SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
460 West Broadway
South Boston, Massachusetts 02127
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(617) 268-2500
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, par value $1.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the registrant's common stock
as of January 17, 1996 is $175,532,767. */
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock, par value $1.00 per share.
Outstanding at January 25, 1996: 5,250,624 shares.
Documents Incorporated by Reference:
Part III: Portions of the definitive proxy statement for the 1996 Annual Meeting
of Stockholders are incorporated by reference.
*/ Solely for the purposes of this calculation, all executive officers and
directors of the registrant and all stockholders beneficially owning more than
5% of the registrant's common stock are considered to be affiliates.
PART I
ITEM 1 BUSINESS
MERGER
On October 10, 1995, The Boston Bancorp (the "Bancorp"or the
"Company") and Bank of Boston Corporation ("Bank of Boston"), a corporation
organized and existing under the laws of the Commonwealth of Massachusetts,
entered into an Agreement and Plan of Reorganization, pursuant to which a
wholly-owned subsidiary of Bank of Boston will merge with and into Bancorp (the
"Merger"). The Merger is intended to constitute a tax-free reorganization to be
accounted for as a purchase by Bank of Boston. It is anticipated that the Merger
will be consummated in June 1996 (the date on which the Merger is consummated is
referred to as the "Effective Time"), and is subject to the approval of the
stockholders of Bancorp, the receipt of various regulatory approvals and the
satisfaction (or, where permissible, waiver) of certain other closing
conditions.
The amount of consideration to be received by Bancorp stockholders in
the proposed transaction (the "Merger Consideration") cannot be determined at
this time because it will be based in large part on Bancorp's Adjusted Net Worth
at the month-end preceding the closing. On October 11, 1995, in its news release
announcing the transaction, Bancorp estimated that, assuming Bancorp's assets
(including its $1.6 billion investment portfolio) retained their then current
value and assuming the Merger occurs in June 1996, the per share consideration
to be received by Bancorp shareholders might range from $39.50 to $42.50 in Bank
of Boston Common Stock. This estimate is now outdated because of changes
occurring subsequent to October 11, 1995. An updated estimate will be contained
in the proxy statement for the 1996 Annual Meeting at which the Merger will be
voted upon.
The four factors most likely to cause material variations in the per
share consideration to be received by Bancorp's stockholders are: (i) changes in
the market value of Bancorp's investment portfolio; (ii) the selling price of
Bancorp's commercial and multifamily real estate loan portfolio; (iii) results
of Bancorp's operations from November 1, 1995 through the Measurement Date; and
(iv) the possibility that legislation will be passed by Congress that would
relieve Bancorp of the need to recapture substantially all of the Savings Bank's
excess tax bad debt reserves. These factors will be discussed in more detail in
the Proxy Statement for Bancorp's 1996 Annual Meeting.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a more detailed discussion of the Merger and its
impact on Bancorp's operations in fiscal 1996.
GENERAL
Bancorp, a Massachusetts corporation, was organized in 1984 and became
the holding company of South Boston Savings Bank (the "Bank," the "Savings Bank"
or "South Boston") in 1985. The Company's principal business consists of the
business of South Boston. Its principal assets on an unconsolidated basis at
October 31, 1995 are its investments in its subsidiaries of approximately $181.4
million and investment securities available for sale in the amount of $5.6
million. Other liabilities include indebtedness in the amount of $2.5 million
maturing March 1, 1999. The proceeds of this loan were used to fund stock
purchases through The Boston Bancorp Employee Stock Ownership Plan (the "ESOP").
The Company is not engaged in significant operating business activities.
The Company is a legal entity separate from South Boston, and the
principal sources of its revenues on an unconsolidated basis, which are used for
the payment of dividends and other purposes, are dividends from South Boston
and, to a lesser extent, dividend income received from its investment
securities. See Note 27 to the Consolidated Financial Statements for parent
company only financial information. In 1989, the Company registered as a holding
company with the Office of Thrift Supervision ("OTS"). See "Supervision and
Regulation -- Federal Savings and Loan Holding Company Regulation."
SOUTH BOSTON
South Boston, which was founded in 1863, is a Massachusetts-chartered
savings bank serving the Greater Boston area. In 1983, the Bank converted from
mutual to stock form of ownership. The Bank has consistently generated positive
interest rate spreads and reported profitable operations each year. Based on
total assets of $1.89 billion at October 31, 1995, the Bank was the third
largest of the 102 Massachusetts-chartered savings banks.
The Greater Boston area in which the Bank concentrates its marketing
activities is the financial, cultural, educational and medical center of New
England and a major center of commerce and transportation. This area has an
economic base comprised of leading financial institutions, high technology
companies, major manufacturing and publishing enterprises, and government
entities.
The Bank obtains deposits from the general public through its seven
full service banking offices in South Boston, Dorchester, Needham, North Quincy,
Quincy, Weymouth, and West Roxbury, Massachusetts, and by active advertising and
an extensive "bank by mail" program. This enables the Bank to attract deposits
from a substantially broader area in Massachusetts than the communities in which
its offices are located.
South Boston originates mortgage loans through its seven full service
banking offices and in conjunction with its mortgage loan office in South
Boston, Massachusetts. The Bank's residential loans are made on both a fixed and
adjustable rate basis, and generally are underwritten to conform to Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") underwriting guidelines. These loans may be sold in the
secondary market, held in the Bank's portfolio or exchanged for FNMA or FHLMC
issued mortgage-backed securities. The Bank originates commercial and
multifamily mortgage loans that become due on demand after three or five years,
at which time the interest rate can be adjusted to market. At October 31, 1995,
the Bank held $207.7 million of 1- 4 family residential first mortgage loans in
portfolio and $138.6 million of residential, education, multifamily and
commercial real estate first mortgage loans held for sale.
Deposits at South Boston are federally insured to applicable limits by
the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
(the "FDIC") and excess deposit accounts are insured by the Deposit Insurance
Fund ("DIF"). The DIF is a private industry-sponsored deposit insurer. The Bank
is subject to comprehensive regulation, examination, and supervision by the
FDIC. In addition, South Boston, as a state-chartered institution, operates
under Massachusetts law and is subject to comprehensive supervision,
examination, and regulation by the Commissioner of Banks of the Commonwealth of
Massachusetts (the "Commissioner").
The main offices of the Company and South Boston are located at 460
West Broadway, South Boston, Massachusetts 02127 (telephone (617) 268-2500).
STOCK REPURCHASE PROGRAMS
On December 3, 1993, Bancorp instituted a repurchase program
authorizing the Company to purchase 500,000 shares of its outstanding common
stock. The program was completed on December 9, 1993. The aggregate price of the
500,000 shares repurchased under the program was $19.9 million. On July 14,
1994, Bancorp announced the adoption of a repurchase program which authorized
the Company to repurchase up to an additional 500,000 shares of its outstanding
common stock. The repurchase program was terminated in December 1994, after
200,200 shares had been repurchased at an aggregate price of $6.6 million, of
which 73,000 shares at an aggregate price of $2.1 million were repurchased
subsequent to the October 31, 1994 fiscal year end. See Note 23 to the
Consolidated Financial Statements.
COMPETITION
South Boston experiences substantial competition in attracting and
retaining deposit accounts and in lending funds. The primary factors in
competing for deposits are interest rates and customer service. Competition for
deposit accounts comes from other savings institutions, commercial banks, mutual
funds, and corporate and government securities. The primary factors in competing
for loans are interest rates, loan fees and the range of lending services
offered. Competition for origination of real estate loans generally comes from
other savings institutions, commercial banks, mortgage bankers, and insurance
companies.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("IBBEA"), permits a bank holding company to
acquire a bank located in any state notwithstanding otherwise prohibitive state
law if the acquisition does not result in the bank holding company controlling
more than 10% of the deposits in the United States or 30% of deposits in the
state in which the bank to be acquired is located (unless waived by the state).
Effective June 1, 1997, IBBEA will permit an adequately capitalized bank to
merge with a bank in another state and operate the target bank's offices as
branches, subject to similar national and state deposit concentration limits and
certain other conditions, if the state in which the target bank is located does
not enact legislation between September 29, 1994 and June 1, 1997 to prohibit
interstate merger transactions. IBBEA also permits a bank subsidiary of a bank
holding company to act as agent for other depository institutions owned by the
same holding company for certain deposit and loan functions effective as of
September 29, 1995. The foregoing provisions are expected to further increase
competition within the Company's existing market area.
SUBSIDIARIES
Bancorp has one wholly-owned subsidiary other than the Bank -- Boston
Bancorp Securities, Inc. This Bancorp subsidiary is a "security corporation"
within the meaning of the Massachusetts General Laws and as such receives
favorable state tax treatment on its gross income. See "Taxation -- State". At
October 31, 1995, approximately $3.0 million of securities available for sale
were held by this subsidiary.
The Bank has three wholly-owned subsidiaries. Bigelow Development Corp.
("Bigelow") previously was the general partner of the Bigelow School Partnership
in which the Bank held an equity interest. The Bigelow School Partnership was
dissolved in fiscal 1994. Its primary asset, a multi-unit residential
condominium property in South Boston, was sold in October 1995. South Boston
Securities Corp. is also a "security corporation" within the meaning of the
Massachusetts General Laws. The Bank has authority from the Commissioner to fund
this subsidiary with up to $400 million of certain types of securities. At
October 31, 1995, $347.7 million of securities available for sale were held by
this subsidiary. SoBo, Inc. is an inactive corporation and is not material to
the Bank's operations.
EMPLOYEES
At October 31, 1995, the Company, through South Boston, employed 181
persons (full-time equivalent). Management considers its relationship with its
employees to be satisfactory. South Boston currently maintains a comprehensive
employee benefit program providing, among other benefits, a qualified pension
plan, an incentive award plan, an employee stock ownership plan and insurance
plans which include: hospitalization, major medical, dental, life and long-term
disability coverage. The Bank currently has 50 full-time officers with an
average age of 42 years. On average, these officers have been employed by the
Bank for 13 years. South Boston's employees are not represented by any
collective bargaining group.
SUPERVISION AND REGULATION
FEDERAL SAVINGS AND LOAN HOLDING COMPANY REGULATION
South Boston, as a Massachusetts-chartered savings bank insured by the
BIF, is a bank for purposes of the Bank Holding Company Act of 1956, as amended
(the "BHCA"). The BHCA, however, includes provisions which allow the holding
company of a state-chartered savings bank to register and be regulated as a
savings and loan holding company rather than as a bank holding company if the
holding company's subsidiary is a qualified thrift lender ("QTL"). Bancorp,
which became a registered savings and loan holding company in 1989, is subject
to OTS reporting requirements, regulation, supervision and examination.
The Home Owners' Loan Act of 1933, as amended (the "HOLA") prohibits a
savings and loan holding company, such as Bancorp, directly or indirectly, or
through one or more subsidiaries, from (i) acquiring control of, or acquiring by
merger or purchase of assets another savings association or savings and loan
holding company without the prior written approval of the OTS; (ii) acquiring
more than 5% of the issued and outstanding shares of voting stock of another
savings association or savings and loan holding company, subject to certain
exceptions; or (iii) acquiring or retaining control of a financial institution
that does not have Savings Association Insurance Fund (the "SAIF") or BIF
insurance of accounts. The HOLA also allows the OTS to approve transactions
resulting in the creation of multiple savings and loan holding companies
controlling savings associations located in more than one state in both
supervisory and non-supervisory transactions, subject to the requirement that,
in non-supervisory transactions, the law of the state in which the savings
association to be acquired is located must specifically authorize the proposed
acquisition, by language to that effect and not merely by implication. As a
result, Bancorp may, with the prior approval of the OTS, acquire control of
savings associations located in states other than Massachusetts, if the
acquisition is expressly permitted by the laws of the state in which the savings
association to be acquired is located. Restrictions relating to service as an
officer or director of an unaffiliated depository institution holding company or
depository institution are applicable to Bancorp and South Boston under the
Depository Institutions Management Interlocks Act.
If South Boston fails to maintain its status as a QTL, Bancorp will be
required to register with, and be regulated by, the Board of Governors of the
Federal Reserve System (the "FRB") as a bank holding company under the BHCA.
Under the BHCA, a bank holding company is prohibited, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company, and from engaging, directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing
services to its subsidiaries. A bank holding company may, however, engage in, or
acquire shares of companies engaged in, activities which are deemed by the FRB,
by regulation or order, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making any such
determination, the FRB is required to consider whether the performance of such
activities by the holding company or an affiliate can reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest, or unsound banking practices.
South Boston will constitute a QTL if its qualified thrift investments
continue to equal or exceed 65% of its portfolio assets on a monthly average
basis in 9 out of every 12 months. Qualified thrift investments generally
consist of (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans, mobile home
loans, home equity loans and mortgage-backed securities), (ii) certain
obligations of the FDIC, the FSLIC Resolution Fund and the Resolution Trust
Corporation (the "RTC") (for limited periods of time), and (iii) shares of stock
issued by any Federal Home Loan Bank (the "FHLB"), the FHLMC or the FNMA. In
addition, the following assets may be categorized as qualified thrift
investments in an amount not to exceed 20% in the aggregate of portfolio assets:
(i) 50% of the dollar amount of residential mortgage loans originated and sold
within 90 days of origination; (ii) investments in securities of a service
corporation that derives at least 80% of its income from residential housing
finance; (iii) 200% of loans and investments made to acquire, develop or
construct starter homes or homes in credit needy areas (subject to certain
conditions); (iv) loans for the purchase or construction of churches, schools,
nursing homes and hospitals; and (v) consumer loans (in an amount up to 20% of
portfolio assets). For purposes of the QTL test, the term "portfolio assets"
means an institution's total assets minus goodwill and other intangible assets,
the value of property used by the institution to conduct its business, and
liquid assets held by the institution in an amount up to 20% of its total
assets. At October 31, 1995, the Bank was in compliance with the QTL test.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires any company that controls an undercapitalized institution,
in connection with the submission of a capital restoration plan, to guarantee
that the institution will comply with the plan and provide appropriate
assurances of performance. The aggregate liability of any such controlling
company under such guaranty is limited to the lesser of (i) 5% of the
institution's assets at the time it became undercapitalized; or (ii) the amount
necessary to bring the institution into capital compliance at the time it failed
to comply with its capital plan. If the Bank were to become "undercapitalized,"
the Company would be required to guarantee performance of any capital
restoration plan submitted under FDICIA as a condition to FDIC approval of that
plan. See "Federal Bank Regulation" for a discussion of the capital requirements
applicable to the Bank.
FEDERAL BANK REGULATION
As a BIF insured bank, South Boston is subject to certain FDIC
requirements designed to maintain the safety and soundness of individual banks
and the banking system. The FDIC periodically conducts examinations of insured
BIF member banks and, based upon evaluations, may revalue assets of an insured
bank and require establishment of specific reserves in amounts equal to the
difference between such revaluation and the book value of the assets.
Examinations must be conducted no less frequently than every 12 months.
The Bank is subject to the capital adequacy regulations adopted by the
FDIC. The Bank's ability to pay dividends to the Company and expand its business
can be restricted if the Bank's capital falls below levels established by the
FDIC. Under the leverage capital requirement adopted by the FDIC, state
nonmember banks must maintain "core" or "Tier 1" capital of at least 3% of total
assets. For all but the most highly rated banks, the minimum leverage
requirement is 4% to 5% of total assets. The FDIC's risk-based capital
guidelines require state nonmember banks to have a ratio of total capital to
total risk-weighted assets of 8% and a ratio of core capital to total
risk-weighted assets of 4%.
Capital requirements higher than the generally applicable minimum
requirements may be established for a particular bank if the FDIC determines
that the bank's capital was or may become inadequate in view of its particular
circumstances. Individual minimum capital requirements may be appropriate where
a bank is receiving special supervisory attention, has a high degree of exposure
to interest rate risk, or poses other safety or soundness concerns. Effective
January 17, 1994, the FDIC revised its risk-based capital standards to provide
that a bank's concentration of credit risk and nontraditional activities also
would be considered in determining whether a higher individual capital
requirement should be imposed. No such requirement has been established for the
Bank.
At October 31, 1995, the Bank had a ratio of Tier 1 or core capital to
total assets of 8.40%. At October 31, 1995, South Boston's ratio of total
risk-based capital to total risk-weighted assets was 21.94% and its ratio of
Tier 1 capital to total risk-weighted assets was 21.64%. Neither regulatory
capital measure includes any Statement of Financial Accounting Standards
("SFAS") No. 115 adjustment for securities available for sale.
Pursuant to FDICIA, the federal banking agencies have established by
regulation, for each capital measure, the levels at which an insured institution
is considered well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, and when to take
prompt corrective action with respect to insured institutions that fall below
minimum capital standards. The degree of regulatory intervention mandated by
FDICIA is tied to an insured institution's capital category, with increasing
scrutiny and more stringent restrictions being imposed as an institution's
capital declines. The prompt corrective actions specified by FDICIA for
undercapitalized institutions include increased monitoring and periodic review
of capital compliance efforts, a requirement to submit a capital restoration
plan, restrictions on dividends and total asset growth, and limitations on
certain new activities (such as opening new branches and engaging in
acquisitions and new lines of business) without FDIC approval. Institutions that
are "significantly undercapitalized" or "critically undercapitalized" are
subject to additional restrictions under FDIC regulations. The FDIC generally,
is required to appoint a conservator or receiver for a critically
undercapitalized bank no later than 90 days after the bank becomes critically
undercapitalized, subject to a limited exception for banks which are in
compliance with an approved capital plan and which the FDIC certifies are not
likely to fail.
Under the prompt corrective action regulation adopted by the FDIC, an
institution is considered (i) "well capitalized" if the institution has a total
risk-based capital ratio of 10% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 6% or greater, and a leverage ratio of 5% or
greater (provided that the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure); (ii) "adequately
capitalized" if the institution has capital ratios described in clause (i) of
8%, 4% and 4%, respectively; (iii) "undercapitalized" if the institution has
capital ratios described in clause (i) of less than 8%, 4% and 4%, respectively;
(iv) "significantly undercapitalized" if the institution has capital ratios
described in clause (i) of less than 6%, 3% and 3%, respectively; and (v)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets that is less than or equal to 2%. The regulation also permits
the FDIC to determine that a savings institution should be classified in a lower
category based on other information, such as the institution's examination
report, after written notice. At October 31, 1995, South Boston met the
requirements for a "well-capitalized" institution based on its capital ratios as
of such date.
Under applicable FDIC regulations, only well-capitalized depository
institutions may solicit and accept, renew or roll over any brokered deposit.
Adequately capitalized institutions may accept brokered deposits only after
obtaining a waiver from the FDIC. Institutions that are not well capitalized
(including those that meet minimum capital standards) are subject to limits on
rates of interest they may pay on brokered and other deposits. In addition,
institutions that are not well capitalized are subject to increased deposit
insurance premium assessments.
An institution which fails to meet applicable capital standards or is
otherwise deemed to warrant special supervisory attention is required to give
the FDIC 30 days notice of the appointment of any additional director or changes
in the employment or responsibilities of any senior executive officer. The FDIC
may disapprove any such appointment if the competence, experience or integrity
of the individual indicates that it would not be in the best interests of the
public to permit the appointment. As a result of its 1994 FDIC examination,
South Boston was subject to such 30 days notice requirement from January 27,
1995 through December 11, 1995.
In 1995, in accordance with FDICIA, the FDIC modified its risk-based
capital adequacy guidelines to explicitly include a bank's exposure to declines
in the economic value of its capital due to changes in interest rates as a
factor that it will consider in evaluating a bank's capital adequacy. The
federal bank regulatory agencies intend to gather data before establishing an
explicit threshold level above which additional capital may be required. This
rule and future changes to this rule may have the effect of requiring the Bank
to maintain increased capital.
FDICIA also requires the federal bank regulatory agencies to prescribe
safety and soundness regulations relating to (i) internal controls, information
systems and internal audit systems, (ii) loan documentation, (iii) credit
underwriting, (iv) interest rate exposure, (v) asset growth and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. The OTS and FDIC adopted such regulations in 1995. The
safety and soundness regulations contain general guidelines relating to the
foregoing operational, managerial and compensation issues that holding companies
and insured depository institutions are to follow to ensure that they are
operating in a safe and sound manner.
Under FDICIA, an insured state bank, such as the Bank, may not engage
as principal in any activity that is not permissible for a national bank, unless
the FDIC has determined that the activity would pose no significant risk to the
BIF and the state bank is in compliance with applicable capital standards.
Activities of subsidiaries of insured state banks are similarly restricted to
those activities permissible for subsidiaries of national banks, unless the FDIC
has determined that the activity would pose no significant risk to the BIF and
the state bank is in compliance with applicable capital standards. FDICIA also
provides, subject to certain permitted exceptions, that an insured state bank
may not, directly or indirectly, acquire or retain any equity investment of a
type that is not permissible for a national bank. Insured state banks are
required to divest any equity investment that may not be retained by a national
bank or pursuant to a permitted exception as quickly as can be prudently done,
but in no event later than December 19, 1996. Under one of the permitted
exceptions, an insured state bank may, to the extent permitted by the FDIC,
acquire and retain ownership of common or preferred stock listed on a national
securities exchange, provided that the insured state bank made or maintained an
investment in such securities during the period beginning on September 30, 1990
and ending on November 26, 1991 and provided further that the aggregate amount
of the investment does not exceed 100 percent of the bank's capital. This
exception ceases to apply with respect to any insured state bank upon any change
in control of such bank or any conversion of the charter of such bank.
At October 31, 1992, the Bank had common and preferred investments, as
defined by the FDIC, totaling $120.3 million or 91.0% of the Bank's Tier 1
capital. Of these stock investments, $111.1 million consisted of equity
securities, which qualify as "listed stock" for purposes of one of the
exceptions to the prohibition on equity risk investments not permissible for
national banks under FDICIA, and $9.2 million were not eligible for the listed
stock exceptions and must be divested as quickly as prudently possible, but no
later than December 19, 1996. In accordance with the FDIC regulation
implementing the equity investment restrictions under FDICIA, the Bank filed a
notice and request for approval to retain its listed stock investments (i.e.,
New York Stock Exchange and American Stock Exchange listed securities and stocks
traded on the NASDAQ National Market System) and for permission to continue to
invest in listed stock and shares of investment companies registered under the
Investment Company Act of 1940. In February 1993, the Bank received approval
from the FDIC to retain such investments and to continue to make listed stock
investments up to 100% of the Bank's Tier 1 capital. These investments totaled
$75.3 million (fair value of $100.2 million), or 48.72% of the Bank's Tier 1
capital, at October 31, 1995. At such date, the fair value of the Bank's
remaining investments in non-listed stocks that must be divested by no later
than December 19, 1996 totaled $3.0 million. At October 31, 1995, the Bank also
had investments in non-investment grade debt securities (aggregate fair value of
$2.9 million), which are subject to divestiture under FDICIA, unless the FDIC
determines by regulation or order that investments of this type do not pose a
significant risk to the BIF.
Under the Federal Deposit Insurance Act, transactions between
FDIC-insured banks, such as South Boston, and their "affiliates" are subject to
Sections 23A and 23B of the Federal Reserve Act. For purposes of Sections 23A
and 23B of the Federal Reserve Act, the term "affiliate," with respect to South
Boston, includes among other entities, Bancorp, its subsidiaries (other than
South Boston, its subsidiaries and any subsidiaries of Bancorp engaged in
certain activities specified in Section 23A) and any other company that the FRB
may determine has a relationship with South Boston such that the company should
be deemed an affiliate. A transaction with an affiliate is deemed to exist if
the proceeds of the transaction are transferred to, or used for the benefit of,
an affiliate.
Under sections 23A and 23B of the Federal Reserve Act, transactions
between banks and their affiliates are generally limited in the following ways.
First, the aggregate amount of all "covered transactions" (which include, among
other things, loans or other extensions of credit to or on behalf of an
affiliate, purchases of assets from an affiliate, or investments in the
securities of an affiliate) between a bank (and its subsidiaries) and any one
affiliate may not exceed 10% of the capital stock and surplus of the bank, and
the aggregate amount of covered transactions between a bank (and its
subsidiaries) and all affiliates may not exceed 20% of the capital stock and
surplus of the bank. Second, any loan or extension of credit to, or guarantee,
acceptance or letter of credit issued on behalf of an affiliate by a bank or any
of its subsidiaries must at all times be secured by collateral having a market
value equal to a range of 100% to 130% of the outstanding balance of the
extension of credit, depending upon the nature of the collateral. Third, neither
low quality assets nor securities issued by an affiliate may be accepted by a
bank as collateral for an extension of credit issued to or on behalf of any
affiliate. Fourth, a bank and its subsidiaries are prohibited from purchasing a
low quality asset from an affiliate unless the bank or any such subsidiary,
pursuant to an independent credit evaluation, committed itself to purchase the
asset prior to the time the asset was acquired by the affiliate.
Transactions between a bank (and its subsidiaries) and an affiliate
generally must be on terms and conditions, including credit standards, that are
substantially the same, or at least as favorable to the bank (or its
subsidiary), as those prevailing at the time for comparable transactions with or
involving unaffiliated parties or, in the absence of comparable transactions, on
terms and under circumstances, including credit standards, that in good faith
would be offered or would apply to unaffiliated parties. Section 23B of the
Federal Reserve Act imposes additional restrictions on the ability of a bank
(and its subsidiaries) (i) when acting in a fiduciary capacity, to purchase
securities or assets from an affiliate, and (ii) whether acting as principal or
fiduciary, to purchase or acquire, during the existence of any underwriting or
selling syndicate, any security if a principal underwriter of the security is an
affiliate of the bank. Finally, neither a bank nor any of its subsidiaries or
affiliates may publish any advertisement or enter into any agreement stating or
suggesting that the bank is in any way responsible for the obligations of its
affiliates.
South Boston is also subject to certain additional restrictions on
affiliate transactions under the HOLA. Under Section 11 of the HOLA, South
Boston is precluded from (a) making any loan or other extension of credit to any
affiliate, unless that affiliate is engaged solely in activities which the FRB
has determined to be permissible activities for bank holding companies under the
BHCA, or (b) entering into any transaction for the purchase of or investment in
securities issued by an affiliate other than the purchase or investment in
shares of a subsidiary. Section 11 of the HOLA also authorizes the OTS to impose
additional restrictions on any transaction between any savings association,
which for purposes of such section includes South Boston, and any affiliate
which the OTS determines to be necessary to protect the safety and soundness of
the savings association.
FEDERAL DEPOSIT INSURANCE
South Boston's deposit accounts are insured to applicable limits by the
FDIC through the BIF. The Bank is required to pay FDIC insurance premiums in
quarterly installments.
In accordance with FDICIA, the FDIC has established a risk-based
deposit insurance assessment system. The deposit insurance rates range from 0 to
27 basis points for BIF insured banks. Beginning January 1, 1996 the Bank will
pay 3 basis points annually on insured deposits. Deposit insurance assessment
rates depend on the assessment risk classification assigned to each institution.
The FDIC is required to set assessment rates at a level sufficient to restore
the BIF's reserve ratio to 1.25% of total estimated insured deposits. When the
designated reserve ratio ("DRR") is achieved the FDIC is required to set rates
to maintain the reserve ratio at the DRR. The BIF reserve ratio exceeded 1.25%
in 1995.
FDIC insurance of deposits may be terminated by the FDIC, after notice
and hearing, upon a finding by the FDIC that the insured bank has engaged in
unsafe or unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or condition
imposed by, or written agreement with, the FDIC. Additionally, if insurance
termination proceedings are initiated against a bank, the FDIC may temporarily
suspend insurance on new deposits received by the institution under certain
circumstances.
MASSACHUSETTS COMMISSIONER
As a Massachusetts-chartered savings bank, South Boston is subject to
the applicable provisions of Massachusetts banking law and the regulations
adopted thereunder by the Commissioner. The Commissioner administers the
Massachusetts banking laws which contain comprehensive provisions for the
regulation of savings banks, and which govern, among other things, bank
locations, deposit and account activities, mortgage and loan activities,
investment and other powers, including trust powers. Under the Massachusetts
banking laws and regulations, South Boston is subject to periodic examination by
and reporting requirements of the Commissioner. The Bank is a member of the
Mutual Savings Central Fund, Inc., a corporation created by the Massachusetts
legislature and comprised of all Massachusetts-chartered savings banks. The
Mutual Savings Central Fund, Inc., through its Deposit Insurance Fund, insures
its members' deposits and assists its members with respect to their liquidity
needs. The FDIC's basic insured amount for each depositor is up to a maximum of
$100,000, while deposits in excess of $100,000 are insured by the Deposit
Insurance Fund. Deposits maintained in different categories of legal ownership
are generally separately insured by the FDIC.
The powers that Massachusetts-chartered savings banks may exercise
under Massachusetts law are summarized below. Certain of the investment powers
authorized under Massachusetts law for Massachusetts-chartered savings banks,
such as South Boston, have been restricted by federal law to permit only
investments that would be permissible for national banks.
