1
Exhibit 13.0
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. Prior to October 24, 1995, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of the
Bank.
AT DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets..................................... $974,680 $820,567 $640,752 $583,645 $498,812
Investment securities available for sale(1)...... 31,767 1,085 1,022 -- 3,987
Investment securities held to maturity(1)........ 20,630 19,170 16,906 14,784 10,970
Mortgage-backed securities available for
sale(1)........................................ 19,125 23,593 23,873 -- --
Mortgage-backed securities held to maturity(1)... 38,350 43,019 35,116 39,801 45,232
Mortgage loans held for sale..................... 9,817 3,970 8,931 316 25,851
Loans, net....................................... 791,728 676,670 509,496 499,073 385,715
Allowance for loan losses........................ 6,600 4,400 4,275 3,700 4,450
Deposit accounts................................. 619,821 428,818 419,104 413,164 436,898
Borrowed funds................................... 263,640 300,000 126,909 135,031 30,881
Stockholders' equity............................. 81,611 86,355 90,701 30,047 26,017
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income.................................. $ 68,037 $ 52,678 $ 42,454 $ 36,527 $ 36,377
Interest expense................................. 37,129 28,891 23,552 17,022 16,835
-------- -------- -------- -------- --------
Net interest income......................... 30,908 23,787 18,902 19,505 19,542
Provision for loan losses................... 1,696 1,294 3,614 283 3,918
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses.................................... 29,212 22,493 15,288 19,222 15,624
Total non-interest income........................ 4,806 3,567 2,672 1,640 4,320
Total non-interest expense....................... 21,458 21,040 16,009 14,531 16,510
-------- -------- -------- -------- --------
Income before income taxes....................... 12,560 5,020 1,951 6,331 3,434
Income tax expense (benefit)..................... 5,505 2,083 815 2,320 (380)
-------- -------- -------- -------- --------
Net income....................................... $ 7,055 $ 2,937 $ 1,136 $ 4,011 $ 3,814
======== ======== ======== ======== ========
6
2
AT OR FOR THE YEAR ENDED
SELECTED FINANCIAL RATIOS AND DECEMBER 31,
OTHER DATA ------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
PERFORMANCE RATIOS:
Return on average assets.............................. 0.75% 0.40% 0.19% 0.75% 0.74%
Return on average stockholders' equity................ 8.21 3.21 2.57 14.53 16.06
Dividend payout ratio................................. 20.31 31.25 NM NM NM
Average stockholders' equity to average assets........ 9.11 12.35 7.36 5.16 4.61
Stockholders' equity to total assets at end of
period.............................................. 8.37 10.52 14.16 5.15 5.22
Average interest rate spread(3)....................... 2.94 2.79 2.98 3.69 3.93
Net interest margin(4)................................ 3.42 3.34 3.28 3.82 4.04
Average interest-earning assets to average
interest-bearing liabilities........................ 111.53 113.40 107.40 104.16 103.06
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
loans(5)(6).................................... 0.17 0.22 1.00 0.71 0.68
Non-performing assets as a percent of total
assets(6)...................................... 0.16 0.51 0.97 0.68 1.19
Allowance for loan losses as a percent of
loans(5)....................................... 0.82 0.64 0.82 0.74 1.07
Allowance for loan losses as a percent of
non-performing loans(6)........................ 469.75 293.02 81.40 103.61 156.69
NUMBER OF FULL-SERVICE CUSTOMER FACILITIES............ 10 8 8 8 8
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD (IN
THOUSANDS).......................................... 5,520 6,260 6,590 -- --
PER SHARE DATA:
Basic earnings per common share.................. $ 1.28 $ 0.48 $ NM -- --
Diluted earnings per common share................ 1.24 0.48 NM -- --
Dividends per common share....................... 0.26 0.15 NM -- --
Book value per common share at end of period..... 15.72 14.75 14.78 -- --
Market value per common share at end of period... 21.88 14.75 11.75 -- --
- ---------------
(1) The balance does not include FHLB-Boston stock.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
With the exception of end of period ratios, ratios for 1996 are based on
average daily balances while prior years are based on average monthly
balances.
(3) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) Loans includes loans, net, and mortgage loans held for sale, excluding the
allowance for loan losses.
(6) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of all loans 90 days or more past due
and other loans which have been identified by the Company as presenting
uncertainty with respect to the collectibility of interest or principal. It
is the Bank's policy to cease accruing interest on all such loans.
NM -- Not Meaningful /Earnings per share is not presented for the period of
October 24, 1995 (the day of conversion to stock-ownership) through December
31, 1995 as the earnings per share calculation for the sixty-nine day period
was not meaningful. Earnings per share is not presented for the periods
prior to the conversion to stock form, as the Bank was a mutual savings bank
and no stock was outstanding.
7
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
BostonFed Bancorp, Inc. (the "Company") was incorporated in Delaware on
July 11, 1995. On October 24, 1995 it became the holding company for Boston
Federal Savings Bank ("BFS") when it issued 6,589,617 shares of common stock,
utilizing a portion of the proceeds to acquire all of the outstanding stock of
BFS which simultaneously completed its conversion from a mutual savings bank to
a stock form of ownership. On February 7, 1997, the Company acquired Broadway
National Bank, ("BNB"), using the purchase method of accounting, at a cost of
approximately $22 million.
The Company's business has been conducted primarily through its ownership
of BFS and BNB, (collectively the "Banks"). BFS operates its
administrative/branch office located in Burlington, Massachusetts and its seven
other branch offices located in Arlington, Bedford, Billerica, Boston,
Lexington, Peabody and Wellesley, all of which are located in the greater Boston
metropolitan area, and BNB operates two banking offices (Chelsea and Revere)
which are also in the greater Boston metropolitan area. The Company's primary
business is attracting retail deposits from the general public and investing
those deposits and other borrowed funds in loans, mortgage-backed securities,
U.S. Government and federal agency securities and other securities. The Company
originates loans for investment and loans for sale in the secondary market,
generally retaining the servicing rights for loans sold. Loan sales are made
from loans held in the Company's portfolio designated as being held for sale or
originated for sale during the period. The Company's revenues are derived
principally from interest on its loans, and to a lesser extent, interest and
dividends on its investment and mortgage-backed securities, 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, repurchase agreements 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, deposit insurance premiums, advertising, data processing expense, real
estate operations 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.
As a result of the acquisition of BNB, the Company became a bank holding
company subject to regulation by the Federal Reserve Bank ("FRB") and for the
first three years following the initial public offering is also subject to the
regulations of the Office of Thrift Supervision, ("OTS"). BFS continues to be
regulated by the OTS and BNB continues to be regulated by the Office of the
Comptroller of the Currency ("OCC"). Since the acquisition of BNB was
consummated at the close of business on February 7, 1997, the financial
statements of the Company and the following discussion regarding the Company's
financial condition and results of operations at and for the years ended
December 31, 1997 and 1996, include information and data related to BNB only
from February 8, 1997 to December 31, 1997.
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, 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
the required minimum levels of liquid assets at BFS as defined by Office of
Thrift Supervision ("OTS") regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of BFS's deposits and short-term borrowings. BFS's
currently
9
4
required liquidity ratio is 4%, but at December 31, 1996, the required liquidity
ratio was 5%. At December 31, 1997 and 1996, BFS's liquidity ratio was 5.3% and
8.0% respectively. Management has maintained liquidity close to the minimum
requirement so that it may invest any excess liquidity in higher yielding
interest-earning assets or use such funds to repay higher cost FHLB advances or
repurchase agreements. The OCC does not have specific guidance for liquidity
ratios for BNB, but does require banks to maintain reasonable and prudent
liquidity levels. Management believes such levels have been maintained since the
acquisition date.
The Company's most liquid assets are cash, overnight federal funds sold,
short-term investments 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 December 31, 1997, cash,
short-term investments and investment securities available for sale totaled
$56.5 million or 5.8% of total assets. Additional investments were available
which qualified for BFS's regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arise, including FHLB advances and wholesale brokered deposits and repurchase
agreements (collateralized borrowings). At December 31, 1997, the Company had
$256.5 million in advances outstanding from the FHLB and had, with existing
collateral, an additional $181.7 million in overall borrowing capacity from the
FHLB. The Company also borrowed $7.1 million through a repurchase agreement. The
Company generally avoids paying the highest deposit rates in its market and
accordingly utilizes alternative sources of funds such as FHLB advances,
repurchase agreements and wholesale brokered deposits to supplement cash flow
needs.
At December 31, 1997, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $68.5 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 December 31, 1997, totaled $137.5 million. The
Company expects that a substantial majority of the maturing certificate accounts
will be retained by the Company at maturity.
At the time of conversion, BFS was required to establish a liquidation
account in an amount equal to its retained earnings as of June 30, 1995. The
liquidation account will be reduced to the extent that eligible account holders
reduce their qualifying deposits. In the unlikely event of a complete
liquidation of BFS, each eligible account holder will be entitled to receive a
distribution from the liquidation account. BFS is not permitted to declare or
pay dividends on its capital stock, or repurchase any of its outstanding stock,
if the effect thereof would cause its stockholders' equity to be reduced below
the amount required for the liquidation account or applicable regulatory capital
requirements. The balance of the liquidation account at December 31, 1997 was
approximately $11.1 million.
Prior to the Company's acquisition of BNB, the Company, as a savings and
loan holding company, was not required to maintain a minimum level of capital
for regulatory purposes. As a result of the Company's acquisition of BNB and its
resultant status as a bank holding company, the Company is required to maintain
a ratio of capital to assets, on a consolidated basis, which is substantially
equal to that required to be maintained by the Banks. At December 31, 1997, the
consolidated capital to assets ratio of the Company was 8.4%, which exceeded the
minimum regulatory capital requirements for the Company. As of December 31,
1997, BFS exceeded all of its regulatory capital requirements with tangible,
core and risk-based capital ratios of 5.9%, 5.9% and 11.9%, respectively,
compared to the minimum regulatory requirements of 1.5%, 3.0% and 8.0%,
respectively. BNB also exceeded the minimum regulatory capital requirements with
leverage capital, risk-based tier 1 capital and risk-based total capital ratios
of 7.4%, 15.2% and 16.4%, respectively, compared to the minimum regulatory
requirements of 4.0%, 4.0% and 8.0%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
10
5
MARKET RISK AND MANAGEMENT OF
INTEREST RATE RISK
The principal market risk affecting the Company is interest rate risk. The
objective of the Company's interest rate risk management function is to evaluate
the interest rate risk included in certain balance sheet accounts, determine the
level of risk appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with Board of Directors' approved guidelines. Through
such management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates. The Company monitors its interest rate risk as
such risk relates to its operating strategies. The Company's Board of Directors
has established a management Asset/Liability Committee that is responsible for
reviewing the Company's asset/liability policies and interest rate risk
position. The Committee meets frequently and 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 short-term 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 such as wholesale brokered deposits and utilizing FHLB
advances to replace short-term, rate sensitive, retail deposits. The volatile
and generally rising rate environment of 1996 allowed the Company to originate
record loan volume, the majority of loans originated were adjustable-rate loans,
which were primarily retained for BFS's portfolio. Many of these loans, however,
do not reprice until the third or fifth year of their term. As interest rates
generally fell during the second half of 1997, customer preference shifted to
longer-term fixed rate mortgages, many of which were sold in the secondary
market.
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, or reduce, its net interest
income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The Gap Table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three-month period and
subsequent selected time intervals. Annual prepayment rates for adjustable-rate
and fixed-rate residential loans are assumed to be 20.1% and 15.7%,
respectively. Annual prepayment rates for adjustable-rate and fixed-rate
mortgage-backed securities are assumed to be 13.8% and 14.8%, respectively.
Money market deposit accounts are assumed to be immediately rate-sensitive,
while passbook accounts and negotiable order of withdrawal ("NOW") accounts are
assumed to have decay rates of 12% annually. These assumptions may or may not be
indicative of actual prepayment and withdrawals experienced by the Company. The
table does not necessarily indicate the impact of general interest
11
6
rate movements on the Company's net interest income because the actual
repricing dates of various assets and liabilities is subject to customer
discretion and competitive and other pressures and, therefore, actual experience
may vary from that indicated.
The following table shows the gap position of the Company at December 31,
1997:
3 MORE THAN MORE THAN MORE THAN MORE THAN MORE
MONTHS 3 MONTHS 6 MONTHS 1 YEAR TO 3 YEARS TO THAN TOTAL
OR LESS TO 6 MONTHS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS AMOUNT
------- ----------- --------- --------- ---------- ------- ------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Short-term investments......... $ 3,430 $ 8 $ 5 $ 0 $ 5 $ 0 $ 3,448
Investment securities.......... 11,602 4,003 10,174 23,110 3,508 0 52,397
Fixed Rate Loans(1)............ 10,884 10,349 19,703 58,082 33,850 46,527 179,395
Adjustable Rate Loans(1)....... 110,461 69,526 147,448 185,513 110,983 3,414 627,345
Mortgage-backed securities..... 20,991 9,250 5,858 13,765 7,435 176 57,475
Stock in FHLB-Boston........... 16,613 0 0 0 0 0 16,613
-------- ------- -------- -------- -------- -------- --------
Total interest-earning
assets.............. 173,981 93,136 183,188 280,470 155,781 50,117 936,673
-------- ------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Money market deposit
accounts..................... 61,546 0 0 0 0 0 61,546
Savings accounts............... 3,526 3,526 7,052 28,203 28,203 46,348 116,858
NOW accounts................... 3,199 3,199 6,399 25,594 25,594 42,652 106,637
Certificate accounts........... 52,492 37,185 47,843 141,012 5,097 0 283,629
FHLB Advances.................. 42,000 27,000 49,000 127,500 11,000 0 256,500
Securities sold under agreement
to repurchase................ 7,140 0 0 0 0 0 7,140
-------- ------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities......... 169,903 70,910 110,294 322,309 69,894 89,000 832,310
-------- ------- -------- -------- -------- -------- --------
Interest-earning assets less
interest-bearing
liabilities.................. $ 4,078 $22,226 $ 72,894 $(41,839) $ 85,887 $(38,883) $104,363
======== ======= ======== ======== ======== ======== ========
Cumulative interest rate
sensitivity gap.............. $ 4,078 $26,304 $ 99,198 $ 57,359 $143,246 $104,363 $104,363
======== ======= ======== ======== ======== ======== ========
Cumulative interest rate gap as
a percentage of total assets
at December 31, 1997......... 0.42% 2.70% 10.18% 5.88% 14.70% 10.71%
Cumulative interest rate gap as
a percentage of total
interest-earning assets at
December 31, 1997............ 0.44% 2.81% 10.59% 6.12% 15.29% 11.14%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at December 31,
1997......................... 102.40% 110.92% 128.25% 108.52% 119.27% 112.54%
- ---------------
(1) Includes totals loans net of non-performing loans.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. 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.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the
12
7
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. The Company's Board of Directors has
established certain NPV maximum percentage change limits by interest rate shock.
These approved limits are included in the following table. The Company is
operating within the maximum limits imposed by the Board of Directors. The OTS
also produces a similar analysis using its own model, based upon data submitted
on the Company's quarterly Thrift Financial Reports for BFS, the results of
which may vary from the Company's internal model primarily due to differences in
assumptions utilized between the Company's internal model and the OTS model,
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. For purposes of the NPV table, prepayment speeds similar to those used in
the Gap table were used, reinvestment rates were those in effect for similar
products currently being offered and rates on core deposits were modified to
reflect recent trends. The following table sets forth the Company's NPV as of
December 31, 1997, as calculated by the Company.
