FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1997
__________________________
Commission File Number 1-13936
__________________________
BOSTONFED BANCORP INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 52-1940834
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 New England Executive Park, Burlington, Massachusetts 01803
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(617) 273-0300
________________________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 (X) No ( )
Number of shares of common stock, par value $.01 per share,
outstanding as of September 30, 1997: 5,649,937.
<PAGE>
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations for the Three and Nine
Months ended September 30, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended September 30, 1997 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1997 and 1996 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Average Balances and Yield / Costs 9 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 17
PART II _ OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
1
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(Dollars in Thousands, Except Per Share Data)
September 30, December 31,
1997 1996
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 24,375 $ 18,278
Investment securities available for sale
(amortized cost of $36,536 and $1,085 at
September 30, 1997 and December 31, 1996
respectively) 36,679 1,085
Investment securities held to maturity (fair
value of $22,858 and $19,045 at September 30, 1997
and December 31, 1996, respectively) 22,875 19,170
Mortgage-backed securities available for sale
(amortized cost of $20,268 and $23,915 at
September 30, 1997 and December 31, 1996,
respectively) 20,255 23,593
Mortgage-backed securities held to maturity (fair
value of $39,694 and $43,033 at September 30, 1997
and December 31, 1996, respectively) 39,519 43,019
Mortgage loans held for sale 16,999 3,970
Loans, net of allowance for loan losses of $6,000
and $4,400 at September 30, 1997 and December 31,
1996, respectively 762,756 676,670
Accrued interest receivable 5,248 4,067
Stock in FHLB of Boston and Federal Reserve Bank 16,364 16,295
Premises and equipment 6,842 4,979
Real estate held for sale or development - 874
Real estate owned 270 2,668
Other assets 8,522 5,899
-------- --------
Total assets $960,704 $820,567
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $570,164 $428,818
Federal Home Loan Bank advances 291,500 296,500
Securities sold under agreements to repurchase 8,466 3,500
Advance payments by borrowers for taxes
and insurance 3,256 2,100
Other liabilities 5,512 3,294
------- -------
Total liabilities 878,898 734,212
------- -------
Commitments and contingencies
Stockholders' equity;
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued -- -- -- --
Common stock, $0.01 par value; 17,000,000 shares
authorized; 6,589,617 shares issued (5,649,937 and
6,260,317 shares outstanding, respectively) 66 66
Additional paid-in capital 65,305 64,461
Retained earnings 37,305 33,131
Unrealized gain (loss) on investment securities
available for sale, net 71 (322)
Less Treasury Stock, (939,680 shares and
329,300 shares, respectively), at cost (15,505) (4,739)
Less unallocated ESOP shares (3,929) (3,929)
Less unearned Stock-Based Incentive Plan (1,507) (2,313)
-------- --------
Total stockholders' equity 81,806 86,355
-------- --------
Total liabilities and stockholders' equity $960,704 $820,567
======== ========
See accompanying condensed notes to consolidated financial statements.
2
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, except per share amount)
Three Months Ended Nine Months Ended
------------------ ------------------
9/30/97 9/30/96 9/30/97 9/30/96
------------------ ------------------
(Unaudited)
Interest and dividend income:
Loans $ 15,111 $ 12,159 $ 43,583 $ 32,771
Mortgage-backed securities 1,040 1,320 3,244 3,778
Investment securities 1,391 604 3,782 1,546
------- ------- ------- -------
Total interest and
dividend income 17,542 14,083 50,609 38,095
------- ------- ------- -------
Interest expense:
Deposit accounts 4,970 3,896 13,904 11,854
Borrowed funds 4,630 4,041 13,735 8,704
------- ------- ------- -------
Total interest expense 9,600 7,937 27,639 20,558
------- ------- ------- -------
Net interest and divided income 7,942 6,146 22,970 17,537
Provision for loan losses 395 390 1,275 1,126
------- ------- ------- -------
Net interest and dividend
income after provision 7,547 5,756 21,695 16,411
Non-interest income:
Loan processing and servicing
fees 321 319 918 990
Gain on sale of loans 341 137 723 511
Deposit service fees 442 300 1,268 831
Other 199 83 570 332
------- ------- ------- -------
Total non-interest income 1,303 839 3,479 2,664
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 3,429 2,542 10,037 7,178
Occupancy and equipment 769 599 2,311 1,854
Federal deposit insurance
premiums 74 246 216 724
SAIF Special Assessment - 2,670 - 2,670
Real estate operations (76) 186 (1,186) 180
Other 1,441 1,107 4,220 3,593
------- ------- ------- -------
Total non-interest expense 5,637 7,350 15,598 16,199
------- ------- ------- -------
Income (loss) before income taxes 3,213 (755) 9,576 2,876
Income tax expense (benefit) 1,512 (334) 4,256 1,150
------- ------- ------- -------
Net income (loss) $ 1,701 $ (421) 5,320 1,726
======= ======= ======= =======
Primary earnings (loss) per share $0.31 ($0.07) $0.95 $0.28
Fully diluted earnings
(loss) per share $0.30 ($0.07) $0.91 $0.28
Weighted average shares
outstanding 5,436,453 6,160,446 5,584,322 6,145,332
Common stock equivalents
due to dilutive effect
of stock options 258,641 - 258,641 -
Total weighted average
shares outstanding 5,695,094 6,160,446 5,842,963 6,145,332
See accompanying condensed notes to consolidated financial statements.
