1
EXHIBIT 13
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
BFS.
AT DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(IN THOUSANDS)
Selected Financial Condition Data:
Total assets ........................................ $1,139,123 $974,680 $820,567 $640,752 $583,645
Investment securities available for sale(1) ......... 49,137 31,767 1,085 1,022 --
Investment securities held to maturity(1) ........... 7,302 20,630 19,170 16,906 14,784
Mortgage-backed securities available for sale(l) .... 21,029 19,125 23,593 23,873 --
Mortgage-backed securities held to maturity(1) ...... 22,913 38,350 43,019 35,116 39,801
Mortgage loans held for sale ........................ 17,008 9,817 3,970 8,931 316
Loans, net .......................................... 943,662 791,728 676,670 509,496 499,073
Allowance for loan losses ........................... 8,500 6,600 4,400 4,275 3,700
Deposit accounts .................................... 707,144 619,821 428,818 419,104 413,164
Borrowed funds ...................................... 337,500 263,640 300,000 126,909 135,031
Stockholders' equity ................................ 81,794 81,611 86,355 90,701 30,047
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(IN THOUSANDS)
Selected Operating Data:
Interest income ..................................... $ 74,775 $ 68,037 $ 52,678 $ 42,454 $ 36,527
Interest expense .................................... 42,557 37,129 28,891 23,552 17,022
---------- -------- -------- -------- --------
Net interest income ................................ 32,218 30,908 23,787 18,902 19,505
Provision for loan losses .......................... 1,642 1,696 1,294 3,614 283
---------- -------- -------- -------- --------
Net interest income after provision
for loan losses ................................... 30,576 29,212 22,493 15,288 19,222
Total non-interest income ........................... 6,128 4,806 3,567 2,672 1,640
Total non-interest expense .......................... 23,932 21,458 21,040 16,009 14,531
---------- -------- -------- -------- --------
Income before income taxes .......................... 12,772 12,560 5,020 1,951 6,331
Income tax expense (benefit) ........................ 5,151 5,505 2,083 815 2,320
---------- -------- -------- -------- --------
Net income .......................................... $ 7,621 $ 7,055 $ 2,937 $ 1,136 $ 4,011
========== ======== ======== ======== ========
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SELECTED FINANCIAL RATIOS AND OTHER DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
Performance ratios:(2)
Return on average assets ............................... 0.72% 0.75% 0.40% 0.19% 0,75%
Return on average stockholders' equity ................. 9.02 8.21 3.21 2.57 14.53
Dividend payout ratio .................................. 24.70 20.31 31.25 NM NM
Average stockholders' equity to average assets ......... 7.99 9.11 12.35 7.36 5.16
Stockholders' equity to total assets at end of period .. 7.18 8.37 10.52 14.16 5.15
Average interest rate spread(3) ........................ 2.69 2.94 2.79 2.98 3.69
Net interest margin(4) ................................. 3.17 3.42 3.34 3.28 3.82
Average interest-earning assets to average
interest-bearing liabilities .......................... 111.60 111.53 113.40 107.40 104.16
Asset quality ratios:(2)
Non-performing loans as a percent of loans(5)(6) ...... 0.09 0.17 0.22 1.00 0.71
Non-performing assets as a percent of total assets(6).. 0.08 0.16 0.51 0.97 0.68
Allowance for loan losses as a percent of loans(5) .... 0.88 0.82 0.64 0.82 0.74
Allowance for loan losses as a percent of
non-performing loans(6) .............................. 1,029.06 469.75 293.02 81.40 103.61
Number of full-service customer facilities ............. 10 10 8 8 8
Number of shares outstanding at end
of period (in thousands) .............................. 5,112 5,520 6,260 6,590 --
Per Share Data:
Basic earnings per common share ....................... $ 1.50 $ 1.28 $ 0.48 $ NM --
Diluted earnings per common share ..................... 1.43 1.24 0.48 NM --
Dividends per common share ............................ 0.37 0.26 0.15 NM --
Book value per common share at end of period .......... 16.84 15.72 14.75 14.78 --
Market value per common share at end of period ........ 17.63 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.
(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 stockownership) 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.
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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, gains on sale of
loans, fees and loan servicing income. The Company's primary sources of funds
are deposits, principal and interest payments on loans, investments,
mortgage-backed securities, Federal Home Loan Bank of Boston ("FHLB") advances,
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 was 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, 1998 and 1997, include information and data related to BNB only
from February 8, 1997 to December 31, 1998.
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
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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 required
liquidity ratio is 4%. At December 31, 1998 and 1997, BFS's liquidity ratio was
6.9% and 5.3% 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, 1998, cash,
short-term investments and investment securities available for sale totaled
$86.3 million or 7.6% 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, 1998, the
Company had $337.5 million in advances outstanding from the FHLB and had, with
existing collateral, an additional $130.5 million in overall borrowing capacity
from the FHLB. Additional collateral was available at BNB, however, a collateral
report for BNB was not required to be prepared as of December 31, 1998. 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, 1998, the Company had commitments to originate loans
and unused outstanding lines of credit totaling $157.3 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, 1998, totaled $198.1 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, 1998 was
approximately $9.5 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, 1998, the consolidated capital to assets ratio of the Company was 7.2%,
which exceeded the minimum regulatory capital requirements for the Company. As
of December 31, 1998, BFS exceeded all of its regulatory capital requirements
with tangible, core, risk-based tier 1, and risk-based capital ratios of 5.1%,
5.1%, 8.9% and 10.2%, respectively, compared to the minimum regulatory
requirements of 2.0%, 4.0%, 4.0% 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%, 14.4% and 15.3%,
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 throughout the Company's operations. Unlike
industrial companies, nearly all of the assets and
10
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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.
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 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 and throughout 1998, customer preference shifted to
longer-term fixed rate mortgages, the vast majority 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, 1998, 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, 1998, 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 21.7% and 14.7%,
respectively. Annual prepayment rates for adjustable-rate and fixed-rate
mortgage-backed securities are assumed to be 15.1% and 12.8%, respectively.
Money market deposit accounts are assumed to be immediately rate-sensitive,
while passbook accounts and negotiable order of withdrawal ("NOW") accounts are
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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 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, 1998 and 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 ............... $ 17,895 $ 8 $ 60 $ 105 $ 0 $ 0 $ 18,068
Investment securities ................ 26,786 7,031 4,282 14,256 3,059 1,025 56,439
Fixed Rate Loans(1) .................. 16,833 16,425 30,914 103,070 75,719 80,585 323,546
Adjustable Rate Loans(1) ............. 123,401 61,363 115,329 233,364 92,956 18,402 644,815
Mortgage-backed securities ........... 18,474 2,997 8,750 12,529 1,192 0 43,942
Stock in FHLB-Boston ................. 17,802 0 0 0 0 0 17,802
-------- ------- -------- -------- -------- -------- ----------
Total Interest-earning assets ...... 221,191 87,824 159,335 363,324 172,926 100,012 1,104,612
-------- ------- -------- -------- -------- -------- ----------
INTEREST-BEARING LIABILITIES
Money market deposit accounts ........ 61,756 0 0 0 0 0 61,756
Savings accounts ..................... 3,925 3,925 7,850 31,402 31,402 52,339 130,843
NOW accounts ......................... 3,448 3,448 6,896 27,585 27,585 45,972 114,934
Certificate accounts ................. 35,867 63,911 88,344 144,704 5,833 0 338,659
FHLB Advances ........................ 26,000 10,000 78,000 159,500 44,000 20,000 337,500
-------- ------- -------- -------- -------- -------- ----------
Total interest-bearing liabilities . 130,996 81,284 181,090 363,191 108,820 118,311 983,692
-------- ------- -------- -------- -------- -------- ----------
Interest-earning assets less
interest-bearing liabilities ........ $ 90,195 $ 6,540 $ 21,755) $ 133 $ 64,106 $(18,299) $ 120,920
-------- ------- -------- -------- -------- -------- ----------
Cumulative interest rate sensitivity
gap
December 31, 1998 ................... $ 90,195 $96,735 $ 74,980 $ 75,113 $139,219 $120,920 $ 120,920
======== ======= ======== ======== ======== ======== ==========
Cumulative interest rate gap as a
percentage of total assets at
December 31, 1998 ................... 7.92% 8.49% 6.58% 6.59% 12.22% 10.62%
Cumulative interest rate gap as a
percentage of total interest-earning
assets at December 31, 1998 ......... 8.17% 8.76% 6.79% 6.80% 12.60% 10.95%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities at
December 31, 1998 ................... 168.85% 145.57% 119.06% 109.93% 116.09% 112.29%
Cumulative interest rate sensitivity
gap
December 31, 1997 ................... $ 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 total loans net of non-performing loans
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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 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, 1998 and 1997, as calculated by the Company.
Net Portfolio Value as of December 31, 1998
--------------------------------------------
Change in Interest Rates In Basis Points $ $ % Board NPV
(Rate Shock) Amount Change Change Limits % Ratio
- ----------------------------------------- ------- -------- ------- -------- -----
(Dollar in thousands)
400 ................................. 93,985 (30,759) (24.7) (30.0) 8.3
300 ................................. 103,788 (20,956) (16.8) (25.0) 9.1
200 ................................. 113,61l (11,133) (8.9) (20.0) 10.0
100 ................................. 120,618 (4,126) (3.3) (10.0) 10.6
Static .............................. 124,744 11.0
(100) ............................... 126,627 1,883 1.5 (10.0) 11.1
(200) ............................... 126,108 1,364 1.1 (20.0) 11.1
(300) ............................... 123,260 (1,484) (1.2) (25.0) 10.8
(400) ............................... 119,726 (5,018) (4.0) (30.0) 10.5
Net Portfolio Value as of December 31, 1997
--------------------------------------------
Change in Interest Rates In Basis Points $ $ % Board NPV
(Rate Shock) Amount Change Change Limits % Ratio
- ----------------------------------------- ------- -------- ------- -------- -----
(Dollar in thousands)
400 ................................. 76,878 (24,583) (24.2) (30.0) 7.9
300 ................................. 85,462 (15,599) (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
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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 1998, 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, 1998, 1997 and 1996. 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. The average balance data is derived from daily balances. The
yields and costs include fees, premiums and discounts which are considered
adjustments to yields.
