FORM 10-Q
UNITED STATES
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: June 30, 1998
__________________________
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)
(781) 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 July 31, 1998: 5,393,137.
<PAGE>
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 (unadudited) and December 31, 1997 2
Consolidated Statements of Operations for the Three
and Six Months ended June 30, 1998 and 1997 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended
June 30, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1998 and 1997 (unaudited) 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
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18 - 19
PART II _ OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
1
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(Dollars in Thousands, Except Per Share Data)
June 30, December 31,
1998 1997
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 21,619 $ 24,690
Investment securities available for sale
(amortized cost of $52,090 and $31,554 at
June 30, 1998 and December 31, 1997
respectively) 52,124 31,768
Investment securities held to maturity (fair
value of $13,029 and $20,630 at June 30, 1998
and December 31, 1997, respectively) 12,993 20,630
Mortgage-backed securities available for sale
(amortized cost of $14,776 and $19,007 at
June 30, 1998 and December 31, 1997,
respectively) 14,866 19,125
Mortgage-backed securities held to maturity (fair
value of $33,317 and $38,903 at June 30, 1998
and December 31, 1997, respectively) 32,799 38,350
Mortgage loans held for sale 29,317 9,817
Loans, net of allowance for loan losses of $7,459
and $6,600 at June 30, 1998 and December 31,
1997, respectively 855,494 791,728
Accrued interest receivable 5,472 5,163
Stock in FHLB of Boston and Federal Reserve Bank 16,613 16,613
Premises and equipment 6,760 6,842
Real estate owned 99 195
Other assets 10,051 9,759
-------- --------
Total assets $1,058,207 $974,680
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $652,308 $619,821
Federal Home Loan Bank advances 314,061 256,500
Securities sold under agreements to repurchase 0 7,140
Advance payments by borrowers for taxes
and insurance 2,870 3,133
Other liabilities 6,414 6,475
------- -------
Total liabilities 975,653 893,069
------- -------
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 (5,393,137 and
5,520,437 shares outstanding, respectively) 66 66
Additional paid-in capital 66,080 65,282
Retained earnings 41,408 38,645
Accumulated other comprehensive income 74 242
Less Treasury Stock, (1,196,480 shares and
1,069,180 shares, respectively), at cost (20,941) (18,146)
Less unallocated ESOP shares (3,174) (3,174)
Less unearned Stock-Based Incentive Plan (959) (1,304)
-------- --------
Total stockholders' equity 82,554 81,611
-------- --------
Total liabilities and stockholders' equity $1,058,207 $974,680
======== ========
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 Six Months Ended
------------------ ------------------
6/30/98 6/30/97 6/30/98 6/30/97
------------------ ------------------
(Unaudited)
Interest income:
Loans $ 16,047 $ 14,686 $ 31,896 $ 28,472
Mortgage-backed securities 856 1,073 1,797 2,204
Investment securities 1,390 1,311 2,801 2,391
------- ------- ------- -------
Total interest income 18,293 17,070 36,494 33,067
------- ------- ------- -------
Interest expense:
Deposit accounts 5,922 4,762 11,616 8,934
Borrowed funds 4,480 4,420 8,783 9,105
------- ------- ------- -------
Total interest expense 10,402 9,182 20,399 18,039
------- ------- ------- -------
Net interest income 7,891 7,888 16,095 15,028
Provision for loan losses 342 455 745 880
------- ------- ------- -------
Net interest
income after provision 7,549 7,433 15,350 14,148
Non-interest income:
Loan processing and servicing
fees 196 298 340 597
Gain on sale of loans 771 252 1,426 382
Deposit service fees 414 444 823 825
Other 205 187 401 372
------- ------- ------- -------
Total non-interest income 1,586 1,181 2,990 2,176
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 3,498 3,368 6,908 6,608
Occupancy and equipment 810 846 1,584 1,542
Federal deposit insurance
premiums 80 71 159 142
Real estate operations (24) (219) (38) (1,110)
Other 1,729 1,430 3,460 2,779
------- ------- ------- -------
Total non-interest expense 6,093 5,496 12,073 9,961
------- ------- ------- -------
Income before income taxes 3,042 3,118 6,267 6,363
Income tax expense 1,239 1,413 2,575 2,744
------- ------- ------- -------
Net income $ 1,803 $ 1,705 $ 3,692 $ 3,619
======= ======= ======= =======
Basic earnings per share $0.35 $0.30 $.72 $.63
Diluted earnings
per share $0.33 $0.30 $.68 $.62
Basic weighted average shares
outstanding 5,106,663 5,579,032 5,136,368 5,658,257
Common stock equivalents
due to dilutive effect
of stock options 315,319 176,867 288,453 176,867
Diluted total weighted average
shares outstanding 5,421,982 5,755,899 5,424,821 5,835,124
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)
Six Months Ended June 30, 1998
(Unaudited)
<CAPTION>
Unearned
Accumulated Stock-
Additional other Unallocated Based Total
Common paid-in Retained Treasury Comprehensive ESOP Incentive stockholders'
stock capital earnings Stock income shares Plan equity
------ -------- --------- -------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 66 65,282 38,645 (18,146) 242 (3,174) (1,304) 81,611
Net income - - - - 1,889 - - - - - - - - 1,889
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $89) - - - - - - - - (204) - - - - (204)
--------
Total comprehensive income - - - - - - - - - - - - - - 1,685
Cash dividends declared and
paid ($0.07 per share) - - - - (387) - - - - - - - - (387)
Common Stock repurchased
(98,200 shares at an average
price of $21.27 per share) - - - - - - (2,089) - - - - - - (2,089)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 197 197
