UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-13795
THE BOSTON BANCORP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2850710
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
460 West Broadway
South Boston, Massachusetts 02127
(Address of principal executive offices) (Zip Code)
(617) 268-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO --
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date, is:
Class: Common stock, par value $1.00 per share.
Outstanding at February 29, 1996: 5,269,132 shares.
THE BOSTON BANCORP
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of
January 31, 1996 and October 31, 1995 ............................. 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended January 31, 1996 and 1995 ...................... 4
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended January 31, 1996 and 1995 ...................... 5
Notes to Consolidated Financial Statements (Unaudited) ............ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 20
Item 2. Changes in Securities ............................................. 20
Item 3. Defaults Upon Senior Securities ................................... 20
Item 4. Submission of Matters to a Vote of Security-Holders ............... 20
Item 5. Other Information ................................................. 20
Item 6. Exhibits and Reports on Form 8-K .................................. 20
Signature Page .................................................... 21
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
January 31, 1996 October 31, 1995
---------------- ----------------
(Unaudited)
Assets:
Cash and due from banks................................................. $ 21,524 $ 15,733
Federal funds sold...................................................... 22,700 --
Investment securities available for sale at fair value (Note C)......... 362,480 404,397
Mortgage-backed securities available for sale at fair value (Note C).... 908,345 1,041,056
Loans held for sale, net (Note D)....................................... 127,550 138,556
Loans, net ( net of allowance for possible loan losses
of $2,002 and $2,121, respectively) .................................. 200,626 209,947
Other real estate, net.................................................. 6,397 7,540
Federal Home Loan Bank stock............................................ 25,675 25,675
Land, buildings and equipment, net...................................... 9,415 9,649
Accrued income receivable............................................... 14,661 14,531
Receivable for securities sold.......................................... 7,858 11,185
Other assets............................................................ 7,839 7,815
----------- ------------
Total assets.......................................................... $ 1,715,070 $ 1,886,084
=========== ============
Liabilities and stockholders' equity:
Deposits................................................................ 1,352,332 1,339,467
ESOP loan payable....................................................... 2,079 2,520
Notes payable........................................................... 5,550 5,650
Securities sold under agreements to repurchase.......................... 57,875 92,185
Federal Home Loan Bank advances......................................... 65,000 236,500
Accrued interest payable................................................ 4,180 4,244
Mortgagors' escrow accounts............................................. 615 840
Deferred income taxes................................................... 2,057 3,192
Other liabilities....................................................... 13,824 6,856
----------- ------------
Total liabilities..................................................... 1,503,512 1,691,454
----------- ------------
Commitments and contingencies (Note F).................................... -- --
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 5,251,374 and
5,218,193 shares, respectively........................................ 5,251 5,218
Additional paid-in capital.............................................. 29,563 28,554
Retained earnings....................................................... 152,516 139,194
Unearned compensation expense - ESOP.................................... (2,079) (2,520)
Net unrealized gain on securities available for sale.................... 26,307 24,184
----------- ------------
Total stockholders' equity............................................ 211,558 194,630
----------- ------------
Total liabilities and stockholders' equity............................ $ 1,715,070 $ 1,886,084
=========== ============
See accompanying notes to consolidated financial statements.
