FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 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 October 31, 2001: 4,474,203.
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000 2
Consolidated Statements of Operations for the Three
and Nine Months ended September 30, 2001 and 2000 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended March 31, 2001,
June 30, 2001 and September 30, 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 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
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(In Thousands)
September 30, December 31,
2001 2000
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 63,072 $ 50,675
Investment securities available for sale
(amortized cost of $65,093 at September 30,
2001 and $63,361 at December 31, 2000) 65,950 63,421
Investment securities held to maturity (fair
value of $852 at September 30, 2001 and $2,328
at December 31, 2000) 804 2,304
Mortgage-backed securities available for sale
(amortized cost of $91,941 at September 30, 2001
and $15,488 at December 31, 2000) 93,142 15,372
Mortgage-backed securities held to maturity (fair
value of $45,701 at September 30, 2001 and $54,970
at December 31, 2000) 44,570 55,283
Loans held for sale 34,329 12,816
Loans, net of allowance for loan losses of $11,974
and $11,381 at September 30, 2001 and December 31,
2000 1,077,612 1,036,435
Accrued interest receivable 7,918 7,375
Stock in FHLB of Boston and Federal Reserve Bank 24,208 20,649
Premises and equipment 10,513 10,647
Real estate owned 0 145
Goodwill, net of amortization 18,101 19,195
Other assets 35,697 33,465
-------- --------
Total assets $1,475,916 $1,327,782
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $871,152 $849,647
Federal Home Loan Bank advances and other
Borrowed Money 467,000 344,334
Corporation-obligated mandatorily redeemable
capital securities 32,000 32,000
Advance payments by borrowers for taxes
and insurance 2,985 2,864
Other liabilities 10,174 9,024
------- -------
Total liabilities 1,383,311 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 (4,492,403
and 4,648,481 shares outstanding at September 30,
2001 and December 31, 2000, respectively) 66 66
Additional paid-in capital 67,737 67,538
Retained earnings 62,870 57,696
Accumulated other comprehensive income 1,255 88
Less: Treasury stock, at cost (2,097,214 shares
and 1,941,136 shares at September 30, 2001
and December 31, 2000, respectively at cost) (38,195) (34,281)
Less: Unallocated ESOP shares (1,058) (1,058)
Less: Unearned Stock-Based Incentive Plan (70) (136)
-------- --------
Total stockholders' equity 92,605 89,913
-------- --------
Total liabilities and stockholders' equity $1,475,916 $1,327,782
========= =========
See accompanying condensed notes to consolidated financial statements.
2
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars In Thousands, except per share amount)
Three Months Ended Nine Months Ended
------------------ ------------------
9/30/01 9/30/00 9/30/01 9/30/00
------------------ ------------------
(Unaudited) (Unaudited)
Interest income:
Loans $ 20,638 $ 20,335 $ 62,098 $ 59,762
Mortgage-backed securities 2,151 1,239 5,191 3,208
Investment securities 1,335 1,737 4,648 4,769
------- ------- ------- -------
Total interest income 24,124 23,311 71,937 67,739
------- ------- ------- -------
Interest expense:
Deposit accounts 7,453 8,350 23,560 23,303
Borrowed funds 6,392 5,687 17,674 17,335
Corporation obligated mandatorily
redeemable capital securities
distributions 880 257 2,641 257
------- ------- ------- -------
Total interest expense 14,725 14,294 43,875 40,895
------- ------- ------- -------
Net interest income 9,399 9,017 28,062 26,844
Provision for loan losses 200 250 620 750
------- ------- ------- -------
Net interest
income after provision 9,199 8,767 27,442 26,094
Non-interest income:
Deposit service fees 620 499 1,802 1,432
Loan processing and servicing
fees (134) 148 (20) 488
Gain on sale of loans 2,807 2,804 7,538 7,581
Income from bank owned life
insurance 314 317 935 952
Gain on sale of investments 15 0 230 5
Other 598 375 1,434 1,056
------- ------- ------- -------
Total non-interest income 4,220 4,143 11,919 11,514
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 5,316 5,163 15,968 15,411
Occupancy and equipment 1,203 1,090 3,519 3,160
Data processing 389 394 1,230 1,115
Advertising expense 249 233 751 770
Federal deposit insurance
premiums 48 41 133 121
Real estate operations 0 10 7 (264)
Amortization of goodwill 355 355 1,064 1,052
Other 1,854 1,559 5,588 4,835
------- ------- ------- -------
Total non-interest expense 9,414 8,845 28,260 26,200
------- ------- ------- -------
Income before income taxes 4,005 4,065 11,101 11,408
Income tax expense 1,377 1,443 3,954 4,017
------- ------- ------- -------
Net income $ 2,628 $ 2,622 $ 7,147 $ 7,391
======= ======= ======= =======
Basic earnings per share $0.59 $0.56 $1.60 $1.56
Diluted earnings
per share $0.56 $0.54 $1.51 $1.53
Basic weighted average shares
outstanding 4,451,460 4,725,990 4,457,724 4,745,855
Common stock equivalents
due to dilutive effect
of stock options 269,712 157,068 264,492 82,251
Diluted total weighted average
shares outstanding 4,721,172 4,883,058 4,722,216 4,828,106
See accompanying condensed notes to consolidated financial statements.
