UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended, July 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-13795
THE BOSTON BANCORP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2850710
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
460 West Broadway
South Boston, Massachusetts 02127
(Address of principal executive offices) (Zip Code)
(617) 268-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date, is:
Class: Common stock, par value $1.00 per share.
Outstanding at August 31, 1995: 5,218,193 shares.
THE BOSTON BANCORP
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
as of July 31, 1995 and October 31, 1994 ........................ 3
Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months Ended July 31, 1995 and 1994............... 4
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended July 31, 1995 and 1994......................... 5
Notes to Consolidated Financial Statements (Unaudited)........... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 19
Item 2. Changes in Securities............................................ 19
Item 3. Defaults Upon Senior Securities.................................. 19
Item 4. Submission of Matters to a Vote of Security-Holders.............. 19
Item 5. Other Information ............................................... 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signature Page................................................... 21
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except for per share data) (Unaudited)
July 31, 1995 October 31, 1994
------------- ----------------
ASSETS:
Cash and due from banks................................................ $ 17,194 $ 14,884
Federal funds sold..................................................... 9,005 0
Investment securities available for sale, at fair value................ 506,481 615,210
Mortgage-backed securities available for sale, at fair value........... 1,139,865 953,398
Loans held for sale, net (market values of $24,416 and $18,164,
respectively) ....................................................... 24,108 18,164
Loans, net (allowance for possible loan losses $11,080 and $9,471,
respectively) ....................................................... 335,254 350,205
Other real estate, net................................................. 10,709 7,786
Land, building and equipment, net...................................... 9,793 8,254
Accrued income receivable.............................................. 16,170 17,015
Other assets........................................................... 17,919 48,153
---------- ----------
Total assets........................................................... $2,086,498 $2,033,069
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits............................................................... $1,336,312 $1,398,233
Notes payable.......................................................... 5,650 7,550
Borrowings............................................................. 69,303 10,275
Federal Home Loan Bank advances........................................ 427,314 470,000
Accrued interest payable............................................... 5,592 4,557
Mortgagors' escrow accounts............................................ 517 939
Other liabilities...................................................... 61,983 23,893
---------- ----------
Total liabilities...................................................... 1,906,671 1,915,447
---------- ----------
STOCKHOLDERS' EQUITY:
Serial preferred stock, $1.00 par value;
authorized 3,000,000 shares; issued - 0 - shares................. -- --
Common stock, $1.00 par value; authorized 20,000,000
shares; issued and outstanding 5,217,793 and
5,142,989 shares, respectively................................... 5,218 5,143
Additional paid-in capital............................................. 27,316 23,400
Retained earnings...................................................... 126,247 118,149
Unearned compensation expense - ESOP................................... (2,709) (3,276)
Net unrealized gain (loss) on securities available for sale............ 23,755 (25,794)
---------- ----------
Total stockholders' equity............................................. 179,827 117,622
---------- ----------
Total liabilities and stockholders' equity............................. $2,086,498 $2,033,069
========== ==========
See accompanying notes to consolidated financial statements
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data) (unaudited)
Three months ended Nine months ended
July 31, July 31,
--------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Interest on mortgage loans................. $ 8,402 $ 8,094 $ 24,426 $ 24,846
Interest on other loans.................... 233 249 709 601
Interest on investment securities.......... 5,555 7,217 19,381 19,660
Dividends on equity securities............. 2,256 2,166 6,996 6,713
Interest on mortgage-backed securities..... 18,958 17,165 54,293 50,722
Interest on short-term investments......... 170 55 524 543
------- ------- -------- --------
Total interest and dividend income....... 35,574 34,946 106,329 103,085
------- ------- -------- --------
INTEREST EXPENSE:
Interest on deposits....................... 14,300 11,983 40,143 37,264
Interest on notes payable.................. 118 164 369 551
Interest on borrowings..................... 800 50 1,399 52
Interest on Federal Home Loan Bank advances 7,141 6,378 21,796 18,719
------- ------- -------- --------
Total interest expense................... 22,359 18,575 63,707 56,586
------- ------- -------- --------
Net interest and dividend income................ 13,215 16,371 42,622 46,499
Provision for possible loan losses.............. 1,000 1,500 3,000 4,800
------- ------- -------- --------
Net interest and dividend income after
provision for for possible loan losses .. 12,215 14,871 39,622 41,699
------- ------- -------- --------
OTHER INCOME:
Net realized gains on securities........... 3,425 251 3,985 7,336
Provision for losses on joint venture
advances ............................ (149) (203) (433) (530)
Gain (loss) on sales of loans ......... (1,978) -- (2,596) 2
Gain (loss) on sale of real estate .... (38) -- (38) 157
Fees and service charges on loans ..... 425 378 1,274 1,093
Other operating income ................ 330 383 1,122 1,695
------- ------- -------- --------
Total other income .................. 2,015 809 3,314 9,753
------- ------- -------- --------
OTHER EXPENSES:
Salaries and employee benefit ......... 3,569 3,327 9,758 10,357
Advertising expense ................... 218 293 598 812
Occupancy expense ..................... 664 737 2,089 2,184
Net cost of other real estate ......... (247) 127 (511) 724
FDIC deposit insurance assessment ..... 827 826 2,430 2,486