Options exercised - - (2) - - 7 - - - - - - 5
Appreciation in fair value of
shares charged to expense for
compensation plans - - 217 - - - - - - - - - - 217
------- ------- -------- --------- --------- -------- --------- --------
Balance at March 31, 1998 $ 66 65,497 40,147 (20,228) 38 (3,174) (1,107) 81,239
------- ------- -------- --------- --------- -------- --------- --------
Net income - - - - 1,803 - - - - - - - - 1,803
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $51) - - - - - - - - 36 - - - - 36
--------
Total comprehensive income - - - - - - - - - - - - - - 1,839
Cash dividends declared and
paid ($0.10 per share) - - - - (542) - - - - - - - - (542)
Common Stock repurchased
(30,000 shares at an average
price of $24.05 per share) - - - - - - (721) - - - - - - (721)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 148 148
Options exercised - - 1 - - 8 - - - - - - 9
Tax benefit of stock
distributed relating to the
stock-based incentive plan - - 317 - - - - - - - - - - 317
Appreciation in fair value of
shares charged to expense for
compensation plans - - 265 - - - - - - - - - - 265
------- ------- -------- --------- --------- -------- --------- --------
Balance at June 30, 1998 $ 66 66,080 41,408 (20,941) 74 (3,174) (959) 82,554
------- ------- -------- --------- --------- -------- --------- --------
</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 Six Months Ended
June 30,
1998 1997
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 3,692 $ 3,619
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 670 564
Earned SIP shares 345 603
Appreciation in fair value of shares
charged to expense for compensation plans 481 507
Provision for loan losses 745 880
Loans originated for sale (182,855) (54,708)
Proceeds from sale of loans 164,781 43,856
Provision for valuation allowance
for real estate owned - 57
Gain on sale of real estate held
for development - (898)
Gain on sale of real estate
acquired through foreclosure (32) (433)
Gain on sale of loans (1,426) (382)
Increase in accrued interest receivable (309) (755)
Decrease(increase) in prepaid expenses
and other assets, net (81) 2,389
Decrease in accrued expenses and
other liabilities, net (34) (700)
-------- -------
Net cash used in
operating activities (14,023) (5,401)
-------- -------
Cash flows from investing activities:
Net cash of acquired institution - 11,908
Proceeds from sale of mortgage-backed
securities available for sale - 1,084
Proceeds from maturities of investment
securities held to maturity 8,650 3,850
Proceeds from maturities of investment
securities available for sale 3,000 2,000
Purchase of investment securities
available for sale (23,489) (12,019)
Purchase of investment securities
held to maturity (1,000) (3,900)
Purchase of mortgage-backed securities
held to maturity (997) -
Principal payments on mortgage-backed
securities available for sale 4,190 1,548
Principal payments on mortgage-
backed securities held to maturity 6,532 2,287
Increase in loans, net (64,511) (16,816)
Purchases of premises and equipment (472) (494)
Proceeds from sale of real estate owned 128 2,360
Additional investment in real estate owned - (2)
Proceeds from sale of real estate held for
development - 2,102
------- -------
Net cash used in
investing activities (67,969) (6,092)
------- ---------
-Continued on next page-
5
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
1998 1997
------- -------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 32,487 27,912
Repayments of securities sold under
agreement to repurchase (7,140) (23,548)
Proceeds from securities sold under
agreements to repurchase - 28,685
Repayments of Federal Home Loan
Bank advances (224,518) (144,250)
Proceeds from Federal Home Loan
Bank advances 282,079 140,500
Cash dividends paid (929) (731)
Common stock repurchased (2,810) (4,952)
Options exercised 15 -
Increase in advance payments by
borrowers for taxes and insurance (263) (42)
-------- -------
Net cash provided by
financing activities 78,921 23,574
------- -------
Net increase(decrease)
in cash and cash equivalents (3,071) 12,081
Cash and cash equivalents at January 1 24,690 18,278
------- -------
Cash and cash equivalents at June 30 $ 21,619 $ 30,359
======= =======
Supplemental disclosure of cash flow
information:
Payments during
the six months ended June 30, for:
Interest $ 20,062 $ 17,798
======= =======
Taxes $ 2,590 $ 928
======= =======
Supplemental schedule of non-cash
investing activities:
Transfers of mortgage
loans to real estate owned $ - $ 223
======= =======
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 June 30, 1998 and December 31, 1997 and for the three- and
six-month periods ended June 30, 1998 and 1997, and the accounts of its
wholly-owned subsidiary, Broadway National Bank ("BNB") effective at close of
business February 7, 1997 through June 30, 1998. 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 six-month
periods ended June 30, 1998 and 1997 are not necessarily indicative of the
results that may be expected for the entire fiscal year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which sets accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
This Statement is effective for years beginning January 1, 2000. The impact of
adoption is not expected to be material to the Company.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At June 30, 1998, the Company had commitments of $67.9 million to
originate mortgage loans and $4.1 million to purchase loans from correspondent
lenders. Of these $72.0 million commitments, $44.3 million were adjustable rate
mortgage loans at rates ranging from 5.13% to 10.00% and $27.7 million were
fixed rate mortgage loans with interest rates ranging from 6.13% to 8.75%. The
Company also had commitments to sell $53.8 million of mortgage loans.