3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended September 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
------- ------- -------- --------- --------- -------- --------- --------
Net income - - - - 2,628 - - - - - - - - 2,628
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax $804) - - - - - - - - 1,257 - - - - 1,257
--------
Total comprehensive income - - - - - - - - - - - - - - 3,885
Cash dividends declared and
paid ($0.15 per share) - - - - (685) - - - - - - - - (685)
Common Stock repurchased
(73,000 shares at an average
price of $22.53 per share) - - - - - - (1,655) - - - - - - (1,655)
Stock options exercised - - (165) - - 1,426 - - - - - - 1,261
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 12 12
Appreciation in fair value of
shares charged to expense for
compensation plans - - 176 - - - - - - - - - - 176
------- ------- -------- --------- --------- -------- --------- --------
Balance at September 30, 2001 $ 66 67,737 62,870 (38,195) 1,255 (1,058) (70) 92,605
------- ------- -------- --------- --------- -------- --------- --------
See accompanying condensed notes to consolidated financial statements.
4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
2001 2000
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 7,147 $ 7,391
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 2,028 2,013
Earned SIP shares 66 188
Appreciation in fair value of shares
charged to expense for compensation plans 503 265
Income from bank owned life insurance (934) (952)
Provision for loan losses 620 750
Provision for valuation allowance for
real estate owned - 6
Loans originated for sale (384,727) (145,981)
Proceeds from sale of loans 370,752 151,905
Gain on sale of loans (7,538) (7,581)
Gain on sale of real estate
acquired through foreclosure - (4)
Gain on sale of investment securities (230) -
Gain on sale of premises (217) -
Increase in accrued interest receivable (543) (1,402)
Increase in prepaid expenses
and other assets, net (1,268) (1,331)
Increase in accrued expenses and
other liabilities, net 210 2,127
-------- -------
Net cash (used in)provided by
operating activities (14,131) 7,394
-------- -------
Cash flows from investing activities:
Net cash paid for Forward Financial - (994)
Proceeds from sale of investment
securities available for sale 3,628 41
Proceeds from maturities of investment
securities held to maturity 1,500 -
Proceeds from maturities of investment
securities available for sale 24,400 5,000
Purchase of investment securities
available for sale (30,053) (14,769)
Purchase of mortgage-backed securities
available for sale (87,415) (1,986)
Purchase of FHLB and Federal Reserve Stock (3,559) (338)
Principal payments on mortgage-backed
securities available for sale 10,929 1,790
Principal payments on mortgage-
backed securities held to maturity 10,697 6,904
Principal payments on investment
securities available for sale 661 451
Increase in loans, net (41,797) (41,069)
Purchases of premises and equipment (1,499) (3,064)
Proceeds from sale of real estate owned 147 175
Proceeds from sale of premises 790 -
Additional investment in real estate owned (2) (64)
------- -------
Net cash used in
investing activities (111,573) (47,923)
------- ---------
-Continued on next page-
5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
2001 2000
------- -------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 21,505 91,214
Repayments of Federal Home Loan
Bank advances (361,984) (351,263)
Proceeds from Federal Home Loan
Bank advances 484,650 292,794
Proceeds from other borrowings - 1,945
Repayments of other borrowings - (5,000)
Proceeds from Corporation-obligated
mandatorily redeemable
capital securities - 32,000
Cash dividends paid (1,973) (1,862)
Common stock repurchased (5,843) (3,815)
Options exercised, net of taxes 1,625 39
Increase (decrease) in advance payments
by borrowers for taxes and insurance 121 (46)
-------- -------
Net cash provided by
financing activities 138,101 56,006
------- -------
Net increase
in cash and cash equivalents 12,397 15,477
Cash and cash equivalents at beginning of period 50,675 34,696
------- -------
Cash and cash equivalents at end of period $ 63,072 $ 50,173
======= =======
Supplemental disclosure of cash flow
information:
Payments during
the period for:
Interest $ 43,733 $ 41,638
======= =======
Taxes $ 3,393 $ 2,377
======= =======
See accompanying condensed notes to consolidated financial statements.