Professional services ................. 1,572 492 4,397 1,685
Other operating expenses .............. 1,317 1,022 3,602 3,193
------- ------- -------- --------
Total operating expenses ............ 7,920 6,824 22,363 21,441
------- ------- -------- --------
Income before income taxes ..................... 6,310 8,856 20,573 30,011
------- ------- -------- --------
INCOME TAXES:
Federal ............................... 1,670 2,600 5,646 8,729
State ................................. 168 90 518 1,055
------- ------- -------- --------
Total income taxes .................. 1,838 2,690 6,164 9,784
------- ------- -------- --------
NET INCOME ..................................... $ 4,472 $ 6,166 $ 14,409 $ 20,227
======= ======= ======== ========
Primary earnings per share ..................... $0.84 $1.15 $2.76 $3.70
Fully diluted earnings per share ............... $0.84 $1.14 $2.71 $3.70
See accompanying notes to consolidated financial statements
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
July 31,
-----------------------------
1995 1994
------ -----
(Unaudited)
Operating activities:
Net income.......................................................... $ 14,409 $ 20,227
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease (increase) in accrued income receivable.................... 845 (187)
Increase (decrease) in accrued interest payable..................... 1,035 (98)
Amortization of loan discounts and premiums, net.................... 601 (955)
Amortization of investment securities available for sale
discounts and premiums, net....................................... (836) (1,567)
Amortization of mortgage-backed securities available for
sale discounts and premiums, net.................................. 1,989 4,349
Provision for possible loan losses.................................. 3,000 4,800
Net realized gains on investment securities available for sale...... (6,106) (6,873)
Net realized (gains) losses on mortgage-backed securities available
for sale.......................................................... 2,121 (463)
Net losses (gains) on loans held for sale .......................... 2,596 (2)
Increase in loans held for sale..................................... (24,251) (41,054)
Increase in reserve for depreciation................................ 735 595
Loss (gain) on sale of premises and equipment....................... 38 (157)
Decrease (increase) in other assets................................. 30,234 (11,004)
Increase in other liabilities....................................... 3,957 5,255
--------- ---------
Net cash flow from operating activities.......................... 30,367 (27,134)
--------- ---------
Investing activities:
Loans originated, acquired, proceeds from sales of loans,
and principal collections, net.................................... 4,666 (14,285)
Proceeds from sale of other real estate............................. 4,004 5,902
Proceeds from sales of loans........................................ 3,774 19
Purchases of mortgage-backed securities available for sale.......... (242,831) (110,886)
Principal collections of mortgage-backed securities available
for sale.......................................................... 94,397 203,391
Proceeds from sales of mortgage-backed securities available
for sale.......................................................... 21,945 10,379
Purchases of investment securities available for sale............... (69,440) (145,833)
Principal collections of investment securities available for sale... 5,132 14,727
Proceeds from sales of investment securities available for sale..... 204,823 43,024
Proceeds from maturities of investment securities available for sale 7,244 13,597
Capitalized additions to other real estate owned.................... (243) (397)
Purchases of premises and equipment................................. (2,449) (1,863)
Proceeds from sales of premises and equipment....................... 137 499
--------- ---------
Net cash flow from investing activities.......................... 31,159 18,274
--------- ---------
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Nine Months Ended
July 31,
------------------------------
1995 1994
---- ----
(Unaudited)
Financing activities:
Net decrease in deposit accounts ................................... (61,921) (36,319)
Proceeds of Federal Home Loan Bank advances ........................ 474,521 298,669
Payments of Federal Home Loan Bank advances ........................ (517,207) (320,789)
Increase in borrowings under short-term reverse repurchase
agreements ....................................................... 59,028 10,300
(Decrease) increase in mortgagors' escrow accounts ................. (422) 491
Cash dividends declared on common stock ............................ (2,920) (1,975)
Payments on maturing notes payable ................................. (1,900) (7,500)
Proceeds from exercise of stock options ............................ 3,967 1,932
Payments for repurchase of common stock ............................ (3,924) (20,912)
Unearned compensation expense - ESOP ............................. 567 567
-------- --------
Net cash flow from financing activities......................... (50,211) (75,536)
-------- --------
Total increase (decrease) in cash and cash equivalents.............. 11,315 (84,396)
Cash and cash equivalents at beginning of period.................... 14,884 102,794
-------- --------
Cash and cash equivalents at end of period.......................... $ 26,199 $ 18,398
======== ========
See accompanying notes to consolidated financial statements.
THE BOSTON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A) BASIS OF PRESENTATION
The Boston Bancorp ("Bancorp" or the "Company") was formed in October
1984 and, effective March 1, 1985, acquired all of the outstanding shares of the
South Boston Savings Bank ("South Boston" or the "Bank") in exchange on a
one-for-one basis for Bancorp common stock. Bancorp thereby became the holding
company for the Bank.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or all footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements, notes, and other information included
in Bancorp's Form 10-K for its fiscal year ended October 31, 1994.
The financial information included herein reflects all adjustments
(consisting solely of normal recurring adjustments) that are, in the opinion of
management, necessary to present fairly the unaudited consolidated financial
condition as of July 31, 1995 and October 31, 1994 and the unaudited
consolidated results of operations for the three and nine month periods ended
July 31, 1995 and 1994 and the unaudited consolidated statements of cash flows
for the nine-month periods ended July 31, 1995 and 1994.