At June 30, 1998, the Company was servicing first mortgage loans of
approximately $591.8 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 will 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, 1997 for a discussion of the proposed legislation.
NOTE 4: ACQUISITIONS
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 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.
Six Months Ended
------------------
6/30/97
------------------
(In thousands except per share amounts)
Total interest and dividend
income and total
non-interest income $ 36,184
Net income $ 3,770
Net income per share $ 0.65
8
<PAGE>
<TABLE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
<CAPTION>
For the quarter ended June 30: 1998 1997
------------------------------------- ------------------------------
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) $ 88,588 $ 1,390 6.28% $ 87,776 $ 1,311 5.97%
Loan, net and mortgage loans held for sale (2) 853,276 16,047 7.52% 757,134 14,686 7.76%
Mortgage-backed securities (3) 51,148 856 6.69% 63,400 1,073 6.77%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 993,012 18,293 7.37% 908,310 17,070 7.52%
--------- --------- ---------- ---------
Non-interest-earning assets 41,963 41,125
---------- ---------
Total assets $ 1,034,975 $ 949,435
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 63,220 467 2.95% $ 63,696 470 2.95%
Savings accounts 116,211 718 2.47% 121,141 752 2.48%
NOW accounts 105,331 300 1.14% 99,670 277 1.11%
Certificate accounts 304,069 4,437 5.84% 232,641 3,263 5.61%
---------- --------- --------- --------- ---------- ---------
Total 588,831 5,922 4.02% 517,148 4,762 3.68%
Borrowed Funds (4) 300,064 4,480 5.97% 297,514 4,420 5.94%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 888,895 10,402 4.68% 814,662 9,182 4.51%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 62,715 48,437
---------- ---------
Total liabilities 951,610 863,099
---------- ---------
Stockholders' equity 83,365 86,336
---------- ---------
Total liabilities and
stockholders' equity $ 1,034,975 $ 949,435
========== =========
Net interest rate spread (5) $ 7,891 2.69% $ 7,888 3.01%
========= ========= ========== =========
Net interest margin (6) 3.18% 3.47%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 111.71% 111.50%
========= =========
<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 5.97% and 5.93% for the three months ended June 30, 1998 and
June 30, 1997, 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 six months ended June 30: 1998 1997
------------------------------------- ------------------------------
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) $ 90,293 $ 2,801 6.20% $ 80,104 $ 2,391 5.97%
Loan, net and mortgage loans held for sale (2) 836,732 31,896 7.62% 740,057 28,472 7.69%
Mortgage-backed securities (3) 53,695 1,797 6.69% 64,642 2,204 6.82%
---------- --------- --------- --------- ---------- ---------
Total interest-earning assets 980,720 36,494 7.44% 884,803 33,067 7.47%
--------- --------- ---------- ---------
Non-interest-earning assets 41,680 39,674
---------- ---------
Total assets $ 1,022,400 $ 924,477
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 63,430 937 2.95% $ 60,501 892 2.95%
Savings accounts 116,881 1,448 2.48% 114,234 1,414 2.48%
NOW accounts 104,162 596 1.14% 92,561 518 1.12%
Certificate accounts 297,380 8,635 5.81% 219,773 6,110 5.56%
---------- --------- --------- --------- ---------- ---------
Total 581,853 11,616 3.99% 487,069 8,934 3.67%
Borrowed Funds (4) 295,195 8,783 5.95% 308,263 9,105 5.91%
---------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 877,048 20,399 4.65% 795,332 18,039 4.54%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 61,689 42,173
---------- ---------
Total liabilities 938,737 837,505
---------- ---------
Stockholders' equity 83,663 86,972
---------- ---------
Total liabilities and
stockholders' equity $ 1,022,400 $ 924,477
========== =========
Net interest rate spread (5) $16,095 2.79% $15,028 2.93%
========= ========= ========== =========
Net interest margin (6) 3.28% 3.40%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 111.82% 111.25%
========= =========
<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 5.94% and 5.90% for the six months ended June 30, 1998 and
June 30, 1997, 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
<PAGE>
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. Substantially all of the Company's business is coordinated through its
subsidiary banks and references herein to "Company" include the banks as
appropriate. 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 of BNB was consummated at
the close of business on February 7, 1997, the financial statements of the
Company and the following discussion regarding the Company's financial condition
at June 30, 1998 and December 31, 1997, and the results of operations for the
three- and six- months ended June 30, 1998 and 1997 includes information and
data of BNB from February 8, 1997 through June 30, 1998.