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Three Months Ended
January 31,
-----------------------
1996 1995
---- ----
(Unaudited)
Interest and dividend income:
Interest on mortgage loans......................... $ 7,657 $ 8,016
Interest on other loans............................ 293 292
Interest on mortgage-backed securities............. 15,718 16,959
Interest on investment securities.................. 5,373 7,889
Dividends on equity securities..................... 1,529 2,524
Interest on short-term investments................. 394 94
--------- ---------
Total interest and dividend income............... 30,964 35,774
--------- ---------
Interest expense:
Deposits........................................... 15,145 12,764
Federal Home Loan Bank advances.................... 1,681 7,226
Securities sold under agreements to repurchase..... 1,080 175
Notes payable...................................... 117 132
--------- ---------
Total interest expense........................... 18,023 20,297
--------- ---------
Net interest and dividend income..................... 12,941 15,477
Provision for possible loan losses................... -- 1,500
--------- ---------
Net interest and dividend income after provision for
possible loan losses............................. 12,941 13,977
--------- ---------
Other income:
Net realized gains on securities................... 15,573 26
Gain on sales of loans............................. 7 1
Fees and service charges on loans.................. 385 421
Other operating income............................. 290 404
--------- ---------
Total other income............................... 16,255 852
--------- ---------
Other expenses:
Salaries and employee benefits..................... 3,134 3,377
Professional services.............................. 610 424
Occupancy and equipment expense.................... 512 681
FDIC deposit insurance assessment.................. 194 805
Provision for losses on joint venture advances..... -- 142
FHLB advance prepayment penalties.................. 1,183 --
Advertising expense................................ 199 195
Net gain on sale of other real estate.............. (492) (42)
Merger related expenses............................ 178 --
Net cost of other real estate...................... 42 40
Provision for OREO valuation....................... 300 --
Other operating expenses........................... 1,201 1,286
--------- ---------
Total other expenses............................. 7,061 6,908
--------- ---------
Income before income taxes........................... 22,135 7,921
--------- ---------
Income taxes:
Federal............................................ 7,565 2,194
State.............................................. 255 218
--------- ---------
Total income taxes............................... 7,820 2,412
--------- ---------
Net income $ 14,315 $ 5,509
========= =========
Primary earnings per common and common equivalent
share (Note B) .................................... $ 2.70 $ 1.06
========= =========
Fully diluted earnings per share and common equivalent
share (Note B) .................................... $ 2.69 $ 1.06
========= =========
Average number of common shares-Primary (Note B)..... 5,309 5,185
========= =========
Average number of common shares - Fully Diluted
(Note B) .......................................... 5,321 5,191
========= =========
Dividends paid per common share...................... $ .19 $ .19
========= =========
See accompanying notes to consolidated financial statements.
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
January 31,
----------------------
1996 1995
---- ----
(Unaudited)
Operating activities:
Net income...................................... $ 14,315 $ 5,509
Adjustments to reconcile net income to net cash
used in operating activities:
Increase in accrued income receivable........... (130) (837)
(Decrease) increase in accrued interest payable (64) 424
Amortization of loan discounts and premiums, net (203) (183)
Amortization of investment securities available
for sale discounts and premiums, net.......... (304) (559)
Amortization of mortgage-backed securities
available for sale discounts and premiums, net 743 493
Provision for possible loan losses.............. -- 1,500
Provision for OREO valuation.................... 300 --
Net realized gains on investment securities
available for sale ........................... (15,986) (26)
Net realized loss on mortgage-backed securities
available for sale ........................... 413 --
Net gains on sale of loans...................... (7) (1)
Loans originated for sale....................... (10,481) (14,251)
Net gains on sale of other real estate.......... (492) (42)
Increase in reserve for depreciation............ 246 251
Decrease in receivable for securities sold...... 3,327 --
(Increase) decrease in deferred tax asset
(excluding SFAS No. 115) ..................... (3,319) 187
(Increase) decrease in other assets............. (24) 6,719
Increase (decrease) in other liabilities........ 7,135 (3,321)
--------- ---------
NET CASH FLOW USED IN OPERATING ACTIVITIES.... (4,531) (4,137)
--------- ---------
Investing activities:
Loans originated and principal collections, net 11,890 (1,431)
Proceeds from sale of loans..................... 337 141
Proceeds from sale of foreclosed real estate ... 885 744
Purchases of mortgage-backed securities
available for sale ........................... -- (9,954)
Principal collections on mortgage-backed
securities available for sale ................ 45,872 29,475
Principal collections on investment securities
available for sale ........................... 38 --
Proceeds from sales of mortgage-backed
securities available for sale ................ 114,897 --
Purchases of investment securities available
for sale ..................................... (11,632) (33,082)