The results of operations for the three and nine months ended July 31,
1995 are not necessarily indicative of results that may be expected for the
entire year.
NOTE B) EARNINGS PER SHARE
Primary earnings per share for the three and nine months ended July 31,
1995 and 1994 were calculated by adding the common stock equivalents, which
would arise from the exercise of outstanding stock options granted under the
Company's stock option plans, to the weighted average number of shares
outstanding during the respective periods. The number of shares used for
calculating primary earnings per share for the three and nine months ended July
31, 1995 were 5,324,122 and 5,215,783, respectively, and for the three and nine
months ended July 31, 1994, 5,377,916 and 5,467,570, respectively. The weighted
average number of shares outstanding during the three and nine months ended July
31, 1995 were 5,216,677 and 5,143,490, respectively, and for the three and nine
months ended July 31, 1994 were 5,233,286 and 5,285,032, respectively.
The calculation of the common stock equivalent under primary earnings
per share is based, in part, on an average stock price for the period. The
calculation of the common stock equivalent under fully diluted earnings per
share is based, in part, on the price of the stock at the end of the period, if
higher than the average price during the period. Fully diluted earnings per
share for the three and nine months ended July 31, 1995 were based on 5,324,122
shares, and for the three and nine months ended July 31, 1994 were based on
5,398,340 and 5,467,570 shares, respectively.
NOTE C) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
At October 31, 1993 the Company reclassified its investment and
mortgage-backed securities portfolios as available for sale. As a result of the
reclassifications, all investments and mortgage-backed securities are carried at
fair value. Any after-tax net unrealized gain or loss on these securities will
be recognized as a credit or charge to stockholders' equity. Securities
classified as available for sale include securities that management intends to
use as part of its asset/liability management strategy or that may be sold in
response to changes in interest rates, significant prepayment risk and similar
economic factors.
NOTE D) LOANS HELD FOR SALE
Loans originated by the Bank, including educational, certain commercial
loans, and residential loans which conform to specific underwriting standards
outlined by FNMA and FHLMC, are classified as held for sale and recorded at the
lower of aggregate cost or estimated market value. The amount by which cost
exceeds market value, if any, is accounted for as a valuation allowance. Changes
in the valuation allowances are included in the determination of net income of
the period in which such a change occurs.
Gains and losses on loan sales are determined using the specific
identification method. Interest income on loans held for sale is accrued
currently and classified as interest on loans.
NOTE E) SUBSEQUENT EVENT - DIVIDEND PAYMENT
On August 17, 1995, the Board of Directors of Bancorp voted a quarterly
dividend of $.19 per share on each outstanding share of Bancorp common stock.
Such dividend is payable on September 15, 1995 to stockholders of record on
August 31, 1995.
THE BOSTON BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The total assets of The Boston Bancorp increased to $2.086 billion at
July 31, 1995 from $2.033 billion at October 31, 1994, primarily as a result of
an increase in the fair value of the Company's investment portfolio which is
classified as available for sale under FAS 115. The deposits of the Bank
decreased to $1.336 billion at July 31, 1995, from $1.398 billion at October 31,
1994. The decrease was offset, in part, by an increase in the Company's
borrowings of approximately $14.4 million.
At July 31, 1995, the Company's investment portfolio, which is
comprised of investment securities, mortgage-backed securities and federal funds
sold totaled $1.655 billion compared to $1.569 billion at October 31, 1994. The
average life of the investment portfolio, including mortgage-backed securities,
declined to 5.3 years at July 31, 1995 compared to 6.0 years at October 31,
1994. This decline is the result of portfolio restructuring designed to reduce
interest rate risk on the Company's balance sheet. Despite these changes, the
Company's investment portfolio remains sensitive to changes in interest rates,
and the value of the portfolio would be favorably affected by a decline in
prevailing rates and adversely affected by an increase in prevailing rates.
At July 31, 1995, $219.6 million of the mortgage-backed securities
portfolio was represented by Federal National Mortgage Association ( FNMA ),
Federal Home Loan Mortgage Corporation ( FHLMC ), or Government National
Mortgage Association ( GNMA ) adjustable-rate mortgages. The Bank's continued
use of GNMA, FNMA and FHLMC 15-year mortgage-backed securities, both seasoned as
well as newly issued FNMA and FHLMC 5 and 7-year balloon payment mortgage-backed
issues, 30-year seasoned shorter weighted average maturity obligations issued by
the above mentioned entities, and one and three year adjustable-rate
mortgage-backed securities, has resulted in a mortgage-backed securities
portfolio with an average life at July 31, 1995 of approximately 5.3 years. At
July 31, 1995, the amortized cost of the Company's mortgage-backed securities
portfolio exceeded its fair value by $8.8 million, as compared with an excess of
amortized cost over fair value at October 31, 1994, of $61.0 million.
The fair value of the Company's equities portfolio increased to $193.4
million at July 31, 1995 from $187.5 million at October 31, 1994. The fair value
of preferred stock issues held by the Company totaled $10.4 million at July 31,
1995 compared to $17.4 million at October 31, 1994. The fair value of the common
equity portfolio totaled $183.0 million at July 31, 1995, compared to $170.1
million at October 31, 1994. The common stock portfolio continues to be yield
oriented and weighted towards public utility, telephone, bank, and other high
quality dividend paying issues.