Included in other non-interest expenses for the three- and six-month
periods ended June 30, 1998 and 1997 are charges incurred in connection with the
modification or replacement of software or hardware in order for the Company's
computer and related systems to properly recognize dates beyond December 31,
1999.
The impact of computer systems ability to process dates beyond 1999, the
Year 2000 issue, creates a significant business challenge for the Company. The
Company is addressing this issue as it affects all of its software, hardware and
other systems to insure the Company is Year 2000 compliant. The Company has
developed a plan that is based upon the FFIEC (Federal Financial Institutions
Examination Council) recommended phases and time frames for insuring Year 2000
compliance. These phases include awareness, assessment, renovation, validation
and implementation. The Company has completed the awareness phase through
development of a Year 2000 committee and reporting structure. The assessment
phase has been completed with a review of all software, hardware and business
systems including an evaluation of the critical nature and year 2000 business
risk that each application presents. The Company primarily utilizes third-party
vendors for the processing of its critical data processing applications. The
company is working closely with these critical vendors to monitor renovation
and validation efforts to insure that the time frames set out in the Company's
plan are met. The plan anticipates completion of renovations in 1998 and testing
of all critical applications by March 31, 1999. The target date for completion
of the implementation phase is June 30, 1999, a date prior to any anticipated
impact on operating systems.
In the event that the Company's third-party vendors do not successfully or
timely achieve Year 2000 compliance, the Company's operations could be adversely
effected. The Company is developing contingency plans in the event that one or
all of these significant vendors fails to meet Year 2000 operating requirements.
Further, the Company will seek alternative vendors should one of the critical
vendors fail to achieve satisfactory Year 2000 compliance. In the event the
Company's current third party data processing vendors were not to achieve Year
2000 compliance and the Company could not engage alternative vendors in a timely
manner the Company's operations would be adversely impacted.
The total cost of the Year 2000 project is estimated at $300,000 to
$500,000 which includes estimated costs and time associated with third-party
Year 2000 issues, based on information currently available. Through June 30,
1998 the Company has expensed approximately $75,000 to date toward the Year 2000
remediation efforts. A significant portion of the costs associated with the year
2000 project are not expected to be incremental to the Company, but rather
represent a reprioritization of existing internal systems technology.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based upon management's best estimates,
which are derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
11
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B. FINANCIAL CONDITION
Total assets at June 30, 1998 were $1.06 billion, compared to $974.7
million at December 31, 1997, an increase of $83.5 million or 8.6%. The major
components of asset growth included investment securities available for sale,
mortgage loans held for sale and loans, net of allowance for loan losses.
Investment securities available for sale increased to $52.1 million at June 30,
1998 from $31.8 million at December 31, 1997 due to an investment in two mutual
funds that invest primarily in government agency mortgage-backed securities.
Mortgage loans held for sale increased from $9.8 million at December 31, 1997 to
$29.3 million at June 30, 1998 due to the increased activity in the secondary
market resulting from heavy volume of fixed- and adjustable-rate loan
originations for sale. Loans, net of allowance for loan losses, increased by
$63.8 million, or 8.1%, from a balance of $791.7 million at December 31, 1997 to
$855.5 million at June 30, 1998, primarily due to growth in BFS's loan
portfolio. Deposit accounts increased by $32.5 million from a balance of $619.8
million at December 31, 1997 to a balance of $652.3 million at June 30, 1998.
The increase is mainly attributable to the successful roll-out of a new 15-month
retail certificate of deposit acquisition program initiated by BFS. BNB's
deposits also grew by $3.0 million during the six-months ended June 30, 1998.