RATES
IN BASIS NET PORTFOLIO VALUE
POINTS ---------------------------------------------
(RATE $ $ % BOARD NPV
SHOCK) AMOUNT CHANGE CHANGE LIMITS % RATIO
-------- ------- ------- ------ -------- -----
(DOLLAR IN THOUSANDS)
400................... 76,878 (24,583) (24.2) (30.0) 7.9
300................... 85,462 (15,999) (15.8) (25.0) 8.8
200................... 91,425 (10,036) (9.9) (20.0) 9.4
100................... 97,847 (3,614) (3.6) (10.0) 10.0
Static................ 101,461 10.4
(100)................. 107,732 6,271 6.2 (10.0) 11.1
(200)................. 110,465 9,004 8.9 (20.0) 11.3
(300)................. 111,689 10,228 10.1 (25.0) 11.5
(400)................. 113,447 11,986 11.8 (30.0) 11.6
As in the case with the Gap Table, 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 presented 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.
During 1997, the Company continued to follow its past practice of selling,
while generally retaining the servicing rights, certain fixed-rate and
adjustable-rate mortgage loans which were either sold as whole loans or, prior
to sale, converted to mortgage-backed securities. In conjunction with this
mortgage banking activity, the Company uses forward contracts in order to reduce
exposure to interest rate risk. The amount of forward coverage of the "pipeline"
of mortgages is set on a day-to-day basis by an operating officer, within policy
guidelines, based on the Company's assessment of the general direction of
interest rates and the levels of mortgage origination activity.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
The following table sets forth certain information relating to the Company
for the years ended December 31, 1997, 1996 and 1995. The average yields and
costs are derived by dividing income or expense by the average balance of
interest earning assets or interest bearing liabilities, respectively, for the
periods shown. For 1997 and 1996, the average balance data is derived from daily
balances and for 1995, average balance data is derived from average month-end
balances. Management does not believe that the use of average monthly balances
in 1995 instead of average daily balances has caused any material differences in
the information presented. The yields and costs include fees, premiums and
discounts which are considered adjustments to yields.
13
8
AT FOR THE YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------------------
1997 1997 1996
----------------- ----------------------------- -------------------
AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST
-------- ------ -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Investment securities(1).......... $ 72,458 6.21% $ 82,701 $ 5,003 6.05% $ 36,678 $ 2,167
Loan, net and mortgage loans held
for sale(2)..................... 801,545 7.83 759,312 58,805 7.74 603,585 45,513
Mortgage-backed securities(3)..... 57,475 6.97 62,265 4,229 6.79 72,287 4,998
-------- -------- ------- -------- -------
Total interest-earning assets... 931,478 7.65 904,278 68,037 7.52 712,550 52,678
---- ------- ---- -------
Non-interest-earning assets........ 43,202 39,770 28,354
-------- -------- --------
Total assets.................... $974,680 $944,048 $740,904
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing Liabilities:
Money market deposit accounts..... $ 61,546 2.92 $ 61,800 1,822 2.95 $ 46,540 1,395
Savings accounts.................. 116,858 2.50 116,247 2,826 2.43 90,763 2,219
NOW accounts...................... 106,637 1.13 96,590 1,071 1.11 66,336 890
Certificate accounts.............. 283,629 5.82 237,115 13,457 5.68 199,598 11,194
-------- -------- ------- -------- -------
Total........................... 568,670 3.94 511,752 19,176 3.75 403,237 15,698
Borrowed Funds(4).................. 263,640 5.95 299,076 17,953 6.00 225,124 13,193
-------- -------- ------- -------- -------
Total interest-bearing
liabilities................... 832,310 4.58 810,828 37,129 4.58 628,361 28,891
---- ------- ---- -------
Non-interest-bearing liabilities... 60,759 47,264 21,030
-------- -------- --------
Total liabilities............... 893,069 858,092 649,391
-------- -------- --------
Stockholders' equity............... 81,611 85,956 91,513
-------- -------- --------
Total liabilities and
stockholders' equity............... $974,680 $944,048 $740,904
======== ======== ========
Net interest rate spread(5)........ 3.07% $30,908 2.94% $23,787
==== ======= ==== =======
Net interest margin(6)............. 3.42%
====
Ratio of interest-earning assets to
interest-bearing liabilities...... 111.91% 111.53% 113.40%
======== ======== ========
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995
------- -----------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Investment securities(1).......... 5.91% $ 33,558 $ 1,945 5.80%
Loan, net and mortgage loans held
for sale(2)..................... 7.54 503,920 38,079 7.56
Mortgage-backed securities(3)..... 6.91 39,454 2,430 6.16
-------- -------
Total interest-earning assets... 7.39 576,932 42,454 7.36
---- ------- ----
Non-interest-earning assets........ 23,590
--------
Total assets.................... $600,522
========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing Liabilities:
Money market deposit accounts..... 3.00 $ 49,693 1,472 2.96
Savings accounts.................. 2.44 99,498 2,485 2.50
NOW accounts...................... 1.34 65,661 931 1.42
Certificate accounts.............. 5.61 189,080 10,235 5.41
-------- -------
Total........................... 3.89 403,932 15,123 3.74
Borrowed Funds(4).................. 5.86 133,268 8,429 6.32
-------- -------
Total interest-bearing
liabilities................... 4.60 537,200 23,552 4.38
---- ------- ----
Non-interest-bearing liabilities... 19,145
--------
Total liabilities............... 556,345
--------
Stockholders' equity............... 44,177
--------
Total liabilities and
stockholders' equity............... $600,522
========
Net interest rate spread(5)........ 2.79% $18,902 2.98%
==== ======= ====
Net interest margin(6)............. 3.34% 3.28%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities...... 107.40%
========
- ---------------
(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 5.98%, 5.81%, and 6.31%
for the years ended December 31, 1997, 1996 and 1995, 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.
Note: Average balances for 1997 and 1996 are calculated on a daily basis, while
average balances for 1995 are based on average monthly balances.
14
9
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated to
changes due to rate.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- -------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
---------------- ----------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Investment
securities........ $2,720 $ 116 $ 2,836 $ 181 $ 41 $ 222
Loans, net and
mortgage loans
held for sale..... 11,742 1,550 13,292 7,535 (101) 7,434
Mortgage-backed
securities........ (693) (76) (769) 2,023 545 2,568
------ ------ ------- ------ ------- ------
Total interest-
earning
assets.......... 13,769 1,590 15,359 9,739 485 10,224
------ ------ ------- ------ ------- ------
INTEREST-BEARING LIABILITIES:
Money market deposit
accounts.......... 458 (31) 427 (93) 16 (77)
Savings accounts.... 622 (15) 607 (218) (9) (227)
NOW accounts........ 405 (224) 181 10 (51) (41)
Certificate
accounts.......... 2,104 159 2,263 569 351 920
------ ------ ------- ------ ------- ------
Total............. 3,589 (111) 3,478 268 307 575
Borrowed funds...... 4,334 426 4,760 5,805 (1,041) 4,764
------ ------ ------- ------ ------- ------
Total interest-
bearing
liabilities..... 7,923 315 8,238 6,073 (734) 5,339
------ ------ ------- ------ ------- ------
Net change in net
interest income..... $5,846 $1,275 $ 7,121 $3,666 $ 1,219 $4,885
====== ====== ======= ====== ======= ======
ASSET QUALITY
The following table sets forth information regarding non-performing assets,
which consist of: non-performing loans and real estate owned ("REO"). In
addition to identifying non-performing loans, as discussed below, the Company
identifies loans that are characterized as "impaired" pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of
a Loan -- Income Recognition and Disclosure. Accordingly, loans categorized as
"impaired" include non-performing loans as well as other identified loans. At
December 31, 1997, non-performing loans totaled $1.4 million, (all of which are
included in the balance of impaired loans), impaired loans totaled $2.1 million,
consisting of 34 loans, and REO totaled $195,000, consisting of six properties.
It is the policy of the Company to cease accruing interest on loans 90 days or
more past due and charging off all accrued interest. For the years ended
December 31, 1997, 1996, and 1995, the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $146,000, $103,000, and
$303,000, respectively. For the same periods, the difference between the amount
of interest income which would have been recognized on other impaired loans if
such loans were performing in accordance with their regular terms and actual
amounts recognized was $1,000, $73,000, and $77,000, respectively.
AT DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
NON-PERFORMING LOANS:
Residential real estate:
One- to four-family............... $ 941 $1,463 $1,195
Multi-family...................... -- -- 745
Commercial real estate.............. 458 25 3,312
Other Loans......................... 6 14 --
------ ------ ------
Total........................... 1,405 1,502 5,252
Real estate owned, net(3)............. 195 2,668 971
------ ------ ------
Total non-performing assets..... 1,600 4,170 6,223
Restructured loans.................... 369 2,489 2,941
------ ------ ------
Total risk elements................... $1,969 $6,659 $9,164
====== ====== ======
Allowance for loan losses as a percent
of loans(1)......................... 0.82% 0.64% 0.82%
Allowance for loan losses as a percent
of non-performing loans(2).......... 469.75 293.02 81.40
Non-performing loans as a percent of
loans(1)(2)......................... 0.17 0.22 1.00
Non-performing assets as a percent of
total assets(4)..................... 0.16 0.51 0.97
- ---------------
(1) Loans includes loans, net and mortgage loans held for sale, excluding
allowance for loan losses.
(2) Non-performing loans consist of all 90 days or more past due and other loans
which have been identified by the Company as presenting uncertainty with
respect to the collectability of interest or principal.
(3) REO balances are shown net of related valuation allowances.
(4) Non-performing assets consist of non-performing loans and real estate owned
(REO).
15
10
At December 31, 1997, loans that were characterized as impaired totaled
$2.1 million. All of the impaired loans have been measured using the fair value
of the collateral method. During the year ended December 31, 1997, the average
recorded value of impaired loans was $3.8 million, $139,000 of interest income
was recognized and $286,000 of interest income would have been recognized under
original terms. The composition of impaired loans by type is shown below:
DECEMBER 31,
---------------
1997 1996
------ ------
(IN THOUSANDS)
Impaired loans:
Residential real estate
One- to four-family......... $ 999 $1,763
Multi-family................ 316 2,271
Commercial real estate......... 677 246
Other loans.................... 99 112
------ ------
Total impaired loans... $2,091 $4,392
====== ======
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the national and regional economy. The allowance for loan losses
is maintained at an amount management considers adequate to cover estimated
losses in loans which are deemed probable and estimable based on information
currently known to management. Management's analysis of the adequacy of the
allowance is based upon consideration of a number of factors, including current
economic conditions, actual loss experience and industry trends. In addition
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions for estimated loan losses
based upon judgments different from those of management. Amounts provided for
the years 1997, 1996 and 1995 were $1.7 million, $1.3 million and $3.6 million,
respectively. During the year ended December 31, 1997, there were recoveries of
$399,000 credited to, and charge-offs of $515,000 taken against this allowance.
As of December 31, 1997, the Company's allowance for loan losses was .82% of
total loans compared to .64% as of December 31, 1996. Management believes this
increased coverage ratio is prudent due to the balance increase in the combined
total of construction and land, commercial real estate, home equity and
improvement and consumer loans. These combined total balances increased from
$59.8 million at December 31, 1996 to $91.5 million at December 31, 1997, an
increase of 53%, due in large part to the inclusion of BNB's balances. These
loans aggregated to 11.6% and 8.8% of the total loans, net, at December 31, 1997
and 1996, respectively. The Company had non-performing loans of $1.4 million and
$1.5 million at December 31, 1997 and December 31, 1996, respectively. The
Company will continue to monitor and modify its allowance for loan losses as
conditions dictate. While management believes the Company's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that the Company's level of allowance for loan
losses will be sufficient to cover future loan losses incurred by the Company or
that future adjustments to the allowance for loan losses will not be necessary
if economic and other conditions differ substantially from the economic and
other conditions used by management to determine the current level of allowance
for loan losses.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
Balance at beginning of
period............... $4,400 $4,275 $3,700 $4,450 $4,381
BNB allowance for loan
losses at acquisition
date................. 620 -- -- -- --
Provision for loan
losses............... 1,696 1,294 3,614 283 3,918
Charge-offs:
One- to
four-family........ 370 387 550 711 2,114
Multi-family......... 84 263 483 251 1,114
Commercial........... 45 664 2,297 200 805
Construction and
land............... 0 0 0 0 4
Other.................. 16 198 194 56 17
------ ------ ------ ------ ------
Total.......... 515 1,512 3,524 1,218 4,054
Recoveries............. 399 343 485 185 205
------ ------ ------ ------ ------
Balance at end of
period............... $6,600 $4,400 $4,275 $3,700 $4,450
====== ====== ====== ====== ======
Ratio of net
charge-offs during
the period to average
loans outstanding
during the period.... 0.02% 0.19% 0.60% 0.23% 0.94%
====== ====== ====== ====== ======
The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. The most severe
classification before a charge-off is required is "sub-standard." At December
31, 1997, 1996 and 1995, the Company classified (excluding REO) $5.8 million,
$3.8 million and $8.3 million of sub-standard assets, respectively. Included in
these amounts were $1.4 million, $1.5 million and $5.3 million in non-performing
assets, respectively. In the opinion of management, the performing sub-standard
loans
16
11
evidence one or more weaknesses or potential weaknesses and, depending on the
regional economy and other factors, may become non-performing assets in future
periods.
The preceding and following discussion may contain certain forward-looking
statements which are based on management's current expectations regarding
economic, legislative, and regulatory issues that may impact the Company's
earnings in future periods. Factors that could cause future results to vary
materially from current management expectations include, but are not limited to,
general economic conditions, changes in interest rates, deposit flows, real
estate values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory and technological factors affecting the
Company's operations, pricing, products and services. In particular, these
issues may impact management's estimates used in evaluating market risk and
interest rate risk in its GAP and NPV tables, loan loss provisions,
classification of assets, Year 2000 issues, accounting estimates and other
estimates used throughout this discussion.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
CHANGES IN FINANCIAL CONDITION
Assets at December 31, 1997 totaled $974.7 million, an increase of $154.1
million, or 18.8%, compared to $820.6 million at December 31, 1996. Asset growth
was primarily attributable to the acquisition of BNB and growth in loans, net,
at BFS. This growth at BFS was primarily due to increased originations of
adjustable-rate and ten to fifteen year fixed-rate one- to four-family mortgage
loans which combined with BNB's portfolio caused loans, net, to increase by
$115.1 million to a balance of $791.7 million at December 31, 1997, compared to
a balance of $676.7 million at December 31, 1996. Volatility in market interest
rates and a generally falling interest rate environment in the second half of
1997 reduced customer demand for adjustable-rate loans and increased demand for
longer term, fixed-rate loan products, the bulk of which were sold in the
secondary market. Shorter term loans, generally 15 year or less, were originated
for portfolio. Deposit accounts increased by $191.0 million from a balance of
$428.8 million at December 31, 1996 to a balance of $619.8 million at December
31, 1997. Of the increase, $125.0 million is attributable to the acquisition of
BNB while the balance represents growth in BFS's deposit balances, $75.0 million
of which were obtained through the wholesale certificates of deposit broker
market. BFS obtained these funds for terms of two to three years and the funds
were used primarily to support the growth in loans, net. Mortgage-backed
securities decreased by $9.1 million, or 13.7%, from a balance of $66.6 million
at December 31, 1996 to a balance of $57.5 million at December 31, 1997.
