' equity 92,325 88,949
---------- ---------
Total liabilities and
stockholders' equity $1,357,104 $1,278,469
========== =========
Net interest rate spread (5) $18,663 2.66% $17,827 2.75%
========= ========= ========== =========
Net interest margin (6) 2.97% 3.01%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 106.77% 105.75%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 5.92% and 6.05% for the three months ended June 30, 2001 and
June 30, 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>
10
12
Item 2. 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.
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").
11
13
B. FINANCIAL CONDITION
Total assets at June 30, 2001 were $1.426 billion, compared to $1.328
billion at December 31, 2000, an increase of $98.0 million or 7.4%. Asset growth
was primarily attributable to a $72.5 million increase in mortgage-backed
securities available for sale, an $18.3 million increase in loans held for sale
and a $27.9 million increase in loans, net. Mortgage-backed securities available
for sale increased from $15.4 million at December 31, 2000 to $87.9 million at
June 30, 2001 due primarily to the purchase of various collateralized mortgage
obligations ("CMO's"). Loans held for sale increased from $12.8 million
at December 31, 2000 to $31.2 million at June 30, 2001 and loans, net,
increased from $1.036 billion at December 31, 2000 to $1.064 billion at June 30,
2001 as a result of recent high lending volumes of loans for both portfolio
and for sale. Deposit accounts increased by $16.1 million, from a balance of
$849.6 million at December 31, 2000 to a balance of $865.8 million at June 30,
2001. The increase in deposits is net of $8.8 million reduction in wholesale
brokered certificates of deposit. Thus, retail deposit growth was $24.9 million
during the six-months ended June 30, 2001. Federal Home Loan Bank advances and
other borrowings increased by $83.1 million, to a balance of $427.4 million at
June 30, 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 June 30, 2001, the Company's cash and
loans held for sale, investment securities available for sale and mortgage-
backed securities available for sale totaled $217.7 million, or 15.3% of the
Company's total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 2001, the Company had $427.4
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, 2001, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $265.9 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 June 30, 2001, totaled $287.9 million.
At June 30, 2001, the consolidated stockholders' equity to total assets
ratio was 6.3%. As of June 30, 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%, 13.5% and 7.6%,
respectively. BFS's tier 1, total risk-based, tier 1 risk-based and tangible
equity capital ratios were 6.0%, 11.1%, 9.9% and 6.0%, respectively. BNB's total
risk-based, tier 1 risk-based and tier 1 leverage capital ratios were 13.8%,
12.8%, and 6.3%, respectively.
12
14
D. COMPARISON OF THREE- AND SIX-MONTHS ENDED JUNE 30, 2001 AND 2000
GENERAL
Earnings for the quarter ended June 30, 2001 were $2.5 million, or $.56
basic and $.54 diluted earnings per share, compared to earnings of $2.5 million,
or $.52 basic and diluted earnings per share for the second quarter of 2000.
Earnings for the six-months ended June 30, 2001 amounted to $4.5 million, or
$1.01 basic and $.96 diluted earnings per share, compared to $4.8 million, or
$1.00 basic and $.99 diluted earnings per share for the six-months ended June
30, 2000. The Company's annualized return on average assets was .67% and the
annualized return on average stockholders' equity was 9.79% during the
six-months ended June 30, 2001, compared to .75% and 10.72%, respectively, for
the six-months ended June 30, 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 June
30, 2001 increased by $1.3 million, or 5.6%, to $23.9 million, compared to the
quarter ended June 30, 2000. The increase in interest income was due to the
increase of $82.2 million in average interest-earning assets, partially offset
by a decrease of 9 basis points in the average yield. The average yield on
interest-earning assets decreased to 7.46% for the three months ended June 30,
2001 from 7.55% for the three months ended June 30, 2000. Total interest income
for the six-months ended June 30, 2001 amounted to $47.8 million, an increase of
$3.4 million, or 7.6%, compared to the $44.4 million interest earned for the
six-months ended June 30, 2000. The increase was due to the combined effects
of a $70.8 million increase in the average balance of interest earning assets
and an increase in the average yield of 12 basis points during the six-months
ended June 30, 2001 compared to the prior year period.