Federal Home Loan Bank advances increased by $57.6 million, to a balance of
$314.1 million at June 30, 1998 from a balance of $256.5 million at December 31,
1997. These advances were used to fund the increase in investments available for
sale and mortgage loans held for sale. Other borrowed money (repurchase
agreements), which amounted to $7.1 million at December 31, 1997, were repaid
during the six-months ended June 30, 1998.
12
<PAGE>
C. LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, investments,
mortgage-backed and related securities 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. The
Company has maintained in excess of the required minimum levels of liquid assets
at BFS as defined by 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 4%. At June 30, 1998 and December 31,
1997 BFS's liquidity ratio was 5.6% and 5.7% 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 OCC does not have
specific guidance for liquidity ratios for BNB, but does require banks to
maintain reasonable and prudent liquidity levels. Management believes such
levels have been maintained since the acquisition date.
The Company's most liquid assets are cash, overnight federal funds sold,
short-term investments and loans and investments available for sale. The levels
of these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At June 30, 1998, BFS' cash,
short-term investments and loans and investments available for sale totaled
$47.3 million or 5.2% of BFS's total assets. Additional investments were
available which qualified for BFS's regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1998, BFS had $314.1 million in
advances outstanding from the FHLB. 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 June 30, 1998, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $126.0 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 June 30, 1998, totaled $149.8 million.
At June 30, 1998, the consolidated stockholders' equity to total assets
ratio was 7.8%. As of June 30, 1998, the Company, BFS and BNB exceeded all of
their regulatory capital requirements. The Company's consolidated Tier 1
capital, total capital and Tier 1 leverage ratios were 14.0%, 15.2% and 7.7%,
respectively. BFS's tier 1, total risk-based, tier 1 risk-based and tangible
equity capital ratios were 5.4%, 10.8%, 9.6% and 5.4%, respectively. BNB's
respective capital ratios were 9.3%, 16.2%, 15.2%, and 7.5%.
13
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D. COMPARISON OF THREE- AND SIX-MONTHS ENDED JUNE 30, 1998 AND 1997
General
Earnings for the quarter ended June 30, 1998 were $1.8 million, or $.35
basic earnings per share, $.33 per share on a diluted basis, compared to
earnings of $1.7 million, or $.30 basic and diluted earnings per share for the
second quarter of 1997. Earnings for the six-months ended June 30, 1998 were
$3.7 million or $.72 basic earnings per share, $.68 per share on a diluted
basis, compared to earnings of $3.6 million or $.63 basic earnings per share,
$.62 per share on a diluted basis during the six-months ended June 30, 1997.
Earnings for the first six months of 1997 were enhanced by earnings of $1.1
million (before income taxes) from real estate operations, which included a gain
of $891,000 (before income taxes), from the sale of a land sub-division owned by
a subsidiary of BFS. The current six months were also positively impacted by
gain on sale of loans of $1.4 million (before income taxes) compared to last
year's first six months gain on sale of loans totaling $382,000 (before income
tax). The Company's annualized return on average assets was .72% and the
annualized return on average stockholders' equity was 8.83% during the
six-months ended June 30, 1998, compared to .78% and 8.32%, respectively, for
the six-months ended June 30, 1997 (annualized). Comments regarding the
components of net income are detailed in the following paragraphs.
Interest Income
Total interest income on interest-earning assets for the quarter ended June
30, 1998 increased by $1.2 million, or 7.0%, to $18.3 million, compared to the
quarter ended June 30, 1997. The increase in interest income was primarily
attributable to a $84.7 million increase in average interest-earning assets,
offset by a 15 basis point decrease in the average yield. The average yield on
interest-earning assets decreased to 7.37% for the three months ended June 30,
1998 from 7.52% for the three months ended June 30, 1997. For the first half of
1998, total interest income was $36.5 million, compared to $33.1 million for the
same period in 1997. The major reason for the increase was also the increased
average balances of interest-earning assets which were $980.7 million during the
six-months ended June 30, 1998, compared to $884.8 million during the comparable
period in 1997. The average yields during the six-months ending June 30, 1998
and 1997 were 7.44% and 7.47%, respectively.
Interest income on loans, net, for the quarter ended June 30, 1998
increased by $1.3 million, or 8.8%, to $16.0 million compared to $14.7 million
for the same quarter in 1997. On a year to date basis, interest income on loans.
net, increased $3.4 million to $31.9 million from the $28.5 million earned
during the first half of 1997. The increase in interest income from loans, net,
for the quarter and six months ended June 30, 1998, compared to the same periods
last year, was primarily attributable to increases in average balances of $96.1
million and $96.7 million, respectively. The earnings impact of higher balances
of loans, net was partially offset by declines in the average yield on loans,
net which decreased by 24 basis points to 7.52% during the quarter ended June
30, 1998, compared to 7.76% during the quarter ended June 30, 1997. On a year to
date basis, the yield on loans, net, decreased from 7.69% for the six months
ended June 30, 1997, to 7.62% during the current year period. Interest on
mortgage-backed securities for the quarter ended June 30, 1998 decreased by
$217,000 to $856,000, compared to $1.1 million for the same quarter in 1997.