At July 31, 1995, the fair value, net of tax, of the Company's
investment portfolio, including mortgage-backed securities, was in excess of its
amortized cost by $23.8 million, which under FAS 115 is included as a separate
component of stockholders' equity in the Company's unaudited consolidated
statements of financial condition as of July 31, 1995. At October 31, 1994, the
fair value, net of tax benefit, of the investment portfolio had been $25.8
million less than its amortized cost.
Loans, net, including loans held for sale, decreased to $359.4 million
at July 31, 1995 from $368.4 million at October 31, 1994. Mortgage loan
originations for the three months ended July 31, 1995 decreased to $5.7 million
from $36.9 million for the comparable period ended July 31, 1994 due to a more
competitive lending environment. Of the $5.7 million in mortgage loans
originated during the three months ended July 31, 1995, $5.6 million were
residential mortgage loans, of which $1.3 million were adjustable rate loans and
$4.3 million were fixed rate loans. The remaining $0.1 million represents a loan
secured by a multi-family residential property.
Commercial real estate loans and loans secured by residential rental
properties with more than four units are generally written on three or five year
notes with interest rates fixed at the time of commitment. Options to extend the
notes for another three or five years, subject to strict performance and
valuation criteria, may be granted at origination and exercisable at maturity.
Interest rates during the extended terms are based on pre-set spreads over U.S.
Treasury securities with comparable maturities. Amortization periods are
generally twenty years.
Loans commitments outstanding as of July 31, 1995 totaled $5.2 million,
compared to $12.1 million as of July 31, 1994, and were comprised of fixed and
adjustable rate residential mortgage loans totaling $3.5 million and $0.3
million, respectively, as of July 31, 1995, and $3.5 million and $5.8 million,
respectively, as of July 31, 1994, and commercial and multi-family mortgage loan
commitments totaling $1.4 million as of July 31, 1995 and $2.8 million as of
July 31, 1994.
During the current fiscal quarter, the Bank entered into severance
agreements with certain of its employees providing for either one or two years'
compensation in the event of termination of employment following a change of
control.
Nonperforming Assets and Restructured Loans: The following table
summarizes nonperforming assets and restructured loans at the dates shown. The
Company ceases accruing interest on all loans delinquent 90 or more days.
July 31, 1995 October 31, 1994
------------- ----------------
(Dollars in thousands)
Mortgages delinquent for 90 or more days:
Conventional ....................... $ 2,677 $ 1,222
Commercial ......................... 3,187 3,360
FHA/VA ............................. 426 511
------- -------
Total .............................. 6,290 5,093
------- -------
Loans arising from sales of previously
designated other real estate (FAS 66
loans) (a):
Conventional ....................... -- 2,900
Commercial ......................... -- 7,234
------- -------
Total .............................. -- 10,134
------- -------
Mortgages substantively foreclosed and in
foreclosure (b):
Conventional ....................... 2,997 3,756
Commercial ......................... 7,712 3,913
FHA/VA ............................. -- 117
------- -------
Total ................................... 10,709 7,786
------- -------
Total mortgages loans delinquent for 90 or
more days, FAS 66 loans, mortgages
substantively foreclosed and
in foreclosure ..................... 16,999 23,013
------- -------
Other loans delinquent for 90 or more days:
Secured ............................ 9 9
Unsecured .......................... 74 --
------- -------
83 9
------- -------
Total loans delinquent for 90 or more days,
FAS 66 loans, mortgages substantively
foreclosed and in foreclosure ...... $17,082 $23,022
======= =======
Percent of loans delinquent for 90 or more
days, FAS 66 loans, substantively
foreclosed and in foreclosure to total
loans, including mortgage loans held
for sale (before net items) ........ 4.51% 5.95%
Percent of loans delinquent for 90 or more
days, FAS 66 loans, substantively
foreclosed and in foreclosure
to total assets .................... .82% 1.13%
Restructured loans, net ................. $ 2,468 $ 2,998
---------------
(a) Loans arising from sales of previously designated other real estate
totaling $6.6 million are included as mortgages in foreclosure at July 31,
1995.
(b) Substantive foreclosure is a circumstance in which a loan has reached such
a status that it is economically the same as if the loan collateral is
foreclosed. There are several criteria used to determine if a property has
been substantively foreclosed. These criteria are: the borrower has little
or no equity in the collateral, proceeds for repayment of the loan can be
expected to come only from the operation or sale of the collateral and the
borrower has either formally or effectively abandoned control of the
collateral or retained control of the collateral, but, because of the
current financial condition of the borrower or the economic prospects for
the borrower and/or the collateral in the foreseeable future, it is
doubtful that the borrower will be able to rebuild equity in the collateral
or otherwise repay the loan in the foreseeable future.