Interest income on loans, net, for the quarter ended June 30, 2001
increased by $804,000, or 4.1%, to $20.6 million compared to $19.8 million for
the comparable quarter in 2000. For the six-months ended June 30, 2001, interest
income on loans, net, increased $2.1 million to $41.5 million from $39.4 million
for the six-months ended June 30, 2000. The increase in interest income from
loans, net, for the current six-month period was due to the combined effects of
an increase in yield of 17 basis points and an increase in the average balance
of $30.7 million. The average yield on loans, net for the six-months ended June
30, 2001 was 7.80%, compared to an average yield of 7.63% for the six-months
ended June 30, 2000.
Interest on mortgage-backed securities for the quarter ended June 30, 2001
increased by $483,000 to $1.8 million, compared to $1.3 million for the same
quarter in 2000. This increase in income was primarily due to the $28.8 million
higher average balance during the quarter ended June 30, 2001, compared to the
quarter ended June 30, 2000. An eight basis point increase in the average yield
during the current quarter, compared to the quarter ended June 30, 2000, also
contributed to the increased income. The average yield during the current
quarter was 6.50%, compared to 6.42% for the quarter ended June 30, 2000. For
the six-months ended June 30, 2001, interest on mortgage-backed securities was
$3.0 million, compared to last year's comparable period total of $2.0 million.
This increased income is primarily due to higher average balance of
mortgage-backed securities, which increased by $32.0 million to an average
balance of $93.3 million for the six-months ended June 30, 2001, compared to the
prior year period average balance of $61.2 million. This increase was primarily
attributable to the acquisition of CMO's. These investments were purchased as
part of the Company's effort to leverage the corporation-obligated mandatorily
redeemable capital securities ("trust-preferred securities"), which are
classified as capital for regulatory purposes. A nine basis point improvement in
the average yield in the current period also contributed to the increased
interest income. The average yield on mortgage-backed securities for the
six-months ended June 30, 2001 was 6.52%, compared to 6.43% for the prior year
comparable period.
Income from investment securities was $1.6 million for each of the quarters
ended June 30, 2001 and 2000. Although the average balance of investment
securities increased by $3.8 million in the quarter ended June 30, 2001,
compared to the quarter ended June 30, 2000, the interest income was essentially
the same. This was due to a decrease of 35 basis points in the current quarter's
average yield of 6.44%, compared to the second quarter of 2000 average yield of
6.79%. For the six-months ended June 30, 2001, interest income from investment
securities increased by $281,000 to $3.3 million, compared to $3.0 million for
last year's comparable period. The increase in interest income on investment
securities in the six- months ending June 30, 2001 is primarily due to an
increase in the average balances, which increased by an average of $8.0 million
to $100.1 million for the current six-months, compared to an average balance of
$92.1 for the six- months ended June 30, 2000. Also contributing to the increase
in interest income on investment securities was a four basis point improvement
in the yield, which averaged 6.62% in the six-months ending June 30, 2001.
13
15
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended June 30, 2001 increased by $927,000 or 6.8%, to $14.6 million compared to
$13.7 million for the quarter ended June 30, 2000. The increase in interest
expense for the quarter ended June 30, 2001 was due in part to an increase of
$64.3 million in the average balance of interest-bearing liabilities, which
averaged $1.202 billion during the current quarter, compared to an average
balance of $1.138 billion during the quarter ended June 30, 2000. An increase of
five 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 4.87% during the
quarter ended June 30, 2001, compared to 4.82% for last year's comparable
quarter. The increase was due to the inclusion of the of the $32.0 million trust
preferred securities, which bear an average cost of 11.0%. If the trust
preferred securities were not included in the net interest margin calculation,
the cost of interest bearing liabilities would have been 4.70% in the current
quarter, or 12 basis points lower than last year's comparable quarter. The
Company's cost of interest bearing liabilities has declined slower than overall
market interest rates as approximately one-half of the Company's deposits are
core deposits. These deposits already bear low interest rates and such rates and
market conditions preclude further substantial declines in the interest paid on
these accounts. For the six-months ended June 30, 2001, interest expense on
interest-bearing liabilities totaled $29.1 million, compared to last year's to
date total of $26.6 million, an increase of $2.5 million or 9.6%. This increase
is primarily attributable to a 21 basis point increase in the average cost of
interest-bearing liabilities. The average cost of interest-bearing liabilities
for the six-months ending June 30, 2001 was 4.95%, compared to 4.74% for the
prior year period. As explained above, the current year period average cost
included the impact of the trust preferred securities, which effectively
increased the average cost of interest bearing liabilities by approximately 17
basis points. Also contributing to the higher interest expense was an increase
in the average balance of interest-bearing liabilities, which averaged $1.177
billion during the six-months ended June 30, 2001, compared to an average
balance of $1.122 billion during the six-months ended June 30, 2000.