Proceeds from sales of investment securities
available for sale ........................... 63,187 32,829
Proceeds from maturities of investment
securities available for sale ................ 1,102 3,257
Increase in FHLB stock.......................... -- (697)
Other real estate expenses...................... (157) (179)
Purchases of premises and equipment............. (12) (306)
--------- ---------
NET CASH FLOW FROM INVESTING ACTIVITIES....... 226,407 20,797
--------- ---------
THE BOSTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Three Months Ended
January 31,
---------------------
1996 1995
---- ----
(Unaudited)
Financing activities:
Increase (decrease) in deposit accounts ........ 12,865 (54,584)
Proceeds from Federal Home Loan Bank advances .. -- 163,662
Payments of Federal Home Loan Bank advances .... (171,500) (135,963)
Payments of ESOP loan payable .................. (441) (189)
Net (decrease) increase in securities sold under
agreements to repurchase ..................... (34,310) 14,750
Decrease in mortgagors' escrow accounts ........ (225) (164)
Cash dividends paid on common stock ............ (990) (966)
Payments for maturing notes payable ............ (100) (1,900)
Proceeds from exercise of stock options ........ 875 4
Payments for repurchase of common stock ........ -- (2,141)
Unearned compensation expense - ESOP ........... 441 189
--------- ---------
Net cash flow used in financing activities.... (193,385) (17,302)
Total increase (decrease) in cash and cash
equivalents ................................. 28,491 (642)
Cash and cash equivalents at beginning of period 15,733 14,884
--------- ---------
Cash and cash equivalents at end of period ..... $ 44,224 $ 14,242
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Three Months Ended
January 31,
---------------------
1996 1995
---- ----
(Unaudited)
NON-CASH TRANSACTIONS:
Transfer of other real estate to loans ........... 959 --
Transfer of loans to other real estate ........... 365 1,829
Conversion of real estate loans to FHLMC and FNMA
mortgage-backed securities ..................... 19,395 11,937
Net transfers of loans to loans held for sale .... 5,223 --
Tax benefit of stock options exercised ........... 167 --
SFAS NO. 115:
Increase in stockholders' equity ............... 2,123 5,498
Decrease (increase) in investment securities ... 5,512 (1,901)
Increase in mortgage-backed securities ......... (9,819) (7,710)
Increase in deferred tax liability ............. 2,184 4,113
CASH TRANSACTIONS:
Interest on deposits ............................ 14,976 12,761
Interest on borrowings ........................... 3,109 7,066
Interest on notes payable ........................ 4 48
State taxes ...................................... 404 138
Federal taxes .................................... 3,672 --
See accompanying notes to consolidated financial statements.
THE BOSTON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A) BASIS OF PRESENTATION
The Boston Bancorp ("Bancorp" or the "Company") was formed in October
1984 and, effective March 1, 1985, acquired all of the outstanding shares of the
South Boston Savings Bank ("South Boston" or the "Bank") in exchange on a
one-for-one basis for Bancorp common stock. Bancorp thereby became the holding
company for the Bank.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or all footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements, notes, and other information included
in Bancorp's Form 10-K for its fiscal year ended October 31, 1995 and the Proxy
Statement filed March 8, 1996.
The unaudited interim financial information included herein reflects
all adjustments (consisting solely of normal recurring adjustments) that are, in
the opinion of management, necessary to present fairly the consolidated
financial condition as of January 31, 1996 and the consolidated results of
operations and cash flows for the three-month periods ended January 31, 1996 and
1995.
The results of operations for the three months ended January 31, 1996
are not necessarily indicative of results that may be expected for the entire
year.
NOTE B) EARNINGS PER SHARE
Primary earnings per share for the three months ended January 31, 1996
and 1995 were calculated by adding the common stock equivalents, which would
arise from the exercise of outstanding stock options granted under the Company's
stock option plans, to the weighted average number of shares outstanding during
such quarters. The number of shares used for calculating primary earnings per
share for the three months ended January 31, 1996 and 1995 were 5,308,667 and
5,185,046, respectively. The weighted average number of shares outstanding
during the three months ended January 31, 1996 and 1995 were 5,232,905 and
5,085,925, respectively.
The calculation of the common stock equivalents under primary earnings
per share is based, in part, on an average stock price for the period. The
calculation of the common stock equivalent under fully diluted earnings per
share is based, in part, on the price of the stock at the end of the period, if
higher than the average price during the period. Fully diluted earnings per
share for the three months ended January 31, 1996 were based on 5,320,632 shares
and for the three months ended January 31, 1995 were based on 5,191,352 shares.
NOTE C) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
All investments and mortgage-backed securities are carried at fair
value. Any after-tax net unrealized gain or loss on these securities will be
recognized as a credit or charge to stockholders' equity. Securities classified
as available for sale include securities that management intends to use as part
of its asset/liability management strategy or that may be sold in response to
changes in interest rates, significant prepayment risk and other similar
economic factors.