FOR THE YEAR ENDED DECEMBER 31,
AT ------------------------------------------------------------------------------
DECEMBER 31,1998 1998 1997 1996
----------------- ------------------------- ------------------------- ------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------ ---------- -------- ------- -------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Investment securities(1) ... $ 92,309 5.73% $ 88,166 $ 5,400 6.12% $ 82,701 $ 5,003 6.05% $ 36,678 $ 2,167 5.91%
Loans, net and mortgage
loans held for sale(2) ... 960,670 7.38 876,344 66,040 7.54 759,312 58,805 7.74 603,585 45,513 7.54
Mortgage-backed
securities(3) ............ 43,942 6.88 50,375 3,335 6.62 62,265 4,229 6.79 72,287 4,998 6.91
---------- ---------- ------- ------- ------- -------- -------
Total interest-earning
assets ................. 1,096,921 7.22 1,014,885 74,775 7.37 904,278 68,037 7.52 712,550 52,678 7.39
---- ------- ---- ------- ---- ------- ----
Non-interest-earning
assets ................... 42,202 42,683 39,770 28,354
---------- ---------- ------- --------
Total assets ............. $1,139,123 $1,057,568 $944,048 $740,904
========== ========== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing Liabilities:
Money market deposit
accounts ................. $ 61,756 2.83 $ 62,739 1,838 2.93 $ 61,800 1,822 2.95 $ 46,540 1,395 3.00
Savings accounts ........... 130,843 2.38 121,092 2,999 2.48 116,247 2,826 2 43 90,763 2,219 2.44
NOW accounts ............... 114,934 1.09 104,532 1,158 1.11 96,590 1,071 1.11 66,336 890 1.34
Certificate accounts ....... 338,659 5.72 312,810 18,101 5.79 237,115 13,457 5.68 199,598 11,194 5.61
---------- ---------- ------- ------- ------- -------- -------
Total .................... 646,192 3.95 601,173 24,096 4.01 511,752 19,176 3.75 403,237 15,698 3.89
Borrowed Funds(4) .......... 337,500 5.69 308,191 18,461 5.99 299,076 17,953 6.00 225,124 13,193 5.86
---------- ---------- ------- ------- ------- -------- -------
Total interest-bearing
liabilities ............ 983,692 4.54 909,364 42,557 4.68 810,828 37,129 4.58 628,361 28,891 4.60
---- ------- ---- ------- ---- ------- ----
Non-interest-bearing
liabilities .............. 73,637 63,729 47,264 21,030
---------- ---------- ------- --------
Total liabilities ........ 1,057,329 973,093 858,092 649,391
---------- ---------- ------- --------
Stockholders' equity ....... 81,794 84,475 85,956 91,513
---------- ---------- ------- --------
Total liabilities and
stockholders' equity .... $1,139,123 $1,057,568 $944,048 $740,904
========== ========== ======== ========
Net interest rate
spread(5) ................ 2.68% $32,218 2.69% $30,908 2.94% $23,787 2.79%
==== ======= ==== ======= ==== ======= ====
Net interest margin(6) ..... 3.17% 3.42% 3.34%
==== ==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities .............. 111.51% 111.60% 111.53% 113.40%
========== ========== ======== ========
- -----------
(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 5.94%, 5.98%, and 5.81%
for the years ended December 31, 1998, 1997 and 1996, 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.
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 DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------ -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------- -------------------
VOLUME RATE NET VOLUME RATE NET
------- ------- ------ -------- ------ -------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Investment securities .............................. $ 331 $ 66 $ 397 $ 2,720 $ 116 $ 2,836
Loans, net and mortgage loans held for sale ........ 9,058 (1,823) 7,235 11,742 1,550 13,292
Mortgage-backed securities ......................... (807) (87) (894) (693) (76) (769)
------ ------- ------ ------- ------ -------
Total interest-earning assets .................... 8,582 (1,844) 6,738 13,769 1,590 15,359
------ ------- ------ ------- ------ -------
INTEREST-BEARING LIABILITIES:
Money market deposit accounts ...................... 28 (12) 16 458 (31) 427
Savings accounts ................................... 118 55 173 622 (15) 607
NOW accounts ....................................... 88 (1) 87 405 (224) 181
Certificate accounts ............................... 4,299 345 4,644 2,104 159 2,263
------ ------- ------ ------- ------ -------
Total ............................................ 4,533 387 4,920 3,589 (111) 3,478
------ ------- ------ ------- ------ -------
Borrowed funds ..................................... 547 (39) 508 4,334 426 4,760
------ ------- ------ ------- ------ -------
Total interest-bearing liabilities ............... 5,080 348 5,428 7,923 315 8,238
====== ======= ====== ======= ====== =======
Net change in net interest income .................... $3,502 $(2,192) $1,310 $ 5,846 $1,275 $ 7,121
====== ======= ====== ======= ====== =======
15
10
ASSET QUALITY
The following table sets forth information regarding non-performing
assets, which consist of: nonperforming 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. Accordingly, loans
categorized as impaired include non-performing loans as well as other identified
loans. At December 31, 1998, non-performing loans totaled $809,000, (all of
which are included in the balance of impaired loans), impaired loans totaled
$1.5 million, consisting of 20 loans, and REO totaled $47,000, consisting of one
property. 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, 1998, 1997, and 1996, 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 $34,000, $146,000, and
$103,000, 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, $1,000, and $73,000, respectively.
AT DECEMBER 31,
-------------------------------------
1998 1997 1996
--------- ------- -------
(DOLLARS IN THOUSANDS)
NON-PERFORMING LOANS:
Residential real estate:
One- to four-family ............................................... $ 784 $ 941 $ 1,463
Commercial real estate ............................................ 25 458 25
Other Loans ....................................................... -- 6 14
--------- ------- -------
Total ............................................................. 809 1,405 1,502
Real estate owned, net(3) ............................................. 47 195 2,668
Total non-performing assets ....................................... 856 1,600 4,170
--------- ------- -------
Restructured loans .................................................... 213 369 2,489
Total risk elements ................................................... $ 1,069 $ 1,969 $ 6,659
--------- ------- -------
Allowance for loan losses as a percent of loans(1) .................... 0.88% 0.82% 0.64%
========= ======= =======
Allowance for loan losses as a percent of non-performing loans(2) ..... 1,029.06 469.75 293.02
Non-performing loans as a percent of loans(1)(2) ...................... 0.09 0.17 0.22
Non-performing assets as a percent of total assets(4) ................. 0.08 0.16 0.51
- --------------
(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).
At December 31, 1998, loans that were characterized as impaired totaled
$1.5 million. All of the impaired loans have been measured using the fair value
of the collateral method. During the year ended December 31, 1998, the average
recorded value of impaired loans was $1.8 million, $102,000 of interest income
was recognized and $137,000 of interest income would have been recognized under
original terms. The composition of impaired loans by type is shown below:
DECEMBER 31,
----------------------
1998 1997
------ ------
(IN THOUSANDS)
IMPAIRED LOANS:
Residential real estate
One- to four-family ....................... $1,036 $ 999
Multi-family .............................. 245 316
Commercial real estate ......................... 238 677
Total impaired loans .................. 10 99
------ ------
$1,529 $2,091
------ ------
16
11
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 1998, 1997 and 1996 were $1.6 million, $1.7 million and $1.3 million,
respectively. During the year ended December 31, 1998, there were recoveries of
$517,000 credited to, and charge-offs of $259,000 taken against this allowance.
As of December 31, 1998, the Company's allowance for loan losses was 0.88% of
total loans compared to 0.82% as of December 31, 1997. 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, consumer and business loans. These combined total balances
increased from $93.5 million at December 31, 1997 to $130.9 million at December
31, 1998, an increase of 40%. These loans aggregated to 13.9% and 11.6% of the
total loans, net, at December 31, 1998 and 1997, respectively. The Company had
non-performing loans of $809,000 and $1.4 million at December 31, 1998 and
December 31, 1997, 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,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN THOUSANDS)
Balance at beginning of period .............................. $6,600 $4,400 $4,275 $3,700 $4,450
BNB allowance for loan losses at acquisition date ........... -- 620 -- -- --
Provision for loan losses ................................... 1,642 1,696 1,294 3,614 283
Charge-offs:
One-to four-family ..................................... 51 370 387 550 711
Multi-family ........................................... 2 84 263 483 251
Commercial ............................................. 75 45 664 2,297 200
Other ....................................................... 131 16 198 194 56
------ ------ ------ ------ ------
Total .................................................. 259 515 1,512 3,524 1,218
Recoveries .................................................. 517 399 343 485 185
------ ------ ------ ------ ------
Balance at end of
period ................................................. $8,500 $6,600 $4,400 $4,275 $3,700
====== ====== ====== ====== ======
Ratio of net charge-offs/(net recoveries) during
the period to average loans outstanding
during the period ...................................... (0.03)% 0.02% 0.19% 0.60% 0.23%
====== ====== ====== ====== ======
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, 1998, 1997 and 1996, the Company classified (excluding REO) $4.2 million,
$5.8 million and $3.8 million of sub-standard assets, respectively. Included in
these amounts were $809,000, $1.4 million and $1.5 million in non-performing
assets, respectively. In the opinion of management, the performing sub-standard
loans evidence one or more weaknesses or potential weaknesses and, depending on
the regional economy and other factors, may become nonperforming assets in
future periods.
17
12
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, 1998 AND 1997.