See "Federal Bank Regulation."
(1) Deposits. Massachusetts-chartered savings banks may accept demand
savings, time and other types of deposits subject to applicable regulations.
(2) Residential Mortgage Loans. Massachusetts-chartered savings banks
may make or acquire a wide variety of mortgage loans on real estate located in
Massachusetts, in any other state in which the savings bank has a branch office
(to the extent permitted by the laws of such other state), and in other
jurisdictions under certain limited circumstances. These mortgage loans include
fixed-rate mortgages, graduated payment mortgages, variable-rate mortgages,
residential development loans, participation loans, construction loans,
cooperative and condominium loans and second mortgages.
(3) Commercial Loans. Massachusetts-chartered savings banks may make
secured or unsecured commercial loans to corporations and other commercial
enterprises. With certain exceptions, such loans may be made without geographic
limitation and, additionally, are not subject to percentage-of-assets
limitations.
(4) Consumer and Personal Loans. Massachusetts-chartered savings banks
may make secured or unsecured consumer and personal loans without geographic
limitation or percentage-of-asset limitation.
(5) Investments. Subject to statutory limitations on loans to a single
borrower, under applicable Massachusetts law, a Massachusetts-chartered savings
bank may invest in debt instruments without geographic limitation. Among other
permitted investments, such savings bank may invest up to 15% of its assets in
shares of stock registered on a national securities exchange or quoted on the
NASDAQ System and up to 4% of its deposits in the preferred and common stock of
any corporation organized under the laws of the United States or of any state.
In addition, such savings bank may invest, subject to certain limitations, in
utility company stocks and in the stock of other banks and bank holding
companies. Furthermore, such savings bank has "leeway" authority to invest up to
5% of its deposits in investments not otherwise legally permitted, provided that
any such investments which exceed 3% of the savings bank's deposits must be
invested in companies organized for the purpose of acquiring, constructing,
rehabilitating, leasing, financing and disposing of housing facilities, and
provided further that the aggregate investment in the equity or debt securities
of any one issuer does not exceed 2% of the savings bank's deposits. FDICIA
restricts the Bank's ability to exercise the foregoing investment powers. See
"Federal Bank Regulation."
(6) Other Powers. A Massachusetts-chartered savings bank may, among
other things, hold real estate suitable for the transaction of its business, act
as trustee or custodian for tax-qualified retirement plans, issue or participate
with others in the issuance of certain mortgage-backed securities, purchase
group life, group accident and health insurance covering debtors of such bank
who request such insurance, provide payroll services for their customers and
lease equipment, machinery or personal property to their customers. With the
approval of the Commissioner, Massachusetts-chartered savings banks also may
exercise trust powers.
(7) Branches. With the approval of the Commissioner, Massachusetts
chartered savings banks are generally authorized to establish branches in any
city or town within Massachusetts or, to the extent permitted under the laws of
such state, in any other state.
(8) Mergers. Under certain conditions, Massachusetts-chartered savings
banks have the authority to merge with or acquire other financial institutions
located in Massachusetts or in any other state, to the extent permitted under
the laws of such other state.
(9) Other Aspects of Massachusetts Law. South Boston is also subject to
state statutory and regulatory provisions governing, among other things,
security procedures, interest on deposits, insider transactions, management
interlocks, branching, community reinvestment, real estate procedures,
trust-in-lending and electronic funds transfers.
MASSACHUSETTS BANK HOLDING COMPANY REGULATION
South Boston's parent corporation is not currently a bank holding
company under Massachusetts law since it does not control two or more banks.
However, the activities of the Company are limited under Massachusetts law to
activities permitted a bank holding company registered under the BHCA. In
addition, the acquisition by the Company of 25% or more of the voting stock or
the power to elect a majority of the directors of another commercial bank or
savings institution would subject Bancorp to regulation as a bank holding
company under applicable Massachusetts law and would require the approval of the
Massachusetts Board of Bank Incorporation.
FEDERAL RESERVE SYSTEM
South Boston is subject to regulation of certain matters by the FRB.
The FRB requires depository institutions, including savings banks whose deposits
are insured by the FDIC, to maintain reserves in accordance with applicable
regulations for the purpose of facilitating the implementation of monetary
policy by the Federal Reserve System. Generally, the FRB establishes reserve
requirements for net transaction accounts, nonpersonal time deposits and
Eurocurrency liabilities. It also has authority, subject to the satisfaction of
certain conditions, to impose emergency reserve and supplemental reserve
requirements. At October 31, 1995, the Bank was in compliance with these
requirements.
FEDERAL HOME LOAN BANK SYSTEM
The FHLB System consists of 12 regional FHLBs, each subject to
supervision and regulation by the Federal Housing Finance Board (the "FHFB").
The FHLB provides a central credit facility for member savings institutions.
South Boston, as a member of the FHLB of Boston is required to own shares of
capital stock in that FHLB in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 1/20 of
their advances (borrowings) from the FHLB, whichever is greater. As of October
31, 1995, South Boston was in compliance with this requirement. The maximum
amount which the FHLB of Boston will advance fluctuates from time to time in
accordance with changes in policies of the FHFB and the FHLB of Boston, and the
maximum amount generally is reduced by borrowings from any other source.
TAXATION
FEDERAL
Bancorp, an accrual basis taxpayer, files a Federal consolidated income
tax return with its subsidiaries, South Boston and Boston Bancorp Securities,
Inc., and South Boston's subsidiaries, South Boston Securities Corp., SoBo, Inc.
and Bigelow. The group's tax year end coincides with its financial reporting
year end of October 31.
Savings institutions are generally taxed in the same manner as other
corporations. Unlike other corporations, however, qualifying savings
institutions, such as South Boston that meet certain definitional tests relating
to the nature of their supervision, income, assets and business operations are
allowed to establish a reserve for bad debts and are permitted to deduct
additions to that reserve for losses on "qualifying real property loans" using
either a method based on the institution's actual loss experience (the
"experience method") or a method based on a specified percentage of the
institution's taxable income (the "percentage of taxable income method").
"Qualifying real property loans" are, in general, loans secured by interests in
improved real property. The addition to the reserve for nonqualifying real
property loans must be computed under the experience method. South Boston
computes its addition to its reserve for losses on qualifying real property
loans using either the experience method or the percentage of taxable income
method, depending on which method is more advantageous. Under the percentage of
taxable income method South Boston generally will be permitted to deduct up to
8% of its taxable income, subject to certain limitations. In computing its
alternative minimum tax liability, if any, South Boston would be required to
include as a preference the amount of the bad debt reserve deduction claimed in
excess of the deduction based on the experience method.
When a savings bank is merged into a commercial bank and in certain
other circumstances, it must recapture the excess of its bad debt deductions
computed under the percentage of taxable income method over the deductions
computed under the experience method. The Merger will cause a recapture of South
Boston's excess tax bad debt reserves. Bancorp estimates that stockholders'
equity will be reduced by $15.4 million, and that the aggregate value to be
received by stockholders in the Merger will be reduced by $11.0 million, as a
result of this recapture.
Legislation was recently passed by Congress that would repeal Section
593 of the Internal Revenue Code and provide special rules regarding the
recapture of excess tax bad debt deductions, which might have relieved Bancorp
of the need to recapture the Savings Bank's excess tax bad debt deductions.
President Clinton vetoed this legislation. While it is possible that other
legislation containing similar provisions could be enacted, Bancorp cannot
predict whether or not this will occur prior to the Measurement Date for
determining the Merger Consideration or whether or not Bancorp will be able to
take advantage of such legislation. If legislation relieving Bancorp of the need
to recapture substantially all of the Savings Bank's tax bad debt reserve does
become law before that date and Bancorp is eligible to take advantage of such
legislation, Bancorp will not need to reduce its stockholders' equity on account
of its excess tax bad debt deductions to that extent and, consequently, the
Merger Consideration could increase by up to $2.00 per share.
To the extent that (i) South Boston's reserve for losses on qualifying
real property loans using the percentage of taxable income method exceeds the
amount that would have been allowed under the experience method (excess bad debt
reserves) and (ii) South Boston makes distributions to its stockholder, Bancorp,
that are considered to result in withdrawals from that excess bad debt reserve,
then the amounts withdrawn will be included in South Boston's taxable income.
The amount considered to be withdrawn by such a distribution will be the amount
of the distribution plus the amount necessary to pay the tax with respect to the
withdrawal. Dividends paid out of South Boston's current or accumulated earnings
and profits as calculated for federal income tax purposes, however, will not be
considered to result in withdrawals from South Boston's bad debt reserves.
Distributions in excess of South Boston's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation of South Boston generally will be considered to result in
withdrawals from South Boston's bad debt reserves. At October 31, 1995, South
Boston had approximately $107.9 million in earnings and profits for tax purposes
(apart from amounts allocated to its bad debt reserve) that would be available
for distribution to Bancorp, as South Boston's sole stockholder, without the
imposition of this additional tax on South Boston. The proposed legislation
discussed above would not alter these provisions of the tax law.
South Boston's federal income tax returns have been examined and audited
or closed without audit by the Internal Revenue Service ("IRS") for tax years
through October 31, 1993, and the results of such examinations have been fully
reflected in its financial statements.
STATE
Financial institutions, including savings banks doing business in
Massachusetts, are subject to the bank excise tax on "taxable income" at the
current rate of 12.54%. In 1995, legislation was enacted which will reduce this
rate to 10.50% ratably over the next five years. Taxable income for taxable
years beginning before January 1, 1999 includes gross income as defined under
the provisions of the Internal Revenue Code, plus interest from bonds, notes and
evidences of indebtedness of any state, including Massachusetts, less the
deductions, excluding the deductions for dividends received, state taxes, and
net operating losses, as defined under the provisions of the Internal Revenue
Code. For taxable years beginning on or after January 1, 1999, the definition of
state taxable income is modified to allow a deduction for ninety-five percent of
dividends received when the Bank owns fifteen percent or more of the voting
stock of the institution paying the dividend and to allow deductions for certain
expenses allocated to federally tax exempt obligations.
Bancorp and the Bank's subsidiaries, SoBo, Inc. and Bigelow file
Massachusetts state tax returns separate from the Bank and are taxed on net
earnings and net worth at the same rate as regular corporations. South Boston
Securities Corp. and Boston Bancorp Securities, Inc. are Massachusetts security
corporations. A Massachusetts security corporation is a corporation which
engages exclusively in buying, selling, dealing in or holding securities on its
own behalf. Gross receipts of security corporations are taxed at a rate of
1.32%. No Massachusetts tax is imposed on the net worth of security
corporations.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the
executive officers of the Company and certain senior officers of the Bank, each
of whom has been employed by the Bank or by the Company since it became the
holding company of South Boston in March, 1985, except Messrs. McNulty and Shaw
who were employed in May, 1986 and July, 1989 respectively.
Age at
October 31,
Name 1995 Positions Held
---- ----------- --------------
Robert E. Lee 53 Chairman of the Board, President,
and Chief Executive Officer of the
Company and the Bank and Clerk of
the Company
Robert J. Ranieri 46 Executive Vice President of the
Company and of the Bank
David L. Smart 55 Vice President and Treasurer of the
Company and Senior Vice President,
Treasurer and Chief Financial
Officer of the Bank
Joseph R. Catalano 52 Senior Vice President of the Bank
Gregory F. Shaw 35 Senior Vice President of the Bank
Stephen P. McNulty 47 Vice President of the Bank
There are no family relationships among the named officers.
ITEM 2 PROPERTIES
The following table lists information at October 31, 1995 for each
banking office of the Bank, all of which are owned by the Bank. The Company
currently conducts its business through the offices of the Bank.
Year Office Area Amount of
Location Opened by Square Feet Deposits
-------- ------ -------------- ----------
(Dollars in thousands)
Home Office:
460 W. Broadway
South Boston, MA 02127 ................... 1949 38,945 $ 499,742
Branch Offices:
740 Gallivan Boulevard
Dorchester, MA 02122 ..................... 1972 3,172 193,162
355 Chestnut Street
Needham, MA 02192 ........................ 1990 3,485 91,085
440 Hancock Street
North Quincy, MA 02127 1991 7,482 51,233
690 Adams Street
Quincy, MA 02169 ......................... 1978 4,420 251,558
1833 Centre Street
West Roxbury, MA 02132 ................... 1990 4,187 141,447
544 Main Street
Weymouth, MA 02190 ....................... 1988 7,940 111,240
----- -------
Total ....................................... 69,631 $1,339,467
====== ==========
The Bank also operates a loan processing and operations center located
at 451-455 West Broadway in South Boston, Massachusetts. This property is also
owned by the Bank.
The properties of the Bank are considered adequate for its needs.
In October 1987, the Bank entered into a sale-leaseback transaction with
SBSB Properties Limited Partnership ("the Partnership"), a limited partnership
formed by the Bank whose limited partners consisted initially of 48 officers and
employees of the Bank. The Bank's offices at 451-455 and 460 West Broadway in
South Boston, 740 Gallivan Boulevard in Dorchester, and 690 Adams Street in
Quincy were sold to the Partnership and leased back by the Bank. Subsequently,
the Bank entered into leases with the Partnership as to the West Roxbury and
North Quincy offices, which were acquired from the FDIC in fiscal 1991 and 1992,
respectively, as well as a warehouse located at 312-320 West Third Street in
South Boston.
As part of its examination of the Bank in the fall of 1994, the FDIC
criticized the Partnership as a self-serving arrangement for the benefit of the
Laine and Archibald families, and recommended that the Partnership be dissolved.
On July 20, 1995 the Bank purchased from the Partnership all of the real
property owned by the Partnership in exchange for a cash payment of $6.5
million. The Partnership used the proceeds and its other assets to pay off the
loans that were secured by such real property. After such payment, the
Partnership had no remaining assets and was dissolved on December 8, 1995
without any distributions to its partners. To preserve morale among limited
partners of the Partnership who were also employees of the Bank and to avoid a
dispute with such employee partners about the fairness to them of the
termination of the Partnership, the Bank offered to make a cash payment to such
partners in exchange for obtaining a release from them for any claims that they
might have related to the Partnership. All of the employee limited partners
accepted this offer. The aggregate amount paid to employee partners was
$933,000. No payments were made to Messrs. Richard R. Laine and Paul A.
Archibald, or members of their families. See also Note 10 of the Consolidated
Financial Statements.
ITEM 3 LEGAL PROCEEDINGS
As of October 31, 1995, there were no material pending legal proceedings
to which the Company or any subsidiary was a party or to which any of their
property was subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1995.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of Bancorp is quoted on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System under the
symbol "SBOS". The stock price and other trade information appear in The Wall
Street Journal under NASDAQ over-the-counter markets for National Market issues
under "BostnBcp". The following table sets forth high and low closing sale
prices for the common stock of Bancorp, and cash dividends paid per share for
the periods indicated.
CASH DIVIDENDS
FISCAL QUARTERS HIGH LOW PAID PER SHARE
1995 1st Quarter....... $30 1/2 $24 1/2 $.19
2nd Quarter........ 38 1/2 28 3/4 .19
3rd Quarter........ 44 36 .19
4th Quarter........ 40 1/4 33 1/4 .19
1994 1st Quarter....... $40 1/2 $34 $.19
2nd Quarter........ 39 1/2 33 .19
3rd Quarter........ 35 1/4 29 1/4 .19
4th Quarter........ 40 1/2 30 .19
As of December 31, 1995, Bancorp had approximately 1,415 stockholders of
record and 5,250,124 outstanding shares of common stock. This number does not
reflect the beneficial owners of stock held in nominee or "street" name through
various brokerage firms.
Payment of cash dividends in future periods is subject, among other
things, to Bancorp's earnings, tax and regulatory considerations. See also Note
7 of the Consolidated Financial Statements.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated financial and other
data for the Company at or for the dates indicated. This information should be
read in conjunction with the Consolidated Financial Statements and notes
thereto.
AT OCTOBER 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED BALANCE SHEET DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA)
Total assets ............................ $1,886,084 $2,033,069 $2,204,439 $2,093,961 $1,899,413
Loan portfolio, before net items ........ 216,570 355,624 357,601 485,075 532,022
Loans held for sale (a) ................. 138,556 18,164 61,622 -- 40,600
Allowance for possible loan losses ...... 2,121 9,471 9,325 9,278 7,503
Investment portfolio, including
available for sale:
GNMA, FHLMC, FNMA and other
mortgage-backed securities (b) ...... 1,041,056 989,446 1,091,049 1,058,834 888,992
Other investment securities (b) ....... 404,397 557,014 527,504 463,932 372,991
Nonperforming assets .................... 13,368 23,022 14,771 15,937 18,568
Deposits ................................ 1,339,467 1,405,570 1,454,877 1,440,006 1,298,045
Borrowings:
ESOP loan payable ..................... 2,520 3,276 4,032 4,788 5,543
Other borrowings ...................... -- -- -- 15,000 15,000
Notes payable ......................... 5,650 7,550 15,350 27,100 43,450
Securities sold under agreements
to repurchase ....................... 92,185 10,275 -- 37,840 182,384
Federal Home Loan Bank advances ....... 236,500 470,000 480,000 413,000 222,000
Stockholders' equity (c) ................ 194,630 117,622 198,334 132,179 104,445
Book value per share..................... 37.30 22.87 34.90 21.17 16.77
<FN>
- ---------------
(a) At lower of cost or market value. Reflects the reclassification as loans held for sale on October 31,
1995 of the Bank's entire portfolio of commercial and multifamily real estate loans, which is carried
at that date at $112.0 million.
(b) At fair value in accordance with Statement of Financial Accounting Standards No. 115 -- "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS No. 115). These securities are carried at fair
value with the net unrealized gain or loss on such securities reflected as a separate component of
stockholders' equity, net of taxes.
(c) Includes, in accordance with SFAS No. 115, $24,184,000 of net unrealized gain on securities available
for sale, after taxes at October 31, 1995. Includes $25,794,000 of net unrealized loss on securities
available for sale, after taxes at October 31, 1994, and $54,333,000 of net unrealized gain on
securities available for sale, after taxes at October 31, 1993.
YEARS ENDED OCTOBER 31 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest/dividend income:
Interest on loans $ 33,083 $ 32,391 $ 42,721 $ 55,349 $ 57,250
Interest and dividends on investments 107,757 104,390 111,757 108,246 92,125
- -------------------------------------------------------------------------------------------------------------------------
Total interest/dividend income 140,840 136,781 154,478 163,595 149,375
Interest expense 86,210 76,091 86,797 100,060 103,988
- -------------------------------------------------------------------------------------------------------------------------
Net interest/dividend income 54,630 60,690 67,681 63,535 45,387
Provision for possible loan losses 3,667 5,800 8,000 8,000 9,817
- -------------------------------------------------------------------------------------------------------------------------
Net interest/dividend income after provision for
possible loan losses 50,963 54,890 59,681 55,535 35,570
Net realized gains on securities 25,125 7,906 20,190 12,776 12,806
Other income 3,186 4,363 3,822 3,022 2,720
Provision for losses on joint venture advances (1,618) (982) (1,307) (2,104) (500)
Provision for loss on loans held for sale (a) (8,251) -- -- -- --
Gain (loss) on sales of loans (1,325) (10) 670 16 (233)
General and administrative expenses (29,574) (31,059) (28,549) (25,446) (21,906)
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of a change in an accounting principle 38,506 35,108 54,507 43,799 28,457
Provision for income taxes 10,160 10,531 19,187 15,101 9,422
- -------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change
in accounting principle 28,346 24,577 35,320 28,698 19,035
Cumulative effect of a change in an accounting
principle -- -- -- 3,370 --
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 28,346 $ 24,577 $ 35,320 $ 32,068 $ 19,035
=========================================================================================================================
Earnings per share:
Primary earnings per share before
cumulative effect of a change in
an accounting principle $ 5.34 $ 4.51 $ 5.81 $ 4.51 $ 2.91
Primary earnings per share attributable
to the cumulative effect of a change in an
accounting principle -- -- -- .53 --
- -------------------------------------------------------------------------------------------------------------------------
Primary earnings per share after
cumulative effect of a change in an
accounting principle $ 5.34 $ 4.51 $ 5.81 $ 5.04 $ 2.91
=========================================================================================================================
Fully diluted earnings per share
before cumulative effect of a change in
an accounting principle $ 5.33 $ 4.51 $ 5.75 $ 4.50 $ 2.86
Fully diluted earnings per share attributable
to the cumulative effect of a change in an
accounting principle -- -- -- .53 --
- -------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share after
cumulative effect of a change in an
accounting principle $ 5.33 $ 4.51 $ 5.75 $ 5.03 $ 2.86
=========================================================================================================================
Dividends paid per common share $ .76 $ .76 $ .68 $ .62 $ .60
=========================================================================================================================
Dividend payout ratio before cumulative effective
a change in an accounting principle 14.3% 16.9% 11.8% 13.8% 21.0%
==========================================================================================================================
<FN>
(a) The Bank's entire portfolio of commercial and multifamily real estate loans was reclassified as loans held
for sale on October 31, 1995. In connection with the reclassification, $9.7 million was charged to the
allowance for possible loan losses, and $8.3 million was provided for loss on loans held for sale.
AT OCTOBER 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
OTHER SELECTED FINANCIAL AND STATISTICAL DATA:
(DOLLARS IN THOUSANDS)
Total loans originated during period ........ $71,956 $141,791 $116,941 $166,569 $79,994
Weighted average rate for mortgage loans
originated during the period .............. 7.88% 7.19% 7.51% 8.21% 9.55%
Weighted average yield on loan portfolio (a) 8.59 8.45 9.24 9.81 10.25
Weighted average yield on investment
portfolio (a)(g) .......................... 6.76 6.50 6.89 7.85 9.00
Combined weighted average yield on loan and
investment portfolios (a)(g) .............. 7.11 6.87 7.41 8.41 9.44
Weighted-average cost of funds .............. 4.64 4.02 4.39 5.41 6.92
Interest rate
spread (b)(g) ............................. 2.47 2.85 3.02 3.00 2.52
Average equity/average total assets (a)(f) 7.71 7.26 6.61 5.88 6.13
Return on average equity (a)(f) ............. 18.21 16.35 24.94 24.39 (c) 18.69
Return on average assets (a)(f) ............. 1.40 1.19 1.65 1.44 (c) 1.15
Net yield on average earning assets (a)(d)(f) 2.76 3.05 3.25 3.29 2.87
General and administrative expenses/
total income (e) .......................... 20.53 22.03 18.03 15.27 14.40
General and administrative expenses/
total assets (f) .......................... 1.57 1.53 1.30 1.22 1.15
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Averages based on daily average balances for fiscal year ending October 31, 1995, and monthly average
balances for prior fiscal years.
(b) Difference between the combined yield on loan and investment portfolios and total cost of funds.
(c) Income before cumulative effect of a change in an accounting principle.
(d) Net interest and dividend income divided by average interest-earning assets.
(e) Total income includes total interest and dividend income, fees and service charges on loans and other
operating income.
(f) Includes the effect of SFAS No. 115.
(g) Excludes the effect of SFAS No. 115.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
MERGER AGREEMENT WITH BANK OF BOSTON
Pursuant to the Merger Agreement, a wholly-owned subsidiary of Bank of
Boston will merge into Bancorp. As a result of the Merger, each share of Bancorp
common stock issued and outstanding before the Merger (except shares of Bancorp
common stock held directly or indirectly by Bank of Boston, other than in a
fiduciary capacity or in respect of debts previously contracted, any shares held
as treasury stock by Bancorp and shares held by dissenting stockholders who have
perfected their rights of appraisal) will be converted into a number of shares
or fraction of a share of Bank of Boston common stock, rounded to the nearest
thousandth of a share, equal to the Conversion Number.
The Merger Agreement defines the Conversion Number as the quotient
obtained by dividing:
(i) the sum of:
(A) the Adjusted Net Worth (as defined below) as of the close of
business on the Measurement Date (as defined below), plus (B)
$40,640,806, plus
(C) the product of $40,000 and the number of days after the
Measurement Date to and including the Closing Date, plus
(D) the aggregate exercise price of all options to purchase
Bancorp Common Stock outstanding at the close of business on
the Measurement Date, by
(ii) the product of:
(A) the average of the closing prices of shares of Bank of Boston
Common Stock as reported on the NYSE composite transactions
reporting system for the twenty consecutive trading days
ending on the third business day prior to the Closing Date,
and
(B) the sum of the number of shares of Bancorp Common Stock and
options to purchase shares of Bancorp Common Stock
outstanding at the close of business on the Measurement Date.
The "Closing Date" is defined as the date on which the Merger is
consummated. The "Measurement Date" is the date on which the Adjusted Net Worth
of Bancorp will be measured for purposes of calculating the Conversion Number;
it is defined as the last day of a calendar month that precedes the Closing Date
by not less than 10 nor more than 23 business days.
Bancorp's "Adjusted Net Worth" as of the Measurement Date will equal
Bancorp's consolidated stockholders' equity as of that date, determined in
accordance with generally accepted accounting principles ("GAAP"), adjusted for
certain matters which will be described in detail in the Proxy Statement for
Bancorp's 1996 Annual Meeting.
The amount of consideration to be received by Bancorp stockholders in
the proposed transaction cannot be determined at this time because it will be
based in large part on Bancorp's Adjusted Net Worth at the month-end preceding
the Closing which cannot be known until that time. On October 11, 1995, in its
news release announcing the transaction, Bancorp estimated that, assuming
Bancorp's assets (including its $1.6 billion investment portfolio) retained
their then current value and assuming the Merger occurs in June 1996, the per
share consideration to be received by Bancorp shareholders might range from
$39.50 to $42.50 in Bank of Boston Common Stock. This estimate is outdated
because of changes occurring subsequent to October 11, 1996 and a revised
estimate will be set forth in the Proxy Statement for the 1996 Annual Meeting.
The four factors most likely to cause material variations in the per
share consideration to be received by Bancorp's stockholders are: (i) changes in
the market value of Bancorp's investment portfolio; (ii) the selling price of
Bancorp's commercial and multifamily real estate loan portfolio; (iii) results
of Bancorp's operations from November 1, 1995 through the Measurement Date; and
(iv) the possibility that legislation will be passed by Congress that would
relieve Bancorp of the need to recapture substantially all of the Savings Bank's
excess tax bad debt reserves. These factors will be discussed in more detail in
the Proxy Statement for Bancorp's 1996 Annual Meeting.
As a condition to the Merger, Bancorp is required to effect certain
mandatory pre-closing transactions. These transactions will also be described in
detail in the Proxy Statement for Bancorp's 1996 Annual Meeting. Some of these
transactions will have a significant impact on Bancorp's operations in fiscal
1996 and on the value of the consideration to be received by stockholders in the
Merger, including the liquidation of its entire portfolio of commercial and
multifamily real estate loans (the "CRE Loans"), the liquidation of
approximately two-thirds of its investment portfolio (including all of its
equity securities), the liquidation of all properties held as real estate owned,
and the repayment of all FHLB advances (including all associated prepayment
penalties), the defeasance of the Savings Bank's medium-term notes, and the
accrual of contracted severance costs and certain expenses related to the
proposed acquisition.
GENERAL
The Company's results of operations depend to a great extent on the
Bank's net interest income, the difference between income earned on its
investment and loan portfolios and the interest paid on its deposits and
borrowed funds and the size of the Bank's provisions for loan losses. Net
interest income is primarily affected by the level of earning assets as a
percentage of total assets, the level of interest-bearing liabilities, yields
earned on assets and rates paid on liabilities. Earnings are also affected by
non-interest income which consists primarily of mortgage servicing fees,
transaction account fees and gains and losses on sale of mortgage-backed and
other investment securities. The levels of operating expenses and income taxes
also affect earnings.
The following is a discussion and analysis of the Company's
consolidated results of operations for the last three years and its financial
condition at the end of fiscal 1995 and 1994. In order to understand this
section in context, it should be read in conjunction with the Consolidated
Financial Statements and accompanying footnotes.
MARKETPLACE
South Boston Savings Bank has been an established factor in the South
Boston market for over 130 years, and currently operates seven full-service
branch offices located in South Boston, Dorchester, Quincy, North Quincy,
Weymouth, Needham and West Roxbury. The Bank has carved out a special niche
serving the saving and lending needs of local customers.
Quality service, attractive banking products and superior convenience
are the key components of the Bank's operating philosophy. Customer convenience
is enhanced by the Bank's participation in an automated teller machine ("ATM")
network with over 100,000 outlets, and a well-established "bank-by-mail"
program. These services not only enhance customer access to accounts, but also
provide the Bank opportunities to control operating expenses and offer
competitively priced products and services.
ASSET QUALITY
The Bank emphasizes the origination of first-mortgage loans on
residential and income-producing commercial and multifamily properties. The Bank
has typically not made major construction or development loans, and does not
offer unsecured lines of credit or home equity loans. The Bank has also been
selective in its investment portfolio management, acquiring GNMA, FHLMC and FNMA
securities which are guaranteed in whole or in part, US Government and agencies
securities and equity securities of well established companies which have above
average dividend yields and are not speculative in nature.