NOTE D) LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or
market, 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.
As of January 31, 1996 and October 31, 1995, 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. During the first quarter of fiscal 1996, $19.4 million in residential
mortgages, which were classified as held for sale at October 31, 1995, were
converted into mortgage-backed securities. The remaining residential mortgage
loans were returned to portfolio and are no longer classified as held for sale.
Pursuant to the Agreement and Plan of Reorganization with Bank of Boston
Corporation, the Bank's entire portfolio of commercial and multifamily real
estate loans was classified as held for sale as of October 31, 1995 and remains
classified as held for sale at January 31, 1996. See Note E (subsequent events)
for information regarding the agreement to sell the commercial and multifamily
real estate loan portfolios.
NOTE E) SUBSEQUENT EVENTS
On February 7, 1996, the Bank entered into an agreement (the "Loan
Purchase Agreement") with BlackRock Capital Finance L.P. ("BlackRock"), pursuant
to which BlackRock has agreed to purchase the Bank's commercial real estate and
multi-family loan portfolio (the "CRE Loans") for approximately 87% of the
unpaid principal balance of such loans as of January 31, 1996, subject to
adjustment at the time of closing. The sale is expected to take place in May,
1996.
After the payment of expenses related to the sale, Bancorp's management
expects that the Bank will realize net proceeds on the disposition of its CRE
Loans approximately equal to the current carrying value of the portfolio. As a
result, Bancorp does not expect the sale of its CRE Loans to have any material
effect on stockholders' equity. The net amount that Bancorp will realize from
the disposition of its CRE Loan portfolio will be affected by a determination of
the amount of the reserve, if any, that should be established to provide for the
financial effects of the possibility that the purchaser of the portfolio or its
assignee would assert certain contractual rights against Bancorp. At the present
time, Bancorp is not aware of circumstances that would lead it to establish such
a reserve. However, Bancorp will be in a better position to evaluate the
appropriateness of establishing a reserve at the time of the loan sale closing
based on the results of environmental site reports and assessments being
performed on certain of the properties securing loans in the portfolio and other
information that may come to light. There can be no assurance that the net
proceeds of the loan sale, after the establishment of any required reserve, will
equal the carrying value of the portfolio.
On February 15, 1996, the Board of Directors of Bancorp voted to
approve for the fiscal quarter ended January 31, 1996 a cash dividend of $.19
per share on each outstanding share of Bancorp common stock payable on March 15,
1996 to holders of record of such shares at the close of business on February
29, 1996.
NOTE F) COMMITMENTS AND CONTINGENCIES
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 financial instruments 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 are as follows:
Contract Amount
------------------------------------
January 31, 1996 October 31, 1995
---------------- ----------------
(In thousands)
Commitments to originate loans ............ $ 4,379 $ 8,326
Loans sold with recourse .................. 234,369 221,898
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 commitment 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.
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 credit risk associated with the Bank's loans sold with recourse is
considered in the allowance for possible loan losses.
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 $6.9 million and $6.5 million at January 31,
1996 and October 31, 1995, respectively. The Bank is permitted to borrow from
the Federal Reserve Bank "discount window" under certain conditions. Any such
borrowings must be fully secured by pledges of collateral satisfactory to the
Federal Reserve Bank.
THE BOSTON BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACQUISITION BY BANK OF BOSTON CORPORATION
Bancorp and Bank of Boston Corporation ("Bank of Boston") entered into
an Agreement and Plan of Reorganization (as amended, the "Merger Agreement")
pursuant to which Bancorp will become a wholly-owned subsidiary of Bank of
Boston. It is anticipated that the Merger will be consummated in or around June,
1996. The Merger is subject to the approval of the stockholders of Bancorp, the
receipt of various regulatory approvals and the satisfaction of certain other
closing conditions.
As a condition to the Merger, Bancorp is required to effect certain
mandatory pre-closing transactions. These transactions are 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 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. Bancorp's net income in
the first quarter of 1996 was favorably affected by a high level of gains on the
sale of investment securities. Bancorp expects its net income to continue to be
materially affected by gains and losses on the sale of loans, investment
securities and other assets and by the investment of the proceeds of such sales
in short-term securities which can be expected to have lower yields than the
assets they replace. The Proxy Statement for Bancorp's 1996 Annual Meeting of
stockholders contains a detailed description of the terms of the Merger
Agreement.