3
<PAGE>
<TABLE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands)
Nine Months Ended September 30, 1997
(Unaudited)
<CAPTION>
Net
unrealized Unearned
gain(loss) on Stock-
Additional investments Unallocated Based Total
Common paid-in Retained Treasury available ESOP Incentive stockholders'
stock capital earnings Stock for sale shares Plan equity
------ -------- --------- -------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 66 64,461 33,131 (4,739) (322) (3,929) (2,313) 86,355
Net income - - - - 1,914 - - - - - - - - 1,914
Cash dividends declared and
paid ($0.05 per share) - - - - (313) - - - - - - - - (313)
Common Stock repurchased
(297,815 shares at an average
price of $15.86 per share) - - - - - - (4,722) - - - - - - (4,722)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 351 351
Change in net unrealized loss on
investments available for sale - - - - - - - - (37) - - - - (37)
Appreciation in fair value of
shares charged to expense
for compensation plans - - 207 - - - - - - - - - - 207
------- ------- -------- --------- --------- -------- --------- --------
Balance at March 31, 1997 $ 66 64,668 34,732 (9,461) (359) (3,929) (1,962) 83,755
------- ------- -------- --------- --------- -------- --------- --------
Net income - - - - 1,705 - - - - - - - - 1,705
Cash dividends declared and
paid ($0.07 per share) - - - - (417) - - - - - - - - (417)
Common Stock repurchased
(15,200 shares at an average
price of $15.18 per share) - - - - - - (230) - - - - - - (230)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 252 252
Change in net unrealized gain
(loss) on investments available
for sale - - - - - - - - 378 - - - - 378
Appreciation in fair value of
shares charged to expense
for compensation plans - - 300 - - - - - - - - - - 300
------- ------- -------- --------- --------- -------- --------- --------
Balance at June 30, 1997 $ 66 64,968 36,020 (9,691) 19 (3,929) (1,710) 85,743
------- ------- -------- --------- --------- -------- --------- --------
Net income - - - - 1,701 - - - - - - - - 1,701
Cash dividends declared and
paid ($0.07 per share) - - - - (416) - - - - - - - - (416)
Common Stock repurchased
(297,365 shares at an average
price of $19.50 per share) - - - - - - (5,814) - - - - - - (5,814)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 203 203
Change in net unrealized gain
(loss)on investments available
for sale - - - - - - - - 52 - - - - 52
Appreciation in fair value of
shares charged to expense
for compensation plans - - 337 - - - - - - - - - - 337
------- ------- -------- --------- --------- -------- --------- --------
Balance at September 30, 1997 $ 66 65,305 37,305 (15,505) 71 (3,929) (1,507) 81,806
------- ------- -------- --------- --------- -------- --------- --------
</TABLE>
See accompanying condensed notes to consolidated financial statements.
4
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
1997 1996
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 5,320 $ 1,726
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 843 595
Earned SIP shares 806 625
Appreciation in fair value of shares
for compensation plans 844 160
Provision for loan losses 1,275 1,126
Loans originated for sale (88,431) (124,583)
Proceeds from sale of loans 76,125 129,072
Provision for valuation allowance
for real estate owned 57 72
Gain on sale of real estate held
for development (898) -
Gain on sale of real estate
acquired through foreclosure (539) (52)
Gain on sale of loans (723) (511)
Gain on sale of investment securities (7) -
Increase in accrued interest receivable (325) (688)
Decrease (increase) in prepaid expenses
and other assets, net 3,692 (1,442)
Increase (decrease) in accrued expenses
and other liabilities, net (140) 4,065
-------- -------
Net cash provided by (used in)
operating activities (2,101) 10,165
------- -------
Cash flows from investing activities:
Net cash of acquired institution (note 4) 11,908 -
Proceeds from sale of investment
securities available for sale 9,008 -
Proceeds from sale of mortgage-backed
securities available for sale 1,084 11,282
Proceeds from maturities of investment
securities held to maturity 5,850 5,742
Proceeds from maturities of investment
securities available for sale 4,000 -
Purchase of investment securities
available for sale (13,013) (46)
Purchase of mortgage-backed
securities available for sale - (14,157)
Purchase of investment securities
held to maturity (4,900) (24,529)
Principal payments on mortgage-backed
securities available for sale 2,560 2,205
Principal payments on investment
securities held to maturity - 59
Principal payments on mortgage-
backed securities held to maturity 3,478 4,616
Increase in loans, net (21,669) (149,646)
Purchases of Premises and equipment (676) (472)
Proceeds from sale of real estate owned 3,283 1,926
Additional investment in real estate owned (2) (61)
Proceeds from sale of real estate held for
development 2,102 -
Purchase of FHLB stock - (5,509)
------- -------
Net cash provided by (used in)
investing activities 3,013 (168,590)
------- ---------
-Continued on next page-
5
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Nine Months Ended
September 30,
1997 1996
------- -------
(Unaudited)
Cash flows from financing activities:
Increase (decrease) in deposit accounts 16,324 (1,511)
Repayments of securities sold under
agreements to repurchase (33,685) -
Proceeds from securities sold under
agreement to repurchase 38,651 2,973
Repayments of Federal Home Loan
Bank advances (241,200) (393,314)
Proceeds from Federal Home Loan
Bank advances 236,200 545,047
Cash dividends paid (1,146) (659)
Common stock repurchased (10,766) -
Decrease in advance payments by
borrowers for taxes and insurance 807 736
Purchase of stock for Stock-Based
Incentive Plan - (3,230)
-------- -------
Net cash provided by
financing activities 5,185 150,042
------- -------
Net increase (decrease)
in cash and cash equivalents 6,097 (8,383)
Cash and cash equivalents at January 1 18,278 21,225
------- -------
Cash and cash equivalents at September 30 $ 24,375 $ 12,842
======= =======
Supplemental disclosure of cash flow
information:
Payments during
the nine months for:
Interest $ 27,144 $ 19,825
======= =======
Taxes $ 4,097 $ 1,714
======= =======
Supplemental schedule of non-cash
investing activities:
Transfers of mortgage
loans to real estate owned $ 401 $ 3,806
======= =======
See accompanying condensed notes to consolidated financial statements.