Nonperforming assets (comprised of loans delinquent 90 days or more,
loans classified under SFAS No. 66 -- "Accounting for Sale of Real Estate" as
nonperforming and other real estate) totaled $13.4 million or .71% of total
assets at October 31, 1995, compared to $23.0 million or 1.13% of total assets
at October 31, 1994. The decrease results primarily from the sale of several
significant properties classified as other real estate and sales of real estate
which, under SFAS No. 66, were not treated as sales in prior years but qualified
for sales recognition treatment in 1995.
The Bank's provision for possible loan losses decreased from $5.8
million in fiscal 1994 to $3.7 million in fiscal 1995. The allowance for
possible loan losses decreased from $9.5 million at the end of fiscal 1994 to
$2.1 million at October 31, 1995. This was due primarily to the charge-off of
the $9.7 million portion of the allowance attributable to the CRE Loans, which
were classified as held for sale on October 31, 1995. During fiscal 1995, the
Bank charged off or allocated reserves to portions of loans totaling $12.1
million (including the $9.7 million mentioned above) as compared to charge-offs
and reserve allocations of $6.1 million during fiscal 1994. In addition, the
Bank recorded $8.3 million as a provision for loss on loans held for sale,
relating to the CRE Loan portfolio which was classified as held for sale at
October 31, 1995. Restructured loans were approximately $590,000 and $3.0
million at October 31, 1995 and 1994, respectively.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1995 AND 1994
For the fiscal year ended October 31, 1995, net income increased to
$28.3 million or $5.33 per share on a fully diluted basis from $24.6 million or
$4.51 per share for the fiscal year ended October 31, 1994. The increase in net
income was due to substantially higher net realized gains on securities and
lower provision for possible loan losses, offset in part by a provision for loss
on loans held for sale, lower net interest and dividend income, higher
professional fees and higher losses on sales of loans. Fully diluted shares
outstanding for fiscal 1995 were 5,318,326 as compared to 5,444,982 for fiscal
1994.
On an annual basis, the Company's weighted average cost of funds
increased to 4.64% for fiscal 1995 from 4.02% for fiscal 1994. The
weighted-average yield on average earning assets increased to 7.11% for the
fiscal year ended October 31, 1995 from 6.87% for the prior fiscal year. The
effect of the more rapid increase in the weighted average cost of funds, as
compared to the increase in the yield on average earning assets, resulted in the
Company's interest rate spread narrowing to 2.47% for fiscal 1995 from 2.85% for
fiscal 1994.
Securities sold under agreements to repurchase were $92.2 million as of
October 31, 1995, as compared to $10.3 million as of October 31, 1994. These
agreements are used by the Company as a short-term funding source, depending on
the Company's liquidity needs and the cost of other short-term funding sources,
such as FHLB advances. FHLB advances decreased to $236.5 million at October 31,
1995, down from $470.0 million at October 31, 1994. FHLB advances were paid down
with the proceeds from the sales of investment securities principally during the
last quarter of fiscal 1995. FHLB advances will continue to be paid down in
fiscal 1996, as the Merger Agreement requires the Bank to repay all FHLB
advances prior to the consummation of the Merger.
The Company's total assets declined to $1.9 billion at October 31, 1995
from $2.0 billion at October 31, 1994. The unrealized gain or loss on securities
available for sale increased to a net gain, after tax effect, of $24.2 million
at October 31, 1995 from a net unrealized loss, after tax benefit, of $25.8
million at October 31, 1994, primarily as a result of a sharp decline in
interest rates experienced during the second half of fiscal 1995. Deposits
declined to $1.3 billion at October 31, 1995 from $1.4 billion at the 1994
fiscal year end. Competition from higher-yielding short to intermediate-term
investment alternatives along with an increasing array of financial
alternatives, contributed to the outflow of deposits during fiscal 1995. Total
borrowings, including notes payable, securities sold under agreements to
repurchase, ESOP loan and Federal Home Loan Bank advances declined by $154.2
million to $336.9 million at October 31, 1995 from $491.1 million at October 31,
1994. This decline is attributable, in large part, to the repayment of Federal
Home Loan Bank advances from the proceeds received upon the sales of investment
securities principally during the last quarter of the current fiscal year.
Pursuant to the Plan of Reorganization, the Bank will retire or pay off, prior
to the merger, all FHLB advances and securities sold under agreements to
repurchase. As a result, total assets of the Company are expected to continue to
decline as investments and loans are sold in accordance with the Plan of
Reorganization and the proceeds are utilized to retire borrowings.
Investment and mortgage-backed securities available for sale declined
by $101.0 million to $1.4 billion at October 31, 1995 from $1.5 billion at
October 31, 1994. This decline is attributable, in large part, to sales of
investment securities principally during the last quarter of fiscal 1995, offset
in part by the increase, before tax effect, in the unrealized gain on securities
available for sale.
Total interest and dividend income for the year ended October 31, 1995
increased 3.0% to $140.8 million from $136.8 million for the year ended October
31, 1994. Interest on loans increased slightly to $33.1 million for the year
ended October 31, 1995 as compared to $32.4 million for the year ended October
31, 1994. This modest increase reflects the decline in mortgage loans converted
to FNMA or FHLMC mortgage-backed securities during the current fiscal year,
offset by the decline in mortgage loan originations for the current year to
$65.5 million from $134.1 million for the year ended October 31, 1994. Interest
and dividend income on securities and other short-term investments increased to
$107.8 million for the year ended October 31, 1995 from $104.4 million for the
year ended October 31, 1994. The increase is attributable to an increase in the
average yield earned on the investment portfolio to 6.76% for the fiscal year
ended October 31, 1995 as compared to 6.50% for the fiscal 1994 period. The
effect of the increase in yield on income earned was offset, in part, by a
decline in the average balances of investment securities outstanding during
fiscal 1995 as compared to fiscal 1994, caused in part by sales of investment
securities, principally during the fiscal 1995 fourth quarter. These sales have
been made in part to begin to position the Company to meet the asset sale
requirements of the Merger Agreement. The Company intends to continue to sell
investment securities and CRE Loans through the Effective Time of the Merger and
to invest the proceeds in short-term investments. To the extent Bancorp has not
liquidated its investment and CRE Loan portfolios, it will retain the risk of
fluctuations in the value of such assets and therefore in the Merger
Consideration. The replacement of Bancorp's investments and CRE Loans by
short-term investments may adversely affect Bancorp's dividend and interest
income and operating results. If the Merger is not consumated, Bancorp's future
operating results may be similarly affected for a prolonged period.
Total interest expense increased to $86.2 million for the year ended
October 31, 1995 from $76.1 million for the year ended October 31, 1994. This
increase was due primarily to the lag effect of the increase in short-and
intermediate-term interest rates that took place during fiscal 1994 and the
early part of fiscal 1995, offset in part by the decline in average deposits and
borrowing outstanding during the current fiscal year as compared to the prior
fiscal year. Total deposits and borrowing declined to $1.7 billion at October
31, 1995 from $1.9 billion at October 31, 1994. The Merger Agreement requires
the Bank to repay or defease all borrowings prior to the Measurement Date.
The provision for possible loan losses decreased to $3.7 million for
the year ended October 31, 1995 from $5.8 million for the year ended October 31,
1994. This decline is due principally to a reduction of $1.1 million and $1.0
million, respectively, in the provisions for possible loan losses on commercial
real estate and residential real estate. At October 31, 1995, the Bank's
allowance for possible loan losses totaled $2.1 million as compared to $9.5
million at October 31, 1994. During the 1995 fiscal year, the Bank charged off
commercial real estate loans totaling $11.1 million. Of this amount, $9.7
million was charged off in connection with the reclassification, as loans for
sale, of the CRE Loans. The Bank also provided $8.3 million for losses on loans
held for sale.
Total other income increased to $18.7 million for the year ended
October 31, 1995 from $12.3 million for the year ended October 31, 1994. This
increase is due in part to the increase in net realized gains on securities to
$25.1 million for fiscal 1995 as compared to $7.9 million for fiscal 1994. This
increase was offset in part by a provision in fiscal 1995 for loss on loans held
for sale of $8.3 million for which there was no comparable amount in fiscal
1994, an increase in loss on sales of loans of $1.3 million and a decline in
other operating income which reflects the receipt, in fiscal 1994, of interest
due upon the resolution of litigation in which the Bank received a significant
refund of Massachusetts Bank excise tax.
Total other expenses decreased by 2.6% to $31.2 million for fiscal 1995
from $32.0 million for fiscal 1994. The decrease in other expenses is
attributable to reductions of $3.4 million in other real estate related expenses
(net), $2.5 million in salaries and employee benefits and $1.1 million in FDIC
insurance assessment. These significant decreases in expense were offset in part
by an increase of $3.2 million in professional service fees related to the
Bank's efforts to comply with FDIC recommendations made in early fiscal 1995.
Additionally, charges were recorded in fiscal 1995 for provision for losses on
other assets of $1.1 million, prepayment penalties on FHLB advances of $1.0
million, increases in the provisions for losses on joint venture advances of
$0.6 million, and merger-related costs of $0.4 million. The total decline in
salary and employee benefits of $2.5 million was partially offset by a $0.9
million expense related to the acquisition of certain banking facilities from a
limited partnership which had formerly leased the properties to the Bank. This
amount was paid to certain limited partners, all of whom are Bank employees, in
exchange for obtaining a release of claims from them. In connection with the
purchase of these properties, the carrying value of these properties was reduced
by $0.4 million. This adjustment was included as other operating expense.
The combined effective federal and state income tax rate decreased to 26.4%
for fiscal year 1995 as compared to 30.0% for fiscal 1994. The decrease was the
result of lower state taxes which was achieved by increasing the level of
earning assets held by the state tax favored security corporations owned by the
Company and the Bank. In addition, the Bank incurred a tax loss for financial
reporting purposes and a tax benefit was recorded at the statutory rate of
12.54%. The state tax benefit of the Bank's losses exceeded the state tax
expense of the security corporations which are taxed at a rate of 1.32%.
Net cash and cash equivalents increased $0.8 million during fiscal
1995. Cash was provided from the following sources: a net reduction in
investment securities held for sale of $207 million, an increase of $82 million
in borrowings related to securities sold under agreement to repurchase, proceeds
from sale of loans and other real estate of $16 million, operations, before loan
origination, of $11 million and net loan collections in excess of originations
of $7 million. Cash was utilized to fund: a net reduction in FHLB advances of
$234 million, a net reduction in deposits of $66 million, an increase in
mortgage-backed securities held for sale of $16 million and payment of dividends
to shareholders of $4 million.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1994 AND 1993
For the fiscal year ended October 31, 1994, net income decreased to
$24.6 million or $4.51 per share on a fully diluted basis from $35.3 million or
$5.75 per share for the fiscal year ended October 31, 1993. The decrease in net
income in fiscal 1994 was due to substantially lower net realized gains on
securities, lower net interest and dividend income and increased operating
expenses, which were offset, in part, by a reduction in the provision for
possible loan losses. Operating expenses increased to $32.0 million at October
31, 1994, from $29.9 million at October 31, 1993. Other income decreased by
$12.4 million primarily as a result of decreased realized gains on the sale of
securities. Fully diluted shares outstanding for fiscal 1994 were 5,444,982, as
compared to 6,140,108 for fiscal 1993.
Bancorp's weighted average cost of funds decreased to 4.02% for fiscal
1994 from 4.39% for fiscal 1993. The yield on average earning assets declined to
6.87% for the fiscal year ended October 31, 1994 from 7.41% for fiscal 1993. The
effect of the more rapid decline in the yield on average earning assets, as
opposed to the decline in the weighted average cost of funds, resulted in
Bancorp's interest rate spread narrowing slightly to 2.85% for fiscal 1994 from
3.02% for fiscal 1993.
The Company's one-year asset/liability gap was a negative 27.8% of
total assets at October 31, 1994, as compared to a negative 16.4% of total
assets at October 31, 1993. The one-year negative asset/liability gap widened
during fiscal 1994 primarily as a result of a slow down in prepayments and
pay-offs on mortgage-backed securities resulting from a sharp increase in
interest rates during fiscal 1994. Additionally, a substantial portion of the
Bank's FHLB advances, which had original maturities of two to four years, have,
through the passage of time, fallen into the one-year repricing category.
Beginning in October 1994, maturing FHLB advances were renewed with maturities
of between 15 and 24 months, thereby extending liabilities as a partial means of
bringing the negative one-year asset/liability gap back to between 15% and 20%.
Securities sold under agreements to repurchase were $10.3 million as of
October 31, 1994, as compared to $0 at October 31, 1993. Securities sold under
agreements to repurchase are used by Bancorp to fund short-term liquidity needs,
as they arise. FHLB advances decreased to $470.0 million at October 31, 1994
down from $480.0 million at October 31, 1993.
Overall, Bancorp's total assets declined by $171.4 million from $2.2
billion at October 31, 1993 to $2.0 billion at October 31, 1994. Net unrealized
gain or loss on securities available for sale declined to a net loss, after tax
benefit, of $25.8 million at October 31, 1994 from a net unrealized gain, after
taxes, of $54.3 million at October 31, 1993, primarily as a result of the sharp
increase in interest rates experienced during fiscal 1994. Deposits declined to
$1.4 billion at the 1994 fiscal year end from $1.5 billion at the 1993 fiscal
year end. Competition from higher rate, short- and intermediate-term investments
in the open market, as well as from a broad array of financial alternatives,
contributed to the outflow of deposits during fiscal 1994.
Investment securities available for sale increased $29.5 million to
$557.0 million at October 31, 1994 from $527.5 million at October 31, 1993. A
substantial portion of the increase was attributed to the purchase of FNMA and
FHLMC 10 year final maturity, 3 year call protected issues, purchased at various
price discounts. Mortgage-backed securities available for sale declined $101.6
million to $989.4 million at October 31, 1994, from $1.1 billion at October 31,
1993. Modest net sales during fiscal 1994, rapid pay-offs and prepayments during
the early months of fiscal 1994, as well as the SFAS No. 115 fair value
adjustment, contributed to this decline.
Total interest and dividend income for the year ended October 31, 1994
decreased 11.5% to $136.8 million from $154.5 million for fiscal 1993. Interest
earned on loans decreased $10.3 million, partially as the result of $99.3
million of loans originated by the Bank being converted into FHLMC and FNMA
mortgage-backed securities, which are held as part of the Bank's investment
portfolio, and in part, due to the impact of heavy refinancing activity during
fiscal 1993. Also contributing to the decline was the deferral of previously
recognized interest income and gains on sales of other real estate owned in the
amount of $2.3 million. Interest and dividends on investment securities and
other short-term investments decreased 6.6% to $104.4 million at October 31,
1994 from $111.8 million at October 31, 1993. This decrease was due, in part, to
a decrease of 1.4% in the average balance outstanding during fiscal 1994 as
opposed to fiscal 1993, and in part, to a decrease in the weighted average rate
earned on the investment portfolio from 6.89% in fiscal 1993 to 6.50% in fiscal
1994 which was due, in part, to refinancing within the mortgage-backed
securities portfolio.
Total interest expense decreased 12.3% to $76.1 million for the fiscal
year ended October 31, 1994, from $86.8 million for the comparable period in
fiscal 1993. This decrease was due primarily to the lag effect of the decline in
short-and intermediate-term interest rates that took place during fiscal 1993
and a decrease in the average amounts of deposits and borrowings outstanding
during fiscal 1994 as compared to fiscal 1993. FHLB advances decreased to $470.0
million at October 31, 1994 from $480.0 million at October 31, 1993.
The provision for possible loan losses was $5.8 million for the fiscal
year ended October 31, 1994, down from $8.0 million for fiscal 1993, reflecting
primarily a $1.9 million reduction in the provision for possible losses on
commercial real estate loans. At October 31, 1994, the Bank's allowance for
possible loan losses totaled $9.5 million. During the 1994 fiscal year, the Bank
charged off, or made reserve allocations with respect to, loans totaling $6.1
million. The amounts charged off relate primarily to fair market value
adjustments made to certain loans during fiscal 1994.
Total other expenses increased 7.0% to $32.0 million for fiscal 1994,
compared to $29.9 million in fiscal 1993. A large part of the increase was due
to an adjustment of $952,000 to the carrying value of certain split dollar life
insurance policies to record the policies at their then current cash surrender
values. Additionally, the net cost of other real estate, including a $500,000
provision for loss on other real estate owned, increased by $800,000 compared to
fiscal 1993. These increases were offset, in part, by a decline in profit
sharing plan expense resulting from lower net income in fiscal 1994. The ratio
of total operating expenses to total assets was 1.53% at October 31, 1994, as
compared to 1.30% at October 31, 1993.
The combined effective rate for federal and state income taxes
decreased to 30.0% for fiscal 1994 as compared to 35.2% for fiscal 1993. The
decrease is due in large part to the refund of state income tax recorded in
fiscal 1994 and the increased impact of dividend received deductions on
Bancorp's effective tax rate.
Net cash and cash equivalents decreased $88 million during fiscal 1994.
Cash was provided from the following sources: a net reduction in mortgage-backed
securities held for sale of $175 million, an increase of $10 million in
borrowings related to securities sold under agreement to repurchase, and
proceeds from sale of loans and other real estate of $11 million. Cash was
utilized to fund: a net increase in investment securities held for sale of $131
million, a net reduction in deposits of $49 million, current operation for $37
million, the repurchase of $25 million of the Company's common stock, net loan
originations in excess of collections of $21 million, a net reduction in FHLB
advances of $10 million, a reduction in notes payable of $8 million and payment
of dividends to shareholders of $3 million.
SUBSEQUENT EVENTS
On November 16, 1995, the Board of Directors of Bancorp declared, for
the fiscal quarter ended October 31, 1995, a cash dividend of $0.19 per share on
each outstanding share of Company common stock. Such dividend was paid on
December 15, 1995 to holders of record of such shares at the close of business
on November 30, 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 114 - "Accounting by Creditors for Impairment of a Loan," was
effective for fiscal years beginning after December 15, 1994. This statement
addresses how creditors should establish allowances for credit losses on
individual loans determined to be impaired. SFAS No. 114 was subsequently
modified by SFAS No. 118, which relates to recognition of interest income on
impaired loans. The Company adopted these statements on November 1, 1995 and
implementation of these statements is not expected to have a material effect on
the Company's financial condition or results of operations.
SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," is effective for fiscal years
beginning after December 15, 1995. This Statement establishes accounting
standards for determining impairment of long-lived assets and certain
intangibles. Bancorp does not intend to adopt the Statement before the date it
is required to do so nor is adoption anticipated to have a material effect on
the financial condition or results of operations of Bancorp.
SFAS No. 122 - "Accounting for Mortgage Servicing Rights," is also
effective for fiscal years beginning after December 15, 1995. SFAS No. 122
amends SFAS No. 65 and will require that a mortgage banking enterprise that
acquires mortgage servicing rights either through purchase or origination of
mortgage loans and sells or securitizes those loans with the servicing rights
retained, should allocate the total cost of the mortgage loans to the servicing
rights and the loans based on relative fair values. The Statement also requires
the assessment of capitalized servicing rights for impairment based on fair
value of the rights. Bancorp intends to implement this Statement in fiscal 1996
but does not expect implementation to have a material effect on Bancorp's
financial condition or results of operations.
SFAS No. 123 - "Accounting for Stock-based Compensation," was issued in
October, 1995 and is effective for fiscal years beginning after December 15,
1995. The Statement establishes accounting and reporting standards for
stock-based employee compensation plans. Bancorp will elect, as provided in the
Statement, to continue following the accounting treatment prescribed by APB
Opinion No. 25 - "Accounting for Stock Issued to Employees" as such,
implementation will not have a material effect on Bancorp's consolidated
financial condition or results of operations. Bancorp will be required to
include proforma accounting disclosures of net income measured by the fair value
method defined in the Statement of options granted beginning with the fiscal
year starting November 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity of the Bank is maintained at levels sufficient to meet
normal transaction requirements, and is intended to be flexible enough to take
advantage of market opportunities and to react to unforeseeable liquidity needs.
The Bank concentrates its securities investments in the intermediate maturity
range and in adjustable rate investments. The average life of the Bancorp's
investment portfolio, including mortgage-backed securities, decreased to 4.9
years at October 31, 1995 from 6.0 years at October 31, 1994. Mortgage-backed
securities at October 31, 1995 represented $1.0 billion or 72.0% of Bancorp's
investment portfolio. It is expected that the Bank will continue to sell
investment securities, pursuant to the terms of the Merger Agreement, resulting
in a further shortening of the life of its investment portfolio.
The Bank's principal sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, investment and loan
portfolio earnings, maturities within the investment portfolio, proceeds from
sales of investment securities, sales of securities under agreements to
repurchase, and FHLB advances. The Bank expects to maintain a high level of
liquidity in fiscal 1996 in order to position itself to meet the asset sale
requirements of the Merger Agreement.
Before interest credited of $54.9 million, deposits for the fiscal year
ended October 31, 1995 decreased $121.0 million as compared to a decrease of
$99.2 million during the prior fiscal year. The decrease in fiscal 1995
resulted, in part, from competition from higher-yielding short to intermediate
term investment alternatives. Specifically, during the first half of fiscal
1995, rates paid on the Bank's short-term deposits did not rise as rapidly as
comparable market rates. This resulted in an outflow of monies into higher
yielding money market instruments. Of the $1.3 billion of deposit balances at
October 31, 1995, $542.1 million represented certificate accounts maturing
within one year and $549.9 million represented money market deposit, regular
savings, NOW and checking accounts. As of October 31, 1995, money market deposit
accounts totaled $111.9 million.
As of October 31, 1995, securities sold under agreements to repurchase
totaled $92.2 million, as compared with $10.3 million at October 31, 1994. The
Bank has used the proceeds from these agreements as an alternative short-term
funding source and to meet short-term liquidity needs as they arise.
As of October 31, 1995 and 1994, FHLB advances amounted to $236.5
million and $470.0 million, respectively. FHLB advances have been paid down
principally with the proceeds received from the sales of investment securities
during the last quarter of fiscal 1995. All FHLB advances are expected to be
repaid in fiscal 1996, as such repayment is required by the Merger Agreement
prior to the consummation of the Merger.
Stockholders' equity increased by $77.0 million in fiscal 1995, from
$117.6 million at October 31, 1994 to $194.6 million at October 31, 1995. This
increase stemmed in part from the $50.0 million rise in the net unrealized gain
on securities available for sale, and net income for the current fiscal year of
$28.3 million, offset in part by repurchases of common stock for $3.9 million
and dividends paid of $3.9 million. Stockholders' equity declined in fiscal 1994
by $80.7 million from $198.3 million at October 31, 1993 to $117.6 million at
October 31, 1994. This decrease was the result of a change of $80.1 million from
net unrealized gain on securities available for sale of $54.3 million at October
31, 1993 to a net unrealized loss on securities available for sale of $25.8
million at October 31, 1994. In addition, fiscal 1994 net income of $24.6
million was offset by the $25.4 million cost of repurchases of common stock in
fiscal 1994 and dividends paid of $3.0 million.
Under current regulations of the FDIC, BIF-insured institutions
including the Bank, are currently 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 current risk-based standards, BIF insured institutions are
expected to meet a minimum total risk-based capital to risk-weighted assets
ratio of 8%. The Bank had ratios of Tier 1 capital to total assets of 8.40% and
total risk-based capital to risk-weighted assets of 21.94% at October 31, 1995.
Neither ratio includes the SFAS No. 115 adjustment for unrealized gains on
securities available for sale at October 31, 1995. At October 31, 1995, the Bank
continued to meet the criteria for designation as a "well-capitalized"
institution under the FDIC's prompt corrective action regulations.
At October 31, 1995, the assets of Bancorp, on an unconsolidated basis,
consisted primarily of investment securities available for sale totaling $5.6
million and its investment in its subsidiaries of $181.4 million.
The ESOP loan payable in the amount of $2.5 million matures on March 1,
1999. The proceeds of this loan were used to fund stock purchases through the
ESOP. Earnings at the holding company consisted primarily of dividends received
from the Bank, net realized gains on securities and income earned on its
investment securities. During fiscal 1995, the Bank transferred $7.7 million to
Bancorp in the form of a dividend. These funds were used, in part, to repurchase
the Bancorp's common stock through its stock repurchase programs and to satisfy
other cash flow needs of Bancorp.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike those of most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
ASSET/LIABILITY MANAGEMENT
The Company continues to monitor its sensitivity to changes in interest
rates. The Company's one-year asset/liability gap was a negative 25.6% of total
assets at October 31, 1995, as compared to a negative 27.8% of total assets at
October 31, 1994. For a savings institution with a negative gap for a given
period, such as the Bank, the amount of its interest-bearing liabilities
maturing or otherwise repricing within such period exceeds the amount of the
interest-earning assets maturing or repricing within the same period.
Accordingly, in a declining interest rate environment, institutions with a
negative gap will experience a greater decline in their cost of funds than in
the yield on their assets. Conversely, in a rising interest rate environment,
savings institutions with a negative gap will generally experience a greater
increase in the cost of their liabilities than in the yield on their assets. A
rising interest rate environment imposes risks on institutions with a negative
gap because the cost of liabilities will accelerate at a greater rate than the
income earned on assets during the relevant period. Changes in interest rates
will generally have the opposite effect on a savings bank with a positive gap.
The one-year negative asset liability gap narrowed only slightly at
October 31, 1995. Although the cumulative gap narrowed to negative $482.8
million at October 31, 1995, from negative $572.1 million at October 31, 1994,
the Company's total assets declined to $1.9 billion from $2.0 billion at October
31, 1995 and 1994 respectively, thereby only minimally reducing the one-year
negative gap. Additionally, as open market interest rates in the intermediate
sector of the market were declining during the first half of fiscal 1995, the
Company closely monitored the decline with the objective of lengthening the
maturity of borrowings to between 24 and 48 months, thereby reducing the
one-year negative gap. However, management's plans to lengthen liabilities were
delayed because the board of directors initiated a review of Bancorp's strategic
alternatives, including the possible sale of Bancorp. Late in the third fiscal
quarter, when the possibility of a transaction with Bank of Boston developed,
management decided to maintain the Company's balance sheet and interest rate
risk position pending further development of the proposed transaction. The
Merger Agreement requires substantial assets of the Company to be converted to
cash or cash equivalents and requires all borrowings to be paid off or defeased
prior to the Effective Time of the Merger. These actions are likely to reduce
the Company's negative interest rate gap and possibly create a positive interest
rate gap.
The earnings of the Company depend significantly on the spread between
interest and dividend income earned on its loan and investment portfolios, and
the interest paid on its deposits and borrowings. On an annual basis, the
Company's weighted average cost of funds increased to 4.64% for fiscal 1995 from
4.02% for fiscal 1994. The yield on average earning assets increased to 7.11%
for the fiscal year ended October 31, 1995, from 6.87% for the comparable period
in 1994. The effect of the increase in yield on average earning assets was
offset by the increase in the weighted average cost of funds, and resulted in
the Company's interest rate spread narrowing to 2.47% for fiscal year 1995 from
2.85% for fiscal 1994. The Company's interest rate spread is expected to
continue to narrow as a result of the replacement of Bancorp's investment and
CRE Loan portfolio with short-term investments.
The average yield on the Company's investment portfolio was 6.76% for
fiscal 1995, compared with 6.50% for the prior fiscal year. The increase in the
average yield on the investment portfolio resulted, in part, from higher
yielding assets purchased during the rising rate environment of fiscal 1994.
Overall, the Company's investments are concentrated in the intermediate range,
and include adjustable rate instruments, U.S. Treasury and Federal agency notes,
Federal agency and privately issued mortgage-backed securities, corporate notes
and common and preferred equities.
The average yield on the Company's mortgage portfolio increased to
8.59%, compared to 8.45% for the prior fiscal year. The increase reflects, in
part, an increase in the weighted average rate on mortgages originated during
the current fiscal year to 7.88% from 7.19% for the prior fiscal year. The
average yield was affected also by the increase in short-term interest rates
during fiscal 1994 and the first quarter of fiscal 1995. The increase in
short-term rates was reflected in the repricing of the Bank's adjustable rate
mortgage loans subject to repricing during fiscal 1994 and a portion of fiscal
1995. Residential real estate loans decreased to $207.7 million at October 31,
1995 as compared to $215.1 million at the end of fiscal 1994. This decline in
residential real estate loans was primarily the result of principal collections
on loans, exceeding loans originated by $7.2 million.
At October 31, 1995 the total real estate loan portfolio, before net
items, amounted to $208.4 million as compared to $346.6 million at October 31,
1994. The decrease reflects the commercial and multifamily loan portfolio being
classified as held for sale at October 31, 1995. The commercial and multifamily
real estate loan portfolio, at estimated market value, totaled $112 million at
fiscal 1995 year end.