Mortgage loans held for sale totaled $9.8 million at December 31, 1997, compared
to $4.0 million at December 31, 1996. FHLB advances decreased $40.0 million to a
balance of $256.5 million at December 31, 1997, compared to $296.5 million at
December 31, 1996 as funds from the brokered certificates of deposit mentioned
above were also used to repay FHLB advances. Total stockholders' equity was
$81.6 million at December 31, 1997 or $15.72 per share, compared to $86.4
million or $14.75 per share at December 31, 1996. The decrease in total
stockholders' equity during the year ended December 31, 1997 was primarily due
to the combined effects of the completion of the second and third and
commencement of the fourth 5% stock repurchase programs and dividends paid,
during the year ended December 31, 1997, offset by the change in market
valuation, net of taxes, of the available-for-sale securities portfolio, net
income and the amortization of the Stock-based Incentive Plans. The
stockholders' equity to total assets ratio of the Company was 8.4% at December
31, 1997 and 10.5% at December 31, 1996.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 1997 was $7.1 million, or $1.28
basic earnings per share and $1.24 diluted earnings per share, compared to $2.9
million, or $.48 basic and diluted earnings per share for the comparable period
in 1996. Net income for the year ended December 31, 1996 was adversely impacted
by the one time $2.7 million (approximately $1.6 million after tax, or $.26 per
share) special assessment for the recapitalization of the Savings Association
Insurance Fund ("SAIF"). The improved net income increased the return on average
assets to .75% and the return on average stockholders' equity to 8.21% during
the year ended December 31, 1997, compared to .40% and 3.21%, respectively, for
the year ended December 31, 1996. Excluding the SAIF special assessment, the
return on average assets was .61% and the return on average stockholders' equity
was 4.96% for the year ended December 31, 1996. The increase was primarily
attributable to higher net interest income, due to increased balances of
interest earning assets,
17
12
some of which had higher margins from the BNB acquisition, earnings from real
estate operations and the non-repetition of the one-time $1.6 million after tax
special assessment for the recapitalization of the SAIF. The net interest margin
in 1997 increased to 3.42% from 3.34% during 1996. The improvement in the net
interest margin in 1997 was primarily due to the impact of the acquisition of
BNB which, like most commercial banks, earns a wider margin than thrifts such as
BFS.
Interest Income
Total interest income for the year ended December 31, 1997 increased by
$15.4 million to $68.0 million compared to $52.7 million for the year ended
December 31, 1996. Interest on loans increased by $13.3 million, or 29.2%, to
$58.8 million, during 1997 compared to $45.5 million during 1996. The increase
in interest income in 1997 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $603.6 million for 1996 to $759.3 million for 1997. Approximately
$66 million of such growth was due to the acquisition of BNB. The increased
average loan, net, balances generated an additional $11.7 million of interest
earned while improved yields increased interest earned on loans, net, by $1.6
million. The improved yields were generally the result of increasing rate
adjustments to BFS's adjustable-rate loan portfolio, much of which had been
originated at discounted rates in prior years. Additionally, as interest rates
declined in the second half of 1997, BFS increased the volume of shorter-term,
(ten to fifteen years), higher yielding fixed-rate loans. The loan portfolio
average loan yield was increased 7.74% for 1997 compared to an average yield of
7.54% for 1996. Interest income on investment securities and overnight federal
funds sold increased by $2.8 million to $5.0 million for the year ended December
31, 1997, compared to $2.2 million for the year ended December 31, 1996. The
primary reason for the increase is due to higher average balances of investment
securities due to the acquisition of BNB. Interest income on mortgage-backed
securities decreased by $769,000 for the year ended December 31, 1997 due
primarily to a decrease in average balances compared to the prior year. Average
balances decreased by $10.0 million from an average of $72.3 million during 1996
to an average $62.3 million during 1997. The majority of the mortgage-backed
securities held in 1997 were adjustable GNMA securities. The yields on
mortgage-backed securities decreased from an average yield of 6.91% in 1996 to
6.79% in 1997, resulting in a decrease in interest earned on such securities in
1997 of $76,000, compared to 1996.
Interest Expense
Interest expense increased by $8.2 million, or 28.4%, for the year ended
December 31, 1997 to $37.1 million compared to $28.9 million for the year ended
December 31, 1996. The increase in interest expense for the year ended December
31, 1997 was due to higher interest expense on both deposits and borrowed funds.
Borrowed funds consisted primarily of FHLB advances and were used primarily to
fund loan portfolio growth. Higher average balances of borrowed funds resulted
in a $4.3 million increase in interest expense, while a 14 basis point increase
in the cost of borrowings resulted in a $426,000 increase in interest expense.
The average cost of borrowings for the year ended December 31, 1997 was 6.0%
compared to an average cost of 5.86% for the prior year. Interest expense on
deposit accounts increased by $3.5 million for the year ended December 31, 1997
due primarily to the effects of higher average balances of $511.8 million for
the year ended December 31, 1997 compared to average deposit balances of $403.2
million for the prior year. The increased average balances were primarily
attributable to the acquisition of BNB and BFS's acquisition of wholesale
brokered deposits. The average cost of deposit accounts decreased from 3.89% for
the year ended December 31, 1996 to an average cost of 3.75% for the current
year. A major contributing factor in lowering the cost of savings was the
addition of BNB's savings portfolio which consisted entirely of lower costing
core deposit accounts. BNB had not been offering certificates of deposit to its
customers, as its previous lending needs did not necessitate such savings
products.
Provision for Loan Losses
During 1997, the provision for loan losses was increased to $1.7 million
from the prior year provision of $1.3 million. The higher provision was based on
management's evaluation of the growth and change in composition of the Company's
loan portfolio, existing real estate market conditions, the level of charge-offs
and classified assets. Total non-performing loans decreased to $1.4 million, or
.17% of loans at December 31, 1997 from $1.5 million, or .22% at December 31,
1996. Net charge-offs also decreased, amounting to $116,000, or .02% of average
loans outstanding during 1997 compared with 1996's net charge-off total of $1.2
million or .19% of average loans outstanding. The allowance for loan losses as a
percentage of total loans was 0.82% at December 31, 1997 compared to .64% at
Decem-
18
13
ber 31, 1996. As a percentage of total non-performing loans, the allowance for
loan losses was 469.8% at December 31, 1997, compared to 293.0% a year earlier.
See "Asset Quality" included elsewhere herein.
Non-Interest Income
Total non-interest income increased to $4.8 million for the year ended
December 31, 1997 from $3.6 million for the year ended December 31, 1996. The
primary contributing factors were increased gains on the sale of loans and
higher deposit service fees. The $1.1 million gain on sale of loans during the
current year exceeded the $668,000 for the prior year, primarily due to more
favorable market pricing of loans sold in the secondary market during 1997. The
improved gain on sale of loans was realized despite a reduction in the volume of
loans sold during 1997. Deposit service fees improved to $1.7 million for the
year ended December 31, 1997, compared to $1.1 million for the prior year due to
the inclusion of BNB's deposit service fees and continued growth in BFS's
transaction accounts and service fees collected thereon during 1997.
Non-Interest Expense
Total non-interest expense for the year ended December 31, 1997 was $21.5
million, compared to $21.0 million for 1996. Excluding the SAIF special
assessment of $2.7 million during 1996, non-interest expenses increased by $3.2
million or 17.5%. The primary components of this increase were compensation and
benefits expenses and occupancy and equipment expenses, offset somewhat by
reduced deposit insurance premiums and income from real estate operations.
Compensation and benefits expense for the year ended December 31, 1997 amounted
to $13.5 million, compared to $9.8 million for the prior year. The primary
reasons for this increase of $3.7 million was the inclusion of $2.2 million of
BNB's compensation expenses, a $468,000 increase in the ESOP expense resulting
from appreciation in the Company's stock, and the establishment of a short-term
incentive plan. Occupancy and equipment expense increased from $2.5 million for
the year ended December 31, 1996 to $3.1 million for the year ended December 31,
1997, due essentially to the addition of BNB's expenses. The Company's Federal
Deposit Insurance Premiums were lower this year, $293,000 compared to last
year's total of $916,000 due to the benefits of the Company's payment of the
non-recurring special assessment of $2.7 million to the SAIF in 1996. Data
processing expense increased from $600,000 for the year ended December 31, 1996
to $968,000 for the current year due primarily to the added cost of BNB's data
processing. Real estate operations provided income of $1.2 million during the
year ended December 31, 1997, compared to an expense for the prior year. The two
main contributing factors to the current year's income from real estate
operations are the sale of a land sub-division owned by a subsidiary of BFS and
recoveries from the sale of real estate owned, owing to improvement in general
real estate market conditions during 1997. Other non-interest expense increased
to $4.1 million for the year ended December 31, 1997 from $3.4 million for the
prior year due to the inclusion of BNB's miscellaneous expenses.
Income Taxes
Income tax expense was $5.5 million for the year ended December 31, 1997
(resulting in an effective tax rate of 43.8%), compared to a tax expense of $2.1
million for the year ended December 31, 1996 (resulting in an effective tax rate
of 41.5%). The increase in income tax expense is primarily attributable to an
increase in pre-tax earnings while the slightly higher effective rate is due
primarily to the non-deductibility of the appreciation of the allocated ESOP
shares.
Year 2000 Project
Included in other non-interest expenses in 1997 are charges incurred in
connection with the modification or replacement of software or hardware in order
for the Company's computer and related systems to properly recognize dates
beyond December 31, 1999. The Company has completed its assessment of Year 2000
issues, developed a plan, and arranged for the required resources to complete
the necessary remediation efforts.
The Company will utilize both internal and external resources to reprogram,
or replace and test hardware and software for Year 2000 modifications. The
Company plans to complete changes and testing for mission critical systems by
December 31, 1998, a date prior to any impact on its operating systems. Testing
of non-critical applications will continue into 1999 and will be completed prior
to any impact on operating systems. The total cost of the Year 2000 project is
estimated at $300,000 to $500,000. Through December 31, 1997 the Company
expensed approximately $50,000 toward the assessment and remediation efforts of
the Year 2000 project. The Company will incur costs through the Year 2000, but
does not anticipate that material incremental costs will be incurred in any
single period.
19
14
A significant portion of the costs associated with the Year 2000 project
are not expected to be incremental to the Company, but rather represent a
reprioritization of existing internal systems technology resources.
The Company has initiated formal communications with all of its significant
vendors and service providers to determine the extent to which the Company is
vulnerable to any failure of those third parties to remedy their own Year 2000
issues. The Company's total Year 2000 project costs and estimates to complete
include the estimated costs and time associated with the impact of third-party
Year 2000 issues, based on information currently available. However, there can
be no guarantee that the systems of other companies on which the companies
systems rely will be remediated in a timely manner or that there will be no
adverse effect on the Company's systems. Therefore, the Company could possibly
be negatively impacted to the extent that other entities not affiliated with the
Company are unsuccessful in properly addressing this issue.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based upon management's best estimates,
which are derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995.
CHANGES IN FINANCIAL CONDITION
Assets at December 31, 1996 totaled $820.6 million, an increase of $179.8
million, or 28.1%, compared to $640.8 million at December 31, 1995. This growth
was primarily due to increased originations of adjustable-rate one- to
four-family mortgage loans which caused loans, net, to increase by $167.2
million to a balance of $676.7 million at December 31, 1996, compared to a
balance of $509.5 million at December 31, 1995. Volatility in market interest
rates and a generally rising interest rate environment in 1996 caused customer
preference to shift to adjustable-rate loan products and the demand for fixed-
rate products declined. Deposits increased $9.7 million to $428.8 million at
December 31, 1996 compared to $419.1 million as of December 31, 1995, due
primarily to interest credited to accounts during the year. The Company funded
the increase in loans, net, primarily by borrowing short- and long-term funds
from the FHLB. Mortgage-backed securities increased by $7.6 million, or 12.9%,
from a balance of $59.0 million at December 31, 1995 to a balance of $66.6
million at December 31, 1996. Mortgage loans held for sale totaled $4.0 million
at December 31, 1996, compared to $8.9 million at December 31, 1995. FHLB
advances increased $176.6 million to a balance of $296.5 million at December 31,
1996, compared to $119.9 million at December 31, 1995. Total stockholders'
equity at December 31, 1996 totaled $86.4 million, or $14.75 book value per
share and 10.5% of total assets, compared to $90.7 million, or $14.78 book value
per share and 14.2% of total assets at December 31, 1995. The decrease in total
stockholders' equity is due to the combined effects of the contribution to the
Company's 1995 Stock-Based Incentive Plan Trust (the "SIP") to fund the SIP's
purchase of 4% of the Company's common stock (net of amortization), the
completion of a 5% stock repurchase program, the change in market valuation (net
of taxes), of the available-for-sale securities portfolio and dividends paid,
offset by net income.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 1996 was $2.9 million, or $.48
basic and diluted earnings per share, an increase of $1.8 million or 164%, from
the $1.1 million (with earnings per share not applicable) for the year ended
December 31, 1995. The increase was primarily attributable to higher net
interest income, due to increased balances of interest earning assets and a
lower provision for loan losses, which were partially offset by the one-time
$2.7 million (approximately $1.6 million after tax) special assessment for the
recapitalization of the SAIF as a result of federal legislation enacted in late
1996. Excluding such non-recurring SAIF special assessment, net income for the
year would have been $4.5 million or $.73 basic and diluted earnings per share,
a 309% increase over 1995's net income of $1.1 million, with earnings per share
not meaningful since the Company did not have any stock outstanding until
October 24, 1995. The net interest margin in 1996 increased to 3.34% from 3.28%
during 1995. The improvement in the net interest margin in 1996 was primarily
due to the impact of the Company's utilization of net conver-
20
15
sion proceeds for a full year in 1996 compared to approximately two months in
1995.
Interest Income
Total interest income for the year ended December 31, 1996 increased by
$10.2 million to $52.7 million compared to $42.5 million for the year ended
December 31, 1995. Interest on loans increased by $7.4 million, or 19.4%, to
$45.5 million, during 1996 compared to $38.1 million during 1995. The increase
in interest income in 1996 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $503.9 million for 1995 to $603.6 million for 1996. The increased
average loan balances generated an additional $7.5 million of interest earned
which was partially offset by reduced earnings of $101,000 due to increased
origination of the Company's discounted adjustable-rate loans which resulted in
an overall decline in yields for the loan portfolio whereby the average loan
yield was reduced to 7.54% for 1996 compared to an average of 7.56% for 1995.
Interest income on mortgage-backed securities increased by $2.6 million for the
year ended December 31, 1996 due primarily to an increase in average balances
compared to the prior year. Average balances increased by $32.8 million from an
average of $39.5 million during 1995 to an average $72.3 million during 1996.
The majority of the mortgage-backed securities held in 1996 were adjustable GNMA
securities. The yields on mortgage-backed securities increased from an average
yield of 6.16% in 1995 to 6.91% in 1996, resulting in an increase in interest
earned on such securities in 1996 of $545,000, compared to 1995.
Interest Expense
Interest expense increased by $5.3 million, or 22.5%, for the year ended
December 31, 1996 to $28.9 million compared to $23.6 million for the year ended
December 31, 1995. The primary cause of the increase in interest expense for the
year ended December 31, 1996 was interest expense on borrowed funds consisting
primarily of FHLB advances and to a lesser extent, repurchase agreements which
were used primarily to fund adjustable-rate loans originated for portfolio
during 1996. Interest expense on deposit accounts increased by $575,000 for the
year ended December 31, 1996 due primarily to the effects of higher deposit
rates during the year, caused by a shift of regular savings deposits into higher
yielding certificates of deposit. Average deposit balances were $403.2 million
during the year ended December 31, 1996, compared to $403.9 million for the
prior year, a decrease of $695,000. For the year ended December 31, 1996,
interest expense on borrowed funds was $13.2 million compared to $8.4 million
the prior year, an increase of $4.8 million, or 57.1%. While the average cost of
borrowed funds declined by 46 basis points, from an average of 6.32% for the
year ended December 31, 1995 to 5.86% for 1996, causing interest expense on FHLB
advances to decrease by $1.0 million, the average balances increased from an
average borrowed money balance of $133.3 million in 1995 to an average of $225.1
million in 1996. The higher average balances increased interest expense on
borrowed funds by $5.8 million in 1996 compared to 1995.
Provision for Loan Losses
During 1996, the provision for loan losses was reduced to $1.3 million from
the prior year $3.6 million. The lower provision was based on management's
evaluation of existing real estate market conditions, improvement in the level
of charge-offs and classified assets as well as a stabilization of general
economic conditions in the Company's market area. Total non-performing loans
decreased to $1.5 million, or .22% of loans at December 31, 1996 from $5.3
million, or 1.00% at December 31, 1995. Net charge-offs also decreased,
amounting to $1.2 million, or .19% of average loans outstanding during 1996
compared with 1995's total of $3.0 million or .60% of average loans outstanding.