Total loans 90 or more days delinquent, FAS 66 loans, and mortgages
substantively foreclosed and in foreclosure decreased to $17.1 million at July
31, 1995 from $23.0 million at October 31, 1994. This change is largely
attributable to a decrease in FAS 66 loans to $6.6 million at July 31, 1995 from
$10.1 million at October 31, 1994 reflecting the borrowers' increased
investments in these properties, and a decrease in other real estate owned
(mortgages substantively foreclosed or in foreclosure) to $4.1 million at July
31, 1995 from $7.8 million at October 31, 1994. Mortgage loans relating to FAS
66 or in foreclosure at July 31, 1995 were comprised of $3.0 million of loans
secured by 1-4 family residential property (19 loans) and $7.7 million of loans
secured by commercial real estate (8 loans).
As of July 31, 1995, the Bank's allowance for possible loan losses totaled
$11.1 million compared to $9.5 million at October 31, 1994. The provision for
possible loan losses totaled $1.0 million for the fiscal 1995 third quarter.
Charge-offs, net of recoveries, for the quarter ended July 31, 1995 totaled
$398,000, including $200,000 of charge-offs on commercial real estate loans and
$192,000 of net charge-offs on residential and multi-family real estate loans.
The loan loss provision charged to operations and the related balance in
the allowance for possible loan losses is based upon periodic evaluations of the
loan portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loss experience and management's estimation of future
potential losses. While management uses available information to establish the
allowance for possible loan losses, future additions to the allowance may be
necessary if economic developments differ substantially from the assumptions
used in making the evaluation. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for possible loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management.
The activity and the allowance for possible loan losses by type of loan is
as follows:
Nine Months Ended
July 31,
--------------------
1995 1994
---- ----
(Dollars in thousands)
Balance at beginning of period .............. $ 9,471 $ 9,325
Additions to reserve:
Commercial real estate .................... 2,220 3,840
Residential/multi-family real estate ...... 720 936
Consumer .................................. 60 24
------- -------
Total ....................................... 3,000 4,800
------- -------
Charge-offs (net of recoveries):
Commercial real estate (a) ................ 670 3,391
Residential/multi-family real estate (b) .. 648 592
Consumer .................................. 73 64
------- -------
Total ....................................... 1,391 4,047
------- -------
Balance at end of period .................... $11,080 $10,078
======= =======
(a) Includes reserve allocations in the amounts of $667,000 on four loans (two
allocations totaling $519,000 are on performing loans), and $392,000 on
three performing loans for the nine months ended July 31, 1995 and 1994,
respectively.
(b) Includes reserve allocations in the amounts of $585,000 on six loans (three
allocations totaling $502,000 are on performing loans), and $340,000 on two
performing loans for the nine months ended July 31, 1995 and 1994,
respectively.
Restructured loans, net, decreased to $2.5 million at July 31, 1995
from $3.0 million at October 31, 1994. These loans were restructured as a result
of increased vacancies and reduced rental rates. Specific reserves established
for restructured loans totaled $953,000 at July 31, 1995 and $550,000 at October
31, 1994. Restructured loans at July 31, 1995 were comprised of $483,000 of
first mortgage loans secured by 1-4 family residential property (2 loans), $1.9
million of first mortgage loans secured by 5 or more family residential property
(2 loans), and $84,000 of first mortgage loans secured by commercial real estate
(1 loan). These loans have interest rates ranging from 7.5% - 10.0% with a
weighted average interest rate of 9.20%.
Total deposits decreased 4.4% to $1.336 billion at July 31, 1995 from
$1.398 billion at October 31, 1994. Because the rates paid on the Bank s short
term deposits did not rise as rapidly as comparable market rates, primarily in
the first fiscal quarter, monies flowed into more competitive accounts including
bond and equity mutual funds.
Federal Home Loan Bank advances decreased to $427.3 million at July 31,
1995 from $470.0 million at October 31, 1994. Borrowings, comprised of reverse
repurchase agreements, increased to $69.3 million at July 31, 1995 from $10.3
million at October 31, 1994. The increase in borrowings were utilized, in part,
to offset deposit outflows.
Stockholders' equity increased to $179.8 million at July 31, 1995 from
$117.6 million at October 31, 1994. The increase in stockholders equity reflects
a $49.5 million increase in net unrealized gain on securities available for
sale, net of tax, from a net unrealized loss of $25.8 million at October 31,
1994 to a net unrealized gain of $23.7 million. Stockholders' equity also
increased by $14.4 million of net income for the nine months ended July 31,
1995, while being reduced by $2.1 million utilized to repurchase shares of the
Company s common stock under a stock repurchase program which was terminated in
December 1994 and by dividends paid to stockholders of $2.9 million.
Under current regulations of the FDIC, BIF-insured banks, including
South Boston, are required to maintain minimum levels of Tier 1 capital. Highly
rated banks (i.e., those with a composite rating of 1 under the CAMEL rating
system and that are not experiencing or anticipating significant growth) are
required to maintain Tier 1 capital of at least 3% of their total assets. For
all other banks, the minimum ratio of Tier 1 capital to total assets is 4% to
5%. The FDIC has authority to impose higher requirements for individual banks.
The Bank is also required to maintain a minimum level of risk-based capital.
Under the risk-based standards, BIF-insured institutions are required to have a
ratio of risk-based capital to risk-weighted assets ratio of at least 8%. The
Bank had ratios of Tier 1 capital to total assets of 6.81% and risk-based
capital to risk-weighted assets of 18.17% at July 31, 1995. Based on its capital
ratios as of July 31, 1995, the Bank believes it was "well capitalized" at such
date under the FDIC's prompt corrective action regulations, assuming the absence
of alternative classification by the FDIC based on other factors.