During fiscal 1995, the Bank originated $10.8 million of commercial and
multifamily loans, as compared to $17.8 million of originations during fiscal
1994. Commercial real estate and multifamily mortgages are written on a three or
five year term and are due on demand at the option of the Bank thereafter.
The following table summarizes by major balance sheet category and estimated
repricing period the Company's interest-sensitive assets and interest-sensitive
liabilities at amortized cost or book value, exclusive of the effects of SFAS
No. 115. Certain adjustable rate instruments have repricing periods that differ
from contractual maturities. Loans which have matured are considered demand
loans and are treated as repricing within 90 days.
At October 31, 1995
Repricing Repricing Repricing Repricing
Total Percent Within Within Within Over 5
Amount Total 90 Days 91-365 Days 1-5 Years Years
---------------------------------------------------------------------------------
ASSETS:
Debt securities $ 289,007 17.1% $ 5,974 $ 5,045 $103,329 $174,659
Mortgage-backed securities 1,038,907 61.4 74,097 210,279 341,731 412,800
Loans 363,377 21.5 114,287 67,256 122,049 59,785
---------- ----- -------- -------- -------- --------
Total rate sensitive assets $1,691,291 100.0% $194,358 $282,580 $567,109 $647,244
========== ===== ======== ======== ======== ========
LIABILITIES:
Deposits:
Now accounts $ 95,542 5.8% $ 19,108 -- -- $ 76,434
Regular savings and club
accounts 326,763 19.7 65,353 -- -- 261,410
Money market deposit
accounts 111,910 6.7 111,910 -- -- --
Term deposit certificates 789,529 47.5 119,967 422,130 247,432 --
Borrowings 336,855 20.3 186,305 35,000 115,550 --
---------- ----- -------- -------- -------- --------
Total rate sensitive
liabilities $1,660,599 100.0% $502,643 $457,130 $362,982 $337,844
========== ===== ======== ======== ======== ========
Period repricing difference
(Period gap) $ 30,692 ($308,285) ($174,550) $204,127 $309,400
========== ======== ======== ======== ========
Cumulative repricing
difference (Cumulative gap) ($308,285) ($482,835) ($278,708) $30,692
======== ======== ======== ========
Cumulative gap to total assets (16.3%) (25.6%) (14.8%)
===== ===== =====
The Bank's experience has been that regular savings, club, and NOW
accounts reprice infrequently. The balances in these accounts are also
relatively stable over time as a percentage of total deposits. In the past, some
customers have used these accounts as "transition" accounts where they place
their funds while making longer term investment decisions. To account for this
potentially volatile portion of regular savings, club, and NOW account balances,
Bank management incorporates approximately 20% of the total deposit balances in
these accounts into the one-year repricing period.
YIELDS EARNED AND RATES PAID
The net interest spread of the Company may change as a result of
changes in the difference between the income it receives from its loan and
investment portfolios and its cost of funds. Income from investment securities
is dependent upon the amount invested during the period and changes in general
interest rate levels on such securities. The loan portfolio yield changes
principally as a result of changes in the amount repaid or sold, and the rates
on and the volume of new loans, as such changes relate to the size of the loan
portfolio.
The following table shows the Company's average interest-bearing
balances, interest, average yields earned and rates paid, as well as the spread
between the combined average yields earned on interest-earning assets and
average rates paid on interest-bearing liabilities for the periods indicated.
Average loans outstanding include nonaccrual loans and loans held for sale.
Years Ended October 31,
1995 1994 1993
------------------------------- ------------------------------- -------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance (b) Interest Rate Balance (c) Interest Rate Balance (c) Interest Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Average interest-earning assets:
Loans ................ $ 385,160 $ 33,083 8.59% $ 383,510 $ 32,391 8.45% $ 462,266 $ 42,721 9.24%
Investments (a) ...... 1,594,703 107,757 6.76 1,606,909 104,390 6.50 1,621,540 111,757 6.89
----------- --------- ----------- --------- ----------- --------
Total average interest-
earning assets .... $ 1,979,863 $ 140,840 7.11% $ 1,990,419 $ 136,781 6.87% $ 2,083,806 $154,478 7.41%
=========== ========= ---- =========== ========= ---- =========== ======== -----
Average interest-bearing liabilities:
Deposits ............. $ 1,353,568 $ 54,887 4.05% $ 1,423,624 $ 49,919 3.51% $ 1,440,244 $ 56,836 3.95%
Federal Home Loan
Bank advances ...... 452,203 28,159 6.23 456,320 25,282 5.54 469,282 26,609 5.67
Borrowings ......... 44,524 2,677 6.01 3,721 177 4.76 46,728 1,600 3.41
Notes payable ........ 5,790 487 8.41 8,570 713 8.32 21,102 1,752 8.30
----------- --------- ----------- --------- ----------- --------
Total average interest-
bearing liabilities $ 1,856,085 $ 86,210 4.64% $ 1,892,235 $ 76,091 4.02% $ 1,977,356 $ 86,797 4.39%
----------- --------- ----------- --------- ----------- --------
Interest rate spread.... 2.47% 2.85% 3.02%
==== ==== =====
Average interest-earning
assets, net interest
income and net yield on
earning assets (a) $ 1,979,863 $ 54,630 2.76% $ 1,990,419 $ 60,690 3.05% $ 2,083,806 $ 67,681 3.25%
=========== ========= ==== =========== ========= ==== =========== ======== ====
<FN>
- ------------
(a) Includes mortgage-backed securities; excludes the effects of SFAS No. 115.
(b) Averages based on daily average balances.
(c) Averages based on monthly average balances.
RATE/VOLUME ANALYSIS
The effect on net interest income due to changes in weighted average
interest rates earned and paid and the weighted average amounts of
interest-earning assets and interest-bearing liabilities is shown in the
following table.
Changes due to
Total Rate/
Years Ended Fiscal Fiscal Increase Rate Volume Volume
October 31, 1995 vs. 1994 1995 1994 (Decrease) (a)(d) (b)(d) (c)(d)
- ------------------------- ------ ------ ---------- ------ -------- -------
(In thousands)
Income from interest-earning assets:
Loans................................ $ 33,083 $ 32,391 $ 692 $ 547 $ 143 $ 2
Investments (e)(f)................... 107,757 104,390 3,367 4,192 (793) (32)
---------- ---------- ---------- --------- ----------- -----------
Total............................... 140,840 136,781 4,059 4,739 (650) (30)
---------- ---------- ---------- --------- ----------- -----------
Expense from interest-bearing liabilities:
Deposits............................ 54,887 49,919 4,968 7,870 (2,524) (378)
Federal Home Loan Bank advances..... 28,159 25,282 2,877 3,133 (228) (28)
Borrowings.......................... 2,677 177 2,500 47 1,942 511
Notes Payable....................... 487 713 (226) 8 (231) (3)
---------- ---------- ----------- --------- ----------- -----------
Total.............................. 86,210 76,091 10,119 11,058 (1,041) 102
---------- ---------- ---------- --------- ----------- ----------
Net interest income.................... $ 54,630 $ 60,690 $ (6,060) $ (6,319) $ 391 $ (132)
========== ========== =========== ========== =========== ===========
Changes due to
Total Rate/
Years Ended Fiscal Fiscal Increase Rate Volume Volume
October 31, 1994 vs. 1993 1994 1993 (Decrease) (a)(d) (b)(d) (c)(d)
- ------------------------- ------ ------ ---------- ------ -------- -------
(In thousands)
Income from interest-earning assets:
Loans................................ $ 32,391 $ 42,721 $ (10,330) $ (3,444) $ (7,236) $ 350
Investments (e)(f)................... 104,390 111,757 (7,367) (6,417) (1,008) 58
---------- ---------- ----------- ---------- ----------- ----------
Total............................... 136,781 154,478 (17,697) (9,861) (8,244) 408
---------- ---------- ----------- ---------- ----------- ----------
Expense from interest-bearing
liabilities:
Deposits............................ 49,919 56,836 (6,917) (6,309) (687) 79
Federal Home Loan Bank advances..... 25,282 26,609 (1,327) (630) (715) 18
Borrowings.......................... 177 1,600 (1,423) 181 (1,438) (166)
Notes Payable....................... 713 1,752 (1,039) (2) (1,038) 1
---------- ---------- ----------- ---------- ----------- ----------
Total.............................. 76,091 86,797 (10,706) (6,760) (3,878) (68)
---------- ---------- ----------- --------- ----------- ----------
Net interest income.................... $ 60,690 $ 67,681 $ (6,991) $ (3,101) $ (4,366) $ 476
========== ========== =========== ========== =========== ==========
<FN>
(a) Determined by multiplying the change in the weighted average interest rates between 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 or 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 rata to the three statistics.
(e) Includes mortgage-backed securities.
(f) Excludes the effect of SFAS No. 115.
INVESTMENT ACTIVITIES
Bancorp's investment portfolio, at fair value, totaled $1.5 billion at
October 31, 1995, or 76.6% of total assets. At fiscal year end, the portfolio
consisted of mortgage-backed securities and other investment securities, which
include adjustable and fixed-rate securities and equity issues. Under SFAS No.
115, Bancorp is required to record certain investment securities, not intended
to be held to maturity, at fair value on its balance sheet. At October 31, 1995,
Bancorp had a net unrealized gain, after tax, on its investment portfolio of
$24.2 million after realizing net gains on the sale of securities totaling $21.1
million during the fiscal fourth quarter of 1995. Management's decision to begin
realizing significant securities gains was prompted by continued strength in the
securities markets during 1995 and by the asset sale requirements of the Merger
Agreement. Pursuant to the Merger Agreement, Bancorp is required to sell its
entire equity portfolio and a significant portion of its debt and
mortgage-backed securities portfolio. Management has begun the process of
liquidating its equity portfolio, and expects to liquidate approximately
two-thirds of its fixed-income portfolio before the Effective Time of the
Merger. To the extent Bancorp has not liquidated its investment and CRE Loan
portfolios, it will retain the risk of fluctuations in the value of such assets
and therefore in the Merger Consideration. The replacement of Bancorp's
investments and CRE Loans by short-term investments may adversely affect
Bancorp's dividend and interest income and operating results. If the Merger is
not consumated, Bancorp's future operating results may be similarly affected for
a prolonged period. The unrealized gain at October 31, 1995, as well as the
significant gains booked during the fiscal 1995 fourth quarter, resulted
primarily from the declining interest rate environment which prevailed during
the second half of fiscal 1995, and its effect on the financial markets. At
October 31, 1994, Bancorp's investment portfolio had a net unrealized loss,
after tax benefit, of $25.8 million. The net unrealized after-tax gain and loss
are included as a separate component of stockholders' equity in Bancorp's
consolidated statements of financial condition as of October 31, 1995 and 1994.
The average yield on the investment portfolio was 6.76% for the 1995
fiscal year, an increase from the 6.50% reported for fiscal 1994. The increase
in the average yield on the investment portfolio resulted in part from higher
yielding assets purchased during the rising rate environment of fiscal 1994,
offset in part by lower average balances of investment securities outstanding in
fiscal 1995, as compared to fiscal 1994.
The average life of the investment portfolio, including mortgage-backed
securities, decreased to 4.9 years at October 31, 1995 from 6.0 years at October
31, 1994. The decrease was primarily the result of portfolio restructuring
designed to reduce interest rate risk. The OTS had criticized the high level of
this risk in its examination as of October 20, 1994. This restructuring was
accomplished through purchases of short duration fixed-income investments, as
well as adjustable rate mortgage-backed securities combined with the sale of
longer duration fixed-rate assets. The average life of the investment portfolio
has continued to decline since October 31, 1995.
At October 31, 1995, $206.2 million or 19.8% of the Bank's
mortgage-backed securities portfolio was comprised of FNMA and FHLMC adjustable
rate issues. Approximately $1.0 billion, or 70.2%, of the Bank's investment
portfolio consists of Government National Mortgage Association ("GNMA"), FNMA
and FHLMC mortgage-backed securities. The estimated average life of the
mortgage-backed securities portion of the investment portfolio at October 31,
1995 was 4.7 years, compared to 5.7 years at October 31, 1994. The average life
reflects the Bank's continued strategy of investing primarily in GNMA, FNMA and
FHLMC 15-year mortgage-backed securities and FNMA and FHLMC 7-year balloon
payment mortgage-backed issues.
The fair value of the Company's equity portfolio totaled $104.2 million
at October 31, 1995, compared to $162.5 million at October 31, 1994. The equity
portfolio includes high quality, yield-oriented common and preferred stocks. The
fair value of common equity investments totaled $94.9 million at the 1995 fiscal
year end, compared to $145.1 million at the 1994 fiscal year end. The decrease
resulted from sales of equity securities, particularly during the fiscal fourth
quarter. Proceeds from these sales were used, in part, to reduce the Company's
FHLB advances. The fair value of preferred stock held by the Company totaled
$9.3 million at October 31, 1995, compared to $17.4 million at October 31, 1994.
The decrease resulted from sales, as well as calls, of higher coupon issues.
INVESTMENT PORTFOLIO
The following table sets forth the composition of the Company's
investment portfolio at fair value as of the dates shown:
At October 31,
1995 1994 1993
---- -------------- ----
(Dollars in thousands)
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Debt Securities:
U.S. Government obligations.............................. $ 252,251 $ 343,703 $ 264,372
Other bonds and obligations.............................. 47,969 50,820 62,803
----------- ----------- -----------
Total Debt Securities 300,220 394,523 327,175
----------- ----------- -----------
Equities:
Preferred stock.......................................... 9,340 17,420 32,650
Common stock............................................. 87,912 130,356 121,085
FHLMC voting common stock................................ 6,925 14,715 13,838
------------ ----------- -----------
Total Equity Securities 104,177 162,491 167,573
---------- ----------- -----------
Total investments available for sale 404,397 557,014 494,748
---------- ----------- -----------
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Other mortgage-backed securities (a)........................ 26,016 36,048 32,756
GNMA, FHLMC and FNMA mortgage-backed
securities 1,015,040 953,398 1,091,049
----------- ----------- -----------
Total mortgage-backed securities available for sale 1,041,056 989,446 1,123,805
----------- ----------- -----------
Total investments and mortgage-backed
securities available for sale.......................... $ 1,445,453 $ 1,546,460 $ 1,618,553
============ ============ ===========
Average life of debt and mortgage-
backed securities in years................................. 4.9 6.0 7.0
<FN>
(a) Other mortgage-backed securities consist of both fixed-rate as well as adjustable rate collateralized
mortgage obligations, and conventional mortgage-backed pass-through securities.
The following table sets forth the maturities of the Company's debt and
mortgage-backed securities at amortized cost at October 31, 1995 and the
weighted-average yields of such securities:
After One Year After Five years
Within One Year Through Five Years Through Ten Years After Ten Years
--------------- ------------------ ----------------- ---------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------- -------- ------ --------- ------ -------- ------ ---------
(Dollars in thousands)
DEBT SECURITIES:
U.S. Government
obligations......... $ 2,495 7.55% $ 80,103 7.79% $ 158,555 7.47% $ 313 9.69%
Other bonds and
obligations......... 6,550 6.96 23,227 7.03 15,914 7.24 1,850 7.18
MORTGAGE-BACKED SECURITIES:
Other mortgage-backed
securities.......... -- -- 13 11.39 2,063 6.58 24,161 6.43
GNMA, FHLMC,
and FNMA mortgage-
backed securities. -- -- 60,545 7.96 47,233 7.02 904,892 6.93
------- --------- --------- ---------
Total................... $ 9,045 7.12% $ 163,888 7.75% $ 223,765 7.35% $ 931,216 6.92%
======= ========= ========= =========
At October 31, 1995, the Company did not have an investment in any
issuer (other than securities of the U.S. Government and U.S. Government
agencies and corporations) in excess of 10% of stockholders' equity.
LENDING ACTIVITIES
GENERAL
The Bank's lending activities are primarily focused on the origination
of 1-4 family residential and multifamily real estate mortgage loans. The Bank
offers both fixed- and adjustable rate 1-4 family loans, generally underwritten
in conformity with FNMA and FHLMC guidelines. The Bank's residential mortgage
loans have amortization periods ranging from 7 to 30 years. Rates charged on
adjustable rate mortgage loans ("ARMs") are reset at either one-or three-year
intervals, providing the Bank a margin over the underlying one- or three-year
U.S. Treasury indices.
Commercial and multifamily loans consist mainly of permanent first
mortgages on income producing properties, such as apartment buildings. The Bank
has originated and serviced these types of loans for many years. Commercial and
multifamily mortgages classified as held for sale at October 31, 1995 totaled
$112.0 million compared to $8.9 million as of October 31, 1994. This increase
stemmed from the reclassification to loans held for sale on October 31, 1995 of
the Bank's entire portfolio of CRE Loans. Pursuant to the Merger Agreement, the
Company is required to dispose of its portfolio of CRE Loans. CRE Loans amounted
to $132.1 million or 37.1% of total loans at October 31, 1994. The Bank
originated $10.8 million of CRE Loans in the 1995 fiscal year versus $17.8
million in fiscal 1994. The Bank's fiscal 1995 CRE Loan originations had an
average loan size of approximately $489,000 and an average loan-to-value ratio
of approximately 65.9%. Of the CRE Loans, 82% have matured and were on "demand"
status at October 31, 1995 representing 71% of the outstanding loan balances.
The Bank is currently attempting to execute new loan documentation with respect
to such loans.
Consumer loans totaled $8.2 million, or 3.8% of the total loan portfolio
at October 31, 1995, compared to $9.0 million, or 2.4% of the total loan
portfolio before net items a year ago. Consumer loans include guaranteed student
loans, consumer loans and secured collateral loans.
The total loan portfolio, excluding loans held for sale, was $209.9
million, or 11.1% of total assets at October 31, 1995. At the end of fiscal
1994, the total loan portfolio amounted to $337.2 million, or 16.6% of total
assets. The decline in the total loan portfolio was primarily the result of the
reclassification of the CRE Loans as held for sale and the related provision for
loss on loans held for sale of $8.3 million. In connection with the Bank's
efforts to sell its CRE Loan portfolio, the Bank has begun to improve loan file
documentation and loan administration. If the Merger Agreement were terminated,
management believes that it would be necessary to expend a substantial amount of
time and resources to develop a loan administration function that meets the
Bank's needs and satisfies concerns raised by the Bank's regulators.
LOAN ORIGINATIONS
Substantially all of the real estate loans originated by the Bank during
fiscal 1995 were secured by real estate located in the greater metropolitan
Boston area, reflecting the Bank's commitment to serve the mortgage credit needs
of the institution's primary lending areas, which consist mainly of Boston and
the South Shore.
Mortgage loan applications come from a variety of sources, including
depositors, existing borrowers, walk-in customers and others responding to the
Bank's extensive advertising program. Residential mortgage originations in
fiscal 1995 totaled $65.5 million, a decrease of 51.2% from the $134.1 million
of residential mortgage originations in fiscal 1994; this decrease was partly
attributable to the necessity to redirect Bank lending personnel to focus on
responding to the FDIC recommendations regarding the need for improved loan
underwriting procedures, loan administration, and approval policies, as well as
the need to improve and update documentation for existing loans.
Conventional 1-4 family residential originations in fiscal 1995 were as
follows: $3.2 million in bi-weekly mortgages; $5.1 million in fixed-rate
mortgages with terms of 10 years or less; $19.5 million in adjustable rate
mortgages; $12.0 million in 15 year fixed-rate mortgages and $15.0 million in
fixed-rate mortgages with terms greater than 15 years. The Bank's fiscal 1995
conventional 1-4 family loan originations had an average loan size of
approximately $113,000 and an average loan-to-value ratio of approximately
57.5%. At October 31, 1995, 1-4 family residential mortgage loans totaled $207.7
million, or 95.9% of the total loan portfolio (excluding loans held for sale)
before net items, compared to $213.1 million, or 59.9% of the total loan
portfolio at October 31, 1994.
The following table shows the composition of the Bank's loan
originations during the periods indicated:
Years Ended October 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands)
REAL ESTATE LOANS:
Conventional 1-4 family residential.... $ 54,726 $ 116,222 $ 101,200 $ 137,444 $ 60,315
Commercial/multifamily residential..... 10,750 17,847 9,040 18,317 11,043
----------- ----------- ----------- ----------- ----------
Total real estate loans.............. 65,476 134,069 110,240 155,761 71,358
CONSUMER LOANS........................... 6,480 7,722 6,701 10,808 8,636
----------- ----------- ----------- ----------- ----------
Total loans originated............. $ 71,956 $ 141,791 $ 116,941 $ 166,569 $ 79,994
=========== =========== =========== =========== ==========
SECONDARY MARKET ACTIVITIES
The Bank has historically been active in the secondary mortgage market,
purchasing or selling loans and mortgage-backed securities as conditions
dictated. During fiscal 1995, the Bank purchased $241.9 million of
mortgage-backed securities compared to $115.4 million in fiscal 1994. Sales of
mortgage-backed securities totaled $102.1 million during fiscal 1995 compared to
$10.4 million in fiscal 1994. During fiscal 1995, $11.9 million of mortgage
loans were converted into mortgage-backed securities, as compared with $99.3
million during fiscal 1994.
LOAN SERVICING PORTFOLIO
The following table sets forth information as to the Bank's loan
servicing portfolio at the dates shown:
At October 31,
--------------
1995 % 1994 % 1993 %
---- --- ---- --- ---- --
(Dollars in thousands)
Loans owned and serviced by
the Bank (before net items)(a).... $ 308,461 86.9% $ 318,546 85.2 % $ 344,841 82.3%
Loans owned by the Bank
and serviced by others............. 46,665 13.1 55,242 14.8 74,382 17.7
----------- ----- ----------- ----- ----------- -----
Total loans owned by the
Bank (before net items).......... $ 355,126 100.0% $ 373,788 100.0% $ 419,223 100.0%
=========== ===== =========== ===== =========== =====
Loans serviced for others........... $ 241,545 $ 258,179 $ 226,169
<FN>
(a) Includes $138.6 million, $18.2 million and $61.6 million of loans held for sale at October 31, 1995, 1994
and 1993, respectively.
LOAN COMMITMENTS
South Boston issues commitments to make loans to prospective borrowers
conditioned upon the occurrence of certain events and under specific terms. Loan
commitments are generally issued for the origination of long-term, permanent
loans for the financing of residential properties. At October 31, 1995, in
addition to unadvanced proceeds on loans totaling $137,000, outstanding mortgage
commitments approximated $8.3 million. Commitments to originate mortgage loans
generally expire within 60 days.
INCOME FROM LENDING ACTIVITIES
South Boston realizes fee income from its lending activities, including
origination fees for residential loans and servicing fees from loans sold. The
Bank also receives commitment fees on commercial and multifamily residential
loans and prepayment charges on commercial mortgages that are paid off within
three years of origination. The Bank currently charges up to one point on both
residential and commercial mortgages. Loan origination costs are deferred, and
the net amount is amortized as an adjustment of the related loan's yield. The
Bank is amortizing these amounts over the contractual life of the related loans.
The following table sets forth information concerning South Boston's
loan portfolio (excluding loans held for sale), before allowance for possible
loan losses and other net items, in dollar amounts and in percentages, by type
of loan.
At October 31,
--------------
1995 % 1994 % 1993 % 1992 % 1991 %
---- --- ---- --- ---- --- ---- --- ---- ---
(Dollars in thous ands)
REAL ESTATE LOANS:
Residential:
Conventional.............. $172,833 79.8% $170,987 48.1% $148,538 41.5% $232,568 47.9% $263,290 49.5%
FHA and VA................ 34,108 15.8 40,368 11.3 51,783 14.5 63,797 13.1 73,172 13.8
Multifamily (a)........... -- -- 75,398 21.2 87,913 24.6 91,538 18.9 100,073 18.8
Commercial (a).............. -- -- 54,976 15.5 50,413 14.1 67,792 14.0 73,716 13.9
Construction loans:
Residential............... 709 .3 1,724 .5 1,442 .4 12,134 2.5 4,988 .9
Commercial................ -- -- 1,720 .5 3,095 .9 -- -- -- --
Second mortgages............ 248 .1 735 .2 3,675 1.0 3,767 .8 3,258 .6
Home improvement............ 454 .2 718 .2 922 .3 1,392 .3 1,780 .3
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total real estate loans 208,352 96.2 346,626 97.5 347,781 97.3 472,988 97.5 520,277 97.8
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
CONSUMER LOANS:
Passbook.................. 5,019 2.3 5,615 1.6 6,116 1.7 6,072 1.3 5,680 1.1
Collateral................ 768 .4 756 .2 720 .2 667 .1 641 .1
Commercial................ -- -- -- -- -- -- -- -- 8 --
Personal.................. 476 .2 667 .2 974 .3 927 .2 1,309 .2
Education (guaranteed).... 1,955 .9 1,960 .5 2,010 .5 4,421 .9 4,107 .8
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total consumer loans... 8,218 3.8 8,998 2.5 9,820 2.7 12,087 2.5 11,745 2.2
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans receivable
(before net items)........ $216,570 100.0 % $355,624 100.0% $ 357,601 100.0% $485,075 100.0% $532,022 100.0%
======== ===== ======== ===== ========= ===== ======== ===== ======== =====
<FN>
(a) The Bank's entire portfolio of CRE Loans was reclassified as held for sale on October 31, 1995.
The following table sets forth information concerning South Boston's
loan portfolio (excluding loans held for sale):
At October 31,
--------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
Total loans receivable
(before net items)...................... $ 216,570 $ 355,624 $ 357,601 $ 485,075 $ 532,022
----------- ----------- ----------- ----------- ---------
Add:
Premiums ............................. -- -- -- -- 4
Deduct:
Deferred gains on sales of real estate -- 879 -- -- --
Deferred income on loans financing
sales of real estate ............... 124 1,385 -- -- --
Deferred loan fees ................... 255 558 491 921 1,295
Unearned discounts on loans .......... 3,986 4,760 5,848 7,934 9,370
Unadvanced portions of loans ......... 137 1,330 930 1,633 912
Allowance for possible loan losses ... 2,121 9,471 9,325 9,278 7,503
----------- ----------- ----------- ----------- --------
Totals ........................... 6,623 18,383 16,594 19,766 19,076
----------- ----------- ----------- ----------- --------
Loans, net .............................. $ 209,947 $ 337,241 $ 341,007 $ 465,309 $ 512,946
=========== =========== =========== =========== =========
MATURITY OF LOANS
The following table, which includes loans held for sale, sets forth
certain information at October 31, 1995, regarding the dollar amount of loans
maturing or that can be repriced in the Bank's loan portfolio. Demand loans and
loans having no stated schedule of repayment and no stated maturity are reported
as due in one year or less.
After One After Five
Within Through Through After
One Year Five Years Ten Years Ten years Total
-------- ---------- ----------- --------- -----
(In thousands)
Real estate loans.............. $ 164,460 $ 83,558 $ 53,215 $ 51,211 $ 352,444
Consumer loans................. 9,908 533 468 24 10,933
----------- ----------- ----------- ----------- -----------
Total...................... $ 174,368 $ 84,091 $ 53,683 $ 51,235 $ 363,377
=========== =========== ============ =========== ===========
INTEREST RATE SENSITIVITY OF LOANS
The following table sets forth the dollar amount of all loans maturing
or repricing after October 31, 1996 (excluding loans held for sale) by fixed or
adjustable interest rates.
Fixed Rate Adjustable Rate
(In thousands)
Real estate loans..... $ 139,505 $ 48,479
Consumer loans........ -- 1,025
----------- -----------
Total .............. $ 139,505 $ 49,504
=========== ===========
RISK ELEMENTS
NONPERFORMING ASSETS
The following table summarizes the composition of nonperforming assets
(including nonperforming loans held for sale) at the dates shown:
At October 31,
--------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
Nonaccrual loans......................... $ 5,828 $ 5,102 $ 4,598 $ 1,694 $ 5,710
Other real estate........................ 7,540 17,920 10,173 14,243 12,858
--------- -------- --------- --------- ---------
Total nonperforming assets............... $ 13,368 $ 23,022 $ 14,771 $ 15,937 $ 18,568
========= ======== ========= ========= =========
Nonperforming assets as a
percentage of total assets .71% 1.13% .67% .76% .98%
Nonperforming assets as a
percentage of total loans, including
loans held for sale (before net items) 3.76% 6.16% 3.52% 3.29% 3.24%
The decrease of $9.7 million in nonperforming assets during fiscal 1995
is primarily the result of the sale of several significant properties previously
classified as other real estate and sales of other real estate which, under SFAS
No. 66, were not treated as sales in prior years, but qualified for sales
recognition in 1995. The increase in nonperforming assets at October 31, 1994
compared to October 31, 1993 results primarily from the inclusion of $10.1
million of loans classified under SFAS No. 66 as other real estate at October
31, 1994, which arose from sales of previously designated other real estate.