6
<PAGE>
BOSTONFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of BostonFed Bancorp, Inc., ("BostonFed" or the "Company") and its
wholly-owned subsidiaries, Boston Federal Savings Bank ("BFS") and BF Funding
Corporation as of September 30, 1997 and December 31, 1996 and for the three-
and nine-month periods ended September 30, 1997 and 1996, and the accounts of
its wholly-owned subsidiary, Broadway National Bank ("BNB") effective at close
of business February 7, 1997 through September 30, 1997. Broadway Capital
Corporation, the former holding company of Broadway National Bank, was merged
into BostonFed effective May 28, 1997.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all necessary adjustments,
consisting only of normal recurring accruals necessary for a fair presentation,
have been included. The results of operations for the three- and nine-month
periods ended September 30, 1997 and 1996 are not necessarily indicative of the
results that may be expected for the entire fiscal year.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125
establishes, among other things, new criteria for determining whether a transfer
of financial assets in exchange for cash or other consideration should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
SFAS 125 also establishes new accounting requirements for pledged collateral.
SFAS 125 is effective for most transactions occurring after December 31, 1996
and must be applied prospectively. However, SFAS 127, "Deferral of the Effective
Date of Certain Provisions of SFAS 125", requires the deferral of implementation
as it relates to repurchase agreements, dollar-rolls, securities lending and
similar transactions until the years beginning after December 31, 1997. The
adoption of SFAS 125 has not had a material impact on its consolidated financial
statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). The Statement is effective
for periods ending after December 15, 1997, and will require restatement of all
prior-period earnings per share ("EPS") data presented. The Statement
establishes standards for computing and presenting EPS, and requires dual
presentation of basic and diluted EPS on the face of the income statement. Basic
EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Based on its review of the Statement, management believes the adoption of SFAS
128 will have no material effect on diluted earnings per share of the Company.
Also in February, 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which will be effective for 1997 financial
statements. The corporation's disclosures currently comply with the provisions
of this statement. In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income, which is defined as all changes to equity
except investments by and distributions to shareholders. Net income is a
component of comprehensive income, with all other components referred to in the
aggregate as other comprehensive income. This statement is effective for 1998
financial statements. Also in June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes standards for reporting information about operating segments. An
operating segment is defined as a component of a business for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and evaluate
performance. This statement requires a company to disclose certain incom e
statement and balance sheet information by operating segment, as well as provide
a reconciliation of operating segment information to the company's consolidated
balances. This statement is effective for 1998 annual financial statements.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At September 30, 1997, the Company had commitments of $36.6 million to
originate mortgage loans and $3.2 million to purchase loans from correspondent
lenders. Of these $39.8 million commitments, $28.9 million were adjustable rate
mortgage loans at rates ranging from 6.00% to 10.00% and $10.9 million were
fixed rate mortgage loans with interest rates ranging from 6.50% to 9.50%. The
Company also had commitments to sell $24.0 million of mortgage loans.
At September 30, 1997, the Company was servicing first mortgage loans of
approximately $550.4 million, which are either partially or wholly-owned by
others.
7
<PAGE>
NOTE 3: LEGISLATIVE MATTERS
The proposed legislation regarding elimination of the federal thrift
charter and related issues remains pending before Congress. The Company is
unable to predict whether such legislation would be enacted, the extent to which
the legislation would restrict or disrupt its operations or whether the BIF and
SAIF funds will eventually merge. See Form 10-K for the fiscal year ended
December 31, 1996 for a discussion of the proposed legislation.
NOTE 4: ACQUISITIONS (Unaudited)
On February 7, 1997 the Company acquired BNB, headquartered in Chelsea,
Massachusetts. The purchase price was $22 million and was accounted for using
the purchase method of accounting. The results of operations include the effect
of the purchase for the 235 day period beginning February 8, 1997. In connection
with the acquisition, the fair value of assets acquired and liabilities assumed
were as follows:
February 7, 1997
----------------
(in thousands)
Assets acquired:
Cash and cash equivalents $ 5,758
Fed Funds 28,150
Investments available for sale 35,352
Investment securities 4,646
Loans, net 66,093
Premises and equipment 1,972
Other assets 4,192
---------
Total assets acquired 146,163
Liabilities assumed:
Deposits 125,022
Borrowed funds -
Other liabilities 2,318
--------
Total liabilities assumed 127,340
--------
Assets in excess of liabilities 18,823
Cash paid to Broadway shareholders 22,000
--------
Goodwill $ 3,177
========
The following condensed consolidated pro-forma results of the Company were
prepared as if the acquisition had taken place on January 1 of the respective
year. The pro-forma results are not necessarily indicative of the actual results
of operations had the Company's acquisition of BNB actually occurred on January
1 of the respective year.