CHANGES IN FINANCIAL CONDITION
The Company's assets surpassed the one billion dollar mark during 1998
as its assets increased $164.4 million to a balance of $1.139 billion at
December 31, 1998, compared to $974.7 million at December 31, 1997, an increase
of 16.9%. Asset growth was primarily in cash and cash equivalents of $12.5
million, investment securities available for sale of $17.4 million and loans,
net, of $151.9 million, partially offset by decreases in investment securities
held to maturity of $13.3 million and mortgage-backed securities held to
maturity, of $15.4 million. The growth in loans, net was primarily due to
increased originations of adjustable-rate and ten to fifteen year fixed-rate
one- to four-family mortgage loans combined with increased lending for
construction and land and commercial real estate. Loans, net, increased by
$151.9 million from a balance of $791.7 million at December 31, 1997 to a
balance of $943.7 million at December 31, 1998. Volatility in market interest
rates and a generally falling interest rate environment throughout 1998 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 $87.3 million from a balance of $619.8 million at
December 31, 1997 to a balance of $707.1 million at December 31, 1998. This
increase is mainly attributable to BFS' rollout of a new 15-month retail
certificate of deposit acquisition program, a new money market deposit account
and growth in NOW account balances, offset by decreases in regular certificates
of deposit accounts. Mortgage-backed securities decreased by $13.5 million, or
23.5%, from a balance of $57.5 million at December 31, 1997 to a balance of
$43.9 million at December 31, 1998. Mortgage loans held for sale totaled $17.0
million at December 31, 1998, compared to $9.8 million at December 31, 1997.
FHLB advances increased $81.0 million to a balance of $337.5 million at December
31, 1998, compared to $256.5 million at December 31, 1997 as additional funds
were needed to support balance sheet growth. Total stockholders' equity was
$81.8 million at December 31, 1998 or $16.84 per share, compared to $81.6
million or $15.72 per share at December 31, 1997. Stockholders' equity remained
essentially the same during the year ended December 31, 1998 due to combined
effects of the completion of the fourth and commencement of the fifth 5% stock
repurchase programs and dividends paid, 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 7.2% at December
31, 1998 and 8.4% at December 31, 1997.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 1998 was $7.6 million, or
$1.50 basic earnings per share and $1.43 diluted earnings per share, compared to
$7.1 million, or $1.28 basic earnings per share and $1.24 diluted earnings per
share for the comparable period in 1997. The return on average stockholder's
equity, improved to 9.02% during the year ended December 31, 1998, compared to
8.21% for the year ended December 31, 1997. Return on average assets declined by
three basis points, from 0.75% for the year ended December 31, 1997 to 0.72% for
the current year. Increased earnings were primarily attributable to higher net
interest income, due to increased balances of interest earning assets, although
with lower interest margins, improved gains on the sale of loans, offset by a
reduction in real estate operations income. The net interest margin in 1998
decreased to 3.17% from 3.42% during 1997.
18
13
Generally falling longer term interest rates during 1998 created a flat yield
curve that caused industry-wide margin compression. The Company's margin
suffered as substantial volumes of adjustable-rate loans either refinanced into
lower interest adjustable-rate mortgages or refinanced to fixed-rate loans, the
vast majority of which were sold in the secondary market. Management is
attempting to mitigate the margin compression by de-emphasizing one- to
four-family residential lending and expanding the portfolio of commercial real
estate, construction and land, consumer and business loans.
Interest Income
Total interest income for the year ended December 31, 1998 increased by
$6.7 million to $74.8 million compared to $68.0 million for the year ended
December 31, 1997. Interest on loans increased by $7.2 million, or 12.2%, to
$66.0 million, during 1998 compared to $58.8 million during 1997. The increase
in interest income in 1998 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $759.3 million for 1997 to $876.3 million for 1998. The increased
average loan, net, balances generated an additional $9.1 million of interest
earned while lower yields decreased interest earned on loans, net, by $1.8
million. The lower yields were generally the result of falling interest rates
during 1998 that created an opportunity for borrowers to refinance their
mortgages at lower rates. The loan portfolio average loan yield decreased to
7.54% for 1998 compared to an average yield of 7.74% for 1997. Interest income
on investment securities and overnight federal funds sold increased by $397,000
to $5.4 million for the year ended December 31, 1998, compared to $5.0 million
for the year ended December 31, 1997. The primary reason for the increase is due
to higher average balances of investment securities averaging $88.2 million
during the year ended December 31, 1998, compared to average balances of $82.7
million for the prior year. Interest income on mortgage-backed securities
decreased by $894,000 for the year ended December 31, 1998 due primarily to a
decrease in average balances compared to the prior year. Average balances
decreased by $11.9 million from an average of $62.3 million during 1997 to an
average of $50.4 million during 1998. The majority of the mortgage-backed
securities held in 1998 were adjustable GNMA securities. The yields on
mortgage-backed securities decreased from an average yield of 6.79% in 1997 to
6.62% in 1998, resulting in a decrease in interest earned on such securities in
1998 of $87,000, compared to 1997.
Interest Expense
Interest expense increased by $5.4 million, or 14.6%, for the year
ended December 31, 1998 to $42.6 million compared to $37.1 million for the year
ended December 31, 1997. The increase in interest expense for the year ended
December 31, 1998 was due primarily to higher interest expense on deposits.
Interest expense on deposit accounts increased by $4.9 million for the year
ended December 31, 1998 due primarily to the effects of higher average balances
of $601.2 million for the year ended December 31, 1998 compared to average
deposit balances of $511.8 million for the prior year. The increased average
balances were primarily attributable to the acquisition of certificate accounts,
which increased from an average balance of $237.1 for the year ended December
31, 1997, to an average balance of $312.8 million for the current year. The
higher average balances in certificate accounts resulted in an increase in
interest expense of $4.3 million for the year ended December 31, 1998 compared
to the prior year. The average cost of deposit accounts increased from 3.75%
for the year ended December 31, 1997 to an average cost of 4.01% for the current
year. The acquisition of $90.8 million in the 15-month certificate of deposit
program was the major contributing factor in increasing the cost of savings.
Borrowed funds consisted primarily of FHLB advances that were used primarily to
fund loan portfolio growth. Higher average balances of $308.2 million of
borrowed funds for the year ended December 31, 1998, compared to average
balances of $299.1 million for the prior year, resulted in a $547,000 increase
in interest expense. The average cost of borrowed funds declined by one basis
point, from 6.00% for the year ended December 31, 1997 to an average of 5.99%
for the current year.
Provision for Loan Losses
The provision for loan losses amounted to $1.6 million for the year
ended December 31, 1998 compared to $1.7 million for the prior year. The
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 $809,000, or 0.08% of loans at December 31, 1998 from $1.4
million, or 0.16% at December 31, 1997. The Company recorded
19
14
net recoveries of $258,000 during the year ended December 31, 1998, compared to
net charge-offs of $116,000, or 0.02% of average loans outstanding during 1997.
The allowance for loan losses as a percentage of total loans was 0.88% at
December 31, 1998 compared to 0.82% at December 31, 1997. As a percentage of
total non-performing loans, the allowance for loan losses was 1,029% at December
31, 1998, compared to 469.8% a year earlier. See "Asset Quality" included
elsewhere herein.
Non-Interest Income
Total non-interest income increased to $6.1 million for the year ended
December 31, 1998 from $4.8 million for the year ended December 31, 1997. The
primary contributing factor was increased gains on the sale of loans. The $3.2
million gain on sale of loans during 1998 exceeded the $1.1 million for the
prior year, primarily due to the increased volume of loans sold resulting from
the high volumes of refinancing to long-term fixed rate mortgages, which the
Company generally sells in the secondary market. The continuation of a strong
housing market and economy also contributed to increased volume for financing of
home purchases during 1998. The high volume of refinancing of mortgages,
however, necessitated an adjustment of $481,000 to reflect the impairment to the
originated mortgage servicing rights, ("OMSR") during the year ended December
31, 1998. The adjustment for the impairment of the OMSR, combined with a
decrease in the balance of loans serviced that were sold before OMSR was
recorded, contributed to the decrease in loan processing and servicing fees
which totaled $477,000 for the year ended December 31, 1998, compared to $1.2
million for the prior year. Deposit service fees were $1.7 million for the two
years ended December 31, 1998 and 1997.
Non-Interest Expense
Total non-interest expense for the year ended December 31, 1998 was
$23.9 million, compared to $21.5 million for 1997. The primary components of
this increase were higher data processing expenses, lower real estate operations
income and higher other non-interest expenses. Data processing expense was $1.3
million for the year ended December 31, 1998, compared to $968,000 for the prior
year. The prior year total was lower than normal due to the receipt from the
Company's data processor, of approximately $200,000 as reimbursement of expenses
the Company had incurred in assisting the data processor in developing a new
software program. Additionally, the Company incurred approximately $100,000 of
costs related to the Year 2000 issue. For the year ended December 31, 1998, real
estate operations earned $71,000, compared to earnings of $1.2 million for the
prior year. The prior year total included approximately $891,000 from the sale
of a land sub-division, sold by a subsidiary of BFS, during the first quarter of
1997. Other non-interest expense increased to $5.0 million for the year ended
December 31, 1998 from $4.1 million for the prior year due to the inclusion of
BNB's miscellaneous expenses for the full year and consulting and legal costs
incurred to assist in establishing the Company's tax saving strategies that
included the formation of real estate investment trusts and securities
subsidiaries.
Income Taxes
Income tax expense was $5.2 million for the year ended December 31,
1998 (resulting in an effective rate of 40.3%), compared to a tax expense of
$5.5 million for the year ended December 31, 1997 (resulting in an effective tax
rate of 43.8%). The decrease in income tax expense and rate was due to the
implementation of the tax saving strategies.
Year 2000 Project
Included in other non-interest expenses for the twelve months ended
December 31, 1998 and 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 impact of computer systems ability to process dates beyond 1999, or
the "Year 2000 issue," creates a significant business challenge for the Company.
The Company is addressing this issue as it affects all of its software, hardware
and other systems to insure the Company is Year 2000 compliant. The Company has
developed a plan that is based upon the Federal Financial Institutions
Examination Council ("FFIEC") recommended phases and time frames for insuring
Year 2000 compliance. These phases include awareness, assessment, renovation,
validation and implementation.