These loans did not meet the SFAS No. 66 accounting criteria for recognizing
gains on sale or income accrual. Once these borrowers individually satisfy the
accounting criteria for initial investment and payment history, as set forth in
SFAS No. 66, these loans have converted or will convert to full accrual basis.
Nonaccrual Loans
Nonaccrual loans are those on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or when
payments of principal or interest have become contractually past due 90 days.
Upon such discontinuance, interest previously accrued but not collected is
reversed and charged against income during the period the related loan is placed
on nonaccrual status. Interest received on nonaccrual loans is either applied
against principal or reported as income according to management's judgment as to
the collectibility of principal. The gross interest income that would have been
recorded in fiscal 1995 if nonaccrual loans had been current in accordance with
their original terms was approximately $679,000. The actual amount of interest
income on those loans that was included in net income in fiscal 1995 was
approximately $284,000. The comparable amounts for fiscal 1994 were $788,000 and
$262,000 respectively.
The following table summarizes nonaccrual loans at the dates shown.
At October 31,
--------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
REAL ESTATE LOANS:
Residential:
Conventional......................... $ 2,221 $ 1,222 $ 164 $ 676 $ 1,276
FHA/VA............................... 531 511 706 976 874
Commercial............................. 3,029 3,360 3,613 -- 3,487
--------- -------- --------- --------- ---------
5,781 5,093 4,483 1,652 5,637
--------- -------- --------- --------- ---------
CONSUMER LOANS:
Secured................................ 4 9 83 42 73
Unsecured.............................. 43 -- 32 -- --
--------- -------- --------- --------- ---------
47 9 115 42 73
--------- -------- --------- --------- ---------
Total nonaccrual loans................... $ 5,828 $ 5,102 $ 4,598 $ 1,694 $ 5,710
========= ======== ========= ========= =========
Other Real Estate
Properties acquired through foreclosure or in settlement of loans are
classified as other real estate, as are loans classified as such under SFAS No.
66. The following table summarizes other real estate at the dates shown.
At October 31,
--------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
Conventional............................. $ 1,125 $ 6,656 $ 4,206 $ 5,256 $ 4,960
Commercial............................... 6,415 11,147 5,869 8,690 7,651
FHA/VA ................................. -- 117 98 297 247
--------- -------- --------- --------- ---------
Total other real estate.................. $ 7,540 $ 17,920 $ 10,173 $ 14,243 $ 12,858
========= ======== ========= ========= =========
Restructured Loans
Restructured loans totaled $590,000 and $3.0 million at October 31, 1995
and 1994, respectively. The gross interest income that would have been recorded
in fiscal 1995 if restructured loans had been current in accordance with their
original terms was $86,000. The actual amount of interest income on those loans
that was included in net income in fiscal 1995 was $77,000. The corresponding
amounts for fiscal 1994 were $370,000 and $337,000 respectively. These loans are
not considered troubled debt restructurings as defined in SFAS No. 15.
Potential Problem Loans
Potential problem loans are loans which cause management to have serious
doubts as to the ability of borrowers to comply with present loan repayment
terms and are not already classified as nonaccrual, or restructured. At October
31, 1995 potential problem loans totaled approximately $14.8 million. Of this
amount, $13.2 million were classified as loans held for sale and have been
written down to the lower of aggregate cost or fair market value.
ALLOWANCE FOR POSSIBLE LOAN LOSSES.
An analysis of the allowance for possible loan losses is as follows:
Years Ended October 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period........... $ 9,471 $ 9,325 $ 9,278 $ 7,503 $ 2,859
Charge-offs:
Commercial real estate (a) .......... 11,083 4,383 6,437 5,255 4,338
Residential real estate ............. 801 1,678 1,786 1,777 1,209
Consumer............................. 174 80 28 43 68
--------- -------- --------- --------- ---------
12,058 6,141 8,251 7,075 5,615
--------- -------- --------- --------- ---------
Recoveries:
Commercial real estate............... 849 178 161 620 131
Residential real estate.............. 172 297 136 224 308
Consumer............................. 20 12 1 6 3
--------- -------- --------- --------- ---------
1,041 487 298 850 442
--------- -------- --------- --------- ---------
Net Charge-offs........................ 11,017 5,654 7,953 6,225 5,173
--------- -------- --------- --------- ---------
Provision charged to operations:
Commercial real estate............... 3,469 4,540 6,400 6,400 7,854
Residential real estate.............. 125 1,229 1,520 1,520 1,865
Consumer............................. 73 31 80 80 98
--------- -------- --------- --------- ---------
3,667 5,800 8,000 8,000 9,817
--------- -------- --------- --------- ---------
Balance at end of period............... $ 2,121 $ 9,471 $ 9,325 $ 9,278 $ 7,503
========= ======== ========= ========= =========
Ratio of net charge-offs to average
loans outstanding, including loans
held for sale...................... 2.86% 1.47% 1.72% 1.12% .93%
<FN>
(a) $9.7 million was charged off on October 31, 1995 in connection with the reclassification of the Bank's CRE
Loans as held for sale.
The following table sets forth the allocation of the allowance for
possible loan losses at the dates indicated:
At October 31,
1995 1994 1993 1992 1991
--------------- ------------- -------------- ------------- -------------
(Dollars in thousands)
Amount (b) % Amount (b) % Amount (b) % Amount (b) % Amount (b) %
------ ----- ------ ----- ------ ----- ------ ---- ------ -----
Commercial real
estate (a) .......... $ -- --% $6,765 37.2% $6,430 39.6% $6,306 32.9% $4,541 32.7%
Residential real estate 1,741 96.2 2,245 60.3 2,397 57.7 2,527 64.6 2,560 65.1
Consumer.............. 380 3.8 461 2.5 498 2.7 445 2.5 402 2.2
------ ----- ------ ----- ------ ----- ------ ---- ------ -----
Total................. $2,121 100.0% $9,471 100.0% $9,325 100.0% $9,278 100.0% $7,503 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
<FN>
- --------------------
(a) The Bank's CRE Loans were classified as held for sale on October 31, 1995.
(b) Percentage of loans in each category to total loans.
The allowance for possible loan losses is maintained at a level believed
by management to be adequate to meet reasonably foreseeable loan losses on the
basis of many factors, including the risk characteristics of the portfolio,
underlying collateral, current and anticipated economic conditions that may
affect the borrowers' ability to pay, specific problem loans, and trends in loan
delinquencies and charge-offs. The allowance is increased by provisions charged
to earnings and reduced by loan charge-offs, net of recoveries. Loans are
charged off in whole or in part when, in management's opinion, collectibility is
not considered probable.
While management uses available information to establish the allowance
for possible loan losses, future additions to the allowance may be necessary if
economic conditions 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.
SOURCES OF FUNDS
GENERAL
Deposit accounts are a principal source of South Boston's funds for use
in lending and for other general business purposes. In addition to deposit
accounts, the Bank derives funds from amortization and prepayment of loans and
mortgage-backed securities, investment earnings, maturities within the
investment portfolio, proceeds from sales of loans and investment securities and
borrowings. Scheduled loan payments are a relatively stable source of funds,
while deposit inflows and outflows are significantly influenced by the direction
of interest rates and general economic conditions. Borrowings have been used on
a short-term basis to compensate for reductions in normal sources of funds, such
as, deposit inflows at less than required levels. These borrowings have also
been used on a longer-term basis to support expanded lending activities. Savings
institutions have access to the FRB's discount window under certain
circumstances, however, this has not been a source of borrowing for South
Boston. As a member of the Federal Home Loan Bank System, the Bank is able to
borrow through FHLB advances.
DEPOSITS
South Boston has a wide variety of deposit programs designed to attract
both short-term and long-term deposits from the general public. These deposit
accounts include regular savings and club accounts, NOW accounts and money
market deposit accounts, as well as fixed-rate term certificates of deposit. The
Bank attracts deposits through its seven full service banking offices and
through active advertising in the Greater Boston area. Many of the Bank's
customers take advantage of its extensive "bank by mail" program.
Before interest credited of $54.9 million, deposits for fiscal 1995
decreased $121.0 million. The decrease resulted, in part, from competition from
higher-yielding short to intermediate term investment alternatives.
Specifically, rates paid by the Bank during the first half of fiscal 1995 on
short term deposits did not rise as rapidly as comparable market rates. This
resulted in an outflow of monies into higher yielding money market instruments.
Of the $1.3 billion of deposit accounts at the Bank at October 31, 1995, $542.1
million represented certificate accounts maturing within one year and $549.9
million represented regular savings, club, money market deposit, NOW accounts
and commercial checking accounts.
The following table shows the average amount of deposits of the Bank and
the average rates paid on such deposits for the fiscal years indicated:
1995 1994 1993
----------------------------- ------------------------------ ------------------------------
Weighted Average % of Weighted Average % of Weighted Average % of
Average Amount Total Average Amount Total Average Amount Total
Rate In Average Rate In Average Rate In Average
Paid Thousands Deposits Paid Thousands Deposits Paid Thousands Deposits
--------- --------- -------- -------- --------- -------- -------- --------- --------
Non-interest bearing:
Regular checking....... --% $ 15,272 1.13% --% $ 17,478 1.23% --% $ 16,250 1.13%
Interest Bearing:
NOW accounts (a)....... 1.74 96,666 7.14 1.79 95,029 6.67 2.38 87,289 6.06
Regular savings and
club accounts (a)..... 2.52 358,581 26.49 2.59 431,232 30.29 3.11 429,203 29.80
Money market deposit
accounts (a).......... 2.79 122,874 9.08 2.42 155,743 10.94 2.70 178,813 12.42
Term certificates...... 5.37 760,175 56.16 4.59 724,142 50.87 5.02 728,689 50.59
---------- ------ ----------- ------ ---------- ------
4.05% $1,353,568 100.00% 3.51% $ 1,423,624 100.00% 3.95% $1,440,244 100.00%
========== ====== =========== ====== ========== ======
<FN>
(a) Interest rates in effect at October 31, 1995 for these accounts were consistent with the rates paid during
fiscal 1995.
The following table presents, by various interest rate categories, the
amounts in certificates of deposit of the Bank at October 31, 1995 maturing
during the periods reflected below:
2.50- 4.01- 6.01- 8.01-
4.00% 6.00% 8.00% 10.00% Total
----- ----- ----- ------ -----
(In thousands)
Certificate accounts maturing during
the 12 months ended:
October 31, 1996.............. $ 7,182 $ 410,561 $ 123,530 $ 824 $ 542,097
October 31, 1997.............. 6 69,897 63,530 89 133,522
October 31, 1998.............. 141 28,594 56,316 -- 85,051
October 31, 1999.............. 3 16,515 1,714 -- 18,232
Thereafter.................... -- 1,151 9,476 -- 10,627
-------- ---------- ---------- ------- ----------
Total......................... $ 7,332 $ 526,718 $ 254,566 $ 913 $ 789,529
======== ========== ========== ======= ==========
The following table sets forth, by various interest rate categories, the
amount of time certificates of deposit as of the dates indicated:
At October 31,
--------------
Interest Rate Range 1995 1994 1993
- ------------------- ---- ---- ----
(In thousands)
2.50-4.00%....................................................... $ 7,332 $ 163,461 $ 324,533
4.01-6.00%....................................................... 526,718 544,866 323,615
6.01-8.00%....................................................... 254,566 41,976 68,133
8.01-10.00%...................................................... 913 6,681 12,764
----------- ----------- -----------
Total.................................................... $ 789,529 $ 756,984 $ 729,045
=========== =========== ===========
The following table presents the maturities of South Boston's time
certificates of deposit in amounts of $100,000 or more by time remaining to
maturity:
Remaining Term to Maturity At October 31,
- -------------------------- --------------
1995 1994
---- ----
(In thousands)
Three months or less.................... $ 18,860 $ 24,042
Over three through six months........... 20,487 19,870
Over six through twelve months.......... 54,233 29,792
Over twelve months...................... 52,917 58,542
-------- --------
Total........................... $146,497 $132,246
======== ========
BORROWINGS AND NOTES PAYABLE
In 1987, South Boston initiated a public mortgage-backed, medium-term
note program (the "Notes") in an aggregate principal amount of $100 million. The
Notes have varying terms and interest rates and are direct obligations of the
Bank secured by U.S Treasury securities. As of October 31, 1995 and 1994, the
aggregate principal amount of Notes outstanding was $5.7 million and $7.6
million, respectively. Refer to Note 13 of the Consolidated Financial Statements
as to interest rates and maturities of outstanding Notes. The Bank intends to
defease the Notes as required by the Merger Agreement.
The Bank from time to time borrows funds with securities sold under
agreements to repurchase. As of October 31, 1995 and 1994, securities sold under
agreements to repurchase amounted to $92.2 million and $10.3 million,
respectively. Refer to Note 14 of the Consolidated Financial Statements as to
interest rates and terms of the repurchase agreements.
The Bank is a member of the FHLB System. See "Supervision and
Regulation". At October 31, 1995 and 1994, the Bank had $236.5 million and
$470.0 million, respectively, of outstanding FHLB advances. Refer to Note 15 of
the Consolidated Financial Statements as to interest rates and maturities of
FHLB advances. The Merger Agreement requires the Bank to repay all FHLB
advances, including prepayment penalties thereon, prior to the Effective Time of
the Merger.
The following table sets forth the amounts outstanding of the Company's
borrowings, advances and notes payable at the dates shown:
At October 31,
--------------
1995 1994 1993
---- ---- ----
(In thousands)
ESOP loan payable .................. $ 2,520 $ 3,276 $ 4,032
Notes payable ...................... 5,650 7,550 15,350
Securities sold under agreements
to repurchase .................... 92,185 10,275 --
Federal Home Loan Bank advances .... 236,500 470,000 480,000
------- --------- ----------
Total borrowings ................... $336,855 $ 491,101 $ 499,382
======== ========= ==========
The following table summarizes certain information relative to short-term
borrowings:
Years Ended October 31,
-----------------------
1995 1994 1993
---- ---- ----
(Dollars in thousands)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
Outstanding at October 31...................................... $ 92,185 $ 10,275 $ --
Maximum outstanding at any month-end........................... $ 92,185 $ 10,463 $ 46,853
Average balance outstanding during the year.................... $ 44,524 $ 3,721 $ 46,728
Weighted average rate during the year.......................... 6.01% 4.76% 3.41%
Weighted average rate at fiscal year end....................... 5.81% 4.95% --%
OTHER SHORT-TERM BORROWINGS (FHLB ADVANCES):
Outstanding at October 31...................................... $ 53,500 $ 50,000 $ 28,000
Maximum outstanding at any month-end........................... $ 91,800 $176,299 $ 115,600
Average balance outstanding during the year.................... $ 61,781 $171,018 $ 62,162
Weighted average rate during the year.......................... 6.28% 6.07% 6.48%
Weighted average rate at fiscal year end....................... 5.82% 5.67% 3.38%
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE BOSTON BANCORP AND SUBSIDIARIES
CONTENTS
PAGE
Independent Auditors' Report for the year ended October 31, 1995 ......... 55
Independent Auditors' Report for the years ended October 31, 1994 and 1993 56
Consolidated Statements of Financial Condition ........................... 57
Consolidated Statements of Operations .................................... 58
Consolidated Statements of Changes in Stockholders' Equity ............... 59
Consolidated Statements of Cash Flows .................................... 60
Notes to Consolidated Financial Statements ............................... 63
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Boston Bancorp:
We have audited the accompanying consolidated statement of financial
condition of The Boston Bancorp and subsidiaries at October 31, 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of Bancorp's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audit provides 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 The Boston
Bancorp and subsidiaries at October 31, 1995, and the results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 2, 1996
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
The Boston Bancorp
460 West Broadway
South Boston, MA 02127
We have audited the accompanying consolidated statement of financial
condition of The Boston Bancorp and subsidiaries at October 31, 1994, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years ended October 31, 1994 and 1993. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as, evaluating the overall
consolidated 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 consolidated financial position of
The Boston Bancorp and subsidiaries at October 31, 1994, the results of their
operations, stockholders' equity, and cash flows for the years ended October 31,
1994 and 1993 in conformity with generally accepted accounting principles.
T.C. EDWARDS & CO., P.C.
Woburn, Massachusetts
January 2, 1996
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------
AT OCTOBER 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS:
Cash and due from banks.............................................................. $ 15,733 $ 14,884
Investment securities available for sale at fair value (Note 4)...................... 404,397 557,014
Mortgage-backed securities available for sale at fair value (Note 4)................. 1,041,056 989,446
Loans held for sale, net (Notes 9 and 24)............................................ 138,556 18,164
Loans, net (net of allowance for possible loans losses
of $2,121 and $9,471, respectively) (Notes 6, 7, 19 and 24)........................ 209,947 337,241
Other real estate, net (Note 8)...................................................... 7,540 17,920
Federal Home Loan Bank stock (Notes 5 and 15)........................................ 25,675 24,978
Land, buildings and equipment, net (Note 10)......................................... 9,649 8,254
Accrued income receivable............................................................ 14,531 17,015
Receivable for securities sold....................................................... 11,185 1,335
Deferred income taxes (Note 18) ..................................................... -- 26,083
Other assets (Note 11)............................................................... 7,815 20,735
- ------------------------------------------------------------------------------------------------------------------------------
Total assets............................................................... $ 1,886,084 $ 2,033,069
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Notes 12 and 24)........................................................... $ 1,339,467 $ 1,405,570
ESOP loan payable (Notes 16 and 22).................................................. 2,520 3,276
Notes payable (Notes 13 and 24)...................................................... 5,650 7,550
Securities sold under agreements to repurchase (Notes 14 and 24)..................... 92,185 10,275
Federal Home Loan Bank advances (Notes 15 and 24).................................... 236,500 470,000
Accrued interest payable............................................................. 4,244 4,557
Mortgagors' escrow accounts.......................................................... 840 939
Deferred income taxes (Note 18)...................................................... 3,192 --
Other liabilities.................................................................... 6,856 13,280
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities.......................................................... 1,691,454 1,915,447
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 7, 9 and 20).................................... -- --
- -----------------------------------------------------------------------------------------------------------------------------
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 5,218,193 and 5,142,989 shares, respectively
(Notes 21 and 23)................................................................. 5,218 5,143
Additional paid-in capital........................................................... 28,554 23,400
Retained earnings.................................................................... 139,194 118,149
Unearned compensation expense - ESOP (Notes 16 and 22)............................... (2,520) (3,276)
Net unrealized gain (loss) on securities available for sale (Note 4)................. 24,184 (25,794)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity................................................. 194,630 117,622
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity................................. $ 1,886,084 $ 2,033,069
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest and dividend income:
Interest on mortgage loans (Note 6)................................. $ 32,092 $ 31,379 $ 41,200
Interest on other loans............................................. 991 1,012 1,521
Interest on mortgage-backed securities.............................. 74,905 68,822 79,390
Interest on investment securities................................... 23,154 25,921 20,995
Dividends on equity securities...................................... 8,986 9,004 9,945
Interest on short-term investments.................................. 712 643 1,427
- ------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income........................... 140,840 136,781 154,478
- ------------------------------------------------------------------------------------------------------------------------------
Interest expenses:
Deposits (Note 12).................................................. 54,887 49,919 56,836
Federal Home Loan Bank advances (Note 15)........................... 28,159 25,282 26,609
Securities sold under agreements to repurchase (Note 14)............ 2,677 177 1,600
Notes payable (Note 13)............................................. 487 713 1,752
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense....................................... 86,210 76,091 86,797
- ------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income....................................... 54,630 60,690 67,681
Provision for possible loan losses (Note 7)............................ 3,667 5,800 8,000
- ------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision
for possible loan losses................................... 50,963 54,890 59,681
- ------------------------------------------------------------------------------------------------------------------------------
Other income (charges):
Net realized gains on securities (Note 4)........................... 25,125 7,906 20,190
Provision for loss on loans held for sale (Note 9).................. (8,251) -- --
(Loss) gain on sale of premises and equipment....................... (38) 156 --
(Loss) gain on sale of loans........................................ (1,325) (10) 670
Fees and service charges on loans................................... 1,734 1,508 1,248
Other operating income.............................................. 1,490 2,699 2,574
- ------------------------------------------------------------------------------------------------------------------------------
Total other income........................................... 18,735 12,259 24,682
- ------------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits (Notes 17 and 22).................... 12,452 14,978 14,568
Professional services (Note 26)..................................... 4,602 1,450 933
Occupancy and equipment expense..................................... 2,534 2,909 2,737
FDIC deposit insurance assessment................................... 2,233 3,295 3,288
Provision for losses on joint venture advances (Note 11)............ 1,618 982 1,307
Provision for losses on other assets (Note 11)...................... 1,115 -- --
FHLB advance prepayment penalties (Note 15)......................... 1,004 -- --
Advertising expense................................................. 883 1,063 810
Net gain on sale of other real estate............................... (1,502) -- --
Merger related expenses (Note 2).................................... 419 -- --
Net cost of other real estate....................................... 343 1,694 1,417
Provision for OREO valuation........................................ -- 500 --
Other operating expenses............................................ 5,491 5,170 4,796
- ------------------------------------------------------------------------------------------------------------------------------
Total other expenses......................................... 31,192 32,041 29,856
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes............................................. 38,506 35,108 54,507
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefit):
Federal............................................................. 11,496 10,254 15,446
State ............................................................. (1,336) 277 3,741
- ------------------------------------------------------------------------------------------------------------------------------
Total income taxes (Note 18)................................. 10,160 10,531 19,187
- ------------------------------------------------------------------------------------------------------------------------------
Net income............................................................. $ 28,346 $ 24,577 $ 35,320
==============================================================================================================================
Primary earnings per common and common equivalent share................ $ 5.34 $ 4.51 $ 5.81
==============================================================================================================================
Fully diluted earnings per common and common equivalent share.......... $ 5.33 $ 4.51 $ 5.75
==============================================================================================================================
Average number of common shares - Primary.............................. 5,304 5,445 6,079
==============================================================================================================================
Average number of common shares - Fully diluted........................ 5,318 5,445 6,140
==============================================================================================================================
Dividends paid per common share........................................ $ .76 $ .76 $ .68
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
NET
UNREALIZED
UNEARNED GAIN(LOSS) ON
ADDITIONAL COMPENSATION SECURITIES TOTAL
COMMON PAID-IN RETAINED EXPENSE - AVAILABLE STOCKHOLDERS'
STOCK CAPITAL EARNINGS ESOP FOR SALE EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Balance, October 31, 1992..................... $ 6,244 $23,971 $106,752 $(4,788) $ -- $ 132,179
Proceeds from exercise of stock
Options................................. 92 1,540 -- -- -- 1,632
Cost of repurchases of common stock, $1.00
par value............................... (653) (2,214) (17,909) -- -- (20,776)
Dividends paid to stockholders............. -- -- (5,110) -- -- (5,110)
Amortization of unearned
compensation - ESOP..................... -- -- -- 756 -- 756
Adjustment for net unrealized gain on
securities available for sale........... -- -- -- -- 54,333 54,333
Net income, October 31, 1993............... -- -- 35,320 -- -- 35,320
- -----------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1993..................... 5,683 23,297 119,053 (4,032) 54,333 198,334
Proceeds from exercise of stock
options................................. 115 2,022 -- -- -- 2,137
Tax benefits of stock options
exercised............................... -- 302 -- -- -- 302
Cost of repurchases of common stock, $1.00
par value............................... (655) (2,221) (22,509) -- -- (25,385)
Dividends paid to stockholders............. -- -- (2,972) -- -- (2,972)
Amortization of unearned
compensation - ESOP..................... -- -- -- 756 -- 756
Adjustment for net unrealized loss on
securities available for sale........... -- -- -- -- (80,127) (80,127)
Net income, October 31, 1994............... -- -- 24,577 -- -- 24,577
- -----------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1994..................... 5,143 23,400 118,149 (3,276) (25,794) 117,622
Proceeds from exercise of stock
options................................. 197 3,779 -- -- -- 3,976
Tax benefits of stock options
exercised............................... -- 1,787 -- -- -- 1,787
Cost of repurchases of common stock, $1.00
par value............................... (122) (412) (3,390) -- -- (3,924)
Dividends paid to stockholders............. -- -- (3,911) -- -- (3,911)
Amortization of unearned
compensation - ESOP..................... -- -- -- 756 -- 756
Adjustment for net unrealized gain on
securities available for sale........... -- -- -- -- 49,978 49,978
Net income, October 31, 1995............... -- -- 28,346 -- -- 28,346
------- ------- -------- ------- -------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1995..................... $ 5,218 $28,554 $139,194 $(2,520) $ 24,184 $194,630
=============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income............................................................ $ 28,346 $ 24,577 $ 35,320
Adjustments to reconcile net income to net cash provided by
operating activities
Decrease (increase) in accrued income receivable................... 2,484 (167) 1,837
Decrease in accrued interest payable............................... (313) (332) (571)
Amortization of loan discounts and premiums, net................... (774) (1,226) (2,086)
Amortization of investment securities available for sale discounts and
premiums, net.................................................... (1,047) (2,191) (567)
Amortization of investment securities discounts and premiums, net -- -- (1,852)
Amortization of mortgage-backed securities available for sale discounts and
premiums, net.................................................... 2,894 5,387 1,526
Amortization of mortgage-backed securities discounts and premiums,
net.............................................................. -- -- 4,391
Adjustment to carrying value of other real estate.................. 1,014 -- --
Provision for possible loan losses................................. 3,667 5,800 8,000
Provision for OREO valuation....................................... -- 500 --
Provision for loss on loans held for sale.......................... 8,251 -- --
Provision for losses on joint venture advances..................... 1,618 982 1,307
Provision for losses on other assets............................... 1,115 -- --
Net realized (gain) loss on investment securities available for sale (29,943) (7,443) 1,879
Net realized gains on investment securities........................ -- -- (8,007)
Net realized loss (gain) on mortgage-backed securities
available for sale............................................... 4,818 (463) (6,139)
Net realized gains on mortgage-backed securities................... -- -- (7,923)
Net loss (gain) on sale of loans................................... 1,325 10 (670)
(Increase) decrease in loans held for sale......................... (26) (56,717) 4,355
Loans originated for sale.......................................... (30,915) -- --
Loss (gain) on sale of other real estate........................... (1,502) 427 --
Increase in reserve for depreciation............................... 1,010 835 694
(Gain) loss on sale of premises and equipment...................... 38 (156) --
Increase in receivable for securities sold..................... ... (9,850) (1,335) --
(Increase) decrease in deferred tax asset (excluding SFAS No. 115) (7,193) 827 (326)
Decrease (increase) in other assets................................ 10,186 (6,040) (3,653)
(Decrease) increase in other liabilities........................... (4,637) (20) 4,539
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flow from operating activities........................ (19,434) (36,745) 32,054
- ------------------------------------------------------------------------------------------------------------------------------
(Statement continued on next page)
The accompanying notes are an integral part of these consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
INVESTING ACTIVITIES:
Loans originated and principal collections, net....................... $ 7,221 $(21,413) $(41,660)
Proceeds from sale of loans........................................... 9,879 892 10,551
Proceeds from sale of foreclosed real estate.......................... 7,448 10,546 8,835
Purchases of mortgage-backed securities available for sale............ (241,868) (115,435) (113,304)
Purchases of mortgage-backed securities............................... -- -- (462,039)
Principal collections on mortgage-backed securities available for sale 155,763 279,979 98,324
Principal collections on mortgage-backed securities................... -- -- 198,056
Proceeds from sales of mortgage-backed securities available for sale 102,062 10,382 161,000
Proceeds from sales of mortgage-backed securities..................... -- -- 211,234
Purchases of investment securities available for sale................. (103,671) (199,439) (67,423)
Purchases of investment securities.................................... -- -- (142,699)
Proceeds from maturities of investment securities available for sale 7,022 21,980 14,268
Proceeds from maturities of investment securities..................... -- -- 87,736
Proceeds from sales of investment securities available for sale....... 303,360 45,783 14,914
Proceeds from sales of investment securities.......................... -- -- 89,772
(Increase) decrease in FHLB stock..................................... (697) 872 (5,200)
Other real estate expenses............................................ (243) (1,049) (1,977)
Purchases of premises and equipment................................... (2,580) (2,191) (1,410)
Proceeds from sale of premises and equipment.......................... 137 499 --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash flow from investing activities............................ 243,833 31,406 58,978
- ------------------------------------------------------------------------------------------------------------------------------
(Statement continued on next page)
The accompanying notes are an integral part of these consolidated financial statements.