6
BOSTONFED BANCORP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements as of September 30, 2001
and for the three- and nine-month periods ended September 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 nine-month periods ended
September 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 not 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
September 30, 2001, the Company had $18.1 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,
assuming no impairment expense, based on outstanding weighted average share data
at September 30, 2001.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At September 30, 2001, the Company had commitments of $119.6 million to
originate mortgage loans and $6.3 million to purchase loans from correspondent
lenders. Of these $125.9 million commitments, $97.7 million were adjustable rate
mortgage loans with interest rates ranging from 5.00% to 9.25% and $28.2 million
were fixed rate mortgage loans with interest rates ranging from 5.75% to 9.63%.
The Company also had commitments to sell $73.6 million of mortgage loans.
At September 30, 2001, the Company was servicing first mortgage loans of
approximately $947.0 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'
and the Company's Board of Directors.
7
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 September 30, 2001:
Interest income $ 21,718 2,322 24,040 1,198 (1,114) 24,124
Interest expense 13,393 658 14,051 1,788 (1,114) 14,725
Provision for loan losses 163 37 200 200
Non-interest income 3,915 290 4,205 15 4,220
Non-interest expense 8,110 1,157 9,267 147 9,414
Income tax expense 1,371 244 1,615 (238) 1,377
Net income 2,596 516 3,112 (484) 2,628
Total assets 1,305,274 163,985 1,469,259 162,898 (156,241) 1,475,916
Net interest margin 2.79% 4.75% n.m. n.m. n.m. 2.80%
Return on average assets .81% 1.29% n.m. n.m. n.m. .73%
Return on average equity 11.05% 16.22% n.m. n.m. n.m. 11.21%
At or for the three-months
ended September 30, 2000:
Interest income $ 20,988 2,320 23,308 385 (382) 23,311
Interest expense 13,472 645 14,117 302 (382) 14,037
Provision for loan losses 200 50 250 250
Non-interest income 3,883 310 4,193 (50) 4,143
Non-interest expense 7,687 1,101 8,788 364 (50) 9,102
Income tax expense 1,248 289 1,537 (94) 1,443
Net income 2,290 520 2,810 (188) 2,622
Total assets 1,167,254 149,916 1,317,170 157,951 (154,535) 1,320,586
Net interest margin 2.78% 5.23% n.m. n.m. n.m. 3.06%
Return on average assets .79% 1.41% n.m. n.m. n.m. .80%
Return on average equity 11.01% 17.01% n.m. n.m. n.m. 11.46%
n.m. = not meaningful
(Dollars in Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
-------- -------- ------------ ------- -------------- ------------
At or for the nine-months
ended September 30, 2001:
Interest income $ 64,656 7,101 71,757 3,655 (3,475) 71,937
Interest expense 39,982 2,003 41,985 5,365 (3,475) 43,875
Provision for loan losses 508 112 620 620
Non-interest income 10,826 863 11,689 230 11,919
Non-interest expense 24,092 3,512 27,604 656 28,260
Income tax expense 3,865 793 4,658 (704) 3,954
Net income 7,035 1,544 8,579 (1,432) 7,147
Total assets 1,305,274 163,985 1,469,259 162,898 (156,241) 1,475,916
Net interest margin 2.87% 5.01% n.m. n.m. n.m. 2.91%
Return on average assets .77% 1.33% n.m. n.m. n.m. .69%
Return on average equity 10.31% 16.12% n.m. n.m. n.m. 10.27%
At or for the nine-months
ended September 30, 2000:
Interest income $ 60,966 6,744 67,710 498 (469) 67,739
Interest expense 38,738 1,837 40,575 532 (469) 40,638
Provision for loan losses 580 170 750 750
Non-interest income 10,762 894 11,656 5 (147) 11,514
Non-interest expense 22,362 3,554 25,916 688 (147) 26,457
Income tax expense 3,534 719 4,253 (236) 4,017
Net income 6,540 1,333 7,873 (482) 7,391
Total assets 1,167,254 149,916 1,317,170 157,951 (154,535) 1,320,586
Net interest margin 2.77% 5.24% n.m. n.m. n.m. 3.02%
Return on average assets .76% 1.24% n.m. n.m. n.m. .76%
Return on average equity 10.78% 14.86% n.m. n.m. n.m. 10.97%
n.m. = not meaningful
8