20
15
The Company has completed the awareness phase through development of a
Year 2000 committee and reporting structure including quarterly project status
reports to the Company's Board. The assessment phase has been completed with a
review of all software, hardware and business systems including an evaluation of
the critical nature and Year 2000 business risk that each application presents.
The Company primarily utilizes third-party vendors for the processing of its
critical data processing applications. The Company is working closely with these
critical vendors to monitor renovation and validation efforts to insure that the
time frames set out in the Company's plan are met. Based upon review of
vendor-provided Year 2000 disclosure statements, review of the applicable
testing process and verification of test results, the Company estimates that 90%
of the critical applications were renovated at December 31, 1998. The Company
will continue to work with critical application vendors to verify test results
and anticipates that the remaining critical applications will be renovated and
verified by June 30, 1999, based upon analysis of information currently
available from these vendors. The Company has created an internal Year 2000
testing environment and has developed test scripts incorporating typical
transactions in order to validate the modified systems. Testing with critical
application vendors was substantially completed in the fourth quarter of 1998.
Additional testing including follow-up and interface testing will continue in
1999 and is expected to be completed by June 30, 1999, prior to any anticipated
impact on operating systems. The Implementation phase is ongoing and
incorporates review of replaced or modified and tested systems, as well as,
contingency planning and customer awareness programs.
In the event that the Company's third-party vendors do not successfully
or timely achieve Year 2000 compliance, the Company's operations could be
adversely affected. The Company has begun development of contingency plans in
the event that one or all of these significant vendors fails to meet Year 2000
operating requirements. Plans for various failure scenarios are developed on an
ongoing basis as such risks are identified and incorporate the Company's
business resumption plan. Contingency plans for unexpected Year 2000 related
business interruption will be completed for all mission critical applications
after testing of modified systems, and is expected to be substantially complete
by June 30, 1999. Further, the Company will seek alternative vendors should one
of the critical vendors fail to achieve satisfactory Year 2000 compliance. In
the event the Company's current third party data processing vendors were not to
achieve Year 2000 compliance and the Company could not engage alternative
vendors in a timely manner, the Company's operations would be adversely
impacted.
The total cost of the Year 2000 project is estimated at $400,000 to
$500,000 which includes estimated costs and time associated with third-party
Year 2000 issues and an allocation of payroll costs for personnel assigned to
the Year 2000 project. Through December 31, 1998 the Company has expensed
approximately $250,000 to date toward the Year 2000 remediation efforts. 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.
Based on the remediation, testing and monitoring efforts to date, the
Company expects that most of its critical systems will operate successfully
through the century date change. Therefore, the Company believes that internal
system failures are not likely to adversely affect the Company's operations or
financial condition. The Company has already successfully tested with many of
its critical application vendors and will continue to monitor and validate the
remainder, including the Company's electrical power and telecommunications
providers in 1999. At this time the Company believes the most likely "worst
case" Year 2000 scenarios are temporary and localized disruptions in
infrastructure services which could disrupt the ability of the Company to
provide services to its customers and/or the ability of external service
providers to provide services to the Company.
The Company's evaluation of Year 2000 readiness is based upon
management's best estimates and projections which are derived utilizing numerous
assumptions of future events including the continued availability 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.
21
16
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 the 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 0.75% 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 0.61% 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, 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
22
17
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 increased to 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 0.17% of loans at December 31, 1997 from $1.5 million, or 0.22% at
December 31, 1996. Net charge-offs also decreased, amounting to $116,000, or
0.02% of average loans outstanding during 1997 compared with 1996's net
charge-off total of $1.2 million or 0.19% of average loans outstanding. The
allowance for loan losses as a percentage of total loans was 0.82% at December
31, 1997 compared to 0.64% at December 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
23
18
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-lnterest 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.
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standard, ("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. Reportable
segments of the Company include BFS and BNB.
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of this statement is not expected to
have a material impact on the Company.
24
19
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 21, 1999
25
20
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
December 31, 1998 and 1997
1998 1997
---------- --------
ASSETS
Cash and due from banks (note 1) $ 19,133 $ 21,242
Overnight federal funds sold 17,795 3,330
Certificates of deposit 273 118
---------- --------
Total cash and cash equivalents 37,201 24,690
Investment securities available for sale (amortized
cost of $48,837 at 1998 and $31,554 at 1997) (note 3) 49,137 31,767
Investment securities held to maturity (fair value of
$7,371 at 1998 and $20,630 at 1997) (notes 4 and 11) 7,302 20,630
Mortgage-backed securities available for sale
(amortized cost of $20,935 at 1998 and
$19,007 at 1997) (notes 3, 10 and 11) 21,029 19,125
Mortgage-backed securities held to maturity (fair value
of $23,333 at 1998 and $38,903 at 1997) (notes 4 and 11) 22,913 38,350
Mortgage loans held for sale 17,008 9,817
Loans, net of allowance for loan losses of $8,500
at 1998 and $6,600 at 1997 (notes 5, 6 and 12) 943,662 791,728
Accrued interest receivable (note 7) 5,549 5,163
Stock in FHLB of Boston, at cost (note 11) 17,802 16,613
Premises and equipment, net (note 8) 6,614 6,842
Deferred income tax asset, net (note 12) 1,812 2,020
Prepaid expenses and other assets 9,094 7,935
---------- --------
Total assets $1,139,123 $974,680
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts (note 9) $ 707,144 $619,821
Securities sold under agreements to repurchase (note 10) -- 7,140
Federal Home Loan Bank advances (note 11) 337,500 256,500
Advance payments by borrowers for taxes and insurance 3,405 3,133
Accrued expenses and other liabilities 9,280 6,475
---------- --------
Total liabilities 1,057,329 893,069
---------- --------
Commitments and contingencies (notes 3, 4, 5, 7, 8, 16 and 18)
Stockholders' equity (notes 2 and 13):
Preferred stock, $.01 per value;
1,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value; 17,000,000 shares authorized;
6,589,617 shares issued at 1998 and 1997 66 66
Additional paid-in capital 66,417 65,282
Retained earnings 44,256 38,645
Accumulated other comprehensive income 312 242
Treasury stock, at cost (1,477,176 and
1,069,180 shares at 1998 and 1997) (26,128) (18,146)
Unallocated ESOP shares (2,418) (3,174)
Unearned 1996 stock-based incentive plan (711) (1,304)
---------- --------
Total stockholders' equity 81,794 81,611
---------- --------
Total liabilities and stockholders' equity $1,139,123 $974,680
========== ========
See accompanying notes to consolidated financial statements.
26
21
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------- ------- -------
Interest income:
Loans (note 5) $66,040 $58,805 $45,513
Mortgage-backed securities 3,335 4,229 4,998
Investment securities 5,258 4,736 2,001
Federal funds sold 142 267 166
------- ------- -------
Total interest income 74,775 68,037 52,678
------- ------- -------
Interest expense:
Deposit accounts (note 9) 24,096 19,176 15,698
Borrowed funds (notes 10 and 11) 18,461 17,953 13,193
------- ------- -------
Total interest expense 42,557 37,129 28,891
------- ------- -------
Net interest income 32,218 30,908 23,787
Provision for loan losses (note 6) 1,642 1,696 1,294
------- ------- -------
Net interest income after provision
for loan losses 30,576 29,212 22,493
------- ------- -------
Non-interest income:
Loan processing and servicing fees (note 5) 477 1,241 1,330
Deposit service fees 1,658 1,710 1,140
Gain on sale of loans 3,173 1,114 668
Gain (loss) on sale of investments (note 3) 19 (18) (11)
Other 801 759 440
------- ------- -------
Total non-interest income 6,128 4,806 3,567
------- ------- -------
Non-interest expense:
Compensation and benefits (note 13) 13,728 13,543 9,841
Occupancy and equipment 3,187 3,087 2,479
Deposit insurance premiums 327 293 916
Advertising expense 523 682 588
Data processing 1,286 968 600
Real estate operations (71) (1,230) 561
SAIF special assessment -- -- 2,670
Other 4,952 4,115 3,385
------- ------- -------
Total non-interest expense 23,932 21,458 21,040
------- ------- -------
Income before income taxes 12,772 12,560 5,020
Income tax expense (note 12) 5,151 5,505 2,083
------- ------- -------
Net income $ 7,621 $ 7,055 $ 2,937
======= ======= =======
Basic earnings per share $ 1.50 $ 1.28 $ 0.48
======= ======= =======
Diluted earnings per share $ 1.43 $ 1.24 $ 0.48
======= ======= =======
Weighted average shares outstanding - basic 5,078 5,505 6,118
======= ======= =======
Weighted average shares outstanding - diluted 5,328 5,690 6,128
======= ======= =======
See accompanying notes to consolidated financial statements.