THE BOSTON BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
- --------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES: (IN THOUSANDS)
(Decrease) increase in deposit accounts................................... $(66,103) $(49,307) $ 6,568
-------- -------- --------
Proceeds from Federal Home Loan Bank advances............................. 588,100 486,394 200,110
Payments from Federal Home Loan Bank advances............................. (821,600) (496,394) (133,110)
Payments of ESOP loan payable............................................. (756) (756) (756)
Net increase (decrease) in securities sold under agreements
to repurchase.......................................................... 81,910 10,275 (52,840)
Increase (decrease) in mortgagors' escrow accounts........................ (98) 481 (1,066)
Cash dividends paid on common stock....................................... (3,911) (2,972) (5,110)
Payments for maturing notes payable....................................... (1,900) (7,800) (11,750)
Proceeds from exercise of stock options................................... 3,976 2,137 1,632
Payments for repurchase of common stock................................... (3,924) (25,385) (20,776)
Unearned compensation expense............................................. 756 756 756
- ----------------------------------------------------------------------------------------------------------------------------
Net cash flow from financing activities....................... (223,550) (82,571) (16,342)
- ----------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in cash and cash equivalents.......................... 849 (87,910) 74,690
Cash and cash equivalents at beginning of fiscal year........................... 14,884 102,794 28,104
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of fiscal year................................. $ 15,733 $ 14,884 $102,794
============================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
OCTOBER 31,
--------------------------------------------------
1995 1994 1993
--------------------------------------------------
(IN THOUSANDS)
NON-CASH TRANSACTIONS:
Transfer of other real estate to loans (loans reinstated)................... $ 6,761 $ 1,414 $ 1,302
Transfer of loans to other real estate...................................... 3,101 9,055 4,090
Conversion of real estate loans to FHLMC and FNMA mortgage-backed
certificates.......................................................... 11,937 99,273 81,402
Net transfers of loans to loans held for sale............................... 133,417 -- 65,307
Tax benefit of stock options exercised...................................... 1,787 302 --
SFAS NO. 115:
Transfer of investment and mortgage-backed securities to available for
sale .......................................................... -- -- 1,644,403
(Decrease) increase in stockholders' equity........................... 49,978 (80,127) 54,333
Decrease (increase) in investment securities.......................... (23,104) 59,369 (72,217)
Decrease (increase) in mortgage-backed securities..................... (63,342) 76,286 (15,315)
Increase in deferred tax liability.................................... 36,468 -- 33,199
Increase in deferred tax asset........................................ -- (55,528) --
CASH TRANSACTIONS:
Interest on deposits........................................................ 54,410 50,041 57,205
Interest on borrowings...................................................... 31,594 25,538 28,212
Interest on notes payable................................................... 519 844 1,952
State taxes, net .......................................................... 966 560 4,434
Federal taxes .......................................................... 10,430 11,293 16,800
-------- -------- ----------
The accompanying notes are an integral part of these consolidated financial statements.
THE BOSTON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Boston Bancorp ("Bancorp") was formed in October 1984 and effective
March 1985 acquired all of the outstanding shares of South Boston Savings Bank
("Bank") in exchange for Bancorp common stock and, thereby, became the holding
company for the Bank.
The accounting and reporting policies of Bancorp and its subsidiaries
conform with generally accepted accounting principles and general practices
within the banking industry. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and income and
expenses for the period. Actual results could differ significantly from those
estimates.
The following is a summary of the more significant accounting policies.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Bancorp and
its subsidiaries: Boston Bancorp Securities, Inc., the Bank and the Bank's
subsidiaries: SoBo, Inc., Bigelow Development Corp., and South Boston Securities
Corp. All material intercompany balances and transactions have been eliminated
in the consolidated financial statements.
RECLASSIFICATION:
Certain amounts in prior years have been reclassified to conform with the
current year's presentation.
CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of the consolidated statements of cash flows, cash and due
from banks and federal funds sold are considered to be cash equivalents.
INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
In fiscal 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115 --"Accounting for Certain
Investments in Debt and Equity Securities," which requires the reporting of
certain securities at fair value, except for those securities which Bancorp has
positive intent and ability to hold to maturity. As a result, the entire
portfolio of investment securities and mortgage-backed securities has been
designated as available for sale. These securities are carried at fair value and
a separate component in the stockholders' equity section of the consolidated
statements of financial condition reflects the amount of the net unrealized gain
or loss on securities available for sale, net of taxes. Gains and losses on
disposition of investment and mortgage-backed securities available for sale are
computed by the specific identification method. Accretion and amortization on
debt securities are recognized as adjustments to interest income and are
computed using various methods, none of which differs materially from the
interest method.
Fair values for investment and mortgage-backed securities are based on
quoted market prices or dealer quotes. If quoted market prices or dealer quotes
are not available, market value is estimated using quoted market prices for
similar securities.
Pursuant to the Agreement and Plan of Reorganization between Bank of
Boston Corporation and Bancorp (the "Merger Agreement") (See Note 2), Bancorp is
required to sell its entire equity portfolio and a significant portion of its
debt and mortgage-backed securities portfolio prior to the Merger.
LOANS:
Real estate and non-real estate loans are stated at amortized cost net of
deferred gains on sales of real estate, deferred income on loans financing sales
of real estate, discounts on purchased mortgage loans, deferred loan fees,
unadvanced portions of loans, and allowance for possible loan losses. Interest
income on all loans is credited to income as earned, except as noted on
nonaccrual loans.
Loans held for investment purposes may, in certain circumstances, be
reclassified as held for sale. Designation by management of loans held for
investment or held for sale is based upon a variety of factors such as current
interest rates, liquidity needs, asset/liability management, asset impairment,
and various other factors.
LOAN ORIGINATION FEES AND COSTS:
Loan origination fees and certain direct origination costs are netted, and
the remaining amounts are capitalized and recognized as an adjustment of the
yield on the related loan. The Bank amortizes these amounts over the contractual
life of the related loans, using the level yield method. When loans are sold or
paid off, the unamortized fees and costs are recorded to income or expense.
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
The allowance for possible loan losses is maintained at a level believed
by management to be adequate to meet reasonably foreseeable loan losses on the
basis of various factors; including the risk characteristics of the portfolio,
underlying collateral, current and anticipated economic conditions that may
affect the borrower's ability to pay, specific problem loans, and trends in loan
delinquencies and charge-offs. The allowance is increased by provisions charged
to earnings and reduced by loan charge-offs, net of recoveries. Loans are
charged off in whole or in part when, in management's opinion, collectibility is
not considered probable.
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.
NONACCRUAL LOANS:
Nonaccrual loans are those on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or when
payments of principal or interest have become contractually past due 90 days.
Upon such discontinuance, interest previously accrued but not collected is
reversed and charged against income during the period the related loan is placed
on nonaccrual status. Interest received on nonaccrual loans is either applied
against principal or reported as income according to management's judgment as to
the collectibility of principal. Nonaccrual loans are not returned to full
accrual status until the loans have performed for a reasonable period of time
and concern no longer exists as to the collectibility of principal and interest.
OTHER REAL ESTATE:
Other real estate is composed of properties acquired through foreclosure
or in settlement of loans, as well as loans classified as other real estate
under SFAS No. 66. Loans classified as other real estate under SFAS No. 66 are a
result of sales of other real estate which are financed by the Bank for which
the accounting criteria for recognition of a sale have not been satisfied.
Income received and gains on sales of other real estate that do not meet these
accounting criteria are deferred and accounted for under the cost recovery
method.
Other real estate is recorded at the lower of the carrying value of the
loan or the fair value of the property. Losses arising from the acquisition of
such properties are charged against the allowance for possible loan losses.
Operating expenses and any subsequent provisions to reduce the carrying value to
fair value less estimated selling costs are charged to current period earnings.
Gains and losses upon disposition are reflected in earnings as realized.
Pursuant to the Plan of Reorganization all other real estate will be
disposed of prior to closing.
LOANS HELD FOR SALE:
Loans held for sale are carried at the lower of aggregate cost or market
value, based upon commitments from investors to purchase such loans or upon
prevailing market conditions. Deferred origination fees collected, net of
commitment fees paid, are included in the lower of cost or market determination
and are adjustments to gains or losses on sales of loans.
Pursuant to the Merger Agreement, the Bank's entire portfolio of
commercial and multifamily real estate loans has been classified as held for
sale. All loans held for sale are required to be sold prior to the closing. A
corresponding provision for losses on loans held for sale in the amount of
$8,251,000 was recorded as of October 31, 1995. The portion of the allowance for
possible loan losses attributable to these loans was charged off as of October
31, 1995, reducing the allowance for possible loan losses by $9,700,000.
LAND, BUILDINGS, AND EQUIPMENT:
Land is stated at original cost. Buildings and equipment are stated at
cost less accumulated depreciation. Depreciation is computed principally under
the straight-line method based on estimated useful lives of 25 and 40 years for
buildings and 3 to 20 years for equipment. Maintenance and repair costs are
included in operating expenses while major expenditures for improvements are
capitalized and depreciated.
INVESTMENTS IN REAL ESTATE JOINT VENTURES:
Investments in real estate joint ventures were previously carried at the
lower of cost or estimated net realizable value. Net realizable value was
reviewed periodically and, when necessary, provisions for potential losses were
charged to provision for losses on joint venture advances.
Pursuant to the Merger Agreement, Bancorp is required to dispose of its
investments in real estate joint ventures prior to the closing. Consequently,
these assets have been written down to estimated market value.
INCOME TAXES:
Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income during the period that includes the enactment
date.
PENSION PLAN:
The Bank accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the compensation
cost of an employee's pension benefit over that employee's approximate service
period. Pension costs are funded in the year of accrual using the aggregate cost
method.
EARNINGS PER SHARE:
Earnings per share calculations are based on the weighted average number
of shares outstanding during each year, including the effect of common stock
equivalents.
(2) MERGER AGREEMENT
On October 10, 1995, Bancorp and Bank of Boston Corporation ("Bank of
Boston"), a corporation organized and existing under the laws of the
Commonwealth of Massachusetts, entered into the Merger Agreement, pursuant to
which a wholly-owned subsidiary of Bank of Boston will merge with and into
Bancorp (the "Merger").
The Merger is intended to constitute a tax-free reorganization and to be
accounted for as a purchase. It is anticipated that the Merger will be
consummated in June 1996, and is subject to the approval of the common
shareholders of Bancorp, the receipt of various regulatory approvals and the
satisfaction (or, where permissible, waiver) of certain other closing
conditions.
As a result of the Merger, each share of the common stock of Bancorp
outstanding immediately prior to the effective time of the Merger (except shares
held directly or indirectly by Bancorp or Bank of Boston, other than in a
fiduciary capacity or in respect of debts previously contracted, shares held as
treasury stock by Bancorp and shares held by dissenting stockholders who have
perfected their rights of appraisal), will be converted into the right to
receive shares of common stock of Bank of Boston. The amount of consideration to
be received by Bancorp stockholders in the Merger cannot be determined at this
time because it will be based in large part on Bancorp's Adjusted Net Worth at
the month-end preceding the closing. On October 11, 1995, in its news release
announcing the transaction, Bancorp estimated that, assuming Bancorp's assets
(including its $1.6 billion investment portfolio) retained their then current
value and assuming the Merger occurs in June 1996, the per share consideration
to be received by Bancorp stockholders might range from $39.50 to $42.50 in Bank
of Boston common stock. This estimate is now outdated because of changes
occurring subsequent to October 11, 1995. An updated estimate will be contained
in the proxy statement for Bancorp's 1996 Annual Meeting, at which the Merger
will be voted upon.
(3) CHANGES IN ACCOUNTING PRINCIPLES
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which was amended in October
1994 by SFAS No. 118, "Accounting for Creditors for Impairment of a Loan-Income
Recognition and Disclosure." These Statements are effective November 1, 1995.
The Statements apply to all creditors and all loans, uncollateralized as well as
collateralized, except large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, loans that are measured at fair value
or at the lower of cost or fair value, and leases and debt securities as defined
in SFAS No. 115. The Statements apply to restructured loans that are not
performing in accordance with the terms of the restructuring. The statements
require that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's original effective interest rate or
based on collateral for collateral dependent loans. The Company adopted these
statements on November 1, 1995 and implementation of the statements did not have
a material effect on the Company's financial condition or results of operations.
SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to be Disposed of," is effective for fiscal years beginning
after December 15, 1995. This Statement establishes accounting standards for
determining impairment of long-lived assets and certain intangibles. Bancorp
does not intend to adopt the Statement before it is required to do so and it is
not anticipated to have a material effect on the financial condition or results
of operations of Bancorp.
SFAS No. 122 - "Accounting for Mortgage Servicing Rights," is also
effective for fiscal years beginning after December 15, 1995. SFAS No. 122
amends SFAS No. 65 and will require that a mortgage banking enterprise that
acquires mortgage servicing rights either through purchase or origination of
mortgage loans and sells or securitizes those loans with the servicing rights
retained should allocate the total cost of the mortgage loans to the servicing
rights and the loans based on relative fair values. The Statement also requires
the assessment of capitalized servicing rights for impairment based on fair
value of the rights. Bancorp intends to implement this Statement in fiscal 1996
but does not expect implementation to have a material effect on Bancorp's
financial condition or results of operations.
SFAS No. 123, "Accounting for Stock-based Compensation," was issued in
October 1995 and is effective for fiscal years beginning after December 15,
1995. The Statement establishes accounting and reporting standards for
stock-based employee compensation plans. Bancorp will elect, as provided in the
Statement, to continue following the accounting treatment prescribed by APB
Opinion No. 25 "Accounting for Stock Issued to Employees." As such,
implementation will not have a material effect on Bancorp's consolidated
financial condition or results of operations. Bancorp will be required to
include proforma accounting disclosures of net income measured by the fair value
method defined in the Statement for options granted beginning with the fiscal
year starting November 1, 1996.
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of investment securities available for
sale at October 31, follows:
- ------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------
NET
GROSS GROSS UNREALIZED
AMORTIZED UNREALIZED UNREALIZED FAIR GAINS
COST GAINS LOSSES VALUE (LOSSES)
- ------------------------------------------------------------------------------
(IN THOUSANDS)
Debt Securities:
U.S. government
obligations.... $241,466 $10,929 $(144) $252,251 $10,785
Other bonds and
obligations*... 47,541 863 (435) 47,969 428
- ------------------------------------------------------------------------------
Total debt
securities 289,007 11,792 (579) 300,220 11,213
- ------------------------------------------------------------------------------
Equity Securities:
FHLMC voting common. 543 6,382 -- 6,925 6,382
Other preferred and
corporate stocks. 78,673 20,592 (2,013) 97,252 18,579
- ------------------------------------------------------------------------------
Total equity
securities .... 79,216 26,974 (2,013) 104,177 24,961
- ------------------------------------------------------------------------------
Totals........... $368,223 $38,766 $(2,592) $404,397 $36,174
==============================================================================
- ------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------
NET
GROSS GROSS UNREALIZED
AMORTIZED UNREALIZED UNREALIZED FAIR GAINS
COST GAINS LOSSES VALUE (LOSSES)
- ------------------------------------------------------------------------------
(IN THOUSANDS)
Debt Securities:
U.S. government
obligations .... $357,416 $2,922 $(16,635) $343,703 $(13,713)
Other bonds and
obligations* ... 52,528 479 (2,187) 50,820 (1,708)
- ------------------------------------------------------------------------------
Total debt
securities 409,944 3,401 (18,822) 394,523 (15,421)
- ------------------------------------------------------------------------------
Equity Securities:
FHLMC voting common 1,799 12,916 -- 14,715 12,916
Other preferred and
corporate stocks 132,423 20,174 (4,821) 147,776 15,353
- ------------------------------------------------------------------------------
Total equity
securities 134,222 33,090 (4,821) 162,491 28,269
- ------------------------------------------------------------------------------
Totals ......... $544,166 $36,491 $(23,643) $557,014 $12,848
==============================================================================
* Includes below investment grade corporate debt securities carried at a fair
value of $2,882,000 and $3,871,000 at October 31, 1995 and 1994,
respectively.
The amortized cost and fair value of debt securities available for sale at
October 31, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without prepayment penalties.
------------------------------------------------------
1995 1994
------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- ------------------------------------------------------------------------------
(IN THOUSANDS)
Due in one year or less $ 9,045 $ 9,066 $ 7,486 $ 7,489
Due after one year
through five years .. 103,330 106,844 86,623 87,717
Due after five years
through ten years ... 174,469 182,142 314,400 297,826
Due after ten years ... 2,163 2,168 1,435 1,491
- ------------------------------------------------------------------------------
Totals............... $ 289,007 $300,220 $409,944 $394,523
==============================================================================
Proceeds from sales of debt securities available for sale during the
fiscal years ended October 31, 1995, 1994 and 1993, were $190,963,000,
$7,495,000, and $5,175,000, respectively. Gross gains of $1,076,000, $93,000 and
$39,000, and gross losses of $7,753,000, $-0- and $2,042,000, respectively, were
realized on those sales. Proceeds from sales of equity securities available for
sale during the fiscal years ended October 31, 1995, 1994, and 1993, were
$112,397,000, and $39,160,000 and $9,739,000, respectively. Gross gains of
$38,087,000, $9,288,000 and $1,052,000 and gross losses of $1,467,000,
$1,938,000 and $928,000, respectively, were realized on those sales.
Proceeds from sales of debt securities during the fiscal year ended
October 31, 1993, were $63,270,000. Gross gains of $3,111,000 and gross losses
of $29,000 were realized on those sales. Proceeds from sales of marketable
equity securities during the fiscal year ended October 31, 1993 were
$26,502,000. Gross gains of $6,119,000 and gross losses of $1,194,000 were
realized on those sales.
The amortized cost and fair value of mortgage-backed securities available
for sale at October 31, follows:
- ------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------
NET
GROSS GROSS UNREALIZED
AMORTIZED UNREALIZED UNREALIZED FAIR GAINS
COST GAINS LOSSES VALUE (LOSSES)
- ------------------------------------------------------------------------------
(IN THOUSANDS)
GNMA mortgage-backed
securities...... $ 185,163 $ 867 $(2,130) $ 183,900 $(1,263)
FHLMC participation
certificates ... 289,079 3,751 (1,187) 291,643 2,564
FNMA pass-through
certificates ... 538,428 3,936 (2,867) 539,497 1,069
Other mortgage-backed
securities ..... 26,237 13 (234) 26,016 (221)
- ------------------------------------------------------------------------------
Totals.......... $1,038,907 $8,567 $(6,418) $1,041,056 $ 2,149
- ------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------
NET
GROSS GROSS UNREALIZED
AMORTIZED UNREALIZED UNREALIZED FAIR GAINS
COST GAINS LOSSES VALUE (LOSSES)
- ------------------------------------------------------------------------------
(IN THOUSANDS)
GNMA mortgage-backed
securities...... $ 206,674 $ 459 $(14,437) $192,696 $(13,978)
FHLMC participation
certificates ... 165,268 273 (8,417) 157,124 (8,144)
FNMA pass-through
certificates ... 642,427 315 (39,164) 603,578 (38,849)
Other mortgage-backed
securities ..... 36,048 -- -- 36,048 --
- ------------------------------------------------------------------------------
Totals.......... $1,050,417 $1,047 $(62,018) $989,446 $(60,971)
==============================================================================
The amortized cost and fair value of mortgage-backed securities available
for sale at October 31, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because mortgages backing
individual securities may have the right to prepay with or without prepayment
penalties.
------------------------------------------------------
1995 1994
------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- ------------------------------------------------------------------------------
(IN THOUSANDS)
Due in one year or less $ -- $ -- $ 80 $ 86
Due after one year
through five years 60,558 62,190 22,049 21,834
Due after five years
through ten years.. 49,296 49,722 39,230 36,828
Due after ten years.. 929,053 929,144 989,058 930,698
- ------------------------------------------------------------------------------
Totals............. $1,038,907 $1,041,056 $1,050,417 $ 989,446
==============================================================================
The amortized cost and fair value of investment and mortgage-backed
securities pledged as collateral for various purposes at October 31, 1995, were
$407,255,000 and $410,801,000, respectively, at October 31, 1994, were
$85,009,000 and $80,692,000, respectively and at October 31, 1993, were
$78,059,000 and $91,133,000, respectively. (See notes 13, 14, 15 and 16).
Proceeds from sales of mortgage-backed securities available for sale
during the fiscal years ended October 31, 1995, 1994 and 1993 were $102,062,000,
$10,382,000 and $161,000,000, respectively. Gross gains of $-0-, $463,000 and
$6,177,000 and gross losses of $4,818,000, $-0- and $38,000, respectively, were
realized on those sales.
Proceeds from sale of investments in mortgage-backed securities during
the fiscal year 1993 were $211,234,000. Gross gains of $7,923,000 and gross
losses of $-0- were realized on these sales.
(5) FEDERAL HOME LOAN BANK STOCK
As a member of the Federal Home Loan Bank (FHLB) of Boston, the Bank is
required to invest in FHLB stock in the amount of 1% of its outstanding home
loans or 5% of its outstanding FHLB advances, whichever is higher. The stock is
redeemable at face value and therefore carried at face value.
(6) LOANS
The following schedule summarizes the composition of the loan portfolio,
excluding loans held for sale:
- ----------------------------------------------------------
AT OCTOBER 31
- ----------------------------------------------------------
1995 1994
- ----------------------------------------------------------
(IN THOUSANDS)
REAL ESTATE LOANS:
Residential:
Conventional.................. $172,833 $170,987
FHA and VA.................... 34,108 40,368
Multi family.................. -- 75,398
Commercial....................... -- 54,976
Construction loans:
Residential:.................. 709 1,724
Commercial.................... -- 1,720
Second mortgages................. 248 735
Home improvement................. 454 718
- ----------------------------------------------------------
Total real estate loans..... 208,352 346,626
- ----------------------------------------------------------
CONSUMER LOANS:
Passbook......................... 5,019 5,615
Collateral....................... 768 756
Personal......................... 476 667
Education (guaranteed)........... 1,955 1,960
- ----------------------------------------------------------
Total consumer loans........ 8,218 8,998
- ----------------------------------------------------------
Total loans receivable (before net
items) 216,570 355,624
- ----------------------------------------------------------
Deduct:
Deferred gains on sales of real
estate -- 879
Deferred income on loans financing
sales of real estate.......... 124 1,385
Deferred loan fees............... 255 558
Unearned discount on loans....... 3,986 4,760
Unadvanced portion of loans...... 137 1,330
Allowance for possible loan losses 2,121 9,471
- ----------------------------------------------------------
Totals........................ 6,623 18,383
- ----------------------------------------------------------
Loans, net.......................... $209,947 $337,241
==========================================================
Included in total real estate loans (before net items) are $108,949,000 of
fixed rate loans and $99,403,000 of adjustable rate loans at October 31, 1995.
At October 31, 1995, 1994 and 1993, the Bank provided loan servicing for
others; loans serviced balances were approximately $241,545,000, $258,179,000
and $226,169,000, respectively.
MATURITY OF LOAN PORTFOLIO:
The following table, which includes loans held for sale, sets forth
certain information at October 31, 1995, regarding the dollar amount of loans
which are maturing or which can be repriced in the Bank's portfolio. Demand
loans and loans having no stated schedule of repayments and no stated maturity
are reported as due in one year or less.
- -------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR THROUGH THROUGH AFTER
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Residential and
commercial real
estate loans ..... $164,460 $ 83,558 $ 53,215 $ 51,211 $352,444
Consumer loans..... 9 908 533 468 24 10,933
- -------------------------------------------------------------------------------
Totals... $174,368 $ 84,091 $ 53,683 $ 51,235 $363,377
- -------------------------------------------------------------------------------
The following table sets forth the dollar amount of all loans maturing
after October 31, 1996, by fixed or adjustable interest rates:
- -------------------------------------------------------------------------------
FIXED ADJUSTABLE
RATE RATE
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Residential and commercial real estate loans $139,505 $48,479
Consumer loans.............................. -- 1,025
- -------------------------------------------------------------------------------
Totals............................. $139,505 $49,504
===============================================================================
NONACCRUAL LOANS:
Nonaccrual loans at October 31, 1995, 1994, and 1993, amounted to $5,828,000,
$5,102,000, and $4,598,000, respectively. The reduction in interest income for
the fiscal years ended October 31, 1995, 1994, and 1993, associated with
nonaccrual loans held at the end of each fiscal year, is as follows:
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Income in accordance with
original terms...................... $ 679 $ 788 $ 458
Income recognized................... 284 262 160
- -------------------------------------------------------------------------------
Foregone income..................... $ 395 $ 526 $ 298
===============================================================================
Weighted average contractual interest rates on nonaccrual loans at October 31,
1995, 1994 and 1993 are 9.97%, 8.37%, and 9.31%, respectively.
RESTRUCTURED LOANS:
Restructured loans at October 31, 1995, 1994, and 1993, amounted to $590,000,
$2,998,000, and $7,665,000, respectively. There are no commitments to lend
additional funds to borrowers whose loans have been modified. The effect on
interest income for the fiscal years ended October 31, 1995, 1994, and 1993,
associated with restructured loans held at the end of each year is as follows:
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------
Income in accordance with
original terms......................... $ 86 $ 370 $ 1,369
Income recognized....................... 77 337 1,147
- -------------------------------------------------------------------------------
Foregone income......................... $ 9 $ 33 $ 222
===============================================================================
(7) ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses is as follows:
- -------------------------------------------------------------------------------
OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Balance at beginning of period ...... $ 9,471 $ 9,325 $ 9,278
- -------------------------------------------------------------------------------
Add:
Provision charged to:
Commercial real estate ...... 3,469 4,540 6,400
Residential real estate ..... 125 1,229 1,520
Consumer..................... 73 31 80
- -------------------------------------------------------------------------------
3,667 5,800 8,000
- -------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial real estate ...... 849 178 161
Residential real estate ..... 172 297 136
Consumer..................... 20 12 1
- -------------------------------------------------------------------------------
1,041 487 298
- -------------------------------------------------------------------------------
Less:
Loans charged off or Adjusted to
fair value:
Commercial real estate ...... 11,083 4,383 6,437
Residential real estate ..... 801 1,678 1,786
Consumer..................... 174 80 28
- -------------------------------------------------------------------------------
12,058 6,141 8,251
- -------------------------------------------------------------------------------
Balance at end of period............. $ 2,121 $ 9,471 $ 9,325
===============================================================================
The total reserve for loan losses for federal income tax purposes is
approximately $38,563,000 at October 31, 1995. The amount of unprovided deferred
taxes related to the tax reserves at December 31, 1995 was approximately
$15,400,000. When a savings bank merges into a commercial bank and in certain
other circumstances, it must recapture its excess tax bad debt deductions. The
Merger will cause a recapture of South Boston's excess tax bad debt deductions.
Bancorp estimates that its stockholders' equity will be reduced by $15.4
million, and that the aggregate value to be received by its stockholders in the
Merger will be reduced by $11.0 million, as a result of such recapture.
Legislation was recently passed by Congress that would provide special rules
regarding the recapture of excess tax bad debt deductions, which might have
relieved Bancorp of the need to recapture substantially all of South Boston's
excess tax bad debt deductions. President Clinton vetoed this legislation. While
it is possible that other legislation containing similar provisions could be
enacted, Bancorp cannot predict whether this will occur prior to the Merger.
(8) OTHER REAL ESTATE
The following schedule summarizes other real estate at the dates shown:
- -------------------------------------------------------------------------------
October 31,
- -------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Conventional...... $ 1,125 $ 6,656 $ 4,206 $ 5,256 $ 4,960
Commercial........ 6,415 11,147 5,869 8,690 7,651
FHA/VA............ -- 117 98 297 247
- -------------------------------------------------------------------------------
Total other real estate $ 7,540 $ 17,920 $ 10,173 $ 14,243 $ 12,858
===============================================================================
(9) LOANS HELD FOR SALE
As of October 31, 1995 and 1994, management has identified certain loans
which, depending on market conditions and other factors, may be offered for sale
in the secondary market or converted to mortgage-backed securities which the
Bank may then hold as mortgage-backed securities available for sale.
Pursuant to the Merger Agreement, the Bank's entire commercial and
multifamily portfolio of loans has been classified as held for sale as of
October 31, 1995. The valuation of loan portfolios is an imprecise matter. The
actual value that Bancorp will realize from the disposition of its commercial
and multi-family real estate loan portfolio will be affected by a number of
factors, including prevailing interest rates, the characteristics of the loans
(including repayment histories, loan-to-value ratios and documentation) and a
buyer's subjective evaluation of those credit characteristics. The Company's
management has attempted to take these factors into account in developing the
estimated value of the portfolio and has considered all material market factors
affecting value which were available to it. Management relied primarily on a
valuation methodology which derived estimated present values of the future cash
flows that a buyer of the loans might expect to receive based on an evaluation
of the borrower's credit characteristics, leverage measured by actual debt
service coverage, market level debt service coverage, loan-to-appraised-value,
and loan-to-estimated-property-value, and the quality of the loan documents
relating to each mortgage. There can, of course, be no assurance that Bancorp
will receive an amount for the portfolio consistent with the estimated value.