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the quarter ended September 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) $ 100,200 $ 1,335 5.33% $ 101,167 $ 1,737 6.87%
Loan, net and loans held for sale (2) 1,103,395 20,638 7.48% 1,034,550 20,335 7.86%
Mortgage-backed securities (3) 136,925 2,151 6.28% 75,941 1,239 6.53%
---------- --------- --------- ----------
Total interest-earning assets 1,340,520 24,124 7.20% 1,211,658 23,311 7.70%
--------- --------- ---------- ---------
Non-interest-earning assets 106,101 99,050
---------- ---------
Total assets $ 1,446,621 $1,310,708
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 54,015 349 2.58% $ 57,230 414 2.89%
Savings accounts 176,605 1,026 2.32% 163,349 1,173 2.87%
NOW accounts 127,355 170 0.53% 119,795 226 0.75%
Certificate accounts 410,269 5,908 5.76% 435,395 6,537 6.01%
---------- --------- --------- ---------
Total 768,244 7,453 3.88% 775,769 8,350 4.31%
Borrowed Funds (4) 459,424 6,392 5.57% 357,258 5,687 6.37%
Corporation-obligated mandatorily
redeemable capital securities 32,000 880 11.00% 9,512 257 10.81%
---------- --------- --------- ---------
Total interest-bearing liabilities 1,259,668 14,725 4.68% 1,142,539 14,294 5.00%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 93,211 76,629
---------- ---------
Total liabilities 1,352,879 1,219,168
---------- ---------
Stockholders' equity 93,742 91,540
---------- ---------
Total liabilities and
stockholders' equity $1,446,621 $1,310,708
========== =========
Net interest rate spread (5) $ 9,399 2.52% $ 9,017 2.70%
========= ========= ========== =========
Net interest margin (6) 2.80% 2.98%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 106.42% 106.05%
========= =========
<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 5.55% and 6.36% for the three months ended September 30, 2001 and
September 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>
9
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
For the nine months ended September 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) $ 100,142 $ 4,648 6.19% $ 95,124 $ 4,769 6.68%
Loan, net and loans held for sale (2) 1,076,888 62,098 7.69% 1,033,449 59,762 7.71%
Mortgage-backed securities (3) 107,811 5,191 6.42% 66,120 3,208 6.47%
---------- --------- --------- ----------
Total interest-earning assets 1,284,841 71,937 7.46% 1,194,693 67,739 7.56%
--------- --------- ---------- ---------
Non-interest-earning assets 102,102 94,522
---------- ---------
Total assets $ 1,386,943 $1,289,215
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 54,374 1,111 2.72% $ 56,024 1,201 2.86%
Savings accounts 172,416 3,304 2.55% 158,415 3,264 2.75%
NOW accounts 126,653 603 0.63% 117,524 667 0.76%
Certificate accounts 412,780 18,542 5.99% 417,999 18,171 5.79%
---------- --------- --------- ----------
Total 766,223 23,560 4.10% 749,962 23,303 4.14%
Borrowed Funds (4) 406,519 17,674 5.80% 375,528 17,335 6.15%
Corporation-obligated mandatorily
redeemable capital securities 32,000 2,641 11.00% 3,171 257 10.80%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,204,742 43,875 4.85% 1,128,661 40,895 4.83%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 89,404 70,741
---------- ---------
Total liabilities 1,294,146 1,199,402
---------- ---------
Stockholders' equity 92,797 89,813
---------- ---------
Total liabilities and
stockholders' equity $1,386,943 $1,289,215
========== =========
Net interest rate spread (5) $28,062 2.61% $26,844 2.73%
========= ========= ========== =========
Net interest margin (6) 2.91% 3.00%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 106.65% 105.85%
========= =========
<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 5.78% and 6.15% for the three months ended September 30, 2001 and
September 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
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 expected effects of accounting
pronouncements, 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 and the effects of war or terrorist
activities 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