Three Months Ended Nine Months Ended
------------------ ------------------
9/30/97 9/30/96 9/30/97 9/30/96
------------------ ------------------
(In thousands except per share amounts)
Total interest and dividend
income and total
non-interest income $ 18,845 $ 17,171 $ 55,029 $ 47,556
Net income $ 1,701 $ (94) $ 5,471 $ 2,930
Net income per share $ 0.30 $(0.02) $ 0.94 $ 0.48
8
<PAGE>
<TABLE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
<CAPTION>
For the quarter ended September 30: 1997 1996
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities (1) $ 91,999 $ 1,391 6.05% $ 38,890 $ 604 6.21%
Loan, net and mortgage loans held for sale (2) 772,189 15,111 7.83% 646,869 12,159 7.52%
Mortgage-backed securities (3) 60,994 1,040 6.82% 77,097 1,320 6.85%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 925,182 17,542 7.58% 762,856 14,083 7.38%
--------- --------- ---------- ---------
Non-interest-earning assets 39,850 28,946
---------- ---------
Total assets $ 965,032 $ 791,802
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 63,264 462 2.92% $ 45,919 292 2.54%
Savings accounts 119,765 728 2.43% 90,893 559 2.46%
NOW accounts 99,678 268 1.08% 67,098 210 1.25%
Certificate accounts 243,138 3,512 5.78% 199,246 2,835 5.69%
---------- --------- --------- --------- ---------- ---------
Total 525,845 4,970 3.78% 403,156 3,896 3.87%
Borrowed Funds (4) 303,101 4,630 6.11% 276,603 4,041 5.84%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 828,946 9,600 4.63% 679,759 7,937 4.67%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 50,103 20,819
---------- ---------
Total liabilities 879,049 700,578
---------- ---------
Stockholders' equity 85,983 91,224
---------- ---------
Total liabilities and
stockholders' equity $ 965,032 $ 791,802
========== =========
Net interest rate spread (5) $ 7,942 2.95% $ 6,146 2.71%
========= ========= ========== =========
Net interest margin (6) 3.43% 3.22%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 111.61% 112.22%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 6.08% and 5.83% for the three months ended September 30, 1997 and
September 30, 1996, respectively.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
<CAPTION>
For the nine months ended September 30: 1997 1996
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities (1) $ 84,068 $ 3,782 6.00% $ 34,135 $ 1,546 6.04%
Loan, net and mortgage loans held for sale (2) 750,769 43,583 7.74% 581,295 32,771 7.51%
Mortgage-backed securities (3) 63,426 3,244 6.82% 73,759 3,778 6.83%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 898,263 50,609 7.51% 689,189 38,095 7.37%
--------- --------- ---------- ---------
Non-interest-earning assets 39,733 27,598
---------- ---------
Total assets $ 937,996 $ 716,787
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 61,422 1,354 2.94% $ 46,926 1,004 2.85%
Savings accounts 116,078 2,142 2.46% 91,416 1,703 2.48%
NOW accounts 94,933 786 1.10% 65,625 668 1.36%
Certificate accounts 227,561 9,622 5.64% 200,316 8,479 5.64%
---------- --------- --------- --------- ---------- ---------
Total 499,994 13,904 3.71% 404,283 11,854 3.91%
Borrowed Funds (4) 306,543 13,735 5.97% 199,984 8,704 5.80%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 806,537 27,639 4.57% 604,267 20,558 4.54%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 44,816 20,453
---------- ---------
Total liabilities 851,353 624,720
---------- ---------
Stockholders' equity 86,643 92,067
---------- ---------
Total liabilities and
stockholders' equity $ 937,996 $ 716,787
========== =========
Net interest rate spread (5) $22,970 2.94% $17,537 2.83%
========= ========= ========== =========
Net interest margin (6) 3.41% 3.39%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 111.37% 114.05%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 5.96% and 5.76% for the three months ended September 30, 1997 and
September 30, 1996, respectively.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
</TABLE>
10
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BOSTONFED BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
A. GENERAL
The Company is the holding company for two banking subsidiaries, Boston
Federal Savings Bank, a federally chartered community savings bank and Broadway
National Bank, a nationally chartered commercial bank. On February 7, 1997, the
Company acquired BNB and as a result of the acquisition, the Company became a
bank holding company subject to regulation by the Federal Reserve Bank ("FRB").
Boston Federal Savings Bank is regulated by the Office of Thrift Supervision and
Broadway National Bank is regulated by the Office of the Comptroller of the
Currency. The Company's principal business has been and continues to be
attracting retail deposits from the general public in the areas surrounding its
branch offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family residential mortgage
loans. To a lesser extent, the Company invests in multi-family mortgage,
commercial real estate, construction and land, consumer loans, business loans,
and investment securities. The Company originates loans for investment and loans
for sale in the secondary market, generally retaining the servicing rights for
loans sold. Loan sales are made from loans held in the Company's portfolio
designated as being held for sale or originated for sale during the period. The
Company's revenues are derived principally from interest on its mortgage loans,
and to a lesser extent, interest and dividends on its investment and
mortgage-backed securities, fees and loan servicing income. The Company's
primary sources of funds are deposits, principal and interest payments on loans
and mortgage-backed securities, FHLB advances, repurchase agreements and
proceeds from the sale of loans. Since the acquisition was consummated during
the first quarter, the financial statements of the Company and the following
discussion regarding the Company's financial condition at September 30, 1997 and
the results of operations for the three- and nine-months ended September 30,
1997 includes information and data of BNB from February 8, 1997 through
September 30, 1997. The financial statements of the Company at December 31, 1996
and the results of operations for the three- and nine-months ended September 30,
1996 do not include information and data related to BNB.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for the year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Management
believes that the expense and related potential effect on the Company's
earnings of the year 2000 compliance will not be material.