FINANCIAL CONDITION
The Company's total assets declined to $1.72 billion at January 31,
1996 from $1.89 billion at October 31, 1995, primarily as a result of the sale
of portions of the Bank's investment and mortgage-backed securities portfolios
and the use of the sales proceeds to retire a portion of the Bank's
indebtedness. Management expects to continue the process of liquidating its
entire equity portfolio and a significant portion of its debt and
mortgage-backed securities portfolio pursuant to the Merger Agreement with Bank
of Boston.
At January 31, 1996, the Company's investment portfolio, which is
comprised of investment securities and mortgage-backed securities, totaled $1.27
billion compared to $1.45 billion at October 31, 1995. The average life of the
investment portfolio, including mortgage-backed securities, remained at 4.9
years as of January 31, 1996 compared to October 31, 1995. The average life of
the investment portfolio is likely to decline as the Company sells additional
investment securities in accordance with the terms of the Merger Agreement.
At January 31, 1996, $186.9 million of the mortgage-backed securities
portfolio was represented by either Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") or Government
National Mortgage Association ("GNMA") adjustable-rate issues. The estimated
average life of the mortgage-backed securities portion of the investment
portfolio remained at 4.7 years as of January 31, 1996 compared to October 31,
1995. The pretax net unrealized gain on the Company's mortgage-backed securities
portfolio increased by $9.8 million during the quarter ended January 31, 1996.
The fair value of the Company's equity portfolio totaled $67.3 million
at January 31, 1996 compared to $104.2 million at October 31, 1995. The decrease
resulted primarily from sales of equity securities. The equity portfolio
includes high quality, yield-oriented common and preferred stocks. The fair
value of common equity investments totaled $59.8 million at January 31, 1996,
compared to $94.9 million at October 31, 1995. The fair value of preferred stock
issues held by the Company totaled $7.5 million at January 31, 1996 compared to
$9.3 million at October 31, 1995. These amounts include the effects of SFAS 115
which requires that certain investment securities be recorded at fair value.
At January 31, 1996, the fair value, after taxes, of the Company's
investment portfolio, including mortgage-backed securities, was greater than its
amortized cost by $26.3 million, which under SFAS 115 is included as a separate
component of stockholders' equity in the Company's consolidated statements of
financial condition. At October 31, 1995 the fair value, after taxes, of the
investment portfolio had been $24.2 million greater than its amortized cost.
Loans, net, including loans held for sale, decreased to $328.2 million
at January 31, 1996 from $348.5 million at October 31, 1995. Mortgage loan
originations for the three months ended January 31, 1996 decreased to $12.4
million from $26.5 million for the comparable period ended January 31, 1995. Of
the $12.4 million in mortgage loans originated during the three months ended
January 31, 1996, $7.1 million were residential mortgage loans, of which $1.9
million were adjustable rate loans and $5.2 million were fixed rate loans. The
remaining $5.3 million represents commercial real estate and multifamily
residential mortgage loans. The Company does not expect to originate additional
commercial real estate and multi-family residential mortgage loans because it is
required to dispose of all such loans prior to the Merger.
Total deposits remained relatively constant during the first quarter of
1996, increasing $12.8 million to $1.352 billion. Before interest credited of
$15.1 million, deposits declined by $2.3 million from October 31, 1995 through
January 31, 1996.
FHLB advances declined to $65.0 million at January 31, 1996 from $236.5
million at October 31, 1995. Other borrowings, including ESOP loan payable,
notes payable and securities sold under agreements to repurchase, declined by
$34.9 million at January 31, 1996 to $65.5 million at January 31, 1996 from
$100.4 million at October 31, 1995. The Merger Agreement requires the Bank to
repay all FHLB advances, including prepayment penalties thereon, and all
securities sold under agreement to repurchase prior to the Merger. The Bank is
also required to defease the notes payable prior to the Merger. The ESOP loan
will be repaid in conjunction with the Merger.