B. FINANCIAL CONDITION
Total assets at September 30, 2001 were $1.476 billion, compared to $1.328
billion at December 31, 2000, an increase of $148 million or 11.1%. Asset growth
was primarily attributable to a $77.8 million increase in mortgage-backed
securities available for sale, a $21.5 million increase in loans held for sale
and a $41.2 million increase in loans, net. Mortgage-backed securities available
for sale increased from $15.4 million at December 31, 2000 to $93.1 million at
September 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 $34.3 million at September 30, 2001 and loans, net,
increased from $1.036 billion at December 31, 2000 to $1.078 billion at
September 30, 2001 as a result of recent high lending volumes of loans for both
portfolio and for sale. Deposit accounts increased by $21.6 million, from a
balance of $849.6 million at December 31, 2000 to a balance of $871.2 million at
September 30, 2001. The increase in deposits is net of $21.6 million reduction
in wholesale brokered certificates of deposit. Thus, retail deposit growth was
$43.2 million during the nine-months ended September 30, 2001. Federal Home Loan
Bank advances and other borrowings increased by $122.7 million, to a balance of
$467.0 million at September 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 September 30, 2001, the Company's cash
and loans held for sale, investment securities available for sale and mortgage-
backed securities available for sale totaled $256.5 million, or 17.4% of the
Company's total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 2001, the Company had $467.0
million in advances outstanding from the FHLB. The Company generally does not
pay the highest deposit rates in its market and accordingly utilizes alternative
sources of funds such as FHLB advances, wholesale brokered deposits and
repurchase agreements to supplement cash flow needs.
At September 30, 2001, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $244.10 million. The Company
anticipates that it will have sufficient funds available to meet its
current loan origination commitments. Certificate accounts which are
scheduled to mature in less than one year from September 30, 2001, totaled
$278.3 million.
At September 30, 2001, the consolidated stockholders' equity to total
assets ratio was 6.3%. As of September 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 11.7,
13.1 and 7.3, respectively. BFS's tier 1, total risk-based, tier 1 risk-based
and tangible equity capital ratios were 6.0%, 11.0, 9.8 and 6.0%, respectively.
BNB's tier 1, total risk-based, tangible equity capital and tier 1 leverage
capital ratios were 11.8%, 12.9%, 11.8% and 6.2%, respectively.
12
D. COMPARISON OF THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
GENERAL
Earnings for the quarter ended September 30, 2001 were $2.6 million, or
$.59 basic and $.56 diluted earnings per share, compared to earnings of $2.6
million, or $.56 basic and $.54 diluted earnings per share for the third quarter
of 2000. Earnings for the nine-months ended September 30, 2001 amounted to $7.1
million, or $1.60 basic and $1.51 diluted earnings per share, compared to $7.4
million, or $1.56 basic and $1.53 diluted earnings per share for the nine-months
ended September 30, 2000. The Company's annualized return on average assets was
.69% and the annualized return on average stockholders' equity was 10.27% during
the nine-months ended September 30, 2001, compared to .76% and 10.97%,
respectively, for the nine-months ended September 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
September 30, 2001 increased by $813,000, or 3.5%, to $24.1 million, compared to
the quarter ended September 30, 2000. The increase in interest income was due to
the increase of $128.9 million in average interest-earning assets, partially
offset by a decrease of 50 basis points in the average yield. The average yield
on interest-earning assets decreased to 7.20% for the three-months ended
September 30, 2001 from 7.70% for the three-months ended September 30, 2000.