27
22
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share amounts)
Years ended December 31, 1998, 1997 and 1996
UNEARNED
ACCUMULATED STOCK-
OTHER BASED
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY INCOME ESOP PLAN STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK (LOSS) SHARES ("SIP") EQUITY
--------- ------ ---------- -------- --------- ------------- ----------- --------- -------------
Balance at December 31, 1995 6,590 $66 $63,987 $31,183 $ -- $ -- $(4,535) $ -- $ 90,701
Common stock repurchased
(329 shares at an average
price of $14.39 per share) -- -- -- -- (4,739) -- -- -- (4,739)
Cash dividends declared and
paid ($.15 per share) -- -- -- (989) -- -- -- -- (989)
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- 606 -- 606
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 474 -- -- -- -- -- 474
Common stock acquired for SIP -- -- -- -- -- -- -- (3,230) (3,230)
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- -- 917 917
Comprehensive income:
Changes in net unrealized
gain (loss) in investments
available for sale, net -- -- -- -- -- (322) -- -- (322)
Net income -- -- -- 2,937 -- -- -- -- 2,937
----- --- ------- ------- -------- ----- ------- ------- --------
Comprehensive income 2,615
--------
Balance at December 31, 1996 6,590 66 64,461 33,131 (4,739) (322) (3,929) (2,313) 86,355
28
23
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity, Continued
(in thousands, except per share amounts)
Years ended December 31, 1998, 1997 and 1996
UNEARNED
ACCUMULATED STOCK-
OTHER BASED
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY INCOME ESOP PLAN STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK (LOSS) SHARES ("SIP") EQUITY
--------- ------ ---------- -------- --------- ------------- ----------- --------- -------------
Common stock repurchased
(740 shares at an average
price of $18.12 per share) -- $-- $ -- $ -- $(13,407) $ -- $ -- $ -- $(13,407)
Cash dividends declared and
paid ($.26 per share) -- -- -- (1,541) -- -- -- -- (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 -- -- -- -- -- 821
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- -- 1,009 1,009
Comprehensive income:
Changes in net unrealized
gain (loss) in investments
available for sale, net -- -- -- -- -- 564 -- -- 564
Net income -- -- -- 7,055 -- -- -- -- 7,055
----- --- ------- ------- -------- ----- ------- ------- --------
Comprehensive income 7,619
--------
Balance at December 31, 1997 6,590 66 65,282 38,645 (18,146) 242 (3,174) (1,304) 81,611
(Continued)
29
24
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity, Continued
(in thousands, except per share amounts)
Years ended December 31, 1998, 1997 and 1996
UNEARNED
ACCUMULATED STOCK-
OTHER BASED
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY INCOME ESOP PLAN STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK (LOSS) SHARES ("SIP") EQUITY
--------- ------ ---------- -------- --------- ------------- ----------- --------- -------------
Common stock repurchased
(409 shares at an average
price of $19.56 per share) -- $-- $ -- $ -- $ (7,998) $ -- $ -- $ -- $ (7,998)
Stock options exercised
(900 shares at an average
price of $16.67 per share) -- -- -- -- 16 -- -- -- 16
Cash dividends declared and
paid ($.37 per share) -- -- -- (2,010) -- -- -- -- (2,010)
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- 756 -- 756
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 1,135 -- -- -- -- -- 1,135
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- -- 593 593
Comprehensive income:
Changes in net unrealized
gain (loss) in investments
available for sale, net -- -- -- -- -- 70 -- -- 70
Net income -- -- -- 7,621 -- -- -- -- 7,621
----- --- ------- ------- -------- ----- ------- ------- --------
Comprehensive Income 7,691
--------
Balance at December 31, 1998 6,590 $66 $66,417 $44,256 $(26,128) $ 312 $(2,418) $ (711) $ 81,794
===== === ======= ======= ======== ===== ======= ======= ========
See accompanying notes to consolidated financial statements.
30
25
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
Net cash flows from operating activities:
Net income $ 7,621 $ 7,055 $ 2,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 1,343 963 1,034
Earned SIP shares 593 1,009 917
Reduction in unallocated ESOP shares 756 755 606
Appreciation in fair value of shares charged to expense
for compensation plans 1,135 821 474
Provision for loan losses 1,642 1,696 1,294
Recovery (provision) for valuation allowance for
real estate owned 17 (350) 335
Loans originated for sale (357,405) (117,413) (143,064)
Proceeds from sale of loans 353,387 112,680 148,693
Net loss (gain) on sale of investment securities (19) 18 11
Gain on sale of real estate held for sale or development, net -- (854) --
Decrease (increase) in deferred income taxes 208 (483) 575
(Gain) loss on sale of real estate acquired through foreclosure (60) 189 44
Gain on sale of loans (3,173) (1,114) (668)
Increase in accrued interest receivable (386) (240) (371)
(Increase) decrease in prepaid expenses and other assets (1,520) 3,066 (1,452)
Increase in accrued expenses and other liabilities 2,818 795 787
--------- --------- ---------
Net cash provided by operating activities 6,957 8,593 12,152
--------- --------- ---------
Cash flows from investing activities:
Net cash of acquired institution -- 11,908 --
Proceeds from sales of investment securities available for sale 5,000 14,008 --
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 14,850 9,100 1,745
Purchase of investment securities available for sale (32,217) (13,013) (63)
Purchase of investment securities held to maturity (1,500) (5,900) (9,992)
Purchase of mortgage-backed securities available for sale (10,856) -- (10,666)
Principal repayments of investments securities available-for-sale 10,000 -- --
Purchase of mortgage-backed securities held-to-maturity -- -- (13,891)
Principal repayments on investment securities held to maturity -- -- 6,009
Principal repayments on mortgage-backed securities held to maturity 15,432 4,641 5,934
Principal repayments on mortgage-backed securities available for sale 8,843 3,807 --
Increase in portfolio loans, net (153,576) (51,194) (172,557)
Purchase of FHLB stock (1,189) (249) (7,921)
Purchases of premises and equipment (887) (956) (617)
Proceeds from sale of real estate held for sale or development -- 2,058 --
Proceeds from sale of real estate owned 191 3,167 2,249
Additional investments in real estate owned -- -- (359)
--------- --------- ---------
Net cash used in investing activities (145,909) (17,539) (189,515)
--------- --------- ---------
(Continued)
31
26
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(dollars in thousands)
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
Cash flows from financing activities:
Increase in deposits accounts $ 87,323 $ 65,981 $ 9,714
Proceeds from securities sold under agreement to repurchase -- 7,140 2,973
Repayments of securities sold under agreement to repurchase (7,140) (3,500) (6,473)
Proceeds from Federal Home Loan Bank advances 546,073 276,200 670,304
Repayments of Federal Home Loan Bank advances (465,073) (316,200) (493,713)
Increase in advanced payments by borrowers for
taxes and insurance 272 685 569
Cash dividends paid (2,010) (1,541) (989)
Common stock repurchased (7,998) (13,407) (4,739)
Purchase of common stock for SIP -- -- (3,230)
Stock options exercised 16 -- --
--------- --------- ---------
Net cash provided by financing activities 151,463 15,358 174,416
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 12,511 6,412 (2,947)
Cash and cash equivalents at beginning of year 24,690 18,278 21,225
--------- --------- ---------
Cash and cash equivalents at end of year $ 37,201 $ 24,690 $ 18,278
========= ========= =========
Supplemental disclosure of cash flow information:
Payments during the year for:
Interest $ 42,017 $ 36,746 $ 27,889
========= ========= =========
Taxes $ 3,306 $ 4,688 $ 1,664
========= ========= =========
Supplemental schedule of noncash investing activities:
Transfers of mortgage loans to real estate owned $ -- $ 533 $ 3,966
========= ========= =========
See accompanying notes to consolidated financial statements.
32
27
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
BostonFed Bancorp Inc. (the "Company") is a Bank holding company which
is headquartered in Burlington, Massachusetts and 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 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 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, and periodic
examination by the Federal Reserve Bank ("FRB"). Boston Federal Savings
Bank ("BFS") is subject to the regulations of, and periodic examination
by, the Office of Thrift Supervision ("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.
(a) 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.
(b) 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 $6,528 and $1,980 at BFS and
BNB, respectively, at December 31, 1998.
(Continued)
33
28
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(c) 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.
(d) 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 one to four 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.
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.
(Continued)
34
29
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
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.
(e) 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.
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.
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.
(f) 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.
(Continued)
35
30
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(g) 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.
(h) 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 the Company'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. The Company'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.
(i) PENSION
Pension cost is recognized over the employees' approximate
service period.
(j) EMPLOYEE BENEFITS
The Company continues to follow APB Opinion No. 25, Accounting
for Stock Issued to Employees. See footnote 13 for the expanded
disclosures required by SFAS 123 regarding pro forma net income
and earnings per share.
(k) EARNINGS PER SHARE
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 on
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 years ended December 31 follows:
1998 1997 1996
----- ----- -----
Basic shares 5,078 5,505 6,118
Dilutive impact of stock options 250 185 10
----- ----- -----
Diluted shares 5,328 5,690 6,128
===== ===== =====
(Continued)
36
31
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB)
and Statement of Financial Accounting Standards (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 has
been adopted for the 1998 consolidated financial statements. The
following table shows the components of other comprehensive
income for the years ended December 31:
1998 1997 1996
------ ----- -----
Net income $7,621 7,055 2,937
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (loss) arising
during the period 73 557 (326)
Reclassification adjustment for (gain) losses
included in net income, net of tax (3) 7 4
------ ----- -----
70 564 (322)
------ ----- -----
Comprehensive income $7,691 7,619 2,615
====== ===== =====
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. See footnote 17 for the Company's reportable segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Under this
statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method
it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the
ineffective aspect of the hedge. This Statement is effective for
all fiscal quarters of fiscal years beginning after June 15,
1999. The adoption of this statement is not expected to have a
material impact on the Company's financial position.
(Continued)
37
32
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(2) STOCKHOLDERS' EQUITY
Prior to the Company's initial public 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 $9.5 million
(unaudited) at December 31, 1998.
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 has 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, 1998, there were no shares of
preferred stock has been issued.
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, 1998, that BFS
and BNB meets all capital adequacy requirements to which it is subject.
(Continued)
38
33
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
As of August 24, 1998, the most recent notification from the OTS
categorized BFS as "well capitalized" by regulatory definition. As of
December 4, 1998, 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, 1998, 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 below.
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY REGULATORY
ACTUAL PURPOSES DEFINITIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(DOLLARS IN THOUSANDS)
As of December 31, 1998:
Risk-based Total Capital:
BFS $57,944 10.2% $45,538 8.0% $56,923 10.0%
BNB 10,131 15.3 5,291 8.0 6,614 10.0
Core Capital:
BFS 50,820 5.1 39,533 4.0 49,417 5.0
Risk-based Tier I Capital:
BFS 50,820 8.9 22,769 4.0 34,154 6.0
BNB 9,492 14.4 2,645 4.0 3,968 6.0
Tangible Capital:
BFS 50,820 5.1 19,767 2.0 49,417 5.0
Leverage Capital:
BNB 9,492 7.4 5,167 4.0 6,459 5.0
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
(Continued)
39
34
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
At December 31, 1998 and 1997, the consolidated capital to assets ratio
was 7.2% and 8.4%, respectively, which exceeded the minimum capital
requirements for the Company. During 1998, the Company's Board of
Directors approved a program to repurchase up to 268,417 or
approximately 5%, 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, 1998, 408,896
shares were repurchased under this program and a previously approved
program, at a total cost of $8 million.