The allowance for loan losses as a percentage of total loans was 0.64% at
December 31, 1996 compared to .82% at December 31, 1995. As a percentage of
total non-performing loans, the allowance for loan losses was 293.0% at December
31, 1996, compared to 81.4% a year earlier. See "Asset Quality" included
elsewhere herein.
Non-Interest Income
Total non-interest income increased to $3.6 million for the year ended
December 31, 1996 from $2.7 million for the year ended December 31, 1995. The
primary contributing factors were increased gains on the sale of loans and
higher transaction account service fees. The $668,000 gain on sale of loans
during the current year exceeded the $214,000 for the prior year due mostly to
the implementation of Statement of Financial Accounting Standards ("SFAS") No.
122, Accounting for Mortgage Servicing Rights, as of January 1, 1996. Deposit
service fees improved to $1.1 million for the year ended December 31, 1996,
compared to $668,000 for the prior year due to continued growth in transaction
accounts and service fees collected thereon during 1996.
21
16
Non-Interest Expense
Total non-interest expense for the year ended December 31, 1996 was $21.0
million, compared to $16.0 million for 1995. The increase of $5.0 million, or
31.3%, was primarily attributable to the SAIF special assessment of $2.7
million, increased compensation and benefits expenses, occupancy and equipment
expenses and other expenses. Compensation and benefits expense for the year
ended December 31, 1996 amounted to $9.8 million, compared to $8.4 million for
the prior year. The primary reason for the increase is the SIP expense, which
amounted to $1.1 million, (including $187,000 in market value appreciation).
Office occupancy and equipment expense increased from $2.2 million for the year
ended December 31, 1995 to $2.5 million for the year ended December 31, 1996,
due to higher costs incurred for the new data processing service and the costs
of new automation equipment placed in service during the current year. While the
Company's Federal Deposit Insurance Premiums were slightly lower this year, the
Company paid a non-recurring special assessment of $2.7 million. Other
non-interest expense increased to $3.4 million for the year ended December 31,
1996 from $2.6 million for the prior year due to increased costs of temporary
help and supplies (both due to high lending volumes), and other operating
expenses.
Income Taxes
Income tax expense was $2.1 million for the year ended December 31, 1996
(resulting in an effective tax rate of 41.5%), compared to a tax expense of
$815,000 for the year ended December 31, 1995 (resulting in an effective tax
rate of 41.8%). The increase in income tax expense is primarily attributable to
an increase in pre-tax earnings.
Impact of New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to shareholders. Net income is a component of comprehensive income
with all other components referred to in the aggregate as other comprehensive
income. This statement is effective for 1998 financial statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes standards for
reporting information about operating segments. An operating segment is defined
as a component of a business for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and evaluate performance. This statement
requires a company to disclose certain income statement and balance sheet
information by operating segment, as well as provide a reconciliation of
operating segment information to the company's consolidated balances. This
statement is effective for the 1998 annual financial statements.
22
17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
BostonFed Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of BostonFed
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BostonFed Bancorp,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in note 1, the Company changed its method of accounting for
mortgage servicing rights effective January 1, 1996.
Boston, Massachusetts
January 20, 1998
23
18
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands Except Share Data)
December 31, 1997 and 1996
ASSETS 1997 1996
- ------ ---- ----
Cash and due from banks (note 1) $ 21,242 15,335
Overnight federal funds sold 3,330 2,930
Short-term investments (note 1) 118 13
--------- --------
Total cash and cash equivalents 24,690 18,278
Investment securities available for sale (amortized cost of $31,554 at 1997
and $1,085 at 1996) (note 4) 31,767 1,085
Investment securities held to maturity (fair value of $20,630 at 1997 and
$19,045 at 1996) (notes 5 and 14) 20,630 19,170
Mortgage-backed securities available for sale (amortized cost of $19,007
at 1997 and $23,915 at 1996) (notes 4, 13 and 14) 19,125 23,593
Mortgage-backed securities held to maturity (fair value of $38,903 at 1997
and $43,033 at 1996) (notes 5 and 14) 38,350 43,019
Mortgage loans held for sale 9,817 3,970
Loans, net of allowance for loan losses of $6,600 at 1997 and $4,400 at
1996 (notes 6, 7 and 14) 791,728 676,670
Accrued interest receivable (notes 8 and 13) 5,163 4,067
Stock in FHLB of Boston, at cost (note 14) 16,613 16,295
Premises and equipment, net (note 9) 6,842 4,979
Real estate held for sale or development (note 10) -- 874
Real estate owned (note 11) 195 2,668
Deferred income tax asset, net (note 15) 2,020 1,537
Prepaid expenses and other assets (notes 6 and 20) 7,740 4,362
--------- --------
Total assets $ 974,680 820,567
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts (note 12) $ 619,821 428,818
Securities sold under agreements to repurchase (note 13) 7,140 3,500
Federal Home Loan Bank advances (note 14) 256,500 296,500
Advance payments by borrowers for taxes and insurance 3,133 2,100
Accrued expenses and other liabilities 6,475 3,294
--------- --------
Total liabilities 893,069 734,212
--------- --------
Commitments and contingencies (notes 3, 4, 5, 7, 9, 16, 17, 18 and 19)
Stockholders' equity (notes 2, 3 and 16):
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 issued at 1997 and 1996 66 66
Additional paid-in capital 65,282 64,461
Retained earnings 38,645 33,131
Net unrealized gain (loss) on investments available for sale 242 (322)
Treasury stock, at cost (1,069,180 and 329,300 shares at 1997 and 1996) (18,146) (4,739)
Unallocated ESOP shares (3,174) (3,929)
Unearned 1996 Stock-Based Incentive Plan (1,304) (2,313)
--------- --------
Total stockholders' equity 81,611 86,355
--------- --------
Total liabilities and stockholders' equity $ 974,680 820,567
========= ========
See accompanying notes to consolidated financial statements.
24
19
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except per Share Data)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Interest income:
Loans (note 6) $ 58,805 45,513 38,079
Mortgage-backed securities 4,229 4,998 2,430
Investment securities 4,736 2,001 1,652
Federal funds sold 267 166 293
-------- ------- ------
Total interest income 68,037 52,678 42,454
-------- ------- ------
Interest expense:
Deposit accounts (note 12) 19,176 15,698 15,123
Borrowed funds (notes 13 and 14) 17,953 13,193 8,429
-------- ------- ------
Total interest expense 37,129 28,891 23,552
-------- ------- ------
Net interest income 30,908 23,787 18,902
Provision for loan losses (note 7) 1,696 1,294 3,614
-------- ------- ------
Net interest income after provision for loan losses 29,212 22,493 15,288
-------- ------- ------
Non-interest income:
Loan processing and servicing fees (note 6) 1,241 1,330 1,318
Deposit service fees 1,710 1,140 668
Gain on sale of loans 1,114 668 214
Gain (loss) on sale of investments (note 4) (18) (11) 32
Other 759 440 440
-------- ------- ------
Total non-interest income 4,806 3,567 2,672
-------- ------- ------
Non-interest expense:
Compensation and benefits (note 16) 13,543 9,841 8,423
Occupancy and equipment 3,087 2,479 2,231
Deposit insurance premiums 293 916 947
Advertising expense 682 588 736
Data processing 968 600 615
Real estate operations (notes 10 and 11) (1,230) 561 448
SAIF special assessment (note 3) -- 2,670 --
Other 4,115 3,385 2,609
-------- ------- ------
Total non-interest expense 21,458 21,040 16,009
-------- ------- ------
Income before income taxes 12,560 5,020 1,951
Income tax expense (note 15) 5,505 2,083 815
-------- ------- ------
Net income $ 7,055 2,937 1,136
======== ======= ======
Basic earnings per share $ 1.28 .48 NM
======== ======= ======
Diluted earnings per share $ 1.24 .48 NM
======== ======= ======
Weighted average shares outstanding - basic 5,505 6,118 NM
======== ======= ======
Weighted average shares outstanding - diluted 5,690 6,128 NM
======== ======= ======
See accompanying notes to consolidated financial statements.
25
20
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Years ended December 31, 1997, 1996 and 1995
Net unrealized
gain (loss) on
Shares of Additional investments
Preferred common Common paid-in Retained Treasury available
stock stock stock capital earnings stock for sale, net
----- ----- ----- ------- -------- ----- -------------
Balance at December 31, 1994 $ -- $ -- $ -- $ -- $ 30,047 $ -- $ --
Stock issued pursuant to initial
common stock offering -- 6,590 66 63,855 -- -- --
Common stock acquired by ESOP -- -- -- -- -- -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- --
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- -- 132 -- -- --
Net income -- -- -- -- 1,136 -- --
---- ------ ---- ------- ------- ---- -----
Balance at December 31, 1995 -- 6,590 66 63,987 31,183 -- --
Unearned
Unallocated Stock-Based Total
ESOP Incentive stockholders'
shares Plan ("SIP") equity
------ ------------ ------
Balance at December 31, 1994 -- -- 30,047
Stock issued pursuant to initial
common stock offering -- -- 63,921
Common stock acquired by ESOP (5,290) -- (5,290)
Reduction in unallocated ESOP
shares charged to expense 755 -- 755
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 132
Net income -- -- 1,136
------ ---- ------
Balance at December 31, 1995 (4,535) -- 90,701
(Continued)
26
21
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
(In Thousands, Except Share Data)
Years ended December 31, 1997, 1996 and 1995
Net unrealized
gain (loss) on
Shares of Additional investments
Preferred common Common paid-in Retained Treasury available
stock stock stock capital earnings stock for sale, net
----- ----- ----- ------- -------- ----- -------------
Common stock repurchased
(329,300 shares at an average
price of $14.39 per share) -- -- -- -- -- (4,739) --
Cash dividends declared and paid
(.15 per share) -- -- -- -- (989) -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- --
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- -- 474 -- -- --
Common stock acquired for SIP -- -- -- -- -- -- --
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- --
Changes in net unrealized loss in
investments available for sale,
net -- -- -- -- -- -- (322)
Net income -- -- -- -- 2,937 -- --
-- ----- -- ------ ------- ------ ----
Balance at December 31, 1996 -- 6,590 66 64,461 33,131 (4,739) (322)
Unearned
Unallocated Stock-Based Total
ESOP Incentive stockholders'
shares Plan ("SIP") equity
------ ------------ ------
Common stock repurchased
(329,300 shares at an average
price of $14.39 per share) -- -- (4,739)
Cash dividends declared and paid
(.15 per share) -- -- (989)
Reduction in unallocated ESOP
shares charged to expense 606 -- 606
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 474
Common stock acquired for SIP -- (3,230) (3,230)
Earned portion of SIP shares
charged to expense -- 917 917
Changes in net unrealized loss in
investments available for sale,
net -- -- (322)
Net income -- -- 2,937
------ ------ -------
Balance at December 31, 1996 (3,929) (2,313) 86,355
(Continued)
27
22
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
(In Thousands, Except Share Data)
Years ended December 31, 1997, 1996 and 1995
Net unrealized
gain (loss) on
Shares of Additional investments
Preferred common Common paid-in Retained Treasury available
stock stock stock capital earnings stock for sale, net
----- ----- ----- ------- -------- ----- -------------
Common stock repurchased
(739,880 shares at an average
price of $18.12 per share) -- -- -- -- -- (13,407) --
Cash dividends declared and paid
(.26 per share) -- -- -- -- (1,541) -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- --
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- -- 821 -- -- --
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- --
Changes in net unrealized loss in
investments available for sale,
net -- -- -- -- -- -- 564
Net income -- -- 7,055 -- --
------ ----- ------ ------ ------- ------- ---
Balance at December 31, 1997 $ -- 6,590 $ 66 65,282 38,645 (18,146) 242
====== ===== ====== ====== ======= ======= ===
Unearned
Unallocated Stock-Based Total
ESOP Incentive stockholders'
shares Plan ("SIP") equity
------ ------------ ------
Common stock repurchased
(739,880 shares at an average
price of $18.12 per share) -- -- (13,407)
Cash dividends declared and paid
(.26 per share) -- -- (1,541)
Reduction in unallocated ESOP
shares charged to expense 755 -- 755
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 821
Earned portion of SIP shares
charged to expense -- 1,009 1,009
Changes in net unrealized loss in
investments available for sale,
net -- -- 564
Net income -- -- 7,055
------ ------ -------
Balance at December 31, 1997 (3,174) (1,304) 81,611
====== ====== =======
See accompanying notes to consolidated financial statements.
28
23
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Net cash flows from operating activities:
Net income $ 7,055 2,937 1,136
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 963 1,034 1,109
Earned SIP shares 1,009 917 --
Reduction in unallocated ESOP shares 755 606 755
Appreciation in fair value of shares charged to expense for
compensation plans 821 474 132
Provision for loan losses 1,696 1,294 3,614
Recovery (provision) for valuation allowance for real estate owned (350) 335 246
Loans originated for sale (117,413) (143,064) (78,041)
Proceeds from sale of loans 112,680 148,693 69,640
Net loss (gain) on sale of investment securities 18 11 (32)
Gain on sale of real estate held for sale or development, net (854) -- (167)
Decrease (increase) in deferred income taxes (483) 575 49
Loss on sale of real estate acquired through foreclosure 189 44 --
Gain on sale of loans (1,114) (668) (214)
Increase in accrued interest receivable (240) (371) (694)
Increase (decrease) in minority interest -- -- (226)
Decrease (increase) in prepaid expenses and other assets 3,066 (1,452) (105)
Increase (decrease) in accrued expenses and other liabilities 795 787 (935)
--------- ---------- ----------
Net cash provided by (used in) operating activities 8,593 12,152 (3,733)
--------- ---------- ----------
Cash flows from investing activities:
Net cash of acquired institution 11,908 -- --
Proceeds from sales of investment securities available for sale 14,008 -- 3,096
Proceeds from sale of mortgage-backed securities available for sale 1,084 10,614 --
Proceeds from maturities of investment securities available for sale 4,000 -- --
Proceeds from maturities of investment securities held to maturity 9,100 1,745 3,279
Purchase of investment securities available for sale (13,013) (63) (4,088)
Purchase of investment securities held to maturity (5,900) (9,992) (8,710)
Purchase of mortgage-backed securities available for sale -- (10,666) (23,873)
Purchase of mortgage-backed securities held to maturity -- (13,891) --
Principal repayments on investment securities held to maturity -- 6,009 3,340
Principal repayments on mortgage-backed securities held to maturity 4,641 5,934 4,586
Principal repayments on mortgage-backed securities available for sale 3,807 -- --
Increase in portfolio loans, net (51,194) (172,557) (15,691)
Purchase of FHLB stock (249) (7,921) (743)
Purchases of premises and equipment (956) (617) (1,490)
Proceeds from sale of real estate held for sale or development 2,058 -- 200
Additional investment in real estate held for sale or development -- -- (4)
Proceeds from sale of real estate owned 3,167 2,249 596
Additional investments in real estate owned -- (359) (93)
--------- ---------- ----------
Net cash used in investing activities (17,539) (189,515) (39,595)
--------- ---------- ----------
(Continued)
29
24
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In Thousands)
1997 1996 1995
---- ---- ----
Cash flows from financing activities:
Increase (decrease) in deposits accounts $ 65,981 9,714 5,940
Proceeds from securities sold under agreement to repurchase 7,140 2,973 7,000
Repayments of securities sold under agreement to repurchase (3,500) (6,473) --
Proceeds from Federal Home Loan Bank advances 276,200 670,304 461,029
Repayments of Federal Home Loan Bank advances (316,200) (493,713) (476,151)
Increase (decrease) in advance payments by borrowers for taxes
and insurance 685 569 (204)
Net proceeds from common stock issued pursuant to initial
public offering -- -- 63,921
Cash dividends paid (1,541) (989) --
Common stock repurchased (13,407) (4,739) --
Payments to acquire common stock for ESOP -- -- (5,290)
Purchase of common stock for SIP -- (3,230) --
--------- -------- --------
Net cash provided by financing activities 15,358 174,416 56,245
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,412 (2,947) 12,917
Cash and cash equivalents at beginning of year 18,278 21,225 8,308
--------- -------- --------
Cash and cash equivalents at end of year $ 24,690 18,278 21,225
========= ======== ========
Supplemental disclosure of cash flow information:
Payments during the year for:
Interest $ 36,746 27,889 23,803
========= ======== ========
Taxes $ 4,688 1,664 1,293
========= ======== ========
Supplemental schedule of noncash investing activities:
Transfers of mortgage loans to real estate owned $ 533 3,966 1,333
========= ======== ========
See accompanying notes to consolidated financial statements.