Stockholders' equity increased by $16.9 million to $211.5 million at
January 31, 1996 from $194.6 million at October 31, 1995. The increase is the
result of net income for the quarter of $14.3 million, an increase in the
unrealized gain on securities available for sale of $2.1 million, proceeds from
the exercise of stock options of $1.1 million and a reduction in the unearned
compensation expense attributable to the ESOP loan of $0.4 million. The increase
in stockholders' equity was reduced by dividends paid to stockholders of $1.0
million.
NONPERFORMING ASSETS
The following table summarizes the composition of nonperforming assets
(including nonperforming loans held for sale) at the dates shown:
January 31, 1996 October 31, 1995
----------------- ------------------
(Dollars in thousands)
Nonaccrual loans ................... $ 4,085 $ 5,828
Other real estate .................. 6,397 7,540
------- -------
Total nonperforming assets........ $10,482 $13,368
======= =======
Nonperforming assets as a
percentage of total assets .61% .71%
Nonperforming assets as a percentage
of total loans, including loans held
for sale (before net items) 3.13% 3.76%
NONACCRUAL AND RESTRUCTURED LOANS
The following table summarizes nonaccrual and restructured loans at the
dates shown. 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.
January 31, 1996 October 31, 1995
---------------- ----------------
(In thousands)
REAL ESTATE LOANS:
Residential:
Conventional ........................ $ 1,098 $ 2,221
FHA/VA .............................. 563 531
Commercial .......................... 2,338 3,029
------- -------
3,999 5,781
------- -------
CONSUMER LOANS:
Secured ............................... 10 4
Unsecured ............................. 76 43
------- -------
86 47
------- -------
Total nonaccrual loans .............. $ 4,085 $ 5,828
======= =======
Restructured loans .................... $ 586 $ 590
======= =======
Restructured loans, net, decreased to $586,000 at January 31, 1996 from
$590,000 at October 31, 1995. Specific reserves established for renegotiated
loans totaled $143,000 at January 31, 1996 and October 31, 1995. Restructured
loans, net, at January 31, 1996 were comprised of one 1-4 family residential
loan for $60,000, one multifamily residential loan for $373,000, and two
commercial real estate loans totaling $153,000. These loans have interest rates
ranging from 7.0% - 10.0% with a weighted average interest rate of 8.50%.
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
January 31, 1996, potential problem loans totaled approximately $16.6 million.
Of this amount, $14.8 million were classified as loans held for sale and have
been written down to the lower of aggregate cost or fair market value.
OTHER REAL ESTATE
Properties acquired through foreclosure or in settlement of loans are
classified as other real estate, as are loans classified as such in accordance
with SFAS No. 66. The following table summarizes other real estate at the dates
shown.
January 31, 1996 October 31, 1995
----------------- ------------------
(In thousands)
Conventional ................... $ 774 $ 1,125
Commercial ..................... 5,623 6,415
------- -------
Total other real estate ........ $ 6,397 $ 7,540
======= =======
Assets representing $5.1 million of the $5.6 million of Other Real
Estate at January 31, 1996 are included in the assets to be sold to BlackRock
Capital Finance, L.P. See Note E to Consolidated Financial Statements.
ALLOWANCE FOR POSSIBLE LOANS 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 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.
An analysis of the allowance for possible loan losses is as follows:
Three Months Ended
January 31,
------------------------
1996 1995
---- ----
(In thousands)
Balance at beginning of period ........... $ 2,121 $ 9,471
Charge-offs:
Commercial real estate ............... -- 550
Residential real estate .............. 129 237
Consumer ............................. 5 --
------- -------
134 787
------- -------
Recoveries:
Commercial real estate ............... -- 574
Residential real estate .............. 14 48
Consumer ............................. 1 1
------- -------
15 623
------- -------
Net Charge-offs ........................ 119 164
------- -------
Provisions charged to operations:
Commercial real estate ............... -- 1,110
Residential real estate .............. -- 360
Consumer ............................. -- 30
------- -------
-- 1,500
------- -------
Balance at end of period ............... $ 2,002 $10,807
======= =======
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 January 31, 1996, the Bank had a ratio of Tier 1 or core capital to
total assets of 10.06%. At January 31, 1996, South Boston's ratio of total
risk-based capital to total risk-weighted assets was 26.75% and its ratio of
Tier 1 capital to total risk-weighted assets was 26.44%. Neither regulatory
capital measure includes any Statement of Financial Accounting Standards
("SFAS") No. 115 adjustment for securities available for sale. At January 31,
1996, the Bank met the requirements for a "well-capitalized" institution based
on its capital ratios as of such date.