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
(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, 1998
-----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
Investment securities:
U.S. Government, federal agency
and other obligations:
Maturing within 1 year $32,862 99 (116) 32,845
Maturing after 1 year but within
5 years 15,975 329 (12) 16,292
------- --- ---- ------
Total investment securities $48,837 428 (128) 49,137
======= === ==== ======
Mortgage-backed securities:
Maturing after 5 years but
within 10 years 4,996 6 -- 5,002
Maturing after 10 years 15,939 255 (167) 16,027
------- --- ---- ------
Total mortgage-backed securities $20,935 261 (167) 21,029
======= === ==== ======
(Continued)
40
35
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
DECEMBER 31, 1997
-----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
Investment securities:
Cash management funds $ 1,150 -- -- 1,150
U.S. Government, federal agencies
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
======= === ==== ======
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.
U.S. agency notes with an amortized cost and a fair value of $1,000 at
December 31, 1998 were pledged to provide collateral for customers 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, 1998, no mortgage-backed securities were pledged as
collateral for securities sold under agreements to repurchase.
Included in U.S. government, federal agency and other obligations are
investments that can be called prior to final maturity with an amortized
cost of $7,500 and a fair value of $7,565 at December 31, 1998.
The composition by issuer of mortgage-backed securities available for
sale follows:
DECEMBER 31,
------------------------------------------
1998 1997
------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------ --------- ------
FHLMC $ 4,996 5,002 8,454 8,444
GNMA 5,916 5,982 10,553 10,681
Privately issued collateralized
mortgage obligations 10,023 10,045 -- --
------- ------ ------ ------
$20,935 21,029 19,007 19,125
======= ====== ====== ======
(Continued)
41
36
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
Proceeds from the sale of investment securities and mortgage-backed
securities available for sale amounted to $5,000, $15,092 and $10,614 in
1998, 1997 and 1996, respectively. Realized losses on investment
securities and mortgage-backed securities available for sale were $18
and $11 in 1997 and 1996, respectively. Realized gains amounted to $19
in 1998.
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY
(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, 1998
-----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
Investment securities:
U.S. government, federal
agency and other obligations:
Maturing within one year $ 1,250 1 -- 1,251
Maturing after 1 year but
within 5 years 5,027 63 -- 5,090
Maturing after 5 years but
within 10 years 1,025 5 -- 1,030
------- --- --- ------
Total investment securities $ 7,302 69 -- 7,371
======= === === ======
Mortgage-backed securities:
Maturing after 1 year but
within 5 years 1,205 23 -- 1,228
Maturing after 5 years but
within 10 years 2,309 118 -- 2,427
Maturing after 10 years 19,399 279 -- 19,678
------- --- --- ------
Total mortgage-backed securities $22,913 420 -- 23,333
======= === === ======
(Continued)
42
37
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
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
======= === === ======
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.
At December 31, 1998, a U.S. agency note with an amortized cost and fair
value of $500 was pledged to secure certain of BFS's recourse
liabilities relating to loans sold as described in note 5.
At December 31, 1998, investment securities with an amortized cost of
$500 and a fair value of $501 were pledged to provide collateral for
customers 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.
Included in U.S. government, federal agency and other obligations are
investments that can be called prior to final maturity with an amortized
cost of $5,999 and a fair value of $6,040 at December 31, 1998.
The composition by issuer of mortgage-backed securities held to maturity
follows:
DECEMBER 31,
------------------------------------------
1998 1997
------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------ --------- ------
FHLMC $ 682 695 1,100 1,108
FNMA 428 438 894 902
GNMA 16,645 16,991 22,425 22,858
Privately issued collateralized
mortgage obligation 5,158 5,209 13,931 14,035
------- ------ ------ ------
$22,913 23,333 38,350 38,903
======= ====== ====== ======
(Continued)
43
38
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(5) LOANS (IN THOUSANDS)
The Company's lending activities are conducted principally in eastern
Massachusetts. The Company grants single-family and multi-family
residential loans, commercial real estate loans, commercial loans,
business loans and a variety of consumer loans. In addition, the Company
grants loans for the construction of residential homes, multi-family
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 one to four
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.
The Company's loan portfolio was comprised of the following at
December 31:
1998 1997
-------- -------
Mortgage loans:
Residential 1-4 family $812,564 692,285
Multi-family 22,889 18,874
Construction and land 41,608 20,497
Commercial real estate 48,951 36,400
-------- -------
926,012 768,056
-------- -------
Consumer and other loans:
Home equity and improvement 32,119 28,119
Secured by deposits 934 834
Consumer 4,637 4,984
Business 3,618 3,528
-------- -------
41,308 37,465
-------- -------
Total loans 967,320 805,521
Less:
Allowance for loan losses (note 6) (8,500) (6,600)
Construction loans in process (17,133) (8,527)
Net unearned discount on loans purchased (5) (114)
Deferred loan origination costs 1,980 1,448
-------- -------
Loans, net $943,662 791,728
======== =======
The Company services mortgage loans for investors which are not included
in the accompanying consolidated balance sheets totaling approximately
$648,279 and $549,422 at December 31, 1998 and 1997, respectively. Of
these loans serviced for others, $694 and $827 at December 31, 1998 and
1997, respectively, had been sold with recourse by the Company. In
addition, at December 31, 1998 and 1997, respectively, the Company had
retained the secondary layer of recourse risk on $4,737 and $7,736 of
serviced loans, with such risk limited to $221 and $223 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 $0, $44 and $0
for the years ended December 31, 1998, 1997 and 1996, respectively.
(Continued)
44
39
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
Proceeds from the sales of loans were $353,387 for 1998, $112,680 for
1997 and $148,693 for 1996. Gains recognized on the sales of loans
amounted to $3,173 in 1998, $1,114 in 1997, and $668 in 1996.
A summary of the activity of the mortgage servicing rights, which is
included as a component of other assets, for the years ended December 31
follows:
1998 1997
------- -----
Balance, beginning of year $ 1,534 988
Capitalized mortgage servicing rights 3,149 836
Amortization (1,112) (290)
------- -----
Balance, end of year $ 3,571 1,534
======= =====
The Company has determined that the fair value of mortgage servicing
rights at December 31, 1998 approximates their carrying amount after an
adjustment of $481 was recorded to reflect impairment value of mortgage
servicing rights during 1998. A valuation allowance for the mortgage
servicing rights was not established, as the mortgage servicing rights
were adjusted through additional amortization.
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, at December 31, 1998, are $8,800
and $1,500; respectively. A $1,527 lending relationship at BNB slightly
exceeded the regulatory lending limit at December 31, 1998 as a portion
of the loan had not been sold. The violation was remedied in the first
quarter of 1999. BFS did not have any borrower relationships which
exceeded the limit as of December 31, 1998 and 1997 and BNB did not have
any borrower relationship which exceeded the limit as of December 31,
1997.
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:
1998 1997
------ ------
Balance, beginning of year $1,052 846
Originations 145 22
Broadway acquisition -- 280
Payments (257) (106)
Other changes 12 10
------ -----
Balance, end of year $ 952 1,052
====== =====
At December 31, 1998 and 1997, total impaired loans were $1,529 and
$2,091, respectively. In the opinion of management, no impaired loans
required a specific valuation allowance at December 31, 1998 and 1997.
All impaired loans have been measured using the fair value of the
collateral method. The average recorded value of impaired loans was
$1,857 during 1998 and $3,829 during 1997. The Company follows the same
policy for recognition of income on impaired loans as it does for all
other loans.
(Continued)
45
40
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
The following table summarizes information regarding the reduction of
interest income on impaired loans at December 31:
1998 1997 1996
---- ---- ----
Income in accordance with original terms $137 286 497
Income recognized 102 139 321
---- --- ---
Foregone interest income during year $ 35 147 176
==== === ===
All of the Company's nonaccrual loans are considered to be impaired
loans. Non-accrual loans at December 31, 1998 and 1997 were $809 and
$1,405, respectively.
At December 31, 1998 and 1997, there were no commitments to lend
additional funds to those borrowers whose loans were classified as
impaired.
(6) 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:
1998 1997 1996
------- ------ ------
Balance, beginning of year $ 6,600 4,400 4,275
BNB allowance for loan losses at acquisition date -- 620 --
Provision charged to income 1,642 1,696 1,294
Recoveries 517 399 343
Charge-offs (259) (515) (1,512)
------- ------ ------
Balance, end of year $ 8,500 6,600 4,400
======= ====== ======
(7) ACCRUED INTEREST RECEIVABLE (IN THOUSANDS)
Accrued interest receivable as of December 31 is presented in the
following table:
1998 1997
------ -----
Investment and mortgage-backed securities $ 697 871
Loans 4,852 4,292
------ -----
$5,549 5,163
====== =====
(Continued)
46
41
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(8) 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:
1998 1997
------- ------
Land $ 2,083 2,083
Buildings 4,074 4,036
Furniture, fixtures and equipment 6,876 6,188
Leasehold improvements 1,402 1,291
------- ------
14,435 13,598
Less accumulated depreciation and amortization (7,821) (6,756)
------- ------
$ 6,614 6,842
======= ======
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:
YEARS ENDED DECEMBER 31,
------------------------
1999 $ 1,317
2000 1,317
2001 1,317
2002 1,317
Beyond 2003 7,062
-------
$12,330
=======
Rent expense was $1,257 in 1998, $1,178 in 1997 and $1,095 in 1996.