Interest expense on deposit accounts was $7.9 million for the quarter ended
June 30, 2001, an increase of $110,000 from the $7.8 million for the quarter
ended June 30, 2000. The increase in interest expense on deposit accounts
resulted from an increase in the average deposit account balances of $766.3
million for the three-months ended June 30, 2001, compared to average deposit
account balances of $755.8 million, an increase of $10.5 million compared to the
quarter ended June 30, 2000. The cost of funds for deposit accounts was 4.11%
for the quarters ended June 30, 2001 and 2000. For the six-months ended June 30,
2001, interest expense on deposit accounts was $16.1 million, compared to $15.0
million for the prior year period, and increase of $1.1 million. The increase
was due primarily to the effects of an increase of 15 basis points in the total
cost of deposit accounts during the current period. The average cost of deposit
accounts for the six-months ended June 30, 2001 and 2000 was 4.21% and 4.06%,
respectively.
Interest expense on borrowed funds was $5.9 million for the three-months
ended June 30, 2001 and 2000. The stable interest expense on borrowed funds was
due to the effects of higher average balances offset by a decline in the average
cost of borrowed funds. The average balance of borrowed funds was $404.0 million
in the current quarter, an increase of $21.7 million compared to $382.3 million
for the quarter ended June 30, 2000. The average cost of borrowed funds was
5.81% for the three-months ended June 30, 2001, a decline of 40 basis points
compared to the 6.21% cost of borrowed funds for the three-months ended June 30,
2000. For the six-months ended June 30, 2001, interest expense on borrowed funds
was $11.3 million, compared to $11.6 million for the six-months ended June 30,
2000. The decrease in interest expense on borrowed funds was caused primarily by
the effect of a 12 basis points decline in the average cost of borrowed funds.
The average cost of borrowed funds declined to 5.94% for the six-months ended
June 30, 2001, compared to an average cost of 6.06% for the six months-ended
June 30, 2000.
Net Interest Income
Net interest income during the second quarters of 2001 and 2000 was $9.3
million and $9.0 million, respectively, as increases in interest-earning assets
contributed to the improvement in net interest income. The net interest rate
spread declined from 2.73% for the quarter ended June 30, 2000, to 2.59% for the
current quarter. The net interest margin for the quarter ended June 30, 2001 was
2.90%, compared to 2.99% for the prior year's first quarter. The primary reason
for the decline in the net interest margin is due to the inclusion of the trust
preferred securities expense at an average cost of 11.0% in the current
quarter's calculation. On a year to date basis, net interest income was $18.7
million, compared to $17.8 million for the prior year to date. The net interest
margin was 2.97% for the six-months ended June 30, 2001, compared to 3.01% for
the prior year comparable period. As in the current quarter, the current year to
date net interest margin was also impacted by the inclusion of the cost of the
trust preferred securities.
14
16
Provision for Loan Losses
The Company's provision for loan losses was $208,000 for the quarter ended
June 30, 2001, compared to $249,000 for the comparable quarter last year. The
allowance for loan losses increased from $11.4 million at December 31, 2000 to
$11.7 million at June 30, 2001 due to this quarter's provision, net of
charge-offs/recoveries. The provision decreased for the three-months ended June
30, 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 June 30, 2001, the Company classified $2.9
million of loans ($2.1 million at BFS and $825,000 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 June 30, 2001 was sufficient to provide for
anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at June 30, 2001 was $11.7
million, which represented 1,633% of non-performing loans or 1.05% 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 $305.6 million at June 30, 2001.