The cost and estimated market value of these loans which are shown at the
lower of cost or market in the consolidated statements of financial condition,
as of October 31, follow:
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
Cost Market Cost Market
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Residential mortgages....... $ 23,517 $ 23,841 $ 7,060 $ 6,854
Commercial mortgages........ 120,582 112,000 8,687 8,854
Education (guaranteed)...... 2,708 2,715 2,443 2,456
- -------------------------------------------------------------------------------
Loans held for sale, net.... $146,807 $138,556 $18,190 $ 18,164
===============================================================================
(10)LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment consisted of the following:
- -------------------------------------------------------------------------------
AT OCTOBER 31
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Land.................................. $ 3,069 $ 1,749
Buildings............................. 5,873 2,425
Furniture and equipment............... 3,023 4,190
Assets under capital lease............ -- 2,525
Land improvements..................... 107 115
Lease improvements.................... 138 969
Construction suspense................. -- 10
- -------------------------------------------------------------------------------
12,210 11,983
Accumulated depreciation.............. (2,561) (3,729)
- -------------------------------------------------------------------------------
Land, buildings and equipment, net $ 9,649 $ 8,254
===============================================================================
During October 1987, the Bank sold four bank buildings with a net book
value of $2,957,000 to a limited partnership, whose limited partners at October
31, 1994 included 33 officers and employees of the Bank, at a gain of
$2,843,000. As the sale agreement contained a leaseback provision, the gain had
been deferred and was being reflected as a reduction of occupancy expense over a
30 year period. As of October 31, 1994 and 1993, the balance of this deferred
gain was $2,180,000 and $2,275,000, respectively.
On July 20, 1995, the Bank reacquired the four buildings previously sold
under the sale and leaseback arrangement. The Bank also purchased a branch
facility, land related to another branch and a record retention facility from
the limited partnership.
The reacquired assets were recorded at a value equal to what the
hypothetical book value would have been if the sales and leasebacks had never
occurred. The three additional properties were recorded at the lower of cost or
fair market value. To record the purchase of these properties it was necessary
to reduce the carrying value of these properties by $412,000. This adjustment
was included as other operating expenses.
In connection with the repurchase of the assets from the limited
partnership, 29 officers and employees of the Bank, who were also limited
partners, were paid approximately $933,000 for their release of all claims and
rights related to the limited partnership.
(11) OTHER ASSETS
The Bigelow School Partnership, a partnership in which the Bank had an
equity interest, was dissolved during the fiscal year ended October 31, 1994.
Its primary asset, a multi-unit residential condominium property in South
Boston, was classified as real estate owned, and was sold in October 1995 at a
$20,000 loss. During the fiscal year ended October 31, 1994, the Bank charged
off $626,000 relating to this property.
The Bank has equity interests in two partnerships, the Harbor Point
Apartments Company Limited Partnership ("Harbor Point") and the Parmelee Court
Limited Partnership ("Parmelee Court"), each of which provides residential
housing in the City of Boston.
The Bank is obligated, under a non-interest bearing note payable, to
provide $120,000 in capital contributions to Parmelee Court which is included in
other liabilities.
Pursuant to the Merger Agreement, Bancorp is required to dispose of its
interests in Harbor Point and Parmelee Court. Consequently, their respective
carrying values have been reduced to $460,000 and $0. Harbor Point was sold on
November 3, 1995 for $460,000.
The Bank has recorded provisions for losses on joint venture advances on
Harbor Point of $1,210,000 in 1995, $550,000 in 1994, and $422,000 in 1993 and
provisions on Parmelee Court of $408,000 in 1995 and $152,000 in 1994 and
provisions on Bigelow School of $280,000 in 1994 and $885,000 in 1993.
Pursuant to the Merger Agreement, the Bank recorded a provision for loss
on sale of other assets of $1,115,000 related to the Bank's investment in the
Massachusetts Thrift Fund for Economic Development.
(12) DEPOSITS
The composition of deposit balances is summarized as follows:
- -------------------------------------------------------------------------------
AT OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Non-interest bearing:
Demand deposit
accounts.......... $ 15,723 -- $ 16,283 --
Interest bearing:
NOW accounts..... 95,542 1.75% 97,314 1.75%
Regular savings and
club accounts...... 326,763 2.54 396,355 2.53
Money market deposit
accounts......... 111,910 2.95 138,634 2.50
Term deposit
certificates ...... 789,529 5.80 756,984 4.74
---------- ----------
Total Deposits...... $1,339,467 4.41% $1,405,570 3.63%
========== ==========
The following table presents time certificates of deposit at October 31,
1995 by fiscal year of maturity:
- -------------------------------------------------------------------------------
FISCAL WEIGHTED
YEAR OF AVERAGE
MATURITY AMOUNT RATE
- -------------------------------------------------------------------------------
(IN THOUSANDS)
1996 $ 542,097 5.50%
1997 133,522 6.61
1998 85,051 6.28
1999 18,232 6.02
2000 10,627 6.83
---------
$ 789,529 5.80%
=========
The following table presents the time certificates of deposit in amounts
of $100,000 or more, at the dates indicated, by time remaining to maturity:
- -------------------------------------------------------------------------------
AT OCTOBER 31,
- -------------------------------------------------------------------------------
MATURING 1995 1994
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Three months or less...................... $ 18,860 $ 24,042
Over three through six months............. 20,487 19,870
Over six through twelve months............ 54,233 29,792
Over twelve months........................ 52,917 58,542
- -------------------------------------------------------------------------------
Totals.............................. $ 146,497 $ 132,246
===============================================================================
(13) NOTES PAYABLE
As of September 22, 1986, the Bank, through Merrill Lynch Capital Markets,
initiated and began selling $100,000,000 of Mortgage-Backed Medium-Term Notes,
Series A. At October 31, 1995, the outstanding notes are secured by U.S.
Treasury Notes. The amortized cost (including accrued interest) and fair values
of the pledged collateral at October 31, 1995, were $10,342,000 and $10,419,000,
respectively, and at October 31, 1994, were $49,263,000 and $45,790,000,
respectively. As part of the collateralization requirement, the securities that
are pledged have their respective fair market value adjusted by a factor based
on the security and its maturity and rate. The Bank is required to pledge
eligible collateral having an adjusted market value at least equal to the
principal amount of the outstanding Series A notes plus accrued interest,
thereon. The notes carry a rating of AAA from both Moody's Investors Service,
Inc. and Standard & Poor's Corporation.
As a precondition to the Merger, sufficient funds are required to be
placed in trust to defease the medium term notes in accordance with the
scheduled payments and maturities.
The following schedule summarizes the composition of notes payable:
- -------------------------------------------------------------------------------
FISCAL AT OCTOBER 31
YEAR OF INTEREST RATE ----------------
MATURITY RANGE 1995 1994
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1995 8.15 - 8.25% $ -- $ 1,900
1996 8.20 - 8.20 100 100
1997 8.20 - 8.45 5,550 5,550
- -------------------------------------------------------------------------------
Total notes payable $ 5,650 $ 7,550
===============================================================================
(14) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- -------------------------------------------------------------------------------
AT OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Outstanding at October 31 .............. $ 92,185 $ 10,275
Fair value of collateral at October 31,
including accrued interest .......... 124,186 10,516
Average balance outstanding during the
fiscal year ......................... 44,524 3,721
Maximum outstanding at any month-end ... 92,185 10,463
Weighted average rate at fiscal year-end 5.81% 4.95%
Weighted average rate during the year .. 6.01% 4.76%
The agreements were secured by mortgage-backed securities at October 31, 1995
and by a U.S. Treasury note at October 31, 1994. The securities pledged as
collateral were held by two nationally known government securities dealers,
recognized as primary dealers by the Federal Reserve Bank Board, and was
therefore viewed as having minimal risk.
The length of these agreements ranged from 30 to 33 days in fiscal 1995 and
from 7 days to 32 days in fiscal 1994.
(15) FEDERAL HOME LOAN BANK ADVANCES
The Bank became a member of the Federal Home Loan Bank in June 1987.
Federal Home Loan Bank advances consisted of the following:
- -------------------------------------------------------------------------------
FISCAL
YEAR OF INTEREST RATE AT OCTOBER 31,
MATURITY RANGE 1995 1994
- -------------------------------------------------------------------------------
(IN THOUSANDS)
1995 4.23 - 6.40% $ -- $ 212,000 *
1996 3.67 - 6.92 126,500 198,000 **
1997 4.87 - 7.00 75,000 25,000
1998 5.49 - 6.06 35,000 35,000
- -------------------------------------------------------------------------------
Total Federal Home Loan
Bank advances $236,500 $ 470,000
===============================================================================
* Includes $15,000,000 with an original five year maturity with a three
month rate adjustment to two basis points below the three month LIBOR
(London Interbank Offered Rate).
** Includes $23,000,000 with an original eighteen month maturity with
three month rate adjustments to three month LIBOR at October 31, 1995
and 1994. Also includes $20,000,000 with an original five year maturity
with an annual rate adjustment to twenty-five basis points above the
one year treasury constant maturity yield, but no less than fifteen
basis points over the FHLB agency yield curve at October 31, 1994. and
1993.
Federal Home Loan Bank Advances in the amount of $178,676,000 were prepaid
during the fiscal year ending October 31, 1995 and prepayment penalties in the
amount of $1,004,000 were assessed. Pursuant to the Merger Agreement, the
remaining advances are required to be retired or paid off prior to the Merger.
Additional prepayment penalties may be incurred.
At October 31, 1995 the Federal Home Loan Bank advances were secured by the
capital stock of the Federal Home Loan Bank of Boston owned by the Bank and by
mortgage-backed securities. At October 31, 1995 the amortized cost and fair
value of Federal Home Loan Bank stock and mortgage-backed securities pledged as
collateral were $271,267,000 and $270,527,000, respectively.
At October 31, 1994 the Bank was assigned "blanket lien" status, meaning
they were at liberty to "use, co-mingle, encumber or dispose of any portion of
their collateral" as long as they continued to meet their collateral maintenance
level. At October 31, 1994 the Federal Home Loan Bank advances were secured by
the capital stock of the Federal Home Loan Bank of Boston owned by the Bank, and
were also secured by real estate loans, mortgage-backed securities and
investment securities in an amount equal to collateral maintenance levels
determined by the Federal Home Loan Bank.
Interest expense on short-term advances for fiscal years ended October 31,
1995, 1994, and 1993, amounted to $3,878,000, $5,989,000 and $3,204,000,
respectiviely.
(16) ESOP LOAN PAYABLE
The following summarizes the ESOP loan payable at October 31:
- -------------------------------------------------------------------------------
LENDER MATURITY RATE 1995 1994
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Shawmut Bank, NA 03/01/99 * $2,520 $3,276
===============================================================================
*80% of the Corporate Base Rate of lender, adjusted quarterly.
At October 31, 1995 and 1994, the Company had pledged equity securities
with a fair value of $4,653,000 and $6,928,000 respectively, as collateral on
this loan.
The aggregate amount of sinking fund requirements over the next four years
as of October 31, 1995 in thousands, are as follows:
1996 ................................................. 756
1997 ................................................. 756
1998 ................................................. 756
1999 ................................................. 252
- -------------------------------------------------------------------------------
$2,520
===============================================================================
The proceeds of this loan were used to fund stock purchases through the
Employee Stock Ownership Plan. In conjunction with the plan termination (See
Note 22), the outstanding debt will be retired through the sale of unallocated
shares at the effective time of the Merger.
(17) EMPLOYEE BENEFITS
PENSION PLAN
The Bank sponsors a noncontributory defined benefit pension plan that
covers all employees who meet specified age and length of service requirements.
The plan is administered by the Savings Banks Employees Retirement Association
(SBERA) and provides for benefits to be paid to eligible employees at retirement
based primarily upon their years of service with the Bank and average
compensation levels. Contributions to the plan reflect benefits attributed to
employee's service to date, as well as services expected to be performed in the
future.
Contributions by the Bank are consistent with the funding requirements of
Federal law and regulations. Pension plan assets consist principally of
equity-based mutual funds, bonds, and government securities.
The following sets forth the funded status of the plan:
- -------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Projected benefit obligation:
Vested benefits................. $ (7,507) $ (7,481) $(6,881)
Nonvested benefits.............. -- -- --
- -------------------------------------------------------------------------------
Accumulated benefit
obligations................... (7,507) (7,481) (6,881)
Effect of projected future
compensation levels........... (3,724) (3,720) (5,076)
- -------------------------------------------------------------------------------
Projected benefit obligation (11,231) (11,201) (11,957)
Plan's assets at fair value..... 9,512 8,431 9,142
- -------------------------------------------------------------------------------
Projected benefit obligation in
excess of plan's assets....... (1,719) (2,770) (2,815)
Unrecognized net loss due to
past experience different from
assumptions made.............. (517) 779 1,597
Unrecognized net obligation
existing at initial
SFAS No. 87................... 267 282 298
- -------------------------------------------------------------------------------
Accrued pension cost............ $ (1,969) $ (1,709) $ (920)
===============================================================================
Net periodic pension cost included the following:
- -------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Service cost...................... $ 673 $ 673 $ 616
Interest cost..................... 896 837 768
Return on plan assets............. (674) (530) (588)
Net amortization and deferral .... 16 15 16
Amortization of net loss (gain) .. 35 (40) 69
- -------------------------------------------------------------------------------
Net periodic pension cost... $ 946 $ 955 $ 881
===============================================================================
Assumptions used to develop the net
periodic pension cost follows:
Discount rate............... ..... 7.00% 8.00% 7.00%
Rate of increase in compensation
levels.......................... 5.00% 6.00% 6.00%
Expected long-term rate of return on
on assets ...................... 8.00% 7.00% 7.00%
In connection with the Merger, the SBERA plan will be merged into a
retirement plan offered by Bank of Boston.
EMPLOYEE STOCK REPURCHASE PLAN
On December 10, 1986, the Board of Directors of Bancorp voted to
provide directors, officers, and full-time employees of Bancorp and its
subsidiaries a benefit in the form of an employee stock repurchase plan, under
which such persons have the opportunity to sell their shares of common stock of
Bancorp without paying any brokerage fees or commissions. Under the plan,
Bancorp may purchase, during any fiscal year, up to one percent of the total
number of outstanding shares as of the last day of the prior fiscal year. Such
program was terminated in December 1994.
SUPPLEMENTAL RETIREMENT PLAN
Bancorp has a split dollar life insurance program for certain key
employees of Bancorp and its subsidiaries. Under Bancorp's split dollar program,
as amended, Bancorp is entitled to the lesser of the cash surrender value of the
policy or the amount of the premiums it has paid and the participant is entitled
to the remaining interest in the policy upon the earliest of the following
occurrences: the participant retires after age 65; the participant voluntarily
terminates employment (other than because of retirement after age 55 and before
age 65 or because of disability before age 65); when a participant who has
retired or terminated employment because of disability attains age 65; the
participant becomes employed by a substantial competitor of the Bank; the
participant's employment is terminated for cause; or the participant gives
written notice to Bancorp. In the event of the participant's death, Bancorp is
reimbursed for premiums paid from the balance of the death benefit paid to the
participant's beneficiary. The carrying values of these policies reflect their
current cash surrender value and are included in other assets.
POST RETIREMENT/EMPLOYMENT BENEFITS
SFAS No. 106 - "Employers' Accounting for Postretirement Benefits Other
Than Pensions," requires that the cost of postretirement benefits other than
pensions must be recognized on an accrual basis as employees perform services to
earn the benefits.
As of October 31, 1995, Bancorp does not provide any postretirement
benefits which would be reported under the provisions of SFAS No. 106.
Similarly, SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," prescribes the accrual method for all types of benefits provided to
former or inactive employees after employment, but before retirement. Bancorp
accounts for postemployment benefits under the accrual method as prescribed.
(18) INCOME TAXES
The provision for income taxes consisted of the following:
- -------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Allocation between current and deferred portions:
Current payable:
Federal.............. $15,980 $9,721 $15,524
State................ 1,373 (16) 3,988
- -------------------------------------------------------------------------------
17,353 9,705 19,512
- -------------------------------------------------------------------------------
Deferred:
Federal.............. (4,484) 533 (78)
State................ (2,709) 293 (247)
- -------------------------------------------------------------------------------
(7,193) 826 (325)
- -------------------------------------------------------------------------------
Total provision...... $10,160 $10,531 $19,187
===============================================================================
The following schedule presents the components of the deferred tax assets and
liabilities.
- -------------------------------------------------------------------------------
AT OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses................. $ 9,277 $ 6,121
Valuation adjustment on marketable
equity securities...................... -- 30
Accrued pension expense................... 834 737
Accrued interest payable.................. 983 893
Deferred loan origination fees............ -- 241
Deferred gain............................. 1,268 2,383
Fixed assets ............................. 1,648 --
Unrealized losses - SFAS No. 115 (Note 1) -- 22,329
Other .................................... 691 1,005
- -------------------------------------------------------------------------------
Total gross deferred tax assets 14,701 33,739
- -------------------------------------------------------------------------------
Less: valuation allowance................. -- --
- -------------------------------------------------------------------------------
Net deferred tax asset................ 14,701 33,739
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized loss on loans held for sale -- 2,674
Unrealized gains - SFAS No. 115 (Note 1) 14,139 --
Limited partnership investments........... 3,155 4,607
Accretion income.......................... 36 56
Other .................................... 563 319
- -------------------------------------------------------------------------------
Total gross deferred tax liabilities . 17,893 7,656
- -------------------------------------------------------------------------------
Net deferred tax asset (liability) ... $ (3,192) $26,083
===============================================================================
Reconciliation of the differences between the expected provision for
federal and state income taxes at statutory rates and the amounts actually
provided are as follows:
- -------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Income before
income taxes ........ $38,506 $35,108 $54,507
===============================================================================
Computed federal income
tax expense at
statutory rates....... $13,477 35.0% $12,288 35.0% $19,078 35.0%
Increase (decrease) in
provision resulting from:
State income tax, net of
Federal tax benefit ... (868) (2.3) 180 .5 2,431 4.5
Dividend received
deductions ............ (1,669) (4.3) (1,745) (5.0) (1,992) (3.7)
Tax credit ............ (315) (.8) (307) (.9) (305) (.6)
Other ................. (465) (1.2) 115 .4 (25) --
- -------------------------------------------------------------------------------
Income tax provision $10,160 26.4% $10,531 30.0% $19,187 35.2%
===============================================================================
(19) RELATED PARTY TRANSACTIONS
The following summarizes the activity with respect to loans made to
directors and executive officers of Bancorp and its subsidiaries, their
affiliates and members of their immediate families. It is the Bank's policy not
to make any loans, with the exception of secured passbook loans, to the
executive officers of Bancorp or the Bank.
- -------------------------------------------------------------------------------
OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Balance at beginning of period ....... $ 4,345 $ 4,404 $ 2,893
Additions ............................ -- 256 3,269
Reductions ........................... (603) (315) (1,758)
- -------------------------------------------------------------------------------
Balance at end of period $ 3,742 $ 4,345 $ 4,404
===============================================================================
All such loans were made in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons, except for a $320,000 residential mortgage loan
made in March 1992 to the sister-in-law of the former President of Bancorp and
Executive Vice President of the Bank, Paul A. Archibald. This loan did not
satisfy various aspects of the Bank's loan underwriting criteria.
Significant deposits from related parties totaled $2,710,000 and
$3,427,000 for the fiscal years ended October 31, 1995 and 1994, respectively.
All such deposits were accepted in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons. Also, see note 10 referring to the
sale-leaseback transaction.
(20) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS
AND CONTINGENCIES
OTHER COMMITMENTS
In the normal course of business, there are outstanding various legal
proceedings, claims and commitments and contingent liabilities, such as
commitments to extend credit which are not reflected in the accompanying
consolidated financial statements. After reviewing such matters, Bancorp
believes that resolution of these matters will not materially affect its results
of operations or financial position.
Bancorp may be party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These consolidated financial statements include commitments to originate loans
and loans sold with recourse. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized on
the consolidated statements of financial condition. The contract amounts of
those instruments reflect the extent of involvement Bancorp has in particular
classes of financial instruments.
Bancorp's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and recourse
arrangements is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments as it does for
on-balance sheet instruments. Financial instruments with off-balance sheet risk
at October 31, are as follows:
- -------------------------------------------------------------------------------
CONTRACT AMOUNT
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Commitments to originate loans....... $ 8,326 $ 12,888 11,303
Loans sold with recourse............. 221,898 236,188 197,940
- -------------------------------------------------------------------------------
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments is expected
to expire without being drawn upon, the total commitments do not necessarily
represent future cash requirements. Bancorp evaluates each customer's credit
worthiness on a case by case basis. The amount of collateral obtained, if deemed
necessary by Bancorp for the extension of credit, is based upon management's
credit evaluation of the borrower. Collateral held includes, but is not limited
to, residential and commercial real estate.
The fair value of commitments to originate loans does not differ
materially from the recorded balance. The credit risk associated with the Bank's
loans sold with recourse is considered in the allowance for possible loan
losses, but it cannot be separately determined.
Bancorp has retained credit risk on certain residential mortgage loans it
has converted into FNMA and FHLMC mortgage-backed securities. Accordingly,
Bancorp has retained the risk of loss resulting from any foreclosures on such
loans.
The Bank is permitted to borrow from the Federal Reserve Bank "discount
window" under certain conditions. Any such borrowings would be required to be
fully secured by pledges of collateral satisfactory to the Federal Reserve Bank.
As a nonmember of the Federal Reserve System, the Bank is required to
maintain certain reserve requirements of vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement, included
in "Cash and due from banks," was $6,537,000 and $6,809,000 at October 31, 1995
and 1994, respectively.
(21) STOCK OPTION PLANS
Bancorp, upon its acquisition of the Bank, assumed the stock option plan
of the Bank and agreed to issue Bancorp common stock in lieu of the Bank's
common stock upon the exercise of outstanding options under this plan. The
number of shares initially reserved under the Bank's option plan were equal to
10% of the shares issued at conversion. As of October 31, 1995, no options under
this plan remain available for future grant. During the fiscal year ended
October 31, 1987, Bancorp adopted a stock option plan that provided for the
issuance of 400,000 options of which 300,000 were granted during that fiscal
year. During the fiscal year ended October 31, 1988, the remaining 100,000
options were granted. As of October 31, 1995, no options under this plan remain
available for future grant. At the 1989 Annual Meeting of Stockholders, the
stockholders approved an additional stock option plan for 350,000 shares. At the
1994 Annual Meeting of Stockholders, the stockholders approved an additional
stock option plan for 250,000 shares. As of October 31, 1995, 114,350 options
are available under the 1994 plan for future grant.
At the time the options are granted, no accounting entry is made. The
proceeds from the exercise of the options are credited to common stock for the
par value of the shares purchased and the excess credited to paid-in capital
(See Note 3). The exercise prices of the options outstanding under the various
stock option plans in the amounts of 65,750, 8,350, 63,975, 34,500, 145,450 and
8,000 shares are $20.50, $14.875, $18.625, $35.75, $31.00 and $38.50,
respectively, which equaled the fair market value of Bancorp's common stock on
the date the options were granted. The options expire ten years from their
respective dates of grant.
Stock Option Plans Summary
- -------------------------------------------------------------------------------
OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
Unexercised options outstanding at
beginning of year.................. 637,178 501,775 539,820
Granted .............................. -- 250,000 57,850
Exercised............................. (196,803) (114,597) (91,795)
Expired, canceled or lapsed........... (114,350) -- (4,100)
- -------------------------------------------------------------------------------
Unexercised options outstanding at
end of year......................... 326,025 637,178 501,775
===============================================================================
Prices on options exercised........... $14.875 to $14.875 to $ 4.00 to
$ 31.00 $ 31.00 $ 20.50
Option price per share outstanding ... $14.875 to $14.875 to $ 4.00 to
$ 38.50 $ 38.50 $ 20.50
Exercisable at fiscal year end........ 326,025 637,178 501,775
The Merger Agreement provides that Bancorp stock options outstanding
and unexercised immediately prior to the Merger will be converted into options
to purchase shares of Bank of Boston Common Stock on substantially equivalent
economic terms.
(22) EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 2, 1985, Bancorp established a noncontributory
Employee Stock Ownership Plan (ESOP) designed to invest, on behalf of employees
of Bancorp and the Bank, primarily in the stock of Bancorp. The ESOP is subject
to the Employee Retirement Income Security Act of 1974 and is intended to
constitute a qualified stock bonus plan.
As of October 31, 1995, the ESOP had been funded by two $5,000,000
loans through Bancorp. Bancorp is required to make monthly contributions to the
ESOP in amounts necessary to meet required monthly principal and interest
payments on loans incurred by the ESOP to purchase stock. Bancorp recognizes
expense on the cash payment method.
As of October 31, 1995 and 1994, the ESOP held 595,029 and 665,399
shares, respectively, of stock of Bancorp with 435,879 and 466,485,
respectively, of these shares being allocated to accounts of participants. Based
upon the dates that the ESOP acquired Bancorp's stock, the unallocated shares
are considered outstanding for purposes of earnings per share calculations. For
the fiscal years ended October 31, 1995, 1994 and 1993, interest expense on the
ESOP debt was $205,000, $194,000 and $216,000, respectively. Other contributions
to fund principal payments on the ESOP loans were $756,000, $756,000 and
$756,000, respectively. Dividends paid to the ESOP on unallocated shares used
for debt service by the ESOP were $129,000, $162,000 and $201,000, respectively.
The Merger Agreement requires Bancorp to take all appropriate steps to
terminate the ESOP effective as of the effective time of the Merger. The ESOP
loan will be paid off. All remaining unallocated shares will then be allocated
to persons who were participants in the ESOP immediately prior to the effective
time of the Merger.
(23) STOCK REPURCHASE PROGRAM
On July 14, 1994, Bancorp announced the commencement of a stock
repurchase program to acquire and retire up to 500,000 shares of its common
stock. This program was terminated in December 1994 after 200,200 shares had
been repurchased at a total cost of $6,595,000, of which 73,000 shares at a
total cost of $2,141,000 were repurchased subsequent to the October 31, 1994
fiscal year end.
(24) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents fair value information for those financial
instruments shown in Bancorp's consolidated statements of financial condition
for which no active market exists. The fair values for these financial
instruments were calculated by discounting expected cash flows using discount
rates approximately equal to the current market rates of these instruments.
Because no active market exists for these financial instruments and because
management has not received offers to purchase, in the case of loans held for
sale, Bancorp does not know whether the fair values shown represent values at
which the respective financial instruments could be sold.
Financial instruments that are cash or cash equivalents or have a short
maturity such as accrued interest receivable have a fair value approximating to
their carrying value.
- -------------------------------------------------------------------------------
At October 31,
1995 1994
- -------------------------------------------------------------------------------
Fair Fair
Book Value Book Value
- -------------------------------------------------------------------------------
(In thousands)
Loans, net..................... $ 209,947 $ 214,823 $ 337,241 $ 353,194
Loans held for sale............ 138,556 138,556 18,164 18,164
Term deposit certificates ..... 789,529 791,943 756,984 754,533
Notes payable.................. 5,650 5,698 7,550 7,485
Securities sold under agreements
to repurchase................ 92,185 92,183 10,275 10,275
FHLB advances.................. 236,500 236,861 470,000 467,563
The following table presents fair value information for financial
instruments shown in Bancorp's consolidated statements of financial condition
which have been valued using quoted available market prices.
- -------------------------------------------------------------------------------
At October 31,
1995 1994
- -------------------------------------------------------------------------------
Fair Fair
Book Value Book Value
- -------------------------------------------------------------------------------
(In thousands)
Investment securities
available for sale.. $ 368,223 $ 404,397 $ 544,166 $557,014
Mortgage-backed securities
available for sale...... 1,038,907 1,041,056 1,050,417 989,446
SFAS No. 107 -- "Disclosures About Fair Value of Financial Instruments"
specifies that fair values should be calculated based on the value of one unit,
without regard to any premium or discount that may result from concentration of
ownership of a financial instrument. In addition, SFAS No. 107 does not provide
for reporting of an estimated fair value for its demand, money market and
savings deposits. Such deposits totaled $549,938,000 and $648,586,000 at October
31, 1995 and 1994, respectively, and annually provide funding to the Bank at a
cost significantly below the cost of borrowing funds in the financial market.
Management views the Bank's demand, money market and savings deposits as
continuing sources of less costly funding that provide a significant additional
value to Bancorp that is not reflected above.
Because a limited market exists for a portion of the Bank's financial
instruments and because of the inherent imprecision of estimating fair value
discount rates for financial instruments for which a limited market exists,
management does not believe that the above information reflects the amounts that
would be received if the aforenamed financial instruments were sold.
(25) SUBSEQUENT EVENT
On November 16, 1995, the Board of Directors of Bancorp declared for the
fiscal quarter ended October 31, 1995, a cash dividend of $.19 per share on each
outstanding share of Bancorp common stock payable on December 15, 1995 to
holders of record of such shares at the close of business on November 30, 1995.