Total interest income for the nine-months ended September 30, 2001 amounted to
$71.9 million, an increase of $4.2 million, or 6.2%, compared to the $67.7
million interest earned for the nine-months ended September 30, 2000. The
increase was attributable to the $90.1 million increase in the average balance
of interest earning assets, partially offset by a decrease of 10 basis points in
the average yield during the nine-months ended September 30, 2001 compared to
the prior year period.
Interest income on loans, net, for the quarter ended September 30, 2001
increased by $303,000, or 1.5%, to $20.6 million compared to $20.3 million for
the comparable quarter in 2000. For the nine-months ended September 30, 2001,
interest income on loans, net, increased $2.3 million to $62.1 million from
$59.8 million for the nine-months ended September 30, 2000. The increase in
interest income from loans, net, for the current nine-month period was due to
the $2.3 million increase in the average balance of loans, net, offset somewhat
by the two basis point decline in the average yield. The average yield on loans,
net for the nine-months ended September 30, 2001 was 7.69%, compared to an
average yield of 7.71% for the nine-months ended September 30, 2000.
Interest on mortgage-backed securities for the quarter ended September 30,
2001 increased by $912,000 to $2.2 million, compared to $1.2 million for the
same quarter in 2000. This increase in income was primarily due to the $61.0
million higher average balance during the quarter ended September 30, 2001,
compared to the quarter ended September 30, 2000, partially offset by a 25 basis
point decrease in the average yield during the current quarter, compared to the
quarter ended September 30, 2000. The average yield during the current quarter
was 6.28%, compared to 6.53% for the quarter ended September 30, 2000. For the
nine-months ended September 30, 2001, interest on mortgage-backed securities was
$5.2 million, compared to last year's comparable period total of $3.2 million.
The increased income is primarily due to higher average balance of
mortgage-backed securities, which increased by $41.7 million to an average
balance of $107.8 million for the nine-months ended September 30, 2001, compared
to the prior year period average balance of $66.1 million. The increase in
mortgage-backed securities income was partially offset by a five basis point
reduction in the average yield in the current period. The average yield on
mortgage-backed securities for the nine-months ended September 30, 2001 was
6.42%, compared to 6.47% for the prior year comparable period. The increase in
average balances was primarily attributable to the acquisition of collateralized
mortgage obligations ("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.
Income from investment securities was $1.3 million for the three-months
ended September 30, 2001, compared to $1.7 million for the prior year quarter.
The average balance of investment securities was essentially the same at $100.2
million for the three-months ended September 30, 2001, compared to $101.2
million for the prior year quarter. The decline in income was caused by a
reduction in the average yield, which declined from 6.87% for the three-months
ended September 30, 2000 to 5.33% for the current quarter. The reduction in
yields is reflective of the declines in market interest rates. For the
nine-months ended September 30, 2001, interest income from investment securities
declined by $121,000 to $4.6 million, compared to $4.8 million for last year's
comparable period. Although average balances of investment securities increased
by $5.0 million in the current nine-month period, interest income on investment
securities declined in the nine-months ending September 30, 2001 due to a 49
basis point reduction in the average yield. The average yield declined from
6.68% for the nine-months ended September 30, 2000 to 6.19% for the current
period. Average balances of investment securities increased to $100.1 million in
the current period, compared to $95.1 million for the prior year nine-month
period.