RESULT OF OPERATIONS
For the fiscal quarter ended January 31, 1996, net income increased to
$14.3 million or $2.69 per share on a fully diluted basis from $5.5 million or
$1.06 per share for the fiscal quarter ended January 31, 1995. The increase in
net income was due primarily to substantially higher net realized gains on
securities and a lower provision for possible loan losses, offset in part by an
increase in income taxes, prepayment penalties on FHLB advances, and lower net
interest and dividend income.
Net interest and dividend income for the fiscal quarter ended January
31, 1996 decreased to $12.9 million as compared to $15.5 million for the three
months ended January 31, 1995. This decrease primarily reflects the decrease in
investment income due to the decline in the average investment portfolio
balance, as well as the increase in the weighted average rate paid on deposit
accounts. The increase in the cost of deposits was offset by the decline in
interest paid on FHLB advances, primarily due to the repayment of FHLB advances.
Interest income on the loan portfolio for the fiscal quarter ended
January 31, 1996 decreased to $8.0 million from $8.3 million for the fiscal
quarter ended January 31, 1995. This decline is primarily due to the decrease in
the average loan portfolio balance outstanding. The decrease in average balances
of loans outstanding was a result of lower loan originations, as well as the
conversion of $19.3 million of loans to mortgage-backed securities during the
fiscal quarter ended January 31, 1996. This decline was offset, in part, by an
increase in the weighted average yield on loans over the comparable period for
the prior year. After the Company closes the CRE Loan sale and reinvests the
proceeds in short-term investments, the Company's gross interest income is
likely to decline.
The following table shows the Company's weighted average yields earned
and rates paid, as well as the spread between the combined weighted average
yields earned on interest-earning assets and weighted average rates paid on
interest-bearing liabilities for the periods indicated. The weighted average
yield earned on loans includes income earned on loans held for sale, as well as
the effects of non-accrual loans outstanding.
Three Months Ended
January 31,
1996 1995
--------------------
WEIGHTED AVERAGE YIELD EARNED ON:
Loans.............................. 8.92% 8.61%
Investments (a).................... 7.16 6.84
Combined........................... 7.54 7.18
WEIGHTED AVERAGE RATE PAID ON:
Deposits........................... 4.53 3.70
Borrowings......................... 5.77 5.72
Medium-term notes.................. 8.35 8.54
Federal Home Loan Bank advances.... 5.56 5.92
Overall Cost of funds.............. 4.68 4.30
INTEREST RATE SPREAD ............... 2.86% 2.88%
- ------------
(a) Includes mortgage-backed securities and Federal Home Loan Bank stock;
excludes the effects of SFAS No. 115.
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.
Increase(Decrease) Due To
----------------------------
Three Months Ended Total Rate/
January 31, Current Prior Increase Rate Volume Volume
1996 vs. 1995 Period Period (Decrease) (a) (b) (c)
------------------- ------- ------ ---------- ---- ------ ------
(in thousands)
Income from interest-earning assets:
Loan portfolio(d)..................... $ 7,950 $ 8,308 $ (358) $ 294 $ (630) $ (22)
Investment portfolio(e) (f)........... 23,014 27,466 (4,452) 1,317 (5,505) (264)
--------- -------- -------- ------- -------- -------
Total............................... 30,964 35,774 (4,810) 1,611 (6,135) (286)
--------- -------- -------- ------- -------- -------
Expense from interest-bearing liabilities:
Deposit accounts...................... 15,145 12,764 2,381 2,864 (395) (88)
Borrowings............................ 1,080 175 905 2 895 8
Medium term notes..................... 117 132 (15) (3) (12) --
Federal Home Loan Bank
advances.......................... 1,681 7,226 (5,545) (436) (5,437) 328
--------- -------- -------- ------- -------- -------
Total............................... 18,023 20,297 (2,274) 2,427 (4,949) 248
--------- -------- -------- ------- -------- -------
Net interest income .................... $ 12,941 $ 15,477 $ (2,536) $ (816) $ (1,186) $ (534)
========= ======== ======== ======= ======== =======
<FN>
- --------------
(a) Determined by multiplying the change in the weighted average interest rate between the periods shown by the
prior period average portfolio balance.