(26) REGULATORY MATTERS
On January 27, 1995, the Bank received from the FDIC its written
examination report for the supervisory exam conducted as of September 30, 1994.
The report addressed various criticisms and concerns to be addressed by the
Board and management. In conjunction with the FDIC report, the Bank was
designated to be in "troubled condition." During 1995, the Bank has
substantially complied with the issues addressed in the FDIC examination report
to the satisfaction of the FDIC. It was agreed between the parties that it would
not be appropriate, in light of the pending merger with Bank of Boston, to
continue to work on certain of the issues which were longer term in nature. The
FDIC also granted the Bank forbearance from complying with the Internal Control
and Attestation Requirements of Section 112 of the Federal Deposit Insurance
Corporation Improvement Act for the year ended October 31, 1995. On December 11,
1995, the FDIC informed the Bank that based on its review the "troubled
condition" designation no longer applied to the Bank.
Current Federal Deposit Insurance Corporation (FDIC) regulations
regarding capital requirements of FDIC-insured institutions require most banks
to maintain a leverage capital ratio of 4% to 5% and qualifying total capital to
risk-weighted assets of at least 8%, of which at least 4% must be Tier I
capital. Assets and off-balance-sheet items are assigned to four risk
categories, each with appropriate weights. The risk-based capital rules are
designed to make regulatory capital more sensitive to differences in risk
profiles among banks and bank holding companies, to account for
off-balance-sheet exposure and to minimize disincentives for holding liquid
assets.
At October 31, 1995, the Bank's capital ratios were in excess of these
capital requirements.
(27) THE BOSTON BANCORP (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
BALANCE SHEETS OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Assets:
Cash ................................... $ 6,084 $ 25
Investment securities available for sale
at fair value......................... 5,578 6,929
Investment in subsidiaries.............. 181,405 110,307
Other assets............................ 4,357 4,269
- -------------------------------------------------------------------------------
Total assets....................... $197,424 $121,530
===============================================================================
Liabilities:
Other liabilities....................... $ 2,794 $ 3,908
Stockholders' equity.................... 194,630 117,622
- -------------------------------------------------------------------------------
Total liabilities and
Stockholders' equity............. $197,424 $121,530
===============================================================================
- -------------------------------------------------------------------------------
STATEMENTS OF INCOME FISCAL YEARS ENDED
OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Dividends from subsidiary bank.......... $ 7,650 $29,200 $29,540
Interest and dividend income............ 455 553 1,587
Investment securities gains............. 1,879 2,193 1,539
- -------------------------------------------------------------------------------
Total income............................ 9,984 31,946 32,666
General and administrative expenses .... 1,871 1,281 1,782
- -------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed net income of subsidiaries 8,113 30,665 30,884
Income taxes............................ 472 690 275
- -------------------------------------------------------------------------------
Income before equity in undistributed net
income of subsidiaries................ 7,641 29,975 30,609
Equity in undistributed net income (loss)
of subsidiaries (a)................... 20,705 (5,398) 4,711
- -------------------------------------------------------------------------------
Net income.............................. $28,346 $24,577 $35,320
===============================================================================
The parent company's statements of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders' equity and,
therefore are not reprinted here.
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED
OCTOBER 31,
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.......................... $ 28,346 $ 24,577 $ 35,320
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed net (income)
loss of subsidiaries (a) ....... (20,705) 5,398 (4,711)
Amortization of investment securities
discounts and premiums, net .... -- -- 82
Net realized gains on investment
securities available for sale .. (1,879) (2,193) (194)
Net realized gains on investment
securities...................... -- -- (1,345)
Decrease (increase) in other assets 1,142 (1,423) (1,567)
Increase (decrease) in other
liabilities..................... (272) (2,217) 343
- -------------------------------------------------------------------------------
Net cash flow from
operating activities.......... 6,632 24,142 27,928
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of investment securities ... (903) (111) (2,829)
Proceeds from sales of investment
securities available for sale ...... 3,433 5,581 1,969
Proceeds from sales and maturities of
investment securities .............. -- -- 11,809
Investment in subsidiaries............ -- (5,305) --
- -------------------------------------------------------------------------------
Net cash flow from investing
activities................... 2,530 165 10,949
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments for repurchase of common
stock............................... (3,924) (25,385) (20,776)
Proceeds from exercise of stock
options............................. 3,976 2,137 1,632
Cash dividends paid on common
stock............................... (3,911) (2,972) (5,110)
Payments on borrowings................ -- -- (15,000)
Unearned compensation expense --
ESOP................................ 756 756 756
- -------------------------------------------------------------------------------
Net cash flow from financing
activities................... (3,103) (25,464) (38,498)
- -------------------------------------------------------------------------------
Total increase (decrease) in cash and cash
equivalents........................... 6,059 (1,157) 379
Cash and cash equivalents at beginning of
fiscal year........................... 25 1,182 803
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of fiscal
year ................................. $ 6,084 $ 25 $ 1,182
===============================================================================
(a) Reflects the difference between the dividends paid to the parent company and
the net income of the subsidiaries.
(28) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes the consolidated operating results on a quarterly
basis for the years ended October 31, 1995 and 1994:
- -------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------
4TH 3RD 2ND 1ST
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Interest and dividend
income ............... $34,511 $35,574 $34,981 $35,774
Interest expense ....... 22,503 22,359 21,051 20,297
- -------------------------------------------------------------------------------
Net interest and
dividend income ...... 12,008 13,215 13,930 15,477
Provision for possible
loan losses .......... 667 1,000 500 1,500
Net realized gain on
securities ........... 21,140 3,425 533 26
Provision for losses on
loans held for sale .. 8,251 -- -- --
Gain (loss) on sales of
loans ................ 1,271 (1,978) (618) --
Provision for losses on joint
venture advances ..... 1,185 149 142 142
Other income ........... 828 717 816 826
Other expenses ......... 7,211 7,920 7,677 6,766
- -------------------------------------------------------------------------------
Income before income
taxes ............... 17,933 6,310 6,342 7,921
Income taxes ........... 3,996 1,838 1,914 2,412
- -------------------------------------------------------------------------------
Net income ............. $13,937 $4,472 $ 4,428 $ 5,509
- -------------------------------------------------------------------------------
Primary earnings per
share ................ $ 2.61 $ 0.84 $ 0.85 $ 1.06
Fully diluted earnings
per share ............ $ 2.61 $ 0.84 $ 0.84 $ 1.06
===============================================================================
Interest rate spread ... 2.47% 2.35% 2.37% 2.88%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1994
- -------------------------------------------------------------------------------
Interest and dividend
income ............. $33,696 $34,946 $33,340 $34,799
Interest expense ...... 19,505 18,575 17,950 20,061
- -------------------------------------------------------------------------------
Net interest and
dividend income ..... 14,191 16,371 15,390 14,738
Provision for possible
loan losses ......... 1,000 1,500 1,500 1,800
Net realized gain on
securities .......... 571 251 1,795 5,289
Provision for losses on
joint venture advances 453 203 159 168
Other income .......... 1,407 761 1,345 841
Other expense ......... 9,618 6,824 7,673 6,943
- -------------------------------------------------------------------------------
Income before income
taxes .............. 5,098 8,856 9,198 11,957
Income taxes .......... 748 2,690 2,791 4,303
- -------------------------------------------------------------------------------
Net income ............ $ 4,350 $6,166 $ 6,407 $7,654
===============================================================================
Primary earnings per
share ............... $ .81 $ 1.15 $ 1.19 $ 1.36
Fully diluted earnings
per share ........... $ .81 $ 1.14 $ 1.19 $ 1.35
===============================================================================
Interest rate spread .. 2.89% 3.13% 2.84% 2.76%
- -------------------------------------------------------------------------------
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On March 14, 1995, the Board of Directors of the Company, on the
recommendation of its Audit Committee, appointed KPMG Peat Marwick LLP
independent auditors for the Company. During the Company's two most recent
fiscal years and the subsequent interim period preceding the change in auditors,
the Company had not consulted KPMG Peat Marwick LLP regarding either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements.
As a result of the Board of Directors' action, T.C. Edwards & Company,
P.C., were dismissed as the independent auditors for the Company. T.C. Edwards'
reports on the Company's financial statements for the preceding two years did
not contain an adverse opinion or disclaimer of opinion and were not qualified
in any way. During the Company's two most recent fiscal years and the subsequent
interim period preceding the change in auditors, there were no disagreements
with T.C. Edwards on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, and no event had occurred
that is required to be disclosed by Item 304(a)(1)(v) of Regulation S-K.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Company is omitted from this
Report as the Company intends to file a definitive proxy statement pursuant to
Regulation 14A not later than 120 days after the end of its fiscal year and the
information to be included therein is incorporated herein by reference.
Information regarding the executive officers of the Company is included under
separate caption in Part I of this Report.
ITEM 11 EXECUTIVE COMPENSATION
Information regarding executive compensation is omitted from this
Report as the Company intends to file a definitive proxy statement pursuant to
Regulation 14A not later than 120 days after the end of its fiscal year and the
information to be included therein (other than the Report of the Compensation
and Stock Option Committees and the Stock Performance Graph) is incorporated
herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is omitted from this Report as the
Company intends to file a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of its fiscal year and the information to
be included therein is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is omitted from this Report as the
Company intends to file a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year and the information to
be included therein is incorporated herein by reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Independent Auditors' Reports.
Consolidated Statements of Financial Condition -- October 31, 1995 and 1994.
Consolidated Statements of Operations -- Years Ended October 31,
1995, 1994 and 1993.
Consolidated Statements of Cash Flows -- Years Ended October 31,
1995, 1994 and 1993.
Consolidated Statements of Changes in Stockholders' Equity --
Years Ended October 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
(a)(2) All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(a)(3) The following exhibits are either filed or attached as part of this
Report or are incorporated herein by reference.
Exhibit No. 2 Plan of Reorganization.
(a) Agreement and Plan of Reorganization dated October 10, 1995
by and between the Boston Bancorp and Bank of Boston
Corporation (incorporated herein by reference to Exhibit 2a
to the Company's September 25, 1995 Form 8-K).
(b) Stock Option Agreement dated October 10, 1995 between the
Boston Bancorp and Bank of Boston Corporation (incorporated
herein by reference to Exhibit 2b to the Company's September
25, 1995 Form 8-K).
(c) Press Release re: Acquisition by Bank of Boston Corporation
(incorporated herein by reference to Exhibit 99a to the
Company's September 25, 1995 Form 8-K).
Exhibit No. 3 Charter and Bylaws.
(a) Articles of Organization of the Company, as amended
(incorporated herein by reference to Exhibit 3(a) to the
Company's 1992 Form 10-K).
(b) Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3(b) to the Company's 1992 Form 10-K).
Exhibit No. 10 Material Contracts.
(a) 1983 Stock Option Plan of the Bank (incorporated herein by
reference to Exhibit 10(a) to South Boston's 1983 Form
10-K).
(b) 1986 Stock Option Plan of the Company (incorporated herein
by reference to Exhibit 10(b) to the Company's 1986 Form
10-K).
(c) 1989 Stock Option Plan of the Company, as amended
(incorporated herein by reference to Exhibit 10(c) to the
Company's 1993 Form 10-K).
(d) 1994 Stock Option Plan of the Company (incorporated herein
by reference to Exhibit 10(d) to the Company's 1994 Form
10-K).
(e) Employment Agreement among the Company, South Boston and
Robert E. Lee dated as of December 10, 1991 (incorporated
herein by reference to Exhibit 10(k) to the Company's 1991
Form 10-K).
(f) Employment Agreement among the Company, South Boston and
David L. Smart dated December 10, 1991 (incorporated herein
by reference to Exhibit 10(l) to the Company's 1991 Form
10-K).
(g) Employment Agreement among the Company, South Boston and
Robert J. Ranieri dated February 11, 1992 (incorporated
herein by reference to Exhibit 10(m) to the Company's 1992
Form 10-K).
(h) Employment Agreement between South Boston and Joseph R.
Catalano dated as of February 11, 1992.
(i) Severance Agreement between South Boston and Stephen P.
McNulty dated June 1, 1995.
(j) Amended and Restated Split Dollar Agreement between the
Company and Robert E. Lee dated June 8, 1992 (incorporated
herein by reference to Exhibit 10(u) to the Company's 1992
Form 10-K).
(k) Amended and Restated Split Dollar Agreement between the
Company and David L. Smart dated June 8, 1992 (incorporated
herein by reference to Exhibit 10(v) to the Company's 1992
Form 10-K).
(l) Amended and Restated Split Dollar Agreement between the
Company and Robert J. Ranieri dated June 8, 1992
(incorporated herein by reference to the Exhibit 10(w) to
the Company's 1992 Form 10-K).
(m) Amended and Restated Split Dollar Agreement between the
Company and Joseph R. Catalano dated June 8, 1992.
(n) Amended and Restated Split Dollar Agreement between the
Company and Stephen P. McNulty dated June 8, 1992.
(o) Split Dollar Agreement between the Company and Robert E. Lee
dated December 29, 1992 (incorporated herein by reference to
Exhibit 10(k) to the Company's 1994 Form 10-K).
(p) Split Dollar Agreement between the Company and David L.
Smart dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(l) to the Company's 1994 Form 10-K).
(q) Split Dollar Agreement between the Company and Robert J.
Ranieri dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(m) to the Company's 1994 Form 10-K).
(r) Split Dollar Agreement between the Company and Joseph R.
Catalano dated December 29, 1992.
(s) Split Dollar Agreement between the Company and Stephen P.
McNulty dated December 29, 1992.
(t) Amended Split Dollar Agreement between South Boston and
Robert E. Lee dated August 26, 1993 (incorporated herein by
reference to Exhibit 10(n) to the Company's 1994 Form 10-K).
(u) Amended Split Dollar Agreement between South Boston and
David L. Smart dated August 26, 1993 (incorporated herein by
reference to Exhibit 10(o) to the Company's 1994 Form 10-K).
(v) Amended Split Dollar Agreement between South Boston and
Robert J. Ranieri dated August 26, 1993 (incorporated herein
by reference to Exhibit 10(p) to the Company's 1994 Form
10-K).
(w) Amended Split-Dollar Agreement between South Boston and
Joseph R. Catalano dated August 26, 1993.
(x) Amended Split-Dollar Agreement between South Boston and
Stephen P. McNulty dated August 6, 1993.
(y) Employment Agreement among the Company, South Boston and
Richard R. Laine dated as of December 10, 1991 (incorporated
herein by reference to Exhibit 10(i) to the Company's 1991
Form 10-K).
(z) Employment Agreement among the Company, South Boston and
Paul A. Archibald dated December 10, 1991 (incorporated
herein by reference to Exhibit 10(j) to the Company's 1991
Form 10-K).
(aa) Split Dollar Agreement between the Company and Richard R.
Laine dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(s) to the Company's 1994 Form 10-K).
(bb) Split Dollar Agreement between the Company and Paul A.
Archibald dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(t) to the Company's 1994 Form 10-K).
(cc) Amended Split Dollar Agreement between South Boston and
Richard R. Laine dated August 26, 1993 (incorporated herein
by reference to Exhibit 10(u) to the Company's 1994 Form
10-K).
(dd) Amended Split Dollar Agreement between South Boston and Paul
A. Archibald dated August 26, 1993 (incorporated herein by
reference to Exhibit 10(v) to the Company's 1994 Form 10-K).
(ee) Separation Agreement and related Interim Agreement by and
among the Company, the Bank and Richard R. Laine dated
February 10, 1995 (incorporated herein by reference to
Exhibit 10(w) to the Company's 1994 Form 10-K).
(ff) Separation Agreement and related Interim Agreement by and
among the Company, the Bank and Paul A. Archibald dated
February 10, 1995 (incorporated herein by reference to
Exhibit 10(x) to the Company's 1994 Form 10-K).
(gg) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated as of October 28, 1987
(incorporated herein by reference to Exhibit 10(i) to the
Company's 1987 Form 10-K).
(hh) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated as of November 11, 1988
(incorporated herein by reference to Exhibit 10(n) to the
Company's 1989 Form 10-K).
(ii) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated February 21, 1991 (incorporated
herein by reference to Exhibit 10(u) to the Company's 1991
Form 10-K).
(jj) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated October 21, 1992 (incorporated
herein by reference to Exhibit 10(bb) of the Company's 1992
Form 10-K).
(kk) Ground Lease between South Boston and SBSB Properties
Limited Partnership dated as of May 20, 1994 (incorporated
herein by reference to Exhibit 10(cc) to the Company's 1994
Form 10-K).
(ll) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated as of March 1994 (incorporated
herein by reference to Exhibit 10(dd) to the Company's 1994
Form 10-K).
(mm) Termination of Lease Agreement dated as of July 1995 between
South Boston and SBSB Properties Limited Partnership
(incorporated herein by reference to Exhibit 10(ee) to the
Company's July 31, 1995 Form 10-Q).
(nn) Deed of transfer dated July 19, 1995 from SBSB Properties
Limited Partnership to South Boston (incorporated herein by
reference to Exhibit 10(ff) to the Company's July 31, 1995
Form 10-Q).
(oo) Deed of transfer dated July 19, 1995 from SBSB Properties
Limited Partnership to South Boston (incorporated herein by
reference to Exhibit 10(gg) to the Company's July 31, 1995
Form 10-Q).
(pp) Deed of transfer dated July 19, 1995 from SBSB Properties
Limited Partnership to South Boston (incorporated herein by
reference to Exhibit 10(hh) to the Company's July 31, 1995
Form 10-Q).
(qq) Form of Release between South Boston and certain of its
employees (incorporated herein by reference to Exhibit
10(ii) to the Company's July 31, 1995 Form 10-Q).
(rr) Form of Addendum to Release between South Boston and certain
of its employees (incorporated herein by reference to
Exhibit 10(jj) to the Company's July 31, 1995 Form 10-Q).
Exhibit No. 11 Statement Regarding Computation of Per Share Earnings.
Exhibit No. 16 Letter dated April 14, 1995 of T.C. Edwards & Co., P.C.
regarding change in certifying accountant (incorporated
herein by reference to Exhibit 16 of the Company's Form
8-K/A filed on April 17, 1995).
Exhibit No. 21 Subsidiaries of the Registrant.
Exhibit No. 23
(i) Consent of T.C. Edwards & Co., P.C. for Registration Statement
No. 33-12041.
(ii) Consent of T.C. Edwards & Co., P.C. for Registration Statement
No. 33-28724.
(iii) Consent of T.C. Edwards & Co., P.C. for Registration Statement
No. 33-76958.
(iv) Consent of KPMG Peat Marwick LLP for Registration Statement Nos.
33-12041, 33-28724, and 33-76958.
Exhibit No. 27 Financial Data Schedule
(b) The Company filed on October 19, 1995 a Form 8-K relating to (i) the
proposed acquisition of the Company by Bank of Boston Corporation, (ii) the
resignation of Mr. Peter H. Hersey as Chairman, President and Chief
Executive Officer, (iii) the appointment of Mr. Robert E. Lee as Chairman,
President and Chief Executive Officer and (iv) the resignation of Mr. Roger
H. Doggett as a director.
(c) Exhibits to this Report are attached or incorporated by reference as stated
above.
(d) None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE BOSTON BANCORP
Registrant
By: /s/ Robert E. Lee
--------------------
Robert E. Lee
Chairman of the Board and
President and Chief Executive Officer
February 21, 1996
--------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert E. Lee February 21, 1996
---------------------- -----------------
Robert E. Lee, Chairman of the Board and Date
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ David L. Smart February 21, 1996
---------------------- -----------------
David L. Smart, Vice President and Treasurer Date
(Principal Financial and Accounting Officer)
By:
---------------------- -----------------
Peter H. Hersey, Director Date
By: /s/ W. Randle Mitchell February 21, 1996
---------------------- -----------------
W. Randle Mitchell, Jr., Director Date
By: /s/ Frank G. Neal, Jr. February 21, 1996
---------------------- -----------------
Frank G. Neal, Jr., Director Date
By:
---------------------- ----------------
Richard L. McDowell Date
INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- ----------
2(a) Agreement and Plan of Reorganization dated October 10,
1995 by and between the Boston Bancorp and Bank of Boston
Corporation (incorporated herein by reference to Exhibit
2a to the Company's September 25, 1995 Form 8-K).
2(b) Stock Option Agreement dated October 10, 1995 between the
Boston Bancorp and Bank of Boston Corporation
(incorporated herein by reference to Exhibit 2b to the
Company's September 25, 1995 Form 8-K).
2(c) Press Release re: Acquisition by Bank of Boston
Corporation (incorporated herein by reference to Exhibit
99a to the Company's September 25, 1995 Form 8-K).
3(a) Articles of Organization of the Company, as amended
(incorporated herein by reference to Exhibit 3(a) to the
Company's 1992 Form 10-K).
3(b) Bylaws of the Company, as amended (incorporated by
reference to Exhibit 3(b) the Company's 1992 Form 10-K).
10(a) 1983 Stock Option Plan of the Bank (incorporated herein by
reference to Exhibit 10(a) to South Boston's 1983 Form
10-K).
10(b) 1986 Stock Option Plan of the Company (incorporated herein
by reference to Exhibit 10(b) to the Company's 1986 Form
10-K).
10(c) 1989 Stock Option Plan of the Company, as amended
(incorporated herein by reference to Exhibit 10(c) to the
Company's 1993 Form 10-K).
10(d) 1994 Stock Option Plan of the Company (incorporated herein
by reference to Exhibit 10(d) to the Company's 1994 Form
10-K).
10(e) Employment Agreement among the Company, South Boston and
Robert E. Lee dated as of December 10, 1991 (incorporated
herein by reference to Exhibit 10(k) to the Company's 1991
Form 10-K).
10(f) Employment Agreement among the Company, South Boston and
David L. Smart dated December 10, 1991 (incorporated
herein by reference to Exhibit 10(l) to the Company's 1991
Form 10-K).
10(g) Employment Agreement among the Company, South Boston and
Robert J. Ranieri dated February 11, 1992 (incorporated
herein by reference to Exhibit 10(m) to the Company's 1992
Form 10-K).
10(h) Employment Agreement between South Boston and Joseph R.
Catalano dated as of February 11, 1992.
10(i) Severance Agreement between South Boston and Stephen P.
McNulty dated June 1, 1995.
10(j) Amended and Restated Split Dollar Agreement between the
Company and Robert E. Lee dated June 8, 1992 (incorporated
herein by reference to Exhibit 10(u) to the Company's 1992
Form 10-K).
10(k) Amended and Restated Split Dollar Agreement between the
Company and David L. Smart dated June 8, 1992
(incorporated herein by reference to Exhibit 10(v) to the
Company's 1992 Form 10-K).
10(l) Amended and Restated Split Dollar Agreement between the
Company and Robert J. Ranieri dated June 8, 1992
(incorporated herein by reference to the Exhibit 10(w) to
the Company's 1992 Form 10-K).
10(m) Amended and Restated Split Dollar Agreement between the
Company and Joseph R. Catalano dated June 8, 1992.
10(n) Amended and Restated Split Dollar Agreement between the
Company and Stephen P. McNulty dated June 8, 1992.
10(o) Split Dollar Agreement between the Company and Robert E.
Lee dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(k) to the Company's 1994 Form
10-K).
10(p) Split Dollar Agreement between the Company and David L.
Smart dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(l) to the Company's 1994 Form
10-K).
10(q) Split Dollar Agreement between the Company and Robert J.
Ranieri dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(m) to the Company's 1994 Form
10-K).
10(r) Split Dollar Agreement between the Company and Joseph R.
Catalano dated December 29, 1992.
10(s) Split Dollar Agreement between the Company and Stephen P.
McNulty dated December 29, 1992.
10(t) Amended Split Dollar Agreement between South Boston and
Robert E. Lee dated August 26, 1993 (incorporated herein
by reference to Exhibit 10(n) to the Company's 1994 Form
10-K).
10(u) Amended Split Dollar Agreement between South Boston and
David L. Smart dated August 26, 1993 (incorporated herein
by reference to Exhibit 10(o) to the Company's 1994 Form
10-K).
10(v) Amended Split Dollar Agreement between South Boston and
Robert J. Ranieri dated August 26, 1993 (incorporated
herein by reference to Exhibit 10(p) to the Company's 1994
Form 10-K).
10(w) Amended Split-Dollar Agreement between South Boston and
Joseph R. Catalano dated August 26, 1993.
10(x) Amended Split-Dollar Agreement between South Boston and
Stephen P. McNulty dated August 6, 1993.
10(y) Employment Agreement among the Company, South Boston and
Richard R. Laine dated as of December 10, 1991
(incorporated herein by reference to Exhibit 10(i) to the
Company's 1991 Form 10-K).
10(z) Employment Agreement among the Company, South Boston and
Paul A. Archibald dated December 10, 1991 (incorporated
herein by reference to Exhibit 10(j) to the Company's 1991
Form 10-K).
10(aa) Split Dollar Agreement between the Company and Richard R.
Laine dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(s) to the Company's 1994 Form
10-K).
10(bb) Split Dollar Agreement between the Company and Paul A.
Archibald dated December 29, 1992 (incorporated herein by
reference to Exhibit 10(t) to the Company's 1994 Form
10-K).
10(cc) Amended Split Dollar Agreement between South Boston and
Richard R. Laine dated August 26, 1993 (incorporated
herein by reference to Exhibit 10(u) to the Company's 1994
Form 10-K).
10(dd) Amended Split Dollar Agreement between South Boston and
Paul A. Archibald dated August 26, 1993 (incorporated
herein by reference to Exhibit 10(v) to the Company's 1994
Form 10-K).
10(ee) Separation Agreement and related Interim Agreement by and
among the Company, the Bank and Richard R. Laine dated
February 10, 1995 (incorporated herein by reference to
Exhibit 10(w) to the Company's 1994 Form 10-K).
10(ff) Separation Agreement and related Interim Agreement by and
among the Company, the Bank and Paul A. Archibald dated
February 10, 1995 (incorporated herein by reference to
Exhibit 10(x) to the Company's 1994 Form 10-K).
10(gg) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated as of October 28, 1987
(incorporated herein by reference to Exhibit 10(i) to the
Company's 1987 Form 10-K).
10(hh) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated as of November 11, 1988
(incorporated herein by reference to Exhibit 10(n) to the
Company's 1989 Form 10-K).
10(ii) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated February 21, 1991 (incorporated
herein by reference to Exhibit 10(u) to the Company's 1991
Form 10-K).
10(jj) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated October 21, 1992 (incorporated
herein by reference to Exhibit 10(bb) of the Company's
1992 Form 10-K).
10(kk) Ground Lease between South Boston and SBSB Properties
Limited Partnership dated as of May 20, 1994 (incorporated
herein by reference to Exhibit 10(cc) to the Company's
1994 Form 10-K).
10(ll) Lease Agreement between South Boston and SBSB Properties
Limited Partnership dated as of March 1994 (incorporated
herein by reference to Exhibit 10(dd) to the Company's
1994 Form 10-K).
10(mm) Termination of Lease Agreement dated as of July 1995
between South Boston and SBSB Properties Limited
Partnership (incorporated herein by reference to Exhibit
10(ee) to the Company's July 31, 1995 Form 10-Q).
10(nn) Deed of transfer dated July 19, 1995 from SBSB Properties
Limited Partnership to South Boston (incorporated herein
by reference to Exhibit 10(ff) to the Company's July 31,
1995 Form 10-Q).
10(oo) Deed of transfer dated July 19, 1995 from SBSB Properties
Limited Partnership to South Boston (incorporated herein
by reference to Exhibit 10(gg) to the Company's July 31,
1995 Form 10-Q).
10(pp) Deed of transfer dated July 19, 1995 from SBSB Properties
Limited Partnership to South Boston (incorporated herein
by reference to Exhibit 10(hh) to the Company's July 31,
1995 Form 10-Q).
10(qq) Form of Release between South Boston and certain of its
employees (incorporated herein by reference to Exhibit
10(ii) to the Company's July 31, 1995 Form 10-Q).
10(rr) Form of Addendum to Release between South Boston and
certain of its employees (incorporated herein by reference
to Exhibit 10(jj) to the Company's July 31, 1995 Form
10-Q).
11 Statement Regarding Computation of Per Share Earnings.
16 Letter dated April 14, 1995 of T.C. Edwards & Co., P.C.
regarding change in certifying accountant (incorporated
herein by reference to Exhibit 16 of the Company's Form
8-K/A filed on April 17, 1995).
21 Subsidiaries of the Registrant.
23(i) Consent of T.C. Edwards & Co., P.C. for Registration
Statement No.33-12041.
23(ii) Consent of T.C. Edwards & Co., P.C. for Registration
Statement No. 33-28724.
23(iii) Consent of T.C. Edwards & Co., P.C. for Registration
Statement No. 33-76958.
23(iv) Consent of KPMG Peat Marwick LLP for Registration
Statement Nos. 33-12041, 33-28724, and 33-76958.
27 Financial Data Schedule