30
25
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
As more fully described in note 2, Boston Federal Savings Bank ("BFS")
converted from a mutual savings bank to a capital stock savings bank on
October 24, 1995. As part of the conversion, BostonFed Bancorp, Inc.
(the "Company") was formed, acquired all of BFS's conversion stock, and
issued its common stock in a subscription offering. The Company
acquired Broadway National Bank ("BNB"), effective the close of
business February 7, 1997, which was accounted for using the purchase
method of accounting.
The Company provides a variety of loan and deposit services to its
customers through a network of ten locations. The Company's deposit
gathering is concentrated in the communities surrounding its ten
offices located in the greater Boston metropolitan area, municipalities
of Arlington, Bedford, Billerica, Boston, Burlington, Chelsea,
Lexington, Peabody, Revere and Wellesley. The Company is subject to
competition from other financial institutions including commercial
banks, other savings banks, credit unions, mortgage banking companies
and other financial service providers. The Company is subject to the
regulations of the Federal Reserve Bank ("FRB") and for the first three
years following the initial public offering is also subject to the
regulations of the Office of Thrift Supervision ("OTS"). BFS is also
subject to the regulations of, and periodic examination by, the OTS.
BNB, a national chartered commercial bank, is subject to the
regulations of, and periodic examination by the Office of the
Comptroller of the Currency ("OCC"). The Federal Deposit Insurance
Corporation ("FDIC") insures the deposits of BFS through the Saving
Association Insurance Fund ("SAIF") and insures the deposits of BNB
through the Bank Insurance Fund ("BIF").
In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as
of the dates of the balance sheets, and income and expense for the
periods. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change relate to the
valuation allowance for deferred tax assets and the determination of
the allowance for loan losses and valuation of real estate owned.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: Boston Federal Savings
Bank, Broadway National Bank and B.F. Funding Corporation ("B.F.
Funding").
Boston Federal Savings Bank includes its wholly-owned subsidiaries, Leader
Corporation and BFS Service Corporation. Broadway National Bank
includes its wholly-owned subsidiary, Aygro Corporation. B.F. Funding
is a business corporation formed at the direction of the Company under
the laws of the Commonwealth of Massachusetts on August 25, 1995. B.F.
Funding was established to lend funds to a Company sponsored employee
stock ownership plan trust for the purchase of stock at the initial
public offering. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Certain amounts previously reported have been reclassified to conform to
the current year's presentation.
(Continued)
31
26
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash and Due from Banks
BFS and BNB are required to maintain cash and reserve balances with the
Federal Reserve Bank. Such reserve is calculated based upon deposit
levels and amounted to $4,912 and $1,228 at BFS and BNB, respectively,
at December 31, 1997.
Short-Term Investments
Short-term investments represent certificates of deposit with original
maturities of 90 days or less. These investments are stated at cost
which approximates market value.
Investment and Mortgage-backed Securities
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at
amortized cost; debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading and reported at fair value, with unrealized gains
and losses included in earnings; and debt and equity securities not
classified as either held-to-maturity or trading are classified as
available-for-sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component
of stockholders' equity, net of related income taxes.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income by use of the interest method
adjusted for prepayments. If a decline in fair value below the
amortized cost basis of an investment or mortgage-backed security is
judged to be other than temporary, the cost basis of the investment is
written down to fair value as a new cost basis and the amount of the
write-down is included as a charge against income. Gains and losses on
the sale of investment and mortgage-backed securities are recognized at
the time of sale on a specific identification basis.
Loans
Loans are reported at the principal amount outstanding, reduced by
unamortized discounts and net deferred loan origination fees. Loans
held for sale are carried at the lower of aggregate cost or market
value, considering loan production and sales commitments and deferred
fees. Generally, all longer term (typically mortgage loans with terms
in excess of ten years) fixed-rate residential single-family mortgage
loans are originated for sale and adjustable-rate loans are originated
both for portfolio and for sale. Occasionally, the Company generates
fixed-rate loans which are designated for portfolio at the time of
origination.
Discounts and premiums on loans are recognized as income using the
interest method over the remaining contractual term to maturity of the
loans adjusted for prepayments.
Loan origination fees are offset with related direct incremental loan
origination costs and the resulting net amount is deferred and
amortized to interest income over the contractual life of the
associated loan using the interest method. Net deferred amounts on
loans sold are included in determining the gain or loss on the sale
when the related loans are sold.
The Company sells mortgage loans for cash proceeds approximately equal to
the principal amount of loans sold, but with yields to investors which
reflect current market rates. Gain or loss is recognized at the time of
sale.
(Continued)
32
27
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company adopted the provisions of SFAS No. 122, Accounting for
Mortgage Servicing Right, which amends SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, on January 1, 1996. The Statement
requires that a mortgage banking enterprise recognize as separate
assets, rights to service mortgage loans for others, regardless of how
those servicing rights are acquired. As a result of adopting SFAS No.
122, the net gain on sale of loans increased $1,095 for the year ended
December 31, 1996.
Capitalized mortgage servicing rights are recognized, based on the
allocated fair value of the rights to service mortgage loans for
others. Mortgage servicing rights are amortized to loan processing and
servicing fee income using a method which approximates the level yield
method in proportion to, and over the period of, estimated net
servicing income. Mortgage servicing rights are assessed for impairment
based on the fair value of those rights. Prepayment experience on
mortgage servicing rights is reviewed periodically and, when actual
repayments exceed estimated prepayments, the balance of the mortgage
servicing asset is adjusted by a charge to earnings. Any impairment in
the fair value of those mortgage servicing assets is recognized by a
charge to earnings through a valuation allowance. The risk
characteristics of the underlying loans used to measure impairment
include interest rate and loan origination date.
Accrual of interest on loans is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest
have become contractually past due 90 days or more. Interest received
on non-accrual loans is applied against the principal balance and all
amortization of deferred fees is discontinued. Accrual is generally not
resumed until the loan is brought current, the loan becomes well
secured and in the process of collection and, in either case, when
concern no longer exists as to the collectibility of principal or
interest.
Impaired loans are commercial real estate, multi-family, and non-accrual
mortgage and consumer and other loans, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, for which it is probable that the Company will not be able
to collect all amounts due in accordance with the contractual terms of
the loan agreement. Impaired loans, except those loans that are
accounted for at fair value or at lower of cost or fair value, are
accounted for at the present value of the expected future cash flows
discounted at the loan's effective interest rate or as a practical
expedient in the case of collateralized loans, the lower of the fair
value of the collateral or the recorded amount of the loan. Management
considers the payment status, net worth and earnings potential of the
borrower, and the value and cash flow of the collateral as factors to
determine if a loan will be paid in accordance with its contractual
terms. Management does not set any minimum delay of payments as a
factor in reviewing for impaired classification. Impaired loans are
charged off when management believes that the collectibility of the
loan's principal is remote. Classification of a loan as in-substance
foreclosure is made only when a lender is in substantive possession of
the collateral.
Allowance for Loan Losses
The Company maintains an allowance for probable 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.
(Continued)
33
28
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Management believes the allowance is adequate to absorb probable loan
losses. Factors considered in evaluating the adequacy of the allowance
include 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 for
losses. Such agencies may require the Company to recognize additions to
the 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.
Goodwill
Goodwill is amortized on a straight-line basis over fifteen years.
Goodwill is reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the asset.
Premises and Equipment
Premises and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets (3 to 40
years). Amortization of leasehold improvements is provided over the
life of the related leases by use of the straight-line method. Rental
income on leased facilities is included as a reduction of occupancy and
equipment expense.
Real Estate Held for Sale or Development
Real estate held for sale or development is carried at the lower of cost
or estimated net realizable value. Acquisition and development costs,
including interest, are capitalized. The Company's investments in real
estate are usually made on a joint venture basis. For each project the
Company maintains a controlling interest. Factors similar to those
considered in the evaluation of the allowance for loan losses,
including regulatory agency requirements, are considered in the
evaluation of the net realizable value of real estate held for sale or
development. As of December 31, 1997 the Company had no real estate
held for sale or development.
Real Estate Owned
Real estate owned is acquired through foreclosure or by accepting a deed
in lieu of foreclosure. Real estate owned is recorded at the lower of
the carrying value of the loan or the fair value, less disposal costs,
of the property constructively or actually received, thereby
establishing a new cost basis. Subsequent write-downs are recorded if
the cost basis exceeds current net fair value. Related operating costs,
net of rental income, are reflected in operations when incurred.
Factors similar to those considered in the evaluation of the allowance
for loan losses, including regulatory agency requirements, are
considered in the evaluation of the net fair value of real estate
owned.
(Continued)
34
29
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis
and the tax basis of BFS's assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be realized or settled. BFS's deferred tax asset is
reviewed periodically and adjustments to such asset are recognized as
deferred income tax expense or benefit based on management's judgments
relating to the realizability of such asset. A valuation allowance
related to deferred tax assets is recognized when, in management's
judgment, it is more likely than not that all, or a portion of such
deferred tax assets will not be realized.
Pension
Pension cost is recognized over the employees' approximate service period.
Employee Benefits
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). The Statement encourages companies to adopt
a new accounting method based on the estimated fair value of employee
stock options and other stock awards under which compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. The Company continues to follow APB
Opinion No. 25, Accounting for Stock Issued to Employees. See footnote
16 for the expanded disclosures required by SFAS 123 regarding pro
forma net income and earnings per share.
Earnings Per Share
For 1997, the Company adopted SFAS No. 128, "Earnings per Share". This
Statement specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS"). SFAS No. 128 simplifies
the standards for computing EPS previously found in APB Opinion No. 15
and makes them comparable to international EPS standards. The Statement
replaces the presentation of primary EPS with basis EPS, requires dual
presentation of basic and diluted EPS on the face of the statement of
income, and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The adoption of this pronouncement also
requires restatement of all prior year EPS data presented.
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during
the year adjusted for the weighted average number of unallocated shares
held by the Employee Stock Ownership Plan ("ESOP") and the 1996
Stock-Based Incentive Plan ("SIP"). Diluted earnings per share reflects
the effect to weighted average shares outstanding of the number of
additional shares outstanding if dilutive stock options were converted
into common stock using the treasury stock method.
A reconciliation of the weighted average shares outstanding for the year
ended December 31 follows (In Thousands):
1997 1996
----- -----
Basic shares 5,505 6,118
Dilutive impact of stock options 185 10
----- -----
Diluted shares 5,690 6,128
===== =====
(Continued)
35
30
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Earnings per share is not presented for the period of October 24, 1995
(the date of conversion to a stock savings bank) through December 31,
1995 as the earnings per share calculation for the sixty-nine day
period was not meaningful. Earnings per share is not presented for the
periods prior to the conversion to stock form, as BFS was a mutual
savings bank and no Company stock was outstanding.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS
125"). SFAS 125 establishes, among other things, new criteria for
determining whether a transfer of financial assets in exchange for cash
or other consideration should be accounted for as a sale or as a pledge
of collateral in a secured borrowing. SFAS 125 also establishes new
accounting requirements for pledged collateral. SFAS 125 was effective
for most transactions occurring after December 31, 1996 and must be
applied prospectively. However, SFAS 127, Deferral of the Effective
Date of Certain Provisions of SFAS 125, requires the deferral of
implementation as it relates to repurchase agreements, dollar-rolls,
securities lending and similar transactions in the years beginning
after December 31, 1997. The adoption of SFAS 125 did not have a
material impact on the consolidated financial statements. The adoption
of SFAS No. 127 is not expected to have a material impact on the
consolidated financial statements.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which is effective for the 1997 financial
statements. The Company's disclosures currently comply with the
provisions of this statement.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a
component of comprehensive income, with all other components referred
to in the aggregate as other comprehensive income. This statement is
effective for 1998 financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which establishes
standards for reporting information about operating segments. An
operating segment is defined as a component of a business for which
separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate
resources and evaluate performance. This statement requires a company
to disclose certain income statement and balance sheet information by
operating segment, as well as provide a reconciliation of operating
segment information to the company's consolidated balances. This
statement is effective for the 1998 annual financial statements.
(Continued)
36
31
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) CONVERSION TO STOCK FORM OF OWNERSHIP (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
The Company is a business corporation formed at the direction of BFS under
the laws of Delaware on July 11, 1995. On October 24, 1995, (i) BFS
converted from a federally chartered mutual savings bank to a
federally chartered stock savings bank, (ii) BFS issued all of its
outstanding capital stock to the Company and (iii) the Company
consummated its initial public offering of common stock, par value
$.01 per share (the "Common Stock"), by selling 6,589,617 shares of
Common Stock at a price of $10.00 per share to BFS's Employee Stock
Ownership Plan ("ESOP") and to certain of BFS's eligible account
holders who had subscribed for such shares (collectively, the
"Conversion"). The Conversion resulted in net proceeds of $63.9
million, after expenses of $2.0 million. Net proceeds of $31 million
were invested in BFS to increase BFS's tangible capital to 10% of
BFS's total adjusted assets.
Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, BFS
established a liquidation account at the time of conversion in an
amount equal to the retained earnings of BFS as of the date of its
latest balance sheet date, June 30, 1995, contained in the final
Prospectus used in connection with the Conversion. In the unlikely
event of a complete liquidation of BFS (and only in such an event),
eligible depositors who continue to maintain accounts at BFS shall be
entitled to receive a distribution from the liquidation account. The
total amount of the liquidation account is decreased if the balances
of eligible depositors decrease on the annual determination dates. The
liquidation account approximated $11.1 million (unaudited) at December
31, 1997.
The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory
requirements.
In addition to the 17,000,000 authorized shares of common stock, the
Company authorized 1,000,000 shares of preferred stock with a par
value of $0.01 per share (the "Preferred Stock"). The Board of
Directors is authorized, subject to any limitations by law, to provide
for the issuance of the shares of preferred stock in series, to
establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences, and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. As of December 31, 1997 there
were no shares of preferred stock issued.
(3) STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
BFS and BNB are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, BFS and BNB must meet specific capital guidelines
that involve quantitative measures of BFS's and BNB's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. BFS's and BNB's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require BFS and BNB to maintain minimum amounts and ratios (set forth
in the table below) of risk-weighted, core and tangible capital (as
defined). Management represents, as of December 31, 1997, that BFS and
BNB meets all capital adequacy requirements to which it is subject.
(Continued)
37
32
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of June 9, 1997, the most recent notification from the OTS categorized
BFS as "well capitalized" by regulatory definition. As of May 31,
1997, the most recent notification from the OCC categorized BNB as
"well capitalized." Under "capital adequacy" guidelines and the
regulatory framework to be categorized as "well capitalized" BFS and
BNB must maintain minimum risk-weighted capital, core capital,
leverage, and tangible ratios as set forth in the table. As of
December 31, 1997, BFS and BNB are categorized as "well capitalized"
based on their ratios of risk-weighted core and tangible capital.
These regulatory capital requirements are set forth in terms of (1)
Risk-based Total Capital (Total Capital to Risk Weighted Assets), (2)
Core Capital (Tier I Capital to Adjusted Tangible Assets), (3)
Risk-based Tier I Capital (Tier I Capital to Risk Weighted Assets),
(4) Tangible Capital (Tier I Capital to Tangible Assets), and (5)
Leverage Capital (Tier I Capital to Average Assets).