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:
YEARS ENDED DECEMBER 31,
------------------------
1999 $ 144
2000 106
2001 52
-------
$ 302
=======
(Continued)
47
42
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(9) DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS)
A summary of deposit balances by type is as follows at December 31:
1998 1997
-------- -------
NOW $114,934 106,637
Regular and statement savings 130,843 116,858
Money market 61,756 61,546
Demand deposits and official checks 60,952 51,151
-------- -------
Total noncertificate accounts 368,485 336,192
-------- -------
Certificate accounts:
3 to 6 months 26,066 33,471
1 to 3 year 262,103 196,892
Greater than 3 years 4,442 6,286
IRA/Keogh 46,048 46,980
-------- -------
Total certificate accounts 338,659 283,629
-------- -------
$707,144 619,821
======== =======
Contractual maturity of certificate accounts:
Within one year $198,124 137,520
One to two years 125,285 56,533
Two to three years 9,415 84,479
Over three years 5,835 5,097
-------- -------
$338,659 283,629
======== =======
Aggregate amount of certificate accounts of $100 or more were $29,006
and $18,960 at December 31, 1998 and 1997, 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:
1998 1997 1996
------- ------ ------
NOW $ 1,158 1,071 890
Regular and statement savings 2,999 2,826 2,219
Money market 1,838 1,822 1,395
Certificate accounts 18,101 13,457 11,194
------- ------ ------
$24,096 19,176 15,698
======= ====== ======
The Company has $82,722 of brokered deposits with a weighted average
rate of 6.53% at December 31, 1998. Brokered deposits of $10,000,
$67,705 and $5,017 mature in 1999, 2000 and after 2000, respectively.
There were $75,000 of brokered deposits outstanding at December 31,
1997.
(Continued)
48
43
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(10) SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE (DOLLARS IN THOUSANDS)
1998 1997
-------------- --------------
AMOUNT RATE AMOUNT RATE
------ ------ ------ ------
Securities sold under agreements to
repurchase, due on demand $ -- $ --% $7,140 $5.98%
====== ===== ====== =====
At December 31, 1998, there were no securities sold under agreements to
repurchase. Securities sold under agreement to repurchase averaged
$1,575 during 1998 and $7,261 during 1997. Maximum amounts outstanding
at any month end were $7,140 during 1998 and $21,861 during 1997. The
average cost of repurchase agreements was 5.90% in 1998 and 5.62% in
1997. The securities collateralizing the agreements were not under the
Company's control.
Interest expense was $93 in 1998 and $671 in 1997.
(11) FEDERAL HOME LOAN BANK ("FHLB") OF BOSTON ADVANCES (DOLLARS IN
THOUSANDS)
FHLB of Boston advances by year of maturity at December 31 were:
1998 1997
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
1998 $ -- --% $118,000 5.76%
1999 114,000 5.56 56,000 6.05
2000 113,500 5.85 58,500 6.25
2001 49,000 5.59 13,000 6.14
2002 1,000 6.55 11,000 5.79
2003 40,000 5.57 -- --
Beyond 2003 20,000 5.99 -- --
-------- ---- -------- ----
Total $337,500 5.69% $256,500 5.96%
======== ==== ======== ====
The advances are secured by FHLB of Boston stock and a blanket lien on
certain qualified collateral. The amount of advances is principally
limited to 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 $474,168 and $438,187 at December 31, 1998
and 1997, respectively. Other qualifying assets were available at BNB,
however, a collateral report was not required to be prepared as of
December 31, 1998.
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 $927 and $3,788
at December 31, 1998 and 1997, respectively. Any excess may be redeemed
by the Company or called by FHLB of Boston at par.
Interest expense on FHLB advances was $18,219 in 1998, $17,226 in 1997
and $12,682 in 1996.
(Continued)
49
44
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(12) INCOME TAXES (DOLLARS IN THOUSANDS)
An analysis of the current and deferred federal and state income tax
expense (benefit) follows:
1998 1997 1996
-------- ------- -----
Current income tax expense:
Federal income tax $ 4,654 4,581 1,142
State income tax 287 1,407 366
------- ------ -----
Total current expense 4,941 5,988 1,508
------- ------ -----
Deferred income tax expense (benefit):
Federal deferred income tax 313 (371) 442
State income tax 107 (29) 127
Change in valuation allowance (210) (83) 6
------- ------ -----
Total deferred expense (benefit) 210 (483) 575
------- ------ -----
Total income tax expense $ 5,151 5,505 2,083
======= ====== =====
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:
1998 1997
------ ------
Deferred tax assets:
Allowance for loan losses $3,676 2,747
Deferred compensation 856 766
Real estate owned 7 157
State net operating loss carryforwards -- 86
Premises and equipment -- 80
Other 83 127
------ ------
Gross deferred assets 4,622 3,963
Valuation allowance -- (210)
------ ------
Net deferred tax assets before
deferred tax liabilities 4,622 3,753
------ ------
Deferred liabilities:
Premium on loans sold 1,527 696
Deferred loan fees 806 580
Unrealized gain on securities available for sale 82 89
Premises and equipment 358 368
Other 37 --
------ ------
Gross deferred liabilities 2,810 1,733
------ ------
Net deferred tax asset $1,812 2,020
====== ======
There was no valuation allowance at December 31, 1998. 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 ended December 31,
(Continued)
50
45
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
1998, the Company generated approximately $12,450 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.
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 remains subject to
recapture in the event that the Company 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:
1998 1997 1996
------- ------ ------
Computed expected expense at statutory rate $4,343 4,396 1,707
Items affecting federal income tax rate:
State income tax, net of federal income tax
benefit and before valuation allowance 261 896 325
Change in valuation allowance (210) (83) 6
Allocated ESOP share appreciation 273 212 98
Other 484 84 (53)
------ ----- -----
Effective income tax expense $5,151 5,505 2,083
====== ===== =====
Effective income tax rate 40.3% 43.8% 41.5%
====== ===== =====
(13) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(a) 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.
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 1998 and 1997 and $606 in 1996 to
enable the ESOP to make principal payments on the loan.
(Continued)
51
46
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
The amount contributed was charged to compensation and benefits
expense. The Company recognized $803 in 1998, $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 four 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, 1998 and 1997, shares held in suspense to be
released annually as the loan is paid down amounted to 241,829
and 317,379, respectively. The fair value of unallocated ESOP
shares was $4,263 and $6,944 at December 31, 1998 and 1997,
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.
(b) 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 the 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 1998,
51,230 shares were distributed. Awards outstanding vest in five
annual installments generally commencing one year from the date
of the award. As of December 31, 1998, 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
$608 and $1,226 related to the earned shares in compensation and
benefit expense in 1998 and 1997, 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
December 31, 1998
(c) STOCK OPTION PLANS
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 25,000 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 85,100 remain unawarded.
During 1998, the Company granted employees options to purchase
40,500 shares of common stock at between $18.13 and $24.81 per
share.
A summary of option activity follows:
1998 1997
------------------------- -------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
Balance, beginning of year 733,361 $13.63 604,500 $12.51
Granted 40,500 22.77 135,461 18.89
Forfeited -- -- (6,600) 17.52
Exercised (900) 16.43 -- --
------- -------
Balance, end of year 772,961 $14.12 733,361 $13.63
======= ====== ======= ======
Options exercisable 273,992 $13.40 120,900 $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, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
1998 LIFE PRICE 1998 PRICE
------------ ----------- -------- ------------ --------
570,000 7.3 $12.44 228,000 $12.44
25,000 7.8 13.44 10,000 13.44
7,500 7.9 14.82 3,000 14.82
119,961 8.5 18.82 23,992 18.82
10,000 8.9 19.75 2,000 19.75
15,000 9.2 22.22 3,000 22.22
15,000 9.3 24.81 3,000 24.81
5,000 9.4 23.38 1,000 23.38
5,500 10.0 18.13 --
------- -------
772,961 7.6 $14.12 273,992 $13.40
======= ==== ====== ======= ======
(Continued)
53
48
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
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:
1998 1997
------ ------
Net income as reported $7,621 7,055
Pro forma net income 6,847 6,383
Basic earnings per share as reported 1.50 1.28
Diluted earnings per share as reported 1.43 1.24
Pro forma basic earnings per share 1.35 1.16
Pro forma diluted earnings per share 1.29 1.12
The per share weighted average fair value of stock options
granted during 1998 was $5.28 per share determined using the
Flexible Binomial option pricing model with the following
weighted average assumptions:
1998 1997
------ ------
Expected dividend yield 2.50% 1.54%
Risk-free interest rate 5.23% 5.99%
Expected volatility 24.88% 29.12%
Expected life (years) 4.6 4.0
(d) PENSION PLAN
All eligible officers and employees are included in a
noncontributory defined benefit pension plan provided by BFS and
BNB as participating employers 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, 1998, 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 1998, 1997 and 1996, except for an
administration fee of approximately $5 per year.
(e) 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 $143 for 1998 and $119 for 1997.
(Continued)
54
49
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(f) SHORT TERM INCENTIVE PLAN
The Company established a short-term incentive plan during 1997.
Generally, all BFS (effective in 1997) and BNB (effective in
1998) 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 $721 and $450 during 1998 and 1997, respectively.
(g) EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The Company and BFS entered into employment agreements with its
President and Chief Executive Officer, and two Executive Vice
Presidents. 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.
(h) 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 the Company or its two
banks. 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.
(14) 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.
(15) 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
(Continued)
55
50
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
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.
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:
1998 1997
------- ------
Commitments to originate mortgage loans $97,658 37,233
Unused lines of credit:
Home equity 56,166 42,601
Commercial loans 3,454 1,185
Standby letters of credit 765 372
Commitments to sell loans or swap loans for
mortgage-backed securities 44,942 21,872
(16) 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
December 31, 1998
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.
(a) CASH AND CASH EQUIVALENTS
The fair values of cash and cash equivalents approximate the
carrying amounts as reported in the balance sheet.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(Continued)
57
52
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(g) 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.
(h) 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.
(i) 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.