B. FINANCIAL POSITION
Total assets at September 30, 1997 were $960.7 million, compared to $820.6
million at December 31, 1996, an increase of $140.1 million or 17.1%. Asset
growth was primarily attributable to the acquisition of BNB which was recorded
using the purchase method of accounting. The major components of asset growth
included investment securities available for sale which increased to $36.7
million at September 30, 1997 from $1.1 million at December 31, 1996 due
primarily to the addition of BNB's investment portfolio. Loans, net of allowance
for loan losses increased by $86.1 million, or 12.7%, from a balance of $676.7
million at December 31, 1996 to $762.8 million at September 30, 1997, also
primarily due to the acquisition of BNB's portfolio and growth in BFS's
adjustable-rate loan portfolio. Excluding BNB's portfolio acquired on February
7, 1997, loans, net of allowance for loan losses increased by $20.0 million, due
mostly to increased originations of adjustable-rate mortgages. Mortgage loans
held for sale increased from $4.0 million at year-end 1996 to $17.0 million at
September 30, 1997 due to increased accumulation of mortgage loans held for sale
during the current quarter. Deposit accounts increased by $141.4 million from a
balance of $428.8 million at December 31, 1996 to a balance of $570.2 million at
September 30, 1997. Of the increase, $104.5 million is attributable to the
acquisition of BNB while the balance represents growth in BNB's since the
acquisition, and growth in BFS' deposit balances, $35.0 million of which was
obtained from wholesale CD markets. BFS obtained the brokered CDs for terms of
approximately three years. Federal Home Loan Bank advances were reduced by $5.0
million, to a balance of $291.5 million at September 30, 1997 from a balance of
$296.5 million at December 31, 1996. This reduction was offset by an increase in
other borrowed money (repurchase agreements) which amounted to $8.5 million at
September 30, 1997, compared to $3.5 million at December 31, 1996.
C. ASSET/LIABILITY MANAGEMENT
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board of Directors'
11
<PAGE>
approved guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an Asset/Liability
Committee of Management which is responsible for reviewing the Company's asset/
liability policies and interest rate risk position. The Committee reports trends
and interest rate risk position to the Board of Directors on a quarterly basis.
The Board has established certain risk tolerance levels within which the Company
can operate. The extent and direction of the movement of interest rates is an
uncertainty that could have a negative impact on the earnings of the Company.
In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate, one- to four-family mortgage loans; (2) selling in the
secondary market substantially all fixed-rate mortgage loans originated with
terms greater than 10 years while generally retaining the servicing rights
thereof; (3) primarily investing in investment securities or mortgage- backed
securities with adjustable interest rates; and (4) attempting to reduce the
overall interest rate sensitivity of liabilities by emphasizing longer-term
deposits and utilizing FHLB advances to replace rate sensitive deposits.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a positive gap position would be in a better position to invest
in higher yielding assets which, consequently, may result in the yield on its
assets increasing at a pace more closely matching the increase in the cost of
its interest-bearing liabilities than if it had a negative gap. During a period
of falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap which,
consequently, may tend to restrain the growth of its net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short- term basis and over the life of the asset.
Further, in the event of change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
adjustable-rate loans may decrease in the event of an interest rate increase.
At September 30, 1997, the Company's one year gap was a positive 6.8% of
total assets, compared to a positive 5.3% of total assets at December 31, 1996.
The change in the gap was caused by the addition of BNB which, like most
commercial banks, has a larger portion of its assets, compared to liabilities,
repricing in the one year horizon.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
net portfolio value (NPV") over a range of interest rate change scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario.
12
<PAGE>
As in the case with the gap analysis, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model used assumes that the composition
of the Company's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and also
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements and net
interest income models provide an indication of the Company's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income and will differ from actual
results.
D. LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and related securities and loan sales, FHLB
advances and repurchase agreements. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. However, BFS has maintained in excess of the
required minimum levels of liquid assets as defined by the OTS regulations. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of the BFS's
deposits and short-term borrowings. BFS's current required liquidity ratio is
5%. At September 30, 1997 and December 31, 1996 BFS's liquidity ratio was 6.0%
and 8.0% respectively. Management has maintained liquidity as close as possible
to the minimum requirement so that it may invest any excess liquidity in higher
yielding interest-earning assets or use such funds to repay higher cost FHLB
advances.
The Company's most liquid assets are cash, daily federal funds sold,
Federal Home Loan Bank overnight deposits, short-term investments and loans and
investments and mortgage-backed securities available for sale. The levels of
these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At September 30, 1997, BFS' cash,
short-term investments and loans and investment securities available for sale
totaled $47.7 million or 5.8% of BFS's total assets. Additional investments were
available which qualified for BFS's regulatory liquidity requirements. Under OCC
regulations, BNB does not have specific liquidity requirements, but must
maintain a reasonable and prudent level in order to operate in a safe and sound
manner.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 1997, BFS had $291.5 million
in advances outstanding from the FHLB. The Company also borrowed $8.5 million
through repurchase agreements. The Company generally does not pay the highest
deposit rates in its market and accordingly utilizes alternative sources of
funds such as FHLB advances and repurchase agreements to supplement cash flow
needs.