BFS's and BNB's actual capital amounts and ratios are presented in the
table.
To Be Well
For Capital Capitalized Under
Adequacy Regulatory
Actual Purposes Definitions
------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Risk-based Total Capital:
BFS $54,731 11.9% $36,758 8.0% $45,948 10.0%
BNB 9,477 16.4 4,618 8.0 5,772 10.0
Core Capital:
BFS 48,987 5.9 24,952 3.0 41,586 5.0
Risk-based Tier I Capital:
BNB 8,799 15.2 2,309 4.0 3,463 6.0
Tangible Capital:
BFS 48,987 5.9 12,476 1.5 41,586 5.0
Leverage Capital:
BNB 8,799 7.4 4,753 4.0 5,941 5.0
As of December 31, 1996 (BFS only):
Risk-weighted capital $58,310 13.2% $35,301 8.0% $44,060 10.0%
Core capital 53,910 6.8 23,868 3.0 39,780 5.0
Tangible capital 53,910 6.8 11,934 1.5 39,780 5.0
At December 31, 1997 and 1996, the consolidated capital to assets ratio
was 8.4% and 10.5%, respectively, which exceeded the minimum capital
requirements for the Company. During 1997, the Company's Board of
Directors approved a program to repurchase up to 892,876 or
approximately 15% of its outstanding common shares. The Company plans
to hold the repurchased shares as treasury stock to be used for
general company purposes. During the year ended December 31, 1997,
739,800 shares were repurchased under this program at a total cost of
$13.4 million.
BFS's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. On September 30, 1996, the President signed into
law the Deposit Insurance Funds Act of 1996 (the "Act"). Among other
provisions, the Act empowers the Board of Directors of the FDIC to
impose a special assessment on "SAIF-assessable deposits" as of March
31, 1995 of depository institutions to recapitalize the SAIF. BFS was
assessed a rate of 65.7 cents per $100 of SAIF-assessable deposits.
BFS recorded a charge to SAIF special assessment expense of $2.7
million on September 30, 1996.
(Continued)
38
33
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE (DOLLARS IN
THOUSANDS)
The amortized cost and fair values of investment and mortgage-backed
securities available for sale are shown below by contractual maturity:
December 31, 1997
-------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
Investment securities:
Cash management funds $ 1,150 -- -- 1,150
U.S. Government, federal agency
and other obligations:
Maturing within 1 year 7,987 14 (7) 7,994
Maturing after 1 year but
within 5 years 22,417 206 -- 22,623
------- --- --- ------
Total investment securities $31,554 220 (7) 31,767
======= === === ======
Mortgage-backed securities:
Maturing after 5 years but
within 10 years $ 8,454 -- (10) 8,444
Maturing after 10 years 10,553 151 (23) 10,681
------- --- --- ------
Total mortgage-backed
securities $19,007 151 (33) 19,125
======= === === ======
December 31, 1996
-------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
Investment securities:
Cash management fund $ 1,085 -- -- 1,085
======= === ==== ======
Mortgage-backed securities:
Maturing after 5 years but
within 10 years $10,036 -- (153) 9,883
Maturing after 10 years 13,879 -- (169) 13,710
------- --- ---- ------
Total mortgage-backed
securities $23,915 -- (322) 23,593
======= === ==== ======
Maturities of mortgage-backed securities are shown at final contractual maturity
but are expected to have shorter lives because borrowers have the right to
prepay obligations without prepayment penalties.
(Continued)
39
34
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
U.S. agency notes with an amortized cost of $2,000 and a fair value of
$1,996 at December 31, 1997 were pledged to provide collateral for
customer and the Company's employee tax withholdings that are to be
remitted to the federal government in excess of the $100 of
withholdings insured by the FDIC.
At December 31, 1997, mortgage-backed securities with book value of
$7,414 and fair value of $7,534 were pledged as collateral for
securities sold under agreement to repurchase.
Included in U.S. government, federal agency and other obligations are
investments with callable features that can be called prior to final
maturity with an amortized cost of $2,973 and fair value of $2,994 at
December 31, 1997.
The composition by issuer of mortgage-backed securities available for sale
follows:
December 31,
------------------------------------------------
1997 1996
-------------------- ---------------------
Amortized Fair Amortized Fair
cost value cost value
FHLMC $ 8,454 8,444 10,036 9,883
GNMA 10,553 10,681 13,879 13,710
------- ------ ------ ------
$19,007 19,125 23,915 23,593
======= ====== ====== ======
Proceeds from the sale of investment securities and mortgage-backed
securities available for sale amounted to $15,092, $10,614 and $3,096
in 1997, 1996 and 1995, respectively. Realized losses on investment
securities and mortgage-backed securities available for sale were $18,
$11 and $5 in 1997, 1996 and 1995, respectively. Realized gains
amounted to $37 in 1995.
(Continued)
40
35
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY (DOLLARS IN
THOUSANDS)
The amortized cost and fair values of investment and mortgage-backed
securities held to maturity are shown below by contractual maturity:
December 31, 1997
----------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
Investment securities:
U.S. government, federal
agency and other obligations:
Maturing within one year $ 5,939 7 (19) 5,927
Maturing after 1 year but
within 5 years 13,691 49 (44) 13,696
Maturing after 5 years but
within 10 years 1,000 7 -- 1,007
------- ---- ---- ------
Total investment securities $20,630 63 (63) 20,630
======= ==== ==== ======
Mortgage-backed securities:
Maturing after 1 year but
within 5 years $ 2,050 14 (1) 2,063
Maturing after 5 years but
within 10 years 3,126 132 -- 3,258
Maturing after 10 years 33,174 410 (2) 33,582
------- ---- ---- ------
Total mortgage-backed securities $38,350 556 (3) 38,903
======= ==== ==== ======
December 31, 1996
----------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
Investment securities:
U.S. government, federal
agency and other obligations:
Maturing within one year $ 2,004 -- (3) 2,001
Maturing after 1 year but
within 5 years 15,916 43 (167) 15,792
Maturing after 5 years but
within 10 years 1,000 2 -- 1,002
------- ---- ---- ------
18,920 45 (170) 18,795
------- ---- ---- ------
Certificates of deposit:
Maturing within 1 year 250 -- -- 250
------- ---- ---- ------
Total investment securities $19,170 45 (170) 19,045
======= ==== ==== ======
Mortgage-backed securities:
Maturing after1 year but
within 5 years $ 51 -- (2) 49
Maturing after 5 years but
within 10 years 5,485 86 (51) 5,520
Maturing after 10 years 37,483 113 (132) 37,464
------- ---- ---- ------
Total mortgage-backed securities $43,019 199 (185) 43,033
======= ==== ==== ======
(Continued)
41
36
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities of mortgage-backed securities are shown at final contractual
maturity but are expected to have shorter lives because borrowers have
the right to prepay obligations without prepayment penalties.
A U.S. agency note with amortized cost of $500 and fair value of $496 at
December 31, 1997 was pledged to secure certain of BFS's recourse
liabilities relating to loans sold as described in note 6.
Investment securities with an amortized cost of $1,500 and a fair value
of $1,494 at December 31, 1997 were pledged to provide collateral for
customer and BFS's employee tax withholdings that are to be remitted
to the federal government in excess of the $100 of withholdings
insured by the FDIC.
Included in U.S. government, federal agency and other obligations are
investments with callable features that can be called prior to final
maturity with an amortized cost of $15,084 and a fair value of $15,105
at December 31, 1997.
The composition by issuer of mortgage-backed securities held to maturity
follows:
December 31,
--------------------------------------------
1997 1996
------------------- ------------------
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
FHLMC $ 1,100 1,108 1,356 1,330
FNMA 894 902 1,147 1,129
GNMA 22,425 22,858 26,611 26,696
Privately issued collateralized mortgage obligation 13,931 14,035 13,905 13,878
------- ------ ------ ------
$38,350 38,903 43,019 43,033
======= ====== ====== ======
(6) LOANS (DOLLARS IN THOUSANDS)
The Company's lending activities are conducted principally in eastern
Massachusetts. The Company grants single-family and multifamily
residential loans, commercial real estate loans, commercial loans and a
variety of consumer loans. In addition, the Company grants loans for
the construction of residential homes, multifamily properties,
commercial real estate properties and for land development.
Approximately 99% of the loans granted by the Company are secured by
real estate collateral. The ability and willingness of the
single-family residential and consumer borrowers to honor their
repayment commitments is generally dependent, among other things, on
the level of overall economic activity within the borrowers' geographic
areas and real estate values. The ability and willingness of commercial
real estate, commercial and construction loan borrowers to honor their
repayment commitments is generally affected by the health of the real
estate economic sector in the borrowers' geographic areas and the
general economy.
(Continued)
42
37
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's loan portfolio was comprised of the following at
December 31:
1997 1996
---- ----
Mortgage loans:
Residential 1-4 family $692,285 603,822
Multi-family 18,874 21,381
Construction and land 20,497 12,532
Commercial real estate 36,400 28,136
-------- -------
768,056 665,871
-------- -------
Consumer and other loans:
Home equity and improvement 28,119 17,417
Secured by deposits 2,710 979
Consumer 6,526 1,730
Business 110 724
-------- -------
37,465 20,850
-------- -------
Total loans 805,521 686,721
Less:
Allowance for loan losses (note 7) (6,600) (4,400)
Construction loans in process (8,527) (6,936)
Net unearned discount on loans
purchased (114) (163)
Deferred loan origination costs 1,448 1,448
-------- -------
Loans, net $791,728 676,670
======== =======
The Company services mortgage loans for investors which are not included
in the accompanying consolidated balance sheets totaling approximately
$549,422 and $540,356 at December 31, 1997 and 1996, respectively. Of
these loans serviced for others, $827 and $1,010 at December 31, 1997
and 1996, respectively, had been sold with recourse by the Company. In
addition, at December 31, 1997 and 1996, respectively, the Company had
retained the secondary layer of recourse risk on $7,736 and $9,861 of
serviced loans, with such risk limited to $223 and $267 after the first
layer (25% of each such loss, not to exceed $2,200) is exhausted. The
losses incurred on loans subject to recourse amounted to $44 and $53
for the years ended December 31, 1997 and 1995, respectively. There
were no such losses on loans subject to recourse in 1996.
Proceeds from the sales of loans were $112,680 for 1997, $148,693 for 1996
and $69,640 for 1995. Gains recognized on the sales of loans amounted
to $1,114 in 1997, $668 in 1996, and $214 in 1995.
(Continued)
43
38
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the activity of the mortgage servicing rights, which is
included as a component of other assets, for the year ended
December 31 follows:
1997 1996
---- ----
Balance, beginning of year $ 988 --
Capitalized mortgage servicing rights 836 1,005
Amortization (290) (107)
------ -----
Balance, end of year $1,534 988
====== =====
The Company has determined that the fair value of mortgage servicing
rights at December 31, 1997 approximates their carrying amount.
Therefore, a valuation allowance for the mortgage servicing rights was
not established.
The regulations established by FIRREA implemented a "loan to one borrower
limit" equal to 15% of capital and general valuation reserves. The
regulatory limits for BFS and BNB are $8,300 and $1,900, respectively.
The Company did not have any borrower relationships which exceeded the
limit as of December 31, 1997 and 1996.
In the ordinary course of business, the Company makes loans to its
directors and officers and their related interests at substantially the
same terms prevailing at the time of origination for comparable
transactions with borrowers. The following is a summary of related
party loan activity:
1997 1996
---- ----
Balance, beginning of year $ 846 951
Originations 22 --
Broadway at acquisition 280 --
Payments (106) (86)
Other changes 10 (19)
------ ---
Balance, end of year $1,052 846
====== ===
At December 31, 1997 and 1996, total impaired loans were $2,091 and
$4,392, respectively. In the opinion of management, no impaired loans
required a specific valuation allowance at December 31, 1997 and 1996.
All impaired loans have been measured using the fair value of the
collateral method. The average recorded value of impaired loans was
$3,829 during 1997 and $5,450 during 1996. The Company follows the same
policy for recognition of income on impaired loans as it does for all
other loans.
(Continued)
44
39
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information regarding the reduction of
interest income on impaired loans at December 31:
1997 1996 1995
---- ---- ----
Income in accordance with original terms $286 497 943
Income recognized 139 321 563
---- --- ---
Foregone interest income during year $147 176 380
==== === ===
All of the Company's non-accrual loans are considered to be impaired
loans. Non-accrual loans at December 31, 1997 and 1996 were $1,405 and
$1,502, respectively.
At December 31, 1997 and 1996, there were no commitments to lend
additional funds to those borrowers whose loans were classified as
impaired.
(7) ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)
The following is a summary of the activity in the allowance for loan
losses for the years ended December 31:
1997 1996 1995
---- ---- ----
Balance, beginning of year $4,400 4,275 3,700
BNB allowance for loan losses at acquisition date 620 -- --
Provision charged to income 1,696 1,294 3,614
Recoveries 399 343 485
Charge-offs (515) (1,512) (3,524)
------ ------ ------
Balance, end of year $6,600 4,400 4,275
====== ====== ======
(8) ACCRUED INTEREST RECEIVABLE (IN THOUSANDS)
Accrued interest receivable as of December 31 is presented in the
following table:
1997 1996
---- ----
Investment and mortgage-backed securities $ 871 13
Loans 4,292 4,054
------ -----
$5,163 4,067
====== =====
(Continued)
45
40
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) PREMISES AND EQUIPMENT (IN THOUSANDS)
A summary of the cost, accumulated depreciation and amortization of land,
buildings and equipment is as follows at December 31:
1997 1996
---- ----
Land $ 2,083 519
Buildings 4,036 3,114
Furniture, fixtures and equipment 6,188 4,841
Leasehold improvements 1,291 1,296
------- ------
13,598 9,770
Less accumulated depreciation and amortization (6,756) (4,791)
------- ------
$ 6,842 4,979
======= ======
The Company presently leases office space at three locations and is
committed to minimum annual rentals plus lease escalations. Such leases
expire at various dates with options to renew. Minimum future rentals
are as follows at December 31:
Year ended:
1998 $ 969
1999 240
2000 240
2001 240
Beyond 2001 400
------
$2,089
======
Rent expense was $1,178 in 1997, $1,095 in 1996 and $1,059 in 1995.
The Company is exploring various alternatives with respect to the two
locations which include lease renewal options and options to purchase
upon lease expiration in 1998.
The Company leases, as lessor, office space at two of its branch
locations. The leases expire at various dates with options to renew.
Minimum future rental income is as follows at December 31:
Year ended December 31,
1998 $157
1999 144
2000 106
2001 52
----
$459
====
(Continued)
46
41
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) REAL ESTATE HELD FOR SALE OR DEVELOPMENT (IN THOUSANDS)
The Company's investment in real estate held for sale or development
consists of the following:
Type of Property 1997 1996
---------------- ---- ----
Land $ -- 2,459
Write-downs to net realizable value -- (1,585)
---- ------
Net investment in real estate $ -- 874
==== ======
Net gains on sales of the Company's joint venture interests amounted to
$854 and $167 for the years ended December 31, 1997 and 1995,
respectively. There were no sales in the Company's joint venture
interests for the year ended December 31, 1996. Operating expenses on
real estate held for sale or development were $51 in 1996 and $309 in
1995.