RESULT OF OPERATIONS
Net income for the three months ended July 31, 1995 decreased to $4.5
million, or $.84 per share (fully diluted), from $6.2 million, or $1.14 per
share (fully diluted), for the three months ended July 31, 1994. Net income for
the nine months ended July 31,1995 decreased to $14.4 million, or $2.71 per
share (fully diluted), from $20.2 million, or $3.70 per share (fully diluted)
for the nine months ended July 31, 1994. The decrease in net income for the
three and nine months ended July 31, 1995 reflects lower net interest and
dividend income resulting from higher rates of interest paid on interest-bearing
liabilities, increased operating expenses and loss on sales of loans, offset, in
part, by higher net realized gains on securities during the current quarter. The
fiscal quarter ended July 31, 1995 included one-time charges of approximately
$942,000, or $0.18 per share on a tax-effected basis, related to the acquisition
by the Bank of certain banking facilities from a limited partnership which had
formerly leased the properties to the Bank. The amount paid by the Bank was
sufficient to enable the partnership to repay its mortgage loans, including
prepayment penalties, and also included lump sum payments to certain limited
partners (all of whom are Bank employees) in satisfaction of their partnership
claims. Without these expenses, net income for the fiscal 1995 third quarter
would have totaled $5.4 million, or $1.02 per share. The Company anticipates an
annual after-tax savings of approximately $300,000 resulting from this
transaction.
Net interest and dividend income for the three and nine months ended
July 31, 1995 decreased 19.3% to $13.2 million and 8.3% to $42.6 million,
respectively, as compared to $16.4 million and $46.5 million for the three and
nine months ended July 31, 1994. The decreases primarily reflect higher rates of
interest paid on all major categories of interest-bearing liabilities and a
shift in the mix of liabilities, offset, in part, by higher rates of interest
earned on investment securities.
Interest earned on the investment portfolio totaled $26.9 million for
the three month period ended July 31, 1995, compared with $26.6 million for the
comparable period of 1994, and increased 4.6% to $81.2 million for the nine
months ended July 31, 1995 from $77.6 million for the nine months ended July 31,
1994. This increase primarily reflects higher rates of interest earned during
the nine months ended July 31, 1995 as compared with the same period in fiscal
1994.
Interest income on the loan portfolio for the three months ended July
31, 1995 increased 3.5% to $8.6 million as compared to $8.3 million for the
comparable period in fiscal 1994, and decreased 1.2% to $25.1 million for the
nine months ended July 31, 1995 as compared to the nine months ended July 31,
1994. The income earned on the loan portfolio during the quarter ended July 31,
1995 was higher than in the third quarter of 1994, reflecting an increase in
interest rates, and higher average balances outstanding during this quarter as
compared with the same period in fiscal 1994. The income earned on loans was
lower during the nine months ended July 31, 1995 as compared with the same
period in fiscal 1994, due to lower average yield earned on loans, offset, in
part, by higher average balances during the current period. The average balance
of loans outstanding for the current fiscal year was affected by the conversion
of $11.9 million of loans to mortgage-backed securities during the quarter ended
January 31, 1995. The average balance of loans outstanding was also affected by
the Bank's conversion of loans totaling $99.3 million to mortgage-backed
securities during the fiscal year ended October 31, 1994.
The following table sets forth the weighted average yields on the loan
and investment portfolios, the weighted average rate paid on deposits,
borrowings, medium-term notes and advances and the interest rate spread between
yields earned on loans and investments and rates paid for funds during the
periods indicated.
Weighted Average Yields Three Months Ended Nine Months Ended
and Cost of Funds July 31, July 31,
----------------------- ------------------ ------------------
1995 1994 1995 1994
---- ---- ---- ----
Weighted average yield earned on:
Loans (a) ....................... 8.86% 8.76% 8.61% 8.76%
Investments (b) ................. 6.78 6.66 6.77 6.46
Combined ........................ 7.18 7.06 7.13 6.91
Weighted average rate paid on:
Deposit accounts ................ 4.26 3.39 3.99 3.49
Borrowings ...................... 5.79 4.42 5.97 5.21
Medium-term notes ............... 8.36 8.34 8.42 8.34
Federal Home Loan Bank advances . 6.37 5.50 6.20 5.52
Cost of funds ................... 4.83 3.93 4.59 4.00
Interest rate spread ............ 2.35 3.13 2.53 2.91
(a) Excludes loan fees (except that portion considered an adjustment to yield);
includes effects of non-accrual loans.
(b) Includes mortgage-backed securities. The yields on available for sale
securities are calculated in the same manner as the yield for held to
maturity securities (interest income annualized divided by weighted average
amortized historical cost).
The effect on net interest income of changes in weighted average
interest rates and the weighted average amounts of interest-earning assets and
interest-bearing deposits, borrowings, medium-term notes and advances
outstanding during the periods is shown in the tables below for the periods
indicated.