(b) Determined by multiplying the change in average portfolio balance between periods shown by the weighted average
interest rate for the prior period.
(c) Determined by multiplying the change in the weighted average rate between periods shown by the change in the
average portfolio balance between periods shown.
(d) Includes loans held for sale.
(e) Includes mortgage-backed securities and Federal Home Loan Bank stock.
(f) Excludes the effect of SFAS No. 115.
The average yield on the loan portfolio increased to 8.92% from 8.61%
for the three months ended January 31, 1996 as compared to the same period in
1995, reflecting the decrease in the average loan portfolio as a result of both
charge-offs and provisions for losses on loans held for sale related to the
reclassification of the Commercial Real Estate portfolio. The average yield on
the investment portfolio increased to 7.16% from 6.84% for the three months
ended January 31, 1996 compared to the three months ended January 31, 1995, due
primarily to the sale of approximately $101.6 million in common and preferred
stocks, which typically earn a lower yield than fixed income securities. The
average yield of the investment portfolio is likely to decrease further as the
Company continues to sell investment securities in preparation for the Merger.
Total interest expense decreased to $18.0 million for the three months
ended January 31, 1996 from $20.3 million for the three months ended January 31,
1995 primarily due to the significant reduction in average borrowings
outstanding, offset in part by the increase in cost of deposits. The weighted
average cost of funds increased to 4.68% for the three months ended January 31,
1996 from 4.30% for the same period ended January 31, 1995.
Total other income increased to $16.3 million for the three months
ended January 31, 1996 from $852,000 for the three months ended January 31,
1995, due primarily to higher net realized gains on securities which totaled
$15.6 million for the recent quarter as compared to $26,000 for the three months
ended January 31, 1995. Gross realized gains on the sale of securities totaled
$17.6 million for the three months ended January 31, 1996. Gross realized losses
on the sale of securities during the same period totaled $2.0 million. The
Company will continue to sell investment securities, as required by the Merger
Agreement.
Total other expenses increased 2.2% to $7.1 million for the three
months ended January 31, 1996 from $6.9 million for the comparable period ended
January 31, 1995. The increase in other expenses is attributable to prepayment
penalties on FHLB advances of $1.2 million and a provision for OREO valuation of
$300,000, offset in part by reductions of $611,000 in FDIC insurance assessments
and $243,000 in salaries and employee benefits, and an increase of $450,000 in
net gains on the sale of other real estate as compared to the same period in
fiscal 1995.
The provision for federal and state taxes increased to $7.8 million for
the three months ended January 31, 1996 as compared to $2.4 million for the
three months ended January 31, 1995, reflecting higher effective tax rates and
pretax income resulting from increased net realized gains on the sale of
securities during the current period. The combined federal and state income tax
rate increased to approximately 35% from 30% for the three months ended January
31, 1996 and 1995, respectively. This rate increase is a result of a reduction
in the amount of dividend income qualifying for the dividends received
deduction, as compared to the three months ended January 31, 1995.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10(ss) Letter Agreement dated March 7, 1996
between Bank of Boston Corporation and The
Boston Bancorp.
Exhibit 10(tt) Loan Purchase Agreement dated
February 7, 1996 between South Boston
Savings Bank and BlackRock Capital Finance,
L.P.
Exhibit 27 Financial Data Schedule
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE BOSTON BANCORP
Date: March 15, 1996 By: /s/ Robert E. Lee
--------------- ------------------------------------------
Robert E. Lee
Chairman of the Board and President
and Chief Executive Officer
(Principal Executive Officer)
Date: March 15, 1996 By: /s/ David L. Smart
--------------- ------------------------------------------
David L. Smart
Vice President and Treasurer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit No. Title Page
10(ss) Letter Agreement dated
March 7, 1996 between Bank
of Boston Corporation and The
Boston Bancorp.
10(tt) Loan Purchase Agreement dated
February 7, 1996 between South
Boston Savings Bank and BlackRock
Capital Finance, L.P.
27 Financial Data Schedule