(j) 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:
1998 1997
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
Financial assets:
Cash and cash equivalents $ 37,201 37,201 24,690 24,690
Investment securities available for sale 49,137 49,137 31,767 31,767
Investment securities held to maturity 7,302 7,371 20,630 20,630
Mortgage-backed securities available for sale 21,029 21,029 19,125 19,125
Mortgage-backed securities held to maturity 22,913 23,333 38,350 38,903
Loans, net and mortgage loans held for sale 960,670 968,762 801,545 815,740
Accrued interest receivable 5,549 5,549 5,163 5,163
Stock in FHLB of Boston 17,802 17,802 16,613 16,613
Financial liabilities:
Deposit accounts 707,144 711,063 619,821 625,117
Securities sold under agreements to repurchase -- -- 7,140 7,534
FHLB advances 337,500 341,415 256,500 258,934
Advance payments by borrowers for taxes
and insurance 3,405 3,405 3,133 3,133
(Continued)
58
53
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(17) BUSINESS SEGMENTS
The Company's wholly-owned bank subsidiaries, BFS and BNB (collectively
"the Banks"), have been identified as reportable operating segments in
accordance with the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. BF Funding a
wholly-owned subsidiary of the Company and various subsidiaries of the
Banks, did not meet the quantitative thresholds for determining
reportable segments. The Banks provide general banking services to their
customers, including deposit accounts, residential, commercial, consumer
and business loans. Each Bank also invests in mortgage-backed securities
and other financial instruments. In addition to its own operations, the
Company provides managerial expertise and other professional services.
The results of the Company and BF Funding comprise the "Other" category.
The Company evaluates performance and allocates resources based on the
Banks' net income, net interest margin, return on average assets and
return on average equity. The Banks follow generally accepted accounting
principles as described in the summary of significant accounting
policies. The Company and Banks have intercompany expense and tax
allocation agreements. These inter-company expenditures are allocated at
cost. Asset sales between the Banks were accounted for at current market
prices at the time of sale and approximated cost.
Each Bank is managed separately with its own president, who reports
directly to the respective Boards of Directors of each Bank and the
Chief Executive Officer of the Company and its Board of Directors.
The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable
segments. The table includes information of BNB from the close of
business of February 7, 1997, the date of its acquisition by the
Company, through December 31, 1998.
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
--------- -------- ---------- ------ ------------ ------------
At or for the year ended
December 31, 1998:
Interest income $ 65,411 8,429 73,840 1,452 (517) 74,775
Interest expense 41,069 1,912 42,981 93 (517) 42,557
Provision for loan losses 1,542 100 1,642 -- -- 1,642
Non-interest income 5,579 704 6,283 10 (165) 6,128
Non-interest expense 19,393 4,234 23,627 470 (165) 23,932
Income tax expense 3,611 1,169 4,780 371 -- 5,151
Net income 5,375 1,718 7,093 528 -- 7,621
Total assets 988,747 137,209 1,125,956 87,464 (74,297) 1,139,123
Net interest margin 2.66% 5.14% n.m. n.m. n.m. 3.17%
Return on average assets 0.59% 1.36% n.m. n.m. n.m. 0.72%
Return on average equity 10.30% 13.90% n.m. n.m. n.m. 9.02%
At or for the year ended
December 31, 1997:
Interest income $ 59,282 7,436 66,718 2,016 (697) 68,037
Interest expense 35,531 1,623 37,154 671 (696) 37,129
Provision for loan losses 1,651 45 1,696 -- -- 1,696
Non-interest income 4,296 645 4,941 45 (180) 4,806
Non-interest expense 17,662 3,546 21,208 430 (180) 21,458
Income tax expense 4,104 1,049 5,153 352 -- 5,505
Net income 4,630 1,818 6,448 607 -- 7,055
Total assets 832,133 123,165 955,298 92,559 (73,177) 974,680
Net interest margin 2.92% 5.12% n.m. n.m. n.m. 3.42%
Return on average assets 0.65% 1.06% n.m. n.m. n.m. 0.75%
Return on average equity 10.00% 7.43% n.m. n.m. n.m. 8.21%
n.m. = not meaningful
59
54
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(18) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS)
The following are the condensed financial statements for BostonFed
Bancorp, Inc. (the "Parent Company") only:
BALANCE SHEETS
1998 1997
------- ------
ASSETS
Cash and interest bearing deposit in subsidiary bank $ 6,716 6,812
Certificates of deposit 74 18
------- ------
Total cash and cash equivalents 6,790 6,830
------- ------
Mortgage-backed securities available for sale (amortized
cost of $10,913 at 1998 and $19,007 at 1997) 10,983 19,125
Investment securities available for sale (amortized
cost of $2,035 at 1998 and $0 at 1997) 2,032 --
Investment in subsidiaries, at equity 64,423 61,518
Accrued interest receivable 63 104
Other assets 15 1,298
------- ------
Total assets $84,306 88,875
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreement to repurchase -- 7,140
Accrued expenses and other liabilities 2,512 124
------- ------
Total liabilities 2,512 7,264
------- ------
Total stockholders' equity 81,794 81,611
------- ------
Total liabilities and stockholders' equity $84,306 88,875
======= ======
(Continued)
60
55
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
STATEMENTS OF INCOME
1998 1997 1996
-------- -------- --------
Interest income $ 1,186 $ 1,684 $ 2,164
Interest expense 93 671 439
-------- -------- --------
Net interest income 1,093 1,013 1,725
Non-interest income 13 45 --
Non-interest expense 469 428 307
-------- -------- --------
Income before income taxes 637 630 1,418
Income tax expense 261 226 536
-------- -------- --------
Income before equity in net income of subsidiaries 376 404 882
Equity in net income of subsidiaries 7,245 6,651 2,055
-------- -------- --------
Net income $ 7,621 $ 7,055 $ 2,937
======== ======== ========
STATEMENTS OF CASH FLOWS
1998 1997 1996
-------- -------- --------
Net cash flows from operating activities:
Net income $ 7,621 $ 7,055 $ 2,937
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries (7,245) (6,651) (2,055)
Amortization and accretion, net 81 17 (1)
Appreciation in fair value of shares charged to
expense for compensation plans 1,135 821 474
Earned SIP shares 593 1,009 917
Reduction in unallocated ESOP shares 756 755 606
Loss on sale of investment securities -- -- 11
Decrease in accrued interest receivable 41 21 14
Decrease (increase) in other assets 1,283 (1,098) (200)
Increase (decrease) in accrued expenses
and other liabilities 2,505 175 (59)
-------- -------- --------
Net cash provided by operating activities 6,770 2,104 2,644
-------- -------- --------
(Continued)
61
56
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
STATEMENTS OF CASH FLOWS, CONTINUED
1998 1997 1996
-------- -------- --------
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 8,012 3,807 --
Purchase of mortgage-backed securities available for sale -- -- (10,666)
Purchase of investment securities available for sale (2,035) -- --
Change in investment in subsidiaries 4,340 22,276 9,048
-------- -------- --------
Net cash used in investing activities 10,317 5,167 8,996
-------- -------- --------
Cash flow from financing activities:
Proceeds from securities sold under agreement to purchase -- 7,140 2,973
Repayments of securities sold under agreement to purchase (7,140) (3,500) (6,473)
Common stock repurchases (7,998) (13,407) (4,739)
Purchase of common stock by SIP -- -- (3,230)
Cash dividends paid (2,005) (1,541) (989)
Stock options exercised 16
-------- -------- --------
Net cash provided (used) from financing activities (17,127) (11,308) (12,458)
-------- -------- --------
Net decrease in cash and cash equivalents (40) (4,037) (818)
Cash and cash equivalents at beginning of year 6,830 10,867 11,685
-------- -------- --------
Cash and cash equivalents at end of year $ 6,790 $ 6,830 $ 10,867
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest 93 662 442
Income taxes 296 268 584
(Continued)
62
57
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Summaries of consolidated operating results on a quarterly basis for the
years ended December 31 follow:
1998 QUARTERS 1997 QUARTERS
------------------------------- ------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- ------ ------ ------ ------ ------ ------ ------
Interest and dividend income $19,227 19,054 18,293 18,201 17,428 17,542 17,070 15,997
Interest expense 11,101 11,057 10,402 9,997 9,490 9,600 9,182 8,857
------- ------ ------ ------ ------ ------ ------ ------
Net interest income 8,126 7,997 7,891 8,204 7,938 7,942 7,888 7,140
------- ------ ------ ------ ------ ------ ------ ------
Provision for loan losses 455 442 342 403 421 395 455 425
Non-interest income 1,632 1,506 1,586 1,404 1,327 1,303 1,181 995
Non-interest expense 5,997 5,862 6,093 5,980 5,860 5,637 5,496 4,465
------- ------ ------ ------ ------ ------ ------ ------
Income before income taxes 3,306 3,199 3,042 3,225 2,984 3,213 3,118 3,245
Income tax expense 1,295 1,281 1,239 1,336 1,249 1,512 1,413 1,331
------- ------ ------ ------ ------ ------ ------ ------
Net income $ 2,011 1,918 1,803 1,889 1,735 1,701 1,705 1,914
======= ====== ====== ====== ====== ====== ====== ======
Basic earnings per share $ 0.41 0.38 0.35 0.37 0.33 0.30 0.30 0.33
======= ====== ====== ====== ====== ====== ====== ======
Diluted earnings per share $ 0.39 0.36 0.33 0.35 0.31 0.30 0.30 0.33
======= ====== ====== ====== ====== ====== ====== ======
63
58
ANNUAL MEETING
The annual meeting of stockholders will be held on Wednesday, April 28,
1999, at 2:00 p.m. The meeting will take place at the Burlington Marriot, 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)
1997 1998
_____________________________________ _________________________________
BY QUARTER 1 2 3 4 1 2 3 4
_______________________________________________________ _________________________________
Stock Price
High .......... $17 1/8 $18 $22 1/8 $22 1/2 $23 $25 1/8 $24 $18 7/8
Low ........... 14 1/4 14 1/4 17 3/4 19 5/8 20 22 3/8 15 3/4 13 1/2
Dividend Paid .. .05 .07 .07 .07 .07 .10 .10 .10
As of December 31, 1998, the Company had 5,093,841 shares outstanding
and approximately 625 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.
64