At September 30, 1997, the Company had commitments to originate loans and
unused outstanding lines of credit totalling $95.0 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from September 30, 1997, totalled $139.8 million.
At September 30, 1997, the consolidated stockholders' equity to total
assets ratio was 8.5%. As of September 30, 1997, the Company, BFS and BNB
exceeded all of their regulatory capital requirements. BFS's tangible, core and
risk-based capital ratios were 5.8%, 5.8% and 11.6%, respectively. BNB's tier 1
leverage and risk-based capital ratios were 6.8% and 16.4% respectively, total
risk-based capital was 17.6%. Additionally, BFS' retained earnings at September
30, 1997 includes approximately $13.2 million of tax bad debt reserves for which
no federal income tax liability has been recognized. Under the Small Business
Job Protection Act of 1996 (the "1996 Act") if BFS makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from BFS's unrecaptured tax bad debt reserves. Non-dividend
distributions include distributions in excess of BFS' current and accumulated
earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of BFS's current or accumulated earnings and
profits are not included in BFS's income.
13
<PAGE>
E. COMPARISON OF THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
General
Earnings for the quarter ended September 30, 1997 were $1.7 million, or
$.31 per Share,on a primary basis and $.30 per share on a fully diluted basis,
compared to a loss of $421,000, or $.07 per share for the comparable quarter of
1996. The third quarter of 1996 was adversely impacted by the one time $2.7
million (approximately $1.6 million after tax) special assessment for the
recapitalization of the SAIF. For the nine-months ended September 30, 1997,
earnings amounted to $5.3 million, or $.95 and $.91 per share on a primary and
fully diluted basis, respectively, compared to $1.7 million, or $.28 per share
with no earnings per share dilution for the comparable period in 1996. Real
estate operations income of $1.2 million (before income taxes), contributed to
the increased earnings for the nine months ended September 30, 1997, compared to
an expense of $180,000 (before income taxes) during the comparable period last
year. The real estate operations income resulted primarily from the sale of a
land sub-division owned by a subsidiary of BFS during the first quarter of 1997
and improved prices received on the sale of real estate owned properties. The
improved earnings increased the return on average assets to .76% during the
nine-months ended September 30, 1997 compared to a return on average assets of
.32% for the comparable period last year which was impacted by the SAIF
recapitalization. The return on average stockholders' equity increased to 8.18%
during the nine-months ended September 30, 1997, compared to 2.50% for the
nine-months ended September 30, 1996. Comments regarding the components of net
income are detailed in the following paragraphs. A majority of the balance
increases in interest-earning assets was the result of the Company's acquisition
of BNB, effective the close of business on February 7, 1997.
Interest Income
Total interest income on interest-earning assets for the quarter ended
September 30, 1997 increased by $3.5 million, or 24.8%, to $17.5 million,
compared to the quarter ended September 30, 1996. The increase in interest
income was primarily attributable to a $162.3 million increase in average
interest-earning assets and a 20 basis point increase in the average yield. The
average yield on interest-earning assets increased to 7.58% for the three months
ended September 30, 1997 from 7.38% for the three months ended September 30,
1996. For the nine months ended September 30, 1997, total interest income was
$50.6 million, compared to $38.1 million for the same period in 1996. The major
reason for the increase was also the increased average balances which were
$898.3 million during the nine months ended September 30, 1997, compared to
$689.2 million during the comparable period in 1996. Average yields also
increased by 14 basis points during the nine months ended September 30, 1997
compared to the same period of 1996.
Interest income on loans, net, for the quarter ended September 30, 1997
increased by $3.0 million, or 24.6%, to $15.1 million compared to $12.2 million
for the same quarter in 1996. On a year to date basis, interest income on loans,
net, increased $10.8 million to $43.6 million from the $32.8 million earned
during the year to date period ended September 30, 1996. The increase in
interest income from loans, net, for the quarter and nine months ended September
30, 1997, compared to the same periods last year, was primarily attributable to
increases in average balances of $125.3 million and $169.5 million,
respectively. Additionally, the average yield on loans, net increased by 31
basis points to 7.83% during the quarter ended September 30, 1997, compared to
7.52% during the quarter ended September 30, 1996. On a year to date basis, the
yield on loans, net, increased from 7.51% for the nine months ended September
30, 1996, to 7.74% during the current year period. Interest on mortgage-backed
securities for the quarter ended September 30, 1997 decreased by $280,000 to
$1.0 million, compared to $1.3 million for the same quarter in 1996. This
decrease in income was due primarily to the $16.1 million lower average balance
during the quarter ended September 30, 1997, compared to the quarter ended
September 30, 1996. Additionally, the average yield declined by three basis
points to an average of 6.82% during the quarter ended September 30, 1997,
compared to the same quarter last year. On a year to date basis, interest on
mortgage-backed securities was $3.2 million, compared to last year's comparable
period total of $3.8 million. Average yields declined only one basis point
during the nine months ended September 30, 1997, compared to the same period
last year. Interest income from investment securities was $1.4 million during
the third quarter of 1997, compared to $604,000 for the comparable quarter in
1996. The average yield on investment securities declined by 16 basis points due
to BNB's portfolio which is comprised mostly of lower yielding U.S. Treasury
securities. The average balance increased by $53.1 million to an average of
$92.0 million during the three-months ending September 30, 1997. On a year to
date basis, interest income from investment securities was $3.8 million,
compared to $1.5 million for the nine months ended September 30, 1996. The
average balance of investment securities was $84.1 million for the nine months
ended September 30, 1997, compared to $34.1 million for the comparable period
last year.