Non-performing assets at June 30, 2001 amounted to $946,000 or .07% of
total assets, compared to $1.1 million, or .08% of total assets, 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 $45,000 and $35,000 for the three-month periods ended June 30, 2001 and
2000, respectively. The amount of interest income that was recorded on these
loans was $22,000 and $26,000 for the six-month periods ended June 30, 2001 and
2000, respectively.
At June 30, 2001, loans characterized as impaired totaled $19,000. During
the six-months ended June 30, 2001, the average recorded value of impaired loans
was $134,000, $7,000 interest income was recognized and $7,000 of interest
income would have been recognized under the loans' original terms.
At June 30, 2001 and at December 31, 2000, the Company had $231,000 and
$145,000 in real estate owned and other reposessed assets, respectively. Further
at June 30, 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.
15
17
Non-Interest Income
Total non-interest income improved to $4.5 million for the quarter ended
June 30, 2001, compared to $4.2 million for the quarter ended June 30, 2000 due
primarily to increased gains on the sale of loans. Deposit service fees
increased from $473,000 in the quarter ended June 30, 2000, to $608,000 in the
current quarter. This increase was primarily due to higher levels of deposit
account services activity. On a year to date basis, total non-interest income
was $7.7 million for the six-months ended June 30, 2001, compared to $7.4
million for the prior year comparable period. Deposit service fees improved to
$1.2 million for the six-months ended June 30, 2001, compared to $933,000 for
the six-months ended June 30, 2000 for the same reason previously mentioned.
Loan processing and servicing fees declined to $114,000 during the six-months
ended June 30, 2001, compared to $340,000 for the six-months ended June 30,
2000. The decline in the current period is due to adjustments in the current
quarter to the originated mortgage servicing rights, necessitated by more rapid
serviced loan prepayments than expected. Gain on sale of investments totaled
$215,000 in the current year-to-date period as the Company sold a portion of its
equity securities portfolio during the first quarter of 2001. Other non-interest
income increased to $836,000 during the six-months ended June 30, 2001 from
$681,000 during the six-months ending June 30, 2000 primarily due to the
$157,000 gain on the sale of BFS' previous Billerica Office location during the
second quarter of 2001.
Non-Interest Expense
Total non-interest expenses increased to $9.6 million for the quarter ended
June 30, 2001 from $9.1 million for the quarter ended June 30, 2000 and from
$17.4 million for the six-months ended June 30, 2000 to $18.8 million for the
current six-month period.
Compensation and benefits increased less than 4%, but occupancy and equipment
and data processing increased by 11.9% and 16.6%, respectively, due in part to
expenses incurred by the addition of the new Woburn Office opened in May of
2000. Also, the prior year's non-interest expenses for the six-months ended June
30, 2000 were lowered by the inclusion of real estate operations income
recognized in the dissolution of a real estate subsidiary of BFS. On a
year-to-date basis, other non-interest expense increased from $3.3 million for
the six-months ended June 30, 2000 to $3.7 million for the six-months ended June
30, 2001 due in part to higher outside professional services expense.
Income Tax Expense
Income tax expense for the six-months ended June 30, 2001 and 2000 was $2.6
million. The effective income tax rate was 36.3% during the current year-to-date
period, compared to 35.1% for the prior year period.
16
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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 June 30, 2001, the Company's one year gap was a positive .57%
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
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 30, 2001.
(B) Directors elected at Annual Meeting and Continuing in Office:
(1) Election of Directors to a three-year term
Nominee Total Votes For Total Votes Withheld
Gene J. DeFeudis 3,871,751 343,968
David F. Holland 3,948,143 267,577
(2) Continuing Directors Year Term Expires
David P. Conley 2002
Richard J. Fahey 2002
Patricia M. Flynn 2003
W. Robert Mill 2002
(C) Other matters submitted to a vote of the Stockholders of the Corporation:
Selection of Independent Auditors:
Votes For Votes Against Abstentions
4,195,283 17,811 2,625
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**
4.0 Stock Certificate of BostonFed Bancorp, Inc.*
* Incorporated herein by reference into this document from Exhibits 3.1 and
4.0 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: August 14, 2001 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: August 14, 2001 By: /s/ John A. Simas
__________________________________
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
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