(11) REAL ESTATE OWNED (IN THOUSANDS)
The table below presents the composition of real estate owned by property
type at December 31:
1997 1996
---- ----
Single-family homes and condominiums $195 84
Multi-family and apartment buildings -- 887
Land subdivisions 86 86
Commercial property -- 2,047
---- -----
281 3,104
Valuation allowance to net fair value (86) (436)
---- -----
$195 2,668
==== =====
The following is a summary of the activity in the valuation allowance for
real estate owned:
1997 1996 1995
---- ---- ----
Balance, beginning of year $ 436 243 168
(Recovery) provision charged to income (350) 335 246
Charge-offs -- (142) (171)
----- ---- ----
Balance, end of period $ 86 436 243
===== ==== ====
The table below summarizes the operating results of real estate owned:
1997 1996 1995
---- ---- ----
Income from holding real estate $ 9 163 3
Expenses of holding real estate (172) (294) (63)
Gains (losses) from disposition of properties 189 (44) --
Recovery (provision) to the valuation allowance 350 (335) (246)
----- ---- -----
Net gain (loss) $ 376 (510) (306)
===== ==== =====
(Continued)
47
42
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS)
A summary of deposit balances by type is as follows at December 31:
1997 1996
------------------- ------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
NOW $106,637 1.13% $ 78,517 1.21%
Regular and statement savings 116,858 2.50 88,100 2.49
Money market 61,546 2.92 45,788 3.01
Demand deposits and official checks 51,151 -- 16,289 --
-------- -------
Total noncertificate accounts 336,192 1.76 228,694 1.98
-------- -------
Certificate accounts:
3 to 6 months 33,471 5.14 29,257 5.03
1 to 3 year 196,892 5.93 115,946 5.57
Greater than 3 years 6,286 5.58 7,061 5.44
IRA/Keogh 46,980 5.85 47,860 5.77
-------- -------
Total certificate accounts 283,629 5.82 200,124 5.53
-------- -------
$619,821 3.62% $428,818 3.64%
======== ==== ======== =====
Contractual maturity of certificate accounts:
Within one year $137,520 135,026
One to two years 56,533 37,949
Two to three years 84,479 16,546
Over three years 5,097 10,603
-------- --------
$283,629 $200,124
======== ========
Aggregate amount of certificate accounts of $100 or more were $18,960 and
$15,256 at December 31, 1997 and 1996, respectively. Deposit amounts in
excess of $100 are not federally insured.
Interest expense on deposits consisted of the following for the years
ended December 31:
1997 1996 1995
---- ---- ----
NOW $ 1,071 890 931
Regular and statement savings 2,826 2,219 2,485
Money market 1,822 1,395 1,472
Certificate accounts 13,457 11,194 10,235
------- ------ ------
$19,176 15,698 15,123
======= ====== ======
The Company has $75,000 of brokered deposits with a weighted average
rate of 5.98% at December 31, 1997. Brokered deposits of $10,000 and
$65,000 mature in 1999 and 2000, respectively. There were no brokered
deposits outstanding at December 31, 1996.
(Continued)
48
43
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE (DOLLARS IN THOUSANDS)
1997 1996
------------------ ------------------
Amount Rate Amount Rate
------ ---- ------ ----
Securities sold under agreements to
repurchase, due on demand $7,140 5.98% $3,500 5.45%
====== ==== ====== ====
Securities sold under agreements to repurchase are collateralized by
mortgage-backed securities with a book value of $7,414 and a fair
value of $7,534 at December 31, 1997. Securities sold under agreement
to repurchase averaged $7,261 during 1997, and $7,496 during 1996.
Maximum amounts outstanding at any month end were $21,861 during 1997
and $10,016 during 1996. The average cost of repurchase agreements
was 5.62% in 1997 and 5.86% in 1996. The $7,140 represents three
commitments all scheduled to mature in February, 1998. The securities
collateralizing the agreements are not under the Company's control.
Interest expense was $671 in 1997 and $439 in 1996.
(14) FEDERAL HOME LOAN BANK ("FHLB") OF BOSTON ADVANCES
(DOLLARS IN THOUSANDS)
FHLB of Boston advances by year of maturity at December 31 were:
1997 1996
-------------------- -------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
1997 $ -- 165,000 5.81
1998 118,000 5.76 58,000 5.79
1999 56,000 6.05 56,000 6.05
2000 58,500 6.25 13,500 6.26
2001 13,000 6.14 3,000 6.43
2002 11,000 5.79 1,000 6.55
-------- --------
Total $256,500 5.96% $296,500 5.88%
======== ==== ======== ====
The advances are secured by FHLB of Boston stock and a blanket lien on
certain qualified collateral, defined principally as 90% of the
market value of U.S. Government and federal agency obligations and
75% of the carrying value of first mortgage loans on owner-occupied
residential property. Applying these ratios, and other ratios on
other qualifying collateral, the Company's overall borrowing capacity
was approximately $438,187 and $430,095 at December 31, 1997 and
1996, respectively.
As a member of the FHLB of Boston, the Company is required to maintain a
minimum investment in the capital stock of the Federal Home Loan Bank
of Boston, at cost, in an amount not less than 1% of its outstanding
home loans or 1/20 of its outstanding notes payable to the Federal
Home Loan Bank of Boston, whichever is greater, as calculated at
December 31 of each year. The investment exceeds the required level
by $3,788 and $1,470 at December 31, 1997 and 1996, respectively. Any
excess may be redeemed by the Company or called by FHLB of Boston at
par.
(Continued)
49
44
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest expense on FHLB advances was $17,226 in 1997, $12,682 in 1996
and $8,401 in 1995.
(15) INCOME TAXES (DOLLARS IN THOUSANDS)
An analysis of the current and deferred federal and state income tax
expense (benefit) follows:
1997 1996 1995
---- ---- ----
Current income tax expense:
Federal income tax $4,581 1,142 607
State income tax 1,407 366 159
------ ----- ----
Total current expense 5,988 1,508 766
------ ----- ----
Deferred income tax expense (benefit):
Federal deferred income tax (371) 442 82
State income tax (29) 127 72
Change in valuation allowance (83) 6 (105)
------ ----- ----
Total deferred expense (benefit) (483) 575 49
------ ----- ----
Total income tax expense $5,505 2,083 815
====== ===== ====
The temporary differences (the difference between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases) that give rise to significant portions of the
deferred tax asset and liability are as follows at December 31:
1997 1996
---- ----
Deferred tax assets:
Allowance for loan losses $2,747 1,796
Deferred compensation 766 91
Real estate owned 157 687
State net operating loss carryforwards 86 135
Premises and equipment 80 87
Unrealized loss on securities available for sale -- 110
Other 127 52
------ -----
Gross deferred assets 3,963 2,958
Valuation allowance (210) (403)
------ -----
Net deferred tax assets before deferred tax liabilities 3,753 2,555
------ -----
Deferred liabilities:
Premium on loans sold 696 438
Deferred loan fees 580 576
Unrealized gain on securities available for sale 89 --
Premises and equipment 368 --
Other -- 4
------ -----
Gross deferred liabilities 1,733 1,018
------ -----
Net deferred tax asset $2,020 1,537
====== =====
(Continued)
50
45
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The valuation allowance of $210 at December 31, 1997 is attributable to
state net operating loss carryforwards. Management believes that
existing net deductible temporary differences which give rise to the
net deferred tax asset will reverse during periods in which the
Company generates net taxable income. For the year ending December
31, 1997, the Company generated approximately $14,600 of taxable
income. Factors beyond management's control, such as the general
state of the economy and real estate values, can affect future levels
of taxable income and no assurance can be given that sufficient
taxable income will be generated to fully absorb gross deductible
temporary differences. Management believes it is more likely than not
that the net deferred tax asset will be realized.
Of the change in the valuation allowance of $193, approximately $110 was
attributable to the unrealized losses on securities available for
sale and consequently is not recorded in the statement of income.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the
base year reserve of approximately $13.3 million, on which no
deferred taxes have been provided, remains subject to recapture in
the event that the Bank pays dividends in excess of its earnings and
profits or redeems its stock.
A reconciliation between the amount of total tax expense and expected
tax expense, computed by applying the federal statutory rate to
income before taxes, follows:
1997 1996 1995
---- ---- ----
Computed expected expense at statutory rate $4,396 1,707 663
Items affecting federal income tax rate:
State income tax, net of federal income tax
benefit and before valuation allowance 896 325 152
Change in valuation allowance (83) 6 (105)
Allocated ESOP share appreciation 212 98 45
Other 84 (53) 60
------ ----- ----
Effective income tax expense $5,505 2,083 815
====== ===== ====
Effective income tax rate 43.8% 41.5% 41.8%
====== ===== ====
(16) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Employee Stock Ownership Plan
Effective January 1, 1995, the Company adopted an Employee Stock
Ownership Plan ("ESOP"). The Plan is designed to provide retirement
benefits for eligible employees of BFS. Because the Plan invests
primarily in the stock of the Company, it will also give eligible
employees an opportunity to acquire an ownership interest in the
Company. Employees are eligible to participate in the Plan after
reaching age twenty-one, completing one year of service and working
at least one thousand hours of consecutive service during the
previous year. Contributions are allocated to eligible participants
on the basis of compensation.
(Continued)
51
46
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During October 1995, the Company issued a total of 529,000 shares to the
ESOP at a total purchase price of $5,290. The purchase was made from
the proceeds of a $5,290 loan from B.F. Funding Corporation, a
wholly-owned subsidiary of the Company, bearing interest at the prime
rate. Repayment of the loan is secured by contributions BFS is
obliged to make under a contribution agreement with the ESOP. BFS
made contributions to the ESOP totaling $755 in 1997 and $606 in 1996
to enable the ESOP to make principal payments on the loan. The amount
contributed was charged to compensation and benefits expense. The
Company recognized $604 in 1997 and $287 in 1996 in compensation and
benefit expense and an increase in additional paid-in capital related
to the appreciation in the fair value of allocated ESOP shares. The
balance of the loan will be repaid over a period of approximately
five years, principally with funds from BFS's future contributions to
ESOP, subject to IRS limitations.
Shares used as collateral to secure the loan are released and available
for allocation to eligible employees as the principal balance of the
loan is repaid. Employees vest in their ESOP account at a rate of
33-1/3% annually commencing after the completion of one year of
credited service or immediately if service was terminated due to
death, retirement, disability, or change in control. Dividends on
released shares are credited to the participants' ESOP accounts.
At December 31, 1997 and 1996, shares held in suspense to be released
annually as the loan is paid down amounted to 317,379 and 392,929,
respectively. The fair value of unallocated ESOP shares was $6,944
and $5,796 at December 31, 1997 and 1996, respectively. Dividends on
ESOP shares are charged to retained earnings and ESOP shares
committed-to-be released are considered outstanding in determining
earnings per share.
1996 Stock-Based Incentive Plan
On April 30, 1996, the Company's stockholders approved the 1996
Stock-Based Incentive Plan ("SIP"). The objective of the SIP is to
enable the Company to provide officers and directors with a
proprietary interest in the Company as an incentive to encourage such
persons to remain with the Company. The SIP acquired 263,584 shares
in the open market at an average price of $12.255 per share. This
acquisition represents deferred compensation which is initially
recorded as a reduction in stockholders' equity and charged to
compensation expense over the vesting period of each annual stock
award.
Awards are granted in the form of common stock held by the SIP. A total
of 242,500 shares were awarded on April 30, 1996 and 8,584 shares
were awarded on October 15, 1996. During 1997, 50,217 shares were
distributed. Awards outstanding vest in five annual installments
generally commencing one year from the date of the award. As of
December 31, 1997, 12,500 shares remain unallocated under the SIP.
Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service
period for the portion of each award that vests equally over a
five-year period. The Company recognized $1,226 and $1,104 related to
the earned shares in compensation and benefit expense in 1997 and
1996, respectively.
A recipient will be entitled to all voting and other stockholder
rights. The unallocated SIP shares, with the exception of the
unawarded SIP shares, are considered outstanding in the calculation
of earnings per share.
(Continued)
52
47
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Option Plan
The Company adopted a stock option plan in 1996 ("1996 Plan") for
officers, key employees and directors. Pursuant to the terms of the
1996 plan, the number of common shares reserved for issuance is
658,961 of which 43,100 options remain unawarded. All options have
been issued at not less than fair market value at the date of the
grant and expire in 10 years from the date of the grant. All stock
options granted vest over a five year period from the date of grant.
During 1997, the Company adopted the 1997 stock option plan ("1997
Plan"). Pursuant to the terms of the 1997 plan, 250,000 common shares
are reserved for issuance of which 120,000 options have been granted.
During 1997, the Company granted employees options to purchase 135,461
shares of common stock at between $18.82 and $19.75 per share.
A summary of option activity follows:
1997 1996
------------------------------ -----------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Balance, beginning of year 604,500 $12.51 -- $ --
Granted 135,461 18.89 604,500 12.51
Forfeited (6,600) 18.82 -- --
------- ------ ------- ------
Balance, end of year 733,361 $13.63 604,500 $12.51
======= ====== ======= ======
Options exercisable 120,900 $12.51 -- --
======= ====== ======= ======
A summary of options outstanding and exercisable by price range as of
December 31, follows:
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
as of Remaining Average as of Average
December 31, 1997 Contractual Life Exercise Price December 31, 1997 Exercise Price
----------------- ---------------- -------------- ----------------- --------------
570,000 8.3 $12.44 114,000 $12.44
25,400 8.8 13.44 5,400 13.44
7,500 8.9 14.82 1,500 14.82
120,461 9.5 18.82 -- --
10,000 9.9 19.75 -- --
------- -------
733,361 8.5 $13.63 120,900 $12.51
======= === ====== ======= ======
The Company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation expense has been recognized in the
financial statements. Had the Company determined compensation expense
based on the fair value at the grant date for its stock options under
SFAS 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
(Continued)
53
48
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1997 1996
---- ----
Net income as reported $7,055 2,937
Pro forma net income 6,383 2,533
Basic earnings per share as reported 1.28 .48
Diluted earnings per share as reported 1.24 .48
Pro forma basic earnings per share 1.16 .41
Pro forma diluted earnings per share 1.12 .41
The per share weighted average fair value of stock options granted
during 1997 was $5.21 determined using the Flexible Binomial option
pricing model with the following weighted average assumptions:
1997 1996
---- ----
Expected dividend yield 1.54% 1.63%
Risk-free interest rate 5.99% 6.47%
Expected volatility 29.12% 32.75%
Expected life (years) 4.0 7.8
Pension Plan
All eligible officers and employees are included in a noncontributory
defined benefit pension plan provided by BFS as a participating
employer with Pentegra, formerly known as the Financial Institutions
Retirement Fund. Salaried employees are eligible to participate in
the plan after reaching age twenty-one and completing one year of
service. Pentegra does not segregate the assets or liabilities by
participating employer and, accordingly, disclosure of accumulated
vested and nonvested benefits and net assets available for benefits
required by SFAS No. 87 is not possible. Contributions are based on
individual employer experience. According to Pentegra's
Administrators, as of June 30, 1997, the date of the latest actuarial
valuation, the market value of Pentegra's net assets exceeded the
actuarial present value of vested benefits in the aggregate. There
was no pension expense recorded for 1997, 1996 and 1995, except for
an administration fee of approximately $5 per year.
Deferred Thrift Incentive Plan
BFS and BNB have employee tax deferred thrift incentive plans (the "401K
plans") under which employee contributions to the plans are matched
pursuant to the provisions of the respective plans. All employees who
meet specified age and length of service requirements are eligible to
participate in the 401K plans. The amounts matched by BFS and BNB are
included in compensation and employee benefits expense. The amounts
matched were $119 for 1997 and $88 for 1996.
Short Term Incentive Plan
The Company established a short-term incentive plan during 1997.
Generally, all BFS employees are eligible to participate in the
incentive plan, and awards are granted based on the achievement of
certain performance measures. Compensation expense related to this
award amounted to $450,000 during 1997.
(Continued)
54
49
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Executive Officer Employment Agreements
The Company and BFS entered into employment agreements with its President
and Chief Executive Officer, Executive Vice President, and Chief
Financial Officer. The employment agreements generally provide for
the continued payment of specified compensation and benefits for
three years and provide payments for the remaining term of the
agreement after the officers are terminated, unless the termination
is for "cause" as defined in the employment agreements. The
agreements also provide for payments to the officer upon voluntary or
involuntary termination of the officer following a change in control,
as defined in the agreements. In addition, BFS and BNB entered into
change in control agreements with certain other executives which
provide for the payment, under certain circumstances, to the officer
upon the officer's termination after a change of control, as defined
in their change of control agreements.