13
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended September 30, 2001 increased by $431,000 or 3.0%, to $14.7 million
compared to $14.3 million for the quarter ended September 30, 2000. The increase
in interest expense for the quarter ended September 30, 2001 was due to an
increase of $117.1 million in the average balance of interest-bearing
liabilities, which averaged $1.260 billion during the current quarter, compared
to an average balance of $1.143 billion during the quarter ended September 30,
2000. A decrease of 32 basis points in the average cost of interest-bearing
liabilities during the current quarter offset a portion of the increase in
interest expense resulting from higher average balances. The average cost of
interest-bearing liabilities decreased to 4.68% during the quarter ended
September 30, 2001, compared to 5.00% for last year's comparable quarter. The
decrease in the average cost was due to the decline in overall market interest
rates. 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 nine-months ended September 30, 2001,
interest expense on interest-bearing liabilities totaled $43.9 million, compared
to last year's period total of $40.9 million, an increase of $3.0 million or
7.3%. This increase is primarily attributable to a $76.1 million increase in the
average balance of interest-bearing liabilities. The average balance of
interest-bearing liabilities for the nine-months ending September 30, 2001 was
$1.205 billion, compared to $1.129 billion for the prior year period. The
current year period average balance includes the $32.0 million of trust
preferred securities, which effectively increased the average cost of interest
bearing liabilities by approximately 16 basis points, compared to an increase of
two basis points for the prior year period. Excluding the impact of the trust
preferred securities, the average cost of interest bearing liabilities declined
by 14 basis points in the nine-months ended September 30, 2001, compared to the
prior year period. Including the cost of the trust preferred securities, the
average cost of interest bearing liabilities was 4.85% for the nine-months ended
September 30, 2001, compared to 4.83% for the nine-months ended September 30,
2000.
Interest expense on deposit accounts was $7.5 million for the quarter ended
September 30, 2001, a decrease of $897,000 from the $8.4 million for the quarter
ended September 30, 2000. The decrease in interest expense on deposit accounts
resulted primarily from a 43 basis point decrease in the average cost of
deposits. For the three-months ended September 30, 2001, the average cost of
deposits was 3.88%, compared to 4.31% for the three-months ended September 30,
2000. Also contributing to the decline in interest expense on deposit accounts
was a $7.5 million reduction in average balances during the current quarter. The
average balance of deposit accounts was $768.2 million in the three-months ended
September 30, 2001, compared to $775.8 million for the three-months ended
September 30, 2000. For the nine-months ended September 30, 2001, interest
expense on deposit accounts was $23.6 million, compared to $23.3 million for the
prior year period, and increase of $257,000. The increase was due to higher
average balances of deposit accounts of $766.2 million for the nine-months ended
September 30, 2001, compared to average balances of $750.0 million for the
nine-months ended September 30, 2000, partially offset by a four basis point
reduction in the average cost during the current period. The average cost of
deposit accounts for the nine-months ended September 30, 2001 and 2000 was 4.10%
and 4.14%, respectively.
Interest expense on borrowed funds was $6.4 million for the three-months
ended September 30, 2001, compared to $5.7 million for the three-months ended
September 30, 2000. The increase in 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 $459.4 million
in the current quarter, an increase of $102.1 million compared to an average
balance of $357.3 million for the quarter ended September 30, 2000. The average
cost of borrowed funds was 5.57% for the three-months ended September 30, 2001,
a decline of 80 basis points compared to the 6.37% cost of borrowed funds for
the three-months ended September 30, 2000. For the nine-months ended September
30, 2001, interest expense on borrowed funds was $17.7 million, compared to
$17.3 million for the nine-months ended September 30, 2000. The increase in
interest expense on borrowed funds was caused by the higher average balance of
$406.5 million for the nine-months ended September 30, 2001, compared to average
balances of $375.5 million for the nine-months ended September 30, 2000,
partially offset by the effect of a 35 basis points decline in the average cost
of borrowed funds. The average cost of borrowed funds declined to 5.80% for the
nine-months ended September 30, 2001, compared to an average cost of 6.15% for
the nine-months ended September 30, 2000.
Net Interest Income
Net interest income during the third quarters of 2001 and 2000 was $9.4
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 2.70% for the quarter ended September 30, 2000, to 2.52%
for the current quarter. The net interest margin for the quarter ended September
30, 2001 was 2.80%, compared to 2.98% for the prior year's third 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 whereas last year's third quarter included
less than a third of the average balance in the quarter. On a year to date
basis, net interest income was $28.1 million, compared to $26.8 million for the
prior year to date. The net interest margin was 2.91% for the nine-months ended
September 30, 2001, compared to 3.00% 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
Provision for Loan Losses
The Company's provision for loan losses was $200,000 for the quarter ended
September 30, 2001, compared to $250,000 for the comparable quarter last year.
The allowance for loan losses increased from $11.4 million at December 31, 2000
to $12.0 million at September 30, 2001 due to this quarter's provision, net of
charge-offs/recoveries. The provision decreased for the three-months ended
September 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 September 30, 2001, the Company classified $2.8
million of loans ($2.0 million at BFS and $757,000 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 September 30, 2001 was sufficient to provide for
anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at September 30, 2001 was $12.0
million, which represented 1,453% 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 $314.5 million at September 30, 2001.