This decrease in income was due primarily to the $12.3 million lower average
balance during the quarter ended June 30, 1998, compared to the quarter ended
June 30, 1997. Additionally, the average yield declined by 8 basis points to an
average of 6.69% during the quarter ended June 30, 1998, compared to the same
quarter last year. On a year to date basis, interest on mortgage-backed
securities was $1.8 million, compared to last year's comparable period total of
$2.2 million, also due to declines in average balances and yields. The average
balance of mortgage-backed securities declined by $10.9 million to $53.7 million
for the six-months ended June 30, 1998 compared to the prior year period average
balance of $64.5 million. Average yields were also lower by 13 basis points
during the current period.
Income from investment securities was $1.4 million during the second
quarter of 1998, compared to $1.3 million for the comparable quarter in 1997. On
a year to date basis, income from investment securities was $2.8 million and
$2.4 million, respectively for the six-months ended June 30, 1998 and 1997. The
average yield on investment securities increased by 31 and 23 basis points,
respectively, in the current three- and six-month periods, compared to last
year's periods due to the higher yields received by BFS on the two mutual funds
it invested in January, 1998. The average balance increased by $812,000 to an
average of $88.6 million during the quarter ended June 30, 1998, compared to an
average balance of $87.8 million for the quarter ended June 30, 1997. For the
six-months ended June 30, 1998, the average investment securities balance was
$90.3 million, compared to $80.1 for the prior period. The increase in the
average balance also is primarily due to BFS's investment in the mutual funds
previously mentioned.
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Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended June 30, 1998 increased by $1.2 million or 13.0%, to $10.4 million
compared to the quarter ended June 30, 1997. The increase in interest expense
for the quarter ended June 30, 1998 was due primarily to an increase of $74.2
million in the average balance of interest-bearing liabilities which averaged
$888.9 million during the current quarter, compared to an average balance of
$814.7 million during the quarter ended June 30, 1997. A 17 basis point increase
in the average cost of interest-bearing liabilities also contributed to the
increase in interest expense. The average cost of interest-bearing liabilities
increased to 4.68% during the quarter ended June 30, 1998, compared to 4.51% for
last year's comparable quarter. On a year to date basis, interest expense on
interest-bearing liabilities totaled $20.4 million, compared to last year's to
date total of $18.0 million, a 13.3% increase. The increase was caused by the
combined effects of an 11 basis point increase in the average cost of funds and
an increase of $81.7 million in average balances during the six months ended
June 30, 1998, compared to the prior year period.
Interest expense on deposit accounts was $5.9 million for the quarter ended
June 30, 1998, an increase of $1.1 million from the $4.8 million for the quarter
ended June 30, 1997. The increase in the expense was due to higher average
deposit account balances of $71.7 million and a 34 basis point increase in the
average cost of funds during the quarter ended June 30, 1998, compared to the
quarter ended June 30, 1997. A major reason for the higher cost of funds is due
to the Company's use of wholesale brokered certificates of deposit, which at
June 30, 1998 amounted to $75 million compared to $35 million at June 30, 1997.
The average balance of deposit accounts increased from $517.1 million for the
quarter ending June 30, 1997 to an average balance of $588.8 million for the
quarter ending June 30, 1998, mostly due to the successful roll-out of a new 15
month retail certificate of deposit acquisition program initiated by BFS during
1998. For the six-months ended June 30, 1998, interest expense on deposit
accounts was $11.6 million, compared $8.9 million for the prior year period, an
increase of $2.7 million or 30.3%. The increase was caused by the combined
effects of higher average deposit account balances that averaged $581.9 million
during the six-months ended June 30, 1998, compared to $487.1 million in the
prior year period. Additionally, a 32 basis point increase in the average cost
of deposit accounts also contributed to the increase in interest expense.
Interest expense on borrowed funds increased from $4.4 million for the quarter
ended June 30, 1997 to $4.5 million for the current quarter. The average cost of
borrowed funds increased from 5.94% during the quarter ended June 30, 1997 to an
average of 5.97% during the current quarter. The average balances increased from
$297.5 million during the second quarter of 1997 to an average balance of $300.1
million during the second quarter of 1998. For the six-months ended June 30,
1998, interest expense on borrowed funds was $8.8 million, compared to $9.1
million for the six-months ended June 30, 1997. The reduction in interest
expense on borrowed funds was caused by a $13.1 million decrease in the average
balances from $308.3 million during the six-months ended June 30, 1997 to $295.2
million during the current period. The decrease was offset somewhat by a four
basis increase in the cost of borrowed funds during the current quarter.