Employee Severance Compensation Plan
The Company established an Employee Severance Compensation Plan. The Plan
provides eligible employees with severance pay benefits in the event
of a change in control of BFS or Company. Generally, employees are
eligible to participate in the Plan if they have completed at least
one year of service with the Company and are not eligible to receive
benefits under the executive officer employment agreements. The Plan
provides for the payment, under certain circumstances, of lump-sum
amounts upon termination following a change of control, as defined in
the Plan.
The Company does not provide any postretirement benefits other than
pensions.
(17) LITIGATION
Various legal proceedings are pending against the Company which have
arisen in the normal course of business. In the opinion of
management, the ultimate disposition of these matters is not expected
to have a material adverse effect on the consolidated financial
position, the annual results of operations, or liquidity of the
Company.
(18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (IN THOUSANDS)
In the normal course of business, the Company is party to financial
instruments with off-balance-sheet risk, including commitments to
originate or purchase loans, unadvanced amounts of construction
loans, unused credit lines, standby letters of credit and forward
commitments to sell loans and recourse agreements on assets sold.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Company has
in these particular classes of financial instruments. The Company's
exposure to credit loss in the event of nonperformance by the other
party with respect to loan commitments, unused credit lines and
standby letters of credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments. For forward commitments, the contract
or notional amounts exceed the Company's exposure to credit loss.
(Continued)
55
50
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Commitments to originate loans and unused credit lines are agreements to
lend to a customer, provided the customer meets all conditions
established in the contract. Commitments have fixed expiration dates
and may require payment of a fee. The total commitment amounts do not
necessarily represent total future cash requirements since many
commitments are not expected to be drawn upon. The amount of
collateral obtained, if necessary for the extension of credit, is
based on the credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance by a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers.
Forward commitments to sell loans are contracts which the Company enters
into for the purpose of reducing the market risk associated with
originating loans for sale. In order to fulfill a forward commitment,
the Company typically exchanges through FNMA or FHLMC its current
production of loans for mortgage-backed securities which are then
delivered to a securities firm at a future date at prices or yields
specified by the contracts. Risks may arise from the possible
inability of the Company to originate loans to fulfill the contracts,
in which case the Company may purchase securities in the open market
to deliver against the contracts.
In addition to construction loans in process, the Company had the
following outstanding commitments at December 31:
1997 1996
---- ----
Commitments to originate mortgage loans:
Fixed $16,341 7,540
Variable 20,882 23,116
Unused lines of credit:
Home equity 42,601 30,080
Commercial loans 1,185 209
Standby letters of credit 372 34
Commitments to sell loans or swap loans for
mortgage-backed securities 21,872 8,723
Loans sold with recourse (note 6) 827 1,010
(19) FAIR VALUES OF FINANCIAL INSTRUMENTS (IN THOUSANDS)
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include real estate acquired by foreclosure, the deferred
income tax asset, office properties and equipment, and core deposit
and other intangibles. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in any of the estimates. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Company.
(Continued)
56
51
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for some of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions and changes in the loan, debt and interest rate markets
could significantly affect the estimates.
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximate the carrying
amounts as reported in the balance sheet.
Investment and Mortgage-backed Securities
Fair values for investment securities and mortgage-backed securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
Mortgage Loans Held for Sale
Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to
sell loans have been considered in the determination of the fair
value of mortgage loans held for sale.
Loans
The fair values of loans are estimated using discounted cash flows
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The incremental
credit risk for nonperforming loans has been considered in the
determination of the fair value of loans.
Accrued Interest Receivable
The fair value of accrued interest receivable approximates the carrying
amount as reported in the balance sheet because of its short-term
nature.
Stock in FHLB of Boston
The fair value of Federal Home Loan Bank of Boston ("FHLB") stock
approximates its carrying amount as reported in the balance sheet. If
redeemed, the Company will receive an amount equal to the par value
of the stock.
Deposit Accounts and Advance Payments by Borrowers for Taxes and
Insurance
The fair values of demand deposits (e.g., NOW, regular and statement
savings and money market accounts and advance payments by borrowers
for taxes and insurance) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow technique that applies
interest rates currently being offered on certificates with similar
remaining maturities to a schedule of aggregated expected monthly
maturities on such time deposits.
(Continued)
57
52
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Federal Home Loan Bank Advances
Fair values for FHLB advances are estimated using a discounted cash flow
technique that applies interest rates currently being offered on
advances to a schedule of aggregated expected monthly maturities of
FHLB advances.
Securities Sold Under Agreements to Repurchase
Fair values of securities sold under agreements to repurchase are
estimated using a discounted cash flow technique that applies
interest rates currently being offered on securities sold under
agreements to repurchase to a schedule of expected maturities of
securities sold under agreements to repurchase.
Off-balance-sheet Instruments
The Company's commitments for unused lines and outstanding standby
letters of credit and unadvanced portions of loans and loans sold
with recourse are considered in estimating the fair value of loans.
The carrying amounts and fair values of the Company's financial
instruments at December 31 are as follows:
1997 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $24,690 24,690 18,278 18,278
Investment securities available for sale 31,767 31,767 1,085 1,085
Investment securities held to maturity 20,630 20,630 19,170 19,045
Mortgage-backed securities available for sale 19,125 19,125 23,593 23,593
Mortgage-backed securities held to maturity 38,350 38,903 43,019 43,033
Loans, net and mortgage loans held for sale 801,545 815,740 680,640 678,602
Accrued interest receivable 5,163 5,163 4,067 4,067
Stock in FHLB of Boston 16,613 16,613 16,295 16,295
Financial liabilities:
Deposit accounts $619,821 625,117 428,818 429,060
Securities sold under agreements to repurchase 7,140 7,534 3,500 3,487
FHLB advances 256,500 258,934 296,500 297,873
Advance payments by borrowers for taxes and insurance 3,133 3,133 2,100 2,100
(Continued)
58
53
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) ACQUISITION
On February 7, 1997 the Company acquired BNB, headquartered in Chelsea,
Massachusetts. The purchase price was $22 million and was accounted
for using the purchase method of accounting. The results of
operations include the effect of the purchase for the 327 day period
beginning February 8, 1997. In connection with the acquisition, the
fair value of assets acquired and liabilities assumed were as
follows:
February 7, 1997
----------------
(in thousands)
Assets acquired:
Cash and due from banks $ 5,758
Federal funds sold 28,150
Investment securities available for sale 35,352
Investment securities held to maturity 4,646
Loans, net 66,093
Accrued interest receivable 856
Stock in FRB of Boston 69
Premises and equipment 1,972
Prepaid expenses and other assets 3,267
--------
Total assets acquired 146,163
Liabilities assumed:
Deposit accounts 125,022
Advance payments by borrowers for taxes and insurance 349
Accrued expenses and other liabilities 1,969
--------
Total liabilities assumed 127,340
--------
Assets in excess of liabilities 18,823
Cash paid to BNB shareholders 22,000
--------
Goodwill $ 3,177
========
Goodwill is included as a component of prepaid expenses and other
assets.
The following condensed consolidated pro-forma results of the Company
were prepared as if the acquisition had taken place on January 1 of
the respective year. The pro-forma results are not necessarily
indicative of the actual results of operations had the Company's
acquisition of BNB actually occurred on January 1 of the respective
year.
Year Ended
-------------------------------
December 31, December 31,
1997 1996
---- ----
Total interest and dividend income and
total non-interest income $73,784 $65,329
Net income 7,206 4,263
Basic earnings per share 1.31 .70
Diluted earnings per share 1.27 .70
(Continued)
59
54
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
The following are the condensed financial statements for BostonFed
Bancorp, Inc. (the "Parent Company") only:
BALANCE SHEETS
ASSETS 1997 1996
---- ----
Cash and interest bearing deposit in subsidiary bank $ 6,812 10,854
Short-term investments 18 13
------- ------
Total cash and cash equivalents 6,830 10,867
------- ------
Mortgage-backed securities available for sale (amortized cost
of $19,007 at 1997 and $23,915 at 1996) 19,125 23,593
Investment in subsidiaries, at equity 61,518 55,143
Accrued interest receivable 104 125
Other assets 1,298 200
------- ------
Total assets $88,875 89,928
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreement to repurchase $ 7,140 3,500
Accrued expenses and other liabilities 124 73
------- ------
Total liabilities 7,264 3,573
------- ------
Total stockholders' equity 81,611 86,355
------- ------
Total liabilities and stockholders' equity $88,875 89,928
======= ======
STATEMENTS OF INCOME 1997 1996 1995
---- ---- ----
Interest income $1,684 2,164 316
Interest expense 671 439 5
------ ----- -----
Net interest income 1,013 1,725 311
Non-interest income 45 -- --
Non-interest expense 428 307 10
------ ----- -----
Income before income taxes 630 1,418 271
Income tax expense 226 536 93
------ ----- -----
Income before equity in net income of subsidiaries 404 882 178
Equity in net income of subsidiaries 6,651 2,055 958
------ ----- -----
Net income $7,055 2,937 1,136
====== ===== =====
(Continued)
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55
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
STATEMENT OF CASH FLOWS 1997 1996 1995
---- ---- ----
Net cash flows from operating activities:
Net income $ 7,055 2,937 1,136
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (6,651) (2,055) (908)
Amortization and accretion, net 17 (1) --
Appreciation in fair value of shares charged to
expense for compensation plans 821 474 132
Earned SIP shares 1,009 917 --
Reduction in unallocated ESOP shares 755 606 755
Loss on sale of investment securities -- 11 --
(Increase) decrease in accrued interest receivable 21 14 (139)
(Increase) in other assets (1,098) (200) --
Increase (decrease) in accrued expenses and other liabilities 175 (59) 132
-------- ------- -------
Net cash provided by operating activities 2,104 2,644 1,108
-------- ------- -------
Cash flow from investing activities:
Purchase of BNB (22,000) -- --
Proceeds from sale of mortgage-backed securities for sale 1,084 10,614 --
Principal repayments on mortgage-backed securities available
for sale 3,807 -- --
Purchase of mortgage-backed securities available for sale -- (10,666) (23,873)
Change in investment in subsidiaries 22,276 9,048 (31,181)
-------- ------- -------
Net cash used in (provided by) investing activities 5,167 8,996 (55,054)
-------- ------- -------
Cash flow from financing activities:
Proceeds from securities sold under agreement to repurchase 7,140 2,973 7,000
Repayments of securities sold under agreement to repurchase (3,500) (6,473) --
Net proceeds from common stock issued pursuant to initial
public offering -- -- 63,921
Payments to acquire common stock for ESOP -- -- 5,290
Common stock repurchases (13,407) (4,739) --
Purchase of common stock by SIP - (3,230) --
Cash dividends paid (1,541) (989) --
-------- ------- -------
Net cash provided (used) from financing activities (11,308) (12,458) 65,631
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (4,037) (818) 11,685
Cash and cash equivalents at beginning of year 10,867 11,685 --
-------- ------- -------
Cash and cash equivalents at end of year $ 6,830 10,867 11,685
======== ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 662 442 --
Income taxes 268 584 --
(Continued)
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56
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(22) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis for the
year ended December 31 follows:
1997 Quarters 1996 Quarters
------------------------------------------ -------------------------------------------
(In Thousands, Except Per Share Amounts) (In Thousands, Except Per Share Amounts)
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
Interest and dividend income $17,428 $17,542 $17,070 $15,997 $14,583 $14,083 $12,627 $11,385
Interest expense 9,490 9,600 9,182 8,857 8,333 7,937 6,754 5,867
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 7,938 7,942 7,888 7,140 6,250 6,146 5,873 5,518
------- ------- ------- ------- ------- ------- ------- -------
Provision for loan losses 421 395 455 425 168 390 298 438
Non-interest income 1,327 1,303 1,181 995 914 839 856 969
SAIF special assessment -- -- -- -- -- 2,670 -- --
Non-interest expense 5,860 5,637 5,496 4,465 4,852 4,680 4,533 4,316
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 2,984 3,213 3,118 3,245 2,144 (755) 1,898 1,733
Income tax expense (benefit) 1,249 1,512 1,413 1,331 933 (334) 774 710
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,735 $ 1,701 $ 1,705 $ 1,914 $ 1,211 $ (421) $ 1,124 $ 1,023
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share $ 0.33 $ 0.30 $ 0.30 $ 0.33 $ 0.20 $ (0.07) $ 0.18 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per share $ 0.31 $ 0.30 $ 0.30 $ 0.33 $ 0.20 $ (0.07) $ 0.18 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
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57
ANNUAL MEETING
The annual meeting of stockholder will be held on Thursday, April 29, 1998,
at 2:00 p.m. The meeting will take place at the Burlington Marriott, 1 Mall
Road, at the intersection of Routes 128 & 3A, Burlington, MA.
STOCK LISTING
BostonFed Bancorp, Inc. became a public company on October 24, 1995.
BostonFed Bancorp, Inc. Common Stock is traded on the American Stock Exchange
with the symbol "BFD." The stock is listed as "Bostnfd" in the Boston Globe and
as "BstnfdBcp" in the Wall Street Journal.
COMMON STOCK INFORMATION
Initial Public Offering Price: $10.00 per share.
COMMON STOCK PRICE AND DIVIDENDS PAID (UNAUDITED)
1996 1997
---------------------------------- ----------------------------------
BY QUARTER 1 2 3 4 1 2 3 4
- ----------------------------------------------------------------------------------------------------------
Stock Price
High......................... $12 3/8 $12 5/8 $13 1/2 $15 1/4 $17 1/8 $18 $22 1/8 $22 1/2
Low.......................... 11 3/8 11 1/2 11 1/4 13 14 1/4 14 1/4 17 3/4 19 5/8
Dividend Paid..................... .05 .05 .05 .05 .07 .07 .07
As of December 31, 1997, the Company had 5,520,437 shares outstanding and
approximately 650 stockholders of record, not including persons of entities
holding stock in nominee or street name through brokers or banks.
10-K REPORT
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge upon written request to
BostonFed Bancorp, Inc., Investor Relations, 17 New England Executive Park,
Burlington, MA 01803.
63
58
TRANSFER AGENT
Boston EquiServe Boston EquiServe
Mail Stop: 45-02-62 Mail Stop: 45-02-62
P.O. Box 1865 150 Royall Street
Boston, MA 02105-1865 Canton, MA 02021
Shareholder Inquiries: (781) 575-3170
INDEPENDENT AUDITOR
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
REGULATORY COUNSEL LOCAL COUNSEL
Muldoon, Murphy & Faucette Goodwin, Procter, & Hoar LLP
5101 Wisconsin Avenue NW Exchange Place
Washington, DC 20016 Boston, MA 02109
OFFICES
BOSTON FEDERAL SAVINGS BANK
ARLINGTON BURLINGTON
980 Massachusetts Avenue 17 New England Executive Park
Arlington, MA 02174 Burlington, MA 01803
BEDFORD LEXINGTON
60 The Great Road 1840 Massachusetts Avenue
Bedford, MA 01730 Lexington, MA 02173
BILLERICA PEABODY
459 Boston Road 31 Cross Street
Billerica, MA 01821 Peabody, MA 01960
BOSTON WELLESLEY
75 Federal Street 200 Linden Street
Boston, MA 02110 Wellesley, MA 02181
BROADWAY NATIONAL BANK
CHELSEA REVERE
457 Broadway 411 Broadway
Chelsea, MA 02150 Revere, MA 02151
BOSTONFED BANCORP, INC.
CORPORATE HEADQUARTERS INVESTOR RELATIONS
17 New England Executive Park Amy L. Timmerman
Burlington, MA 01803 (781) 221-6396
(781) 273-0300 (800) 688-2372
64