Non-performing assets at September 30, 2001 amounted to $824,000 or .06% 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 $61,000 and $62,000 for the nine-month periods ended September 30, 2001 and
2000, respectively. The amount of interest income that was recorded on these
loans was $29,000 and $38,000 for the nine-month periods ended September 30,
2001 and 2000, respectively.
At September 30, 2001, there were no loans characterized as impaired.
During the nine-months ended September 30, 2001, the average recorded value of
impaired loans was $204,000, $4,000 interest income was recognized and $4,000 of
interest income would have been recognized under the loans' original terms.
At September 30, 2001 and at December 31, 2000, the Company had $31,000 and
$145,000 in real estate owned and other repossessed assets, respectively.
Further at September 30, 2001, the Company also had restructured real estate
loans amounting to $204,000 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
Non-Interest Income
Total non-interest income improved to $4.2 million for the quarter ended
September 30, 2001, compared to $4.1 million for the quarter ended September 30,
2000 due primarily to increases in deposit service fees and other non-interest
income, partially offset by declines in loan processing and servicing fees.
Deposit service fees increased from $499,000 in the quarter ended September 30,
2000, to $620,000 in the current quarter and from $1.4 million for the
nine-months ended September 30, 2000 to $1.8 million for the nine-months ended
September 30, 2001. These increases were primarily due to higher levels of
deposit account services activity. Loan processing and servicing fees were a
negative $134,000 in the quarter ended September 30, 2001 compared to income of
$148,000 for the quarter ended September 30, 2000 due to adjustments for the
impairment of originated mortgage servicing rights ("OMSR"). Adjustments to the
OMSR were necessary due to the higher than expected levels of prepayments during
the current quarter of loans serviced by the Company. For the nine-months ended
September 30, 2001 loan processing and servicing income was a negative $20,000
compared to income of $488,000 for the comparable period last year, also due to
adjustments to the OMSR during the current period. Gain on sale of investments
totaled $230,000 in the current year-to-date period primarily due to the sale of
a portion of the Company's equity securities portfolio during the first quarter
of 2001. Other non-interest income totaling $598,000 in the current quarter
exceeded the $375,000 earned in the quarter ended September 30, 2000 due
primarily to the recognition of $273,000 gain from the Company's interest in the
sale of the NYCE bank automated teller machine clearing network. For the
nine-months ended September 30, 2001, other non-interest income amounted to $1.4
million compared to $1.1 million for the nine-months ended September 30, 2000.
The increase is due in part to the item mentioned above and the $157,000 gain on
the sale of BFS' former Billerica Office location during the second quarter of
2001.
Non-Interest Expense
Total non-interest expenses increased to $9.4 million
for the quarter ended September 30, 2001 from $8.8 million, or 6.4% for the
quarter ended September 30, 2000 and from $26.2 million for the nine-months
ended September 30, 2000 to $28.3 million, or 7.9% for the current nine-month
period due primarily to increased expenses in occupancy and equipment and other
non interest expense. Occupancy and equipment expense increased by $113,000 and
$359,000 in the three- and nine-months ended September 30, 2001, respectively,
compared to the three- and nine-months ended September 30, 2000, due in part to
expenses incurred by the addition of the new Woburn Office opened in May of 2000
and higher depreciation expenses associated with office renovations and various
repairs and maintenance. Also, the prior year's non-interest expenses for the
nine-months ended September 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 $4.8 million for the nine-months ended September 30, 2000 to $5.6
million for the nine-months ended September 30, 2001 due in part to higher
outside professional services expense.
Income tax expense for the nine-months ended September 30, 2001 and 2000
was $4.0 million. The effective income tax rate was 35.6% during the current
year-to-date period, compared to 35.2% for the prior year period.
16
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 September 30, 2001, the Company's one year gap was a positive 2.68%
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.
17
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
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**
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
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTONFED BANCORP, INC.
(Registrant)
Date: November 14, 2001 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: November 14, 2001 By: /s/ John A. Simas
__________________________________
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
19