Increase(Decrease) Due To
----------------------------
Three Months Ended Total Rate/
July 31, Current Prior Increase Rate Volume Volume
1995 vs. 1994 Period Period (Decrease) (a)(d) (b)(d) (c)(d)
------------------ ------- ------ -------- ------ ------ ------
(In thousands)
Income from interest-earning assets:
Loan portfolio(e).................... $ 8,635 $ 8,343 $ 292 $ 91 $ 199 $ 2
Investment portfolio(f)(g)........... 26,939 26,603 336 485 (146) (3)
------ ------ ------- ------- ----- -----
Total............................. 35,574 34,946 628 576 53 (1)
------ ------ ------- ------- ----- -----
Expense from interest-bearing liabilities:
Deposit accounts..................... 14,300 11,983 2,317 3,042 (576) (149)
Borrowings........................... 800 50 750 15 560 175
Medium term notes.................... 118 164 (46) 0 (46) 0
Federal Home Loan Bank advances...... 7,141 6,378 763 995 (200) (32)
------- ------- ------- ------- ----- ------
Total............................. 22,359 18,575 3,784 4,052 (262) (6)
------- ------- ------- ------- ----- -----
Net interest income....................... $13,215 $16,371 $(3,156) $(3,476) $ 315 $ 5
======= ======= ======= ======= ====== =====
Increase(Decrease) Due To
------------------------------
Nine Months Ended Total Rate/
July 31, Current Prior Increase Rate Volume Volume
1995 vs. 1994 Period Period (Decrease) (a)(d) (b)(d) (c)(d)
------------------ ------- ------ -------- ------ ------ ------
(In thousands)
Income from interest-earning assets:
Loan portfolio(e)...................... $ 25,135 $ 25,447 $ (312) $ (440) $ 130 $ (2)
Investment portfolio(f)(g)............. 81,194 77,638 3,556 3,682 (120) (6)
-------- -------- ------- ------- ------ -----
Total................................ 106,329 103,085 3,244 3,242 10 (8)
-------- -------- ------- ------- ------ -----
Expense from interest-bearing liabilities:
Deposit accounts....................... 40,143 37,264 2,879 4,781 (1,638) (264)
Borrowings............................. 1,399 52 1,347 9 1,166 172
Medium term notes...................... 369 551 (182) 6 (186) (2)
Federal Home Loan Bank advances........ 21,796 18,719 3,077 2,234 748 95
-------- -------- ------- ------- ------- ------
Total................................ 63,707 56,586 7,121 7,030 90 1
-------- -------- ------- ------- ------- ------
Net interest income....................... $ 42,622 $ 46,499 $(3,877) $(3,788) $ (80) $ (9)
======== ======== ======= ======= ======= =====
-------------------------
(a) Determined by multiplying the change in the weighted average interest rate
between the periods shown by the prior period average portfolio balance.
(b) Determined by multiplying the change in average portfolio balance between
periods shown by the weighted average interest rate for the prior period.
(c) Determined by multiplying the change in the weighted average interest rate
between periods shown by the change in the average portfolio balance
between periods shown.
(d) The increases and decreases in income and expense not accounted for in the
calculations described above (arising primarily due to actual monthly rate
and volume variances differing from the averages used in the calculations)
are allocated pro forma to the three statistics.
(e) Includes loans held for sale, and effects of non-accrual loans.
(f) Includes mortgage-backed securities.
(g) Before FAS 115 adjustment.
The average yield on the loan portfolio increased to 8.86% for the
three months ended July 31, 1995, but decreased to 8.61% for the nine months
ended July 31, 1995 reflecting lower average interest rates earlier in the
current fiscal year, as compared to 8.76% for both the three and nine months
ended July 31, 1994. The average yield on the investment portfolio increased to
6.78% and 6.77% for the three and nine months ended July 31, 1995, respectively,
as compared to 6.66% and 6.46% for the same periods in fiscal 1994, due
primarily to rising interest rates.
Total interest expense increased to $22.4 million and $63.7 million for
the three and nine months ended July 31, 1995, respectively, as compared to
$18.6 million and $56.6 million for the same periods in 1994, primarily due to
higher interest rates resulting in an increase in all major categories of
interest expense offset, in part, by lower average balances in deposits. The
weighted average cost of funds increased to 4.83% and 4.59% for the three and
nine months ended July 31, 1995, respectively, as compared to 3.93% and 4.00%
for the same periods in 1994.
Total other income increased to $2.0 million from $809,000 for the
three months ended July 31, 1995 and 1994, respectively, due primarily to higher
net realized gains on securities in the current quarter which totaled $3.4
million as compared to $251,000 in the quarter ended July 31, 1994, offset, in
part, by a $2.0 million loss on sales of loans. Total other income decreased to
$3.3 million from $9.8 million for the nine months ended July 31, 1995 and 1994,
respectively, due primarily to lower net realized gains on securities of $4.0
million and an increase in loss on sales of loans totaling $2.6 million in the
current fiscal year as compared to $7.3 million in net realized gains and $2,000
in gain on sales of loans for the nine months ended July 31, 1994. Gross
realized gains on the sales of securities totaled $8.4 million and $13.5 million
for the three and nine months ended July 31, 1995, respectively. Gross realized
losses on the sales of securities during such periods totaled $5.0 million and
$9.5 million, respectively.