Net Interest Income
Net interest income during the second quarter of 1998 was $7.9 million, the
same as the second quarter of 1997 as industry-wide margin shrinkage was offset
by net interest income earned from asset growth. On a year to date basis, net
interest income was $16.1 million, compared to $15.0 million for the prior year
to date. The net interest margin, at 3.18% for the quarter ended June 30, 1998
was 29 basis points lower than last year's comparable quarter. On a year to date
basis, the net interest margin of 3.28% is 12 basis points lower than last year
to date. The net interest margin was compressed due to the effects of a
continuation of the relatively flat interest rate yield curve.
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<PAGE>
Provision for Loan Losses
The Company's provision for loan losses amounted to $342,000 for the
quarter ended June 30, 1998, compared to the $455,000 loan loss provision for
the comparable quarter last year. For the six months ended June 30, 1998 and
1997, the provision was $745,000 and $880,000, respectively. The allowance for
loan losses increased from $6.6 million at December 31, 1997 to $7.5 million at
June 30, 1998 due to the year-to-date provision and net 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. In addition various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to make additional provisions for estimated loan losses based upon judgements
different from those of management. 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 June 30, 1998, the Company classified $5.5 million of
loans ($4.3 million of BFS and $1.2 million of BNB) as sub-standard compared to
$5.8 million ($4.3 million of BFS and $1.5 million of BNB) at December 31, 1997.
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 June 30, 1998 was sufficient to provide for anticipated losses
inherent in the loan portfolio.
The Company's allowance for loan losses at June 30, 1998 was $7.5 million,
which represented 500.3% of non-performing loans or .84% of total loans,
compared to $6.6 million at December 31, 1997, or 469.8% of non-performing loans
and .82% of total loans.
Non-performing loans at June 30, 1998 amounted to $1.5 million or .17% of
total loans, compared to $1.4 million, or .17% of total loans, at December 31,
1997.
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 $78,000 and $91,000 for the six-month periods ended June 30, 1998 and 1997,
respectively. The amount of interest income that was recorded on these loans was
$30,000 and $17,000 for the six-month periods ended June 30, 1998 and 1997,
respectively.
At June 30, 1998, 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 $2.0 million. All of the impaired loans
have been measured using the fair value of the collateral method. During the
six-months ended June 30, 1998, the average recorded value of impaired loans was
$2.0 million, $59,000 interest income was recognized and $106,000 of interest
income would have been recognized under the loans' original terms.
At June 30, 1998 and at December 31, 1997, the Company had $99,000 and
$195,000 in real estate owned, respectively. Further, at June 30, 1998 the
Company also had restructured real estate loans amounting to $214,000 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.
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<PAGE>
Non-Interest Income
Total non-interest income in the second quarter of 1998 increased by
$405,000, or 34.3%, to $1.6 million from $1.2 million for the three months ended
June 30, 1997. The increase is mainly due to a $519,000 increase in gain on sale
of loans resulting from favorable secondary market conditions, offset somewhat
by lower loan processing and servicing fees due to an adjustment to reduce the
valuation of originated mortgage servicing rights of $45,000 that was
necessitated by faster loan prepayment speeds during the current quarter. For
the six-months ended June 30, 1998, total non-interest income increased to $3.0
million, compared to $2.2 million for the prior period due to the same reasons
as for the current quarter. The adjustment to mortgage servicing rights for the
six months ended June 30, 1998 was $181,000.
Non-Interest Expense
Total non-interest expense was $6.1 million for the quarter ended June 30,
1998 compared to $5.5 million for the comparable quarter in 1997. Compensation
and benefits increased by $130,000, or 3.9%, from $3.4 million for the quarter
ended June 30, 1997 to $3.5 million for the quarter ended June 30, 1998 due to
normal year over year increases. Increased ESOP expenses were offset by
decreases in the cost of the stock-based incentive plan. On a year to date
basis, compensation and benefits expense increased by $300,000 or 4.5%, to $6.9
million for the six-months ended June 30, 1998 compared to $6.6 million for the
prior period. Real estate operations provided income of $24,000 during the
quarter ended June 30, 1998 due to gains on the sale of real estate owned
properties, compared to income of $219,000 during the prior year's comparable
quarter, also due to gains on the sale of real estate owned properties. For the
six months ended June 30, 1998, real estate operations earned $38,000 compared
to earnings of $1.1 million for the six months ended June 30, 1997.
Approximately $891,000 of the $1.1 million was due to the sale of a land
sub-division by a subsidiary of BFS during the first quarter of 1997. Other
non-interest expenses increased to $1.7 million during the quarter ended June
30, 1998 from $1.4 million during the comparable quarter last year. The major
reasons for the increase were consulting and legal costs incurred to assist in
the implementation of certain tax planning strategies, and the inclusion of a
full six months of BNB's expenses for the current period.