14
<PAGE>
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended September 30, 1997 increased by $1.7 million or 21.5%, to $9.6 million
compared to the quarter ended September 30, 1996. The increase in interest
expense for the quarter ended September 30, 1997 was due primarily to an
increase of $149.2 million in the average balance of interest-bearing
liabilities which averaged $828.9 million during the quarter, compared to an
average balance of $679.8 million during the quarter ended September 30, 1996. A
4 basis point decrease in the average cost of interest-bearing liabilities
partially offset the increase in interest expense resulting from higher average
balances during the third quarter of 1997, compared to the quarter ended
September 30, 1996. The average cost of interest-bearing liabilities decreased
to 4.63% during the quarter ended September 30, 1997, compared to 4.67% for last
year's comparable quarter. On a year to date basis, interest expense on
interest-bearing liabilities totaled $27.6 million, compared to last year's to
date total of $20.6 million, a 30.0% increase. The increase was primarily caused
by the effect of higher average balances of $806.5 million during the nine
months ended September 30, 1997 compared to average balances of $604.3 million
during the nine months ended September 30, 1996. The three basis point increase
in the cost of interest-bearing liabilities during the current year to date
period also contributed to the higher interest expense.
Interest expense on deposit accounts was $5.0 million for the quarter ended
September 30, 1997, an increase of $1.1 million from the $3.9 million for the
quarter ended September 30, 1996. The increase in the expense was due to higher
average deposit account balances of $122.7 million, offset by a decrease of 9
basis points in the average cost of funds during the quarter ended September 30,
1997, compared to the quarter ended September 30, 1996. The average balance of
deposit accounts increased from $403.2 million for the quarter ending September
30, 1996 to an average balance of $525.8 million for the quarter ending
September 30, 1997, mostly due to the acquisition of BNB and the acquisition of
$35 million of wholesale brokered certificates of deposit for terms of three
years. Interest expense on borrowed funds increased from $4.0 million for the
quarter ended September 30, 1996 to $4.6 million for the current quarter. The
average cost of borrowed funds increased from 5.84% during the quarter ended
September 30, 1996 to an average of 6.11% during the current quarter. The
average balances increased from $276.6 million during the third quarter of 1996
to an average balance of $303.1 million during the third quarter of 1997.
Net Interest Income
Net interest income increased by $1.8 million during the third quarter of
1997, compared to the same quarter last year, due primarily to asset growth by
BFS and the acquisition of BNB. The net interest rate spread of 2.95% for the
quarter ended September 30, 1997 was 24 basis points higher than the 2.71% for
the comparable quarter last year. The primary reasons for the improvement in the
net interest rate spread are the addition of BNB, as most commercial banks
typically earn a wider spread and an improvement in BFS' net interest rate
spread. The net interest margin was similarly impacted and improved from 3.22%
for the quarter ended September 30, 1996 to 3.43% for the third quarter of 1997.
On a year to date basis the net interest rate spread improved by 11 basis
points. The net interest margin improved from 3.39% for the nine months ended
September 30, 1996 to 3.41% for the nine months ended September 30, 1997 due
primarily to the utilization of capital to repurchase the Company's stock.
Provision for Loan Losses
The Company's provision for loan losses amounted to $395,000 for the
quarter ended September 30, 1997, compared to the $390,000 loan loss provision
for the comparable quarter last year. On a year to date basis through September
30, 1997, the provision for loan losses amounted to $1.3 million, compared to
$1.1 million for the comparable period last year. The allowance for loan losses
has increased from $4.4 million at December 31, 1996 to $6.0 million at
September 30, 1997, after consolidation of BNB's allowance for loan losses of
$605,000 at the time of acquisition and the year to date provision, net of
charge-offs and recoveries.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon management's assessment of the risk
inherent in its loan portfolio in light of current economic conditions, actual
loss experience, industry trends and other factors which may affect the real
estate values in the Company's market area. While management believes the
current allowance for loan losses is adequate, actual losses are dependent upon
future events, and as such, future provisions for loan losses may be necessary.
As part of the Company's determination of the adequacy of the allowance for loan
losses, the Company monitors its loan portfolio through its Asset Classification
Committee. The Committee classifies loans depending on risk of loss
characteristics. The most severe classification before a charge-off is required
is "sub-standard." At September 30, 1997, the Company classified $5.5 million of
loans ($4.2 million of BFS and $1.3 million of BNB) as sub-standard compared to
$3.8 million (BFS only) at December 31, 1996. The Asset Classification
Committee, which meets quarterly, determines the adequacy of the allowance for
loan losses through ongoing analysis of historical loss experience, the
composition of the loan portfolios, delinquency levels, underlying collateral
values, cash flow values and state of the real estate economy. Utilizing these
procedures, management believes that the allowance for loan losses at September
30, 1997 was sufficient to provide for anticipated losses inherent in the loan
portfolio.
15
<PAGE>
The Company's allowance for loan losses at September 30, 1997 was $6.0
million, which represented 647.3% of non-performing loans or .76% of total
loans, compared to $4.4 million at December 31, 1996, or 293.0% of
non-performing loans and .64% of total loans.
Non-performing loans at September 30, 1997 amounted to $927,000 or .12% of
total loans, compared to $1.5 million, or .22% of total loans, at December 31,
1996.
The amount of interest income on non-performing loans that would have been
recorded had these loans been current in accordance with their original terms,
was $137,000 and $110,000 for the nine-month periods ended September 30, 1997
and 1996, respectively. The amount of interest income that was recorded on these
loans was $36,000 and $41,000 for the nine-month periods ended September 30,
1997 and 1996, respectively.