Other operating income for the three and nine months ended July 31,
1995 decreased 13.8% to $330,000 and 33.8% to $1.1 million, respectively, as
compared to $383,000 and $1.7 million for the three and nine months ended July
31, 1994. Other operating income was higher during the prior fiscal year due to
the receipt of a state tax refund in the amount of $510,000 received by the Bank
in February 1994, which reduced state tax expense, and accrued interest totaling
$474,000 which is included in other operating income for the three and six
months ended April 30, 1994.
During the three months ended July 31, 1995, a $2.0 million loss on
sales of loans was incurred primarily from a loss of $1.1 million on a loan with
a remaining principal balance of approximately $2.8 million, and a $800,000
writedown on a loan held for sale. During the second fiscal quarter, a charge to
income was taken in the amount of $1.0 million to writedown the value of a real
estate loan held for sale, resulting in a loss on sales of loans in the amounts
of $2.0 million and $2.6 million for the three and nine months ended July 31,
1995, respectively, from a gain of $2,000 for the fiscal nine month period in
1994.
Total other expenses increased to $7.9 million and $22.4 million for
the three and nine months ended July 31, 1995, respectively, as compared to $6.8
million and $21.4 million for the same periods in fiscal 1994, primarily due to
increased fees for professional services, and expenses associated with the
resolution of the limited partnership which had formerly leased certain banking
facilities to the Bank. Fees for professional services increased to $1.6 million
and $4.4 million for the three and nine months ended July 31, 1995,
respectively, as compared to $492,000 and $1.7 million for the same periods in
1994. The additional professional services are being incurred in connection with
resolutions previously adopted by the Board of Directors in response to
regulatory examinations of the Bank and Company. Salaries and employees benefits
expense, which increased by $242,000 to $3.6 million for the three months ended
July 31, 1995, includes a payment in the amount of $933,000 to certain limited
partners (all of whom are employees of the Bank) in satisfaction of their
partnership-related claims. Salaries and employees benefits expense decreased by
$599,000 to $9.8 million for the nine months ended July 31, 1995, reflecting a
reduction in the Company's profit sharing provision for the three and nine
months ended July 31, 1995 of $378,000 and $1.0 million, respectively, as
compared to the same period in fiscal 1994. Expenses associated with other real
estate for the three and nine months ended July 31, 1995 decreased $374,000 and
$1.2 million, to ($247,000) and ($511,000), respectively, as compared to the
same periods in 1994, reflecting increased rental income received through the
operation of other real estate owned. Other operating expenses for the three and
nine months ended July 31, 1995 increased to $1.3 million and $3.6 million,
respectively, as compared to $1.0 million and $3.2 million for the three and
nine months ended July 31, 1994, respectively, due primarily to expenses in the
amount of $413,000 related to the acquisition of the formerly leased banking
facilities paid during the quarter ended July 31, 1995.
The provision for federal and state taxes decreased to $1.8 million and
$6.2 million for the three and nine months ended July 31, 1995, respectively, as
compared to $2.7 million and $9.8 million for the three and nine months ended
July 31, 1994, respectively, reflecting lower effective tax rates and pretax
income resulting from lower net realized gains on the sale of securities during
the nine months ended July 31, 1995. The combined federal and state income tax
rate decreased to approximately 30% and 33% for the nine months ended July 31,
1995 and 1994, respectively. This decrease stems from the fact that a larger
percentage of pretax income for the three and nine months ended July 31, 1995,
as compared to the same periods in 1994, is taxed at a lower rate.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are, as indicated on the
Exhibit Index, either filed herewith or have
heretofore been filed with the Securities and
Exchange Commission under the Securities Exchange Act
of 1934, as amended, and are referred to and
incorporated by reference to such filings.
Exhibit No. Title
Exhibit 10(ee) Termination of Lease Agreement dated as of July
1995 between the Bank and SBSB Properties
Limited Partnership.
Exhibit 10(ff) Deed of transfer dated July 19, 1995 from SBSB
Properties Limited Partnership to the Bank.
Exhibit 10(gg) Deed of transfer dated July 19, 1995 from SBSB
Properties Limited Partnership to the Bank.
Exhibit 10(hh) Deed of transfer dated July 19, 1995 from SBSB
Properties Limited Partnership to the Bank.
Exhibit 10(ii) Form of Release between the Bank and certain of
its employees.
Exhibit 10(jj) Form of Addendum to Release between the Bank and
certain of its employees.
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE BOSTON BANCORP
Date: September 13, 1995 By: /s/Peter H. Hersey
-------------------- ----------------------
Peter H. Hersey
Chairman, Acting Chief Executive
Officer and President
Date: September 13, 1995 By: /s/David L. Smart
-------------------- ----------------------
David L. Smart
Treasurer and Chief Financial
Officer
EXHIBIT INDEX
Exhibit No. Title Page
10(ee) Termination of Lease Agreement dated
as of July 1995 between the Bank and
SBSB Properties Limited Partnership.
10(ff) Deed of transfer dated July 19, 1995
from SBSB Properties Limited
Partnership to the Bank.
10(gg) Deed of transfer dated July 19, 1995
from SBSB Properties Limited
Partnership to the Bank.
10(hh) Deed of transfer dated July 19, 1995
from SBSB Properties Limited
Partnership to the Bank.
10(ii) Form of Release between the Bank and
certain of its employees.
10(jj) Form of Addendum to Release between
the Bank and certain of its
employees.