At September 30, 1997, loans characterized as impaired, (which include all
non-performing loans and some other sub-standard assets), pursuant to SFAS No.
114, "Accounting by Creditors for Impairment of a Loan", ("SFAS 114") and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
and Disclosure", ("SFAS 118") totaled $3.7 million. All of the impaired loans
have been measured using the fair value of the collateral method. During the
nine-months ended September 30, 1997, the average recorded value of impaired
loans was $4.3 million, $214,000 interest income was recognized and $317,000 of
interest income would have been recognized under the loans' original terms.
At September 30, 1997, the Company had $270,000 in real estate owned
compared to $2.7 million at December 31, 1996. Further, at September 30, 1997
the Company also had restructured real estate loans amounting to $2.3 million
for which interest is being recorded in accordance with the loans' restructured
terms. The amount of the interest income lost on these restructured loans is not
material to the Company's financial statements.
Non-Interest Income
Total non-interest income in the third quarter of 1997 increased by
$464,000, or 55.3%, to $1.3 million from $839,000 for the three months ended
September 30, 1996 due to a $258,000 increase in other non-interest income
(primarily transaction account fees) and a $204,000 increase in gains on the
sale of loans resulting from favorable market conditions.
On a year to date basis, total non-interest income amounted to $3.5 million
for the nine-months ended September 30, 1997, compared to $2.7 million for the
nine-months ended September 30, 1996. The increase in total non-interest income
during the current period was also due to higher transaction account fees, which
include BNB's fees and improved gains on the sale of loans.
Non-Interest Expense
Total non-interest expense was $5.6 million for the quarter ended September
30, 1997 compared to $7.4 million for the comparable quarter in 1996.
Compensation and benefits increased by $887,000 from $2.5 million for the
quarter ended September 30, 1996 to $3.4 million for the quarter ended September
30, 1997. The major reasons for this increase were due to the addition of BNB's
compensation and benefits expense amounting to $602,000 and increased expenses
for the Company's ESOP and Short Term Incentive Plan ("STIP"), which increased
by $328,000 and 113,000, respectively. The increased expenses for the ESOP was
due to increases in the market value of the Company's stock. Such increases are
credited to Additional Paid in Capital in accordance with generally accepted
accounting principles. Occupancy and equipment expense increased to $769,000
during the quarter ended September 30, 1997, compared to $599,000 in the prior
year's quarter due to the inclusion of BNB's expenses. Federal deposit insurance
declined from $246,000 during the quarter ended September 30, 1996 to $74,000
during the current quarter due to lower premiums on deposits resulting from the
SAIF Recapitalization. On a year to date basis, total non-interest expense was
$15.6 million, compared to last year to date total of $16.2 million.
Compensation and benefits increased to $10.0 million for the nine months ended
September 30, 1997, compared to $7.2 million for the comparable period last
year. As with the current quarter, the year to date was similarly impacted by
the inclusion of $1.5 million of compensation and benefits of BNB since February
8, 1997 and increased expenses for the ESOP, and STIP. Federal deposit insurance
premiums declined by $508,000 during the nine months ended September 30, 1997,
compared to the nine months ended September 30, 1996 also due to lower insurance
premiums resulting from the SAIF recapitalization in the third quarter of 1996.
Real estate operations provided $1.2 million of income during the current year
to date period, compared to and expense of $180,000 during the comparable period
last year. The current year to date real estate operations income resulted
primarily from the sale of a land sub-division owned by a subsidiary of BFS as
well as recoveries on the sale of real estate owned. Occupancy and equipment and
other non-interest expenses were higher during the current quarter and year to
date periods, compared to the prior year's periods due primarily to the
inclusion of such expenses from BNB from February 8, 1997 through September 30,
1997.
16
<PAGE>
Income Tax Expense
Income tax expense for the quarter ended September 30, 1997 amounted to
$1.5 million compared to an income tax benefit of $334,000 for the same quarter
last year. The increase was due almost entirely to increased income before tax.
The effective income tax rate was 47% for the quarter ended September 30, 1997,
compared to an effective benefit rate of 44% for the quarter ended September 30,
1996. The primary reasons for the high effective rate during the current quarter
were the goodwill amortization and a greater appreciation in the market value
of shares contributed to the ESOP, neither of which were tax deductible. The tax
benefit for the quarter ended September 30, 1996 was the result of operating
losses caused by the recapitalization of the SAIF. On a year to date basis,
income tax expense was $4.3 million, for an effective rate of 44%, compared to
$1.2 million for an effective rate of 40% for nine months ended September 30,
1996. As with the current quarter, the reasons for the increased tax expense and
effective tax rate during the nine months ending September 30, 1997 were
primarily higher income before income tax and the non-deductibility of both the
goodwill amortization and appreciation in the market value of shares contributed
to the ESOP.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending material legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by management to
be immaterial to the Company's financial condition or results of operations.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
17
<PAGE>
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation*
3.2 Bylaws*
27 Financial Data Schedule**
* Incorporated herein to the Company's Registration Statement on form S-1
originally filed on July 21, 1995
**This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety by reference to such financial statements.
18
<PAGE>
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 thereunto duly authorized.
BOSTONFED BANCORP, INC.
(Registrant)
Date: November 14, 1997 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: November 14, 1997 By: /s/ John A. Simas
__________________________________
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
19
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