Income Tax Expense
Income tax expense for the quarter ended June 30, 1998 was $1.2 million,
compared to $1.4 million for the quarter ended June 30, 1997. The effective
income tax rate was 40.7% during the current quarter, compared to 45.3% for the
quarter ended June 30, 1997. On a year to date basis, income tax expense was
$2.6 million, for an effective rate of 41.1%, compared to $2.7 million for an
effective rate of 43.1% for the six months ended June 30, 1997. As with the
current quarter, the reason for the decreased tax expense and effective tax
rates during the current six-months period is due to the implementation of tax
saving strategies.
17
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Item 3. MARKET RISK AND MANAGEMENT OF INTEREST RATE RISK
The principal market risk affecting the Company is interest rate risk. The
objective of the Company's interest rate risk management function is to evaluate
the interest rate risk included in certain balance sheet accounts, determine the
level of risk appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with Board of Directors' approved guidelines. Through
such management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates. The Company monitors its interest rate risk as
such risk relates to its operating strategies. The Company's Board of Directors
has established a management Asset/Liability Committee that is responsible for
reviewing the Company's asset/ liability policies and interest rate risk
position. The Committee reports trends and interest rate risk position to the
Board of Directors on a quarterly basis. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Company.
In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate, one- to four-family mortgage loans; (2) generally selling in
the secondary market substantially all fixed-rate mortgage loans originated with
terms greater than 15 years while generally retaining the servicing rights
thereof; (3) primarily investing in 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
volatile and generally rising rate environment of 1996 allowed the Company to
originate record loan volume, the majority of loans originated were
adjustable-rate loans, which were primarily retained for BFS's portfolio. Many
of these loans, however, do not reprice until the third or fifth year of their
term. As interest rates generally fell during the second half of 1997 and
remained at a low level in the first half of 1998, customer preference shifted
to longer-term fixed rate mortgages, many of which were sold in the secondary
market. The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. These differences are
a primary component of the risk to net interest income. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a positive gap position would be in a better position to invest
in higher yielding assets which, consequently, may result in the yield on its
assets increasing at a pace more closely matching the increase in the cost of
its interest-bearing liabilities than if it had a negative gap. During a period
of falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap which,
consequently, may tend to restrain the growth of 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 June 30, 1998, the Company's one year gap was a positive 11.1% of total
assets, compared to a positive 10.2% of total assets at December 31, 1997.
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.
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<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. See the Company's Form 10-K for the year ended December 31, 1997 for a
detail of the GAP and NPV tables. There have been no material changes in the net
portfolio value since December 31, 1997.
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
(A) The Annual Meeting of Stockholders of the Corporation
was held on April 29, 1998.
(B) Directors elected at Annual Meeting:
(1) Election of Directors
Nominee Total Votes For Total Votes Withheld
David F. Holland 4,946,387 33,635
Irwin W. Sizer 4,943,056 36,966
(2) Continuing Directors Year Term Expires
Edward P. Callahan 2000
David P. Conley 1999
Richard J. Dennis, Sr. 2000
Charles R. Kent 2000
W. Robert Mill 1999
(C) Other matters submitted to a vote of the Stockholders of the Corporation:
Selection of Independent Auditors
Votes For Votes Against Abstentions Broker Non-votes
4,939,917 7,747 12,358 20,000
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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,
as amended, (SEC No. 33-94860) originally filed on July 21, 1995
20
<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: August 14, 1998 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: August 14, 1998 By: /s/ John A. Simas
__________________________________
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety by reference to such financial statements.)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,517
<INT-BEARING-DEPOSITS> 102
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,990
<INVESTMENTS-CARRYING> 45,792
<INVESTMENTS-MARKET> 46,346
<LOANS> 884,811
<ALLOWANCE> 7,459
<TOTAL-ASSETS> 1,058,207
<DEPOSITS> 652,308
<SHORT-TERM> 119,561
<LIABILITIES-OTHER> 9,284
<LONG-TERM> 194,500
0
0
<COMMON> 66
<OTHER-SE> 82,480
<TOTAL-LIABILITIES-AND-EQUITY> 1,058,207
<INTEREST-LOAN> 31,896
<INTEREST-INVEST> 4,598
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 36,494
<INTEREST-DEPOSIT> 11,616
<INTEREST-EXPENSE> 20,399
<INTEREST-INCOME-NET> 16,095
<LOAN-LOSSES> 745
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,073
<INCOME-PRETAX> 6,267
<INCOME-PRE-EXTRAORDINARY> 6,267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,692
<EPS-PRIMARY> 0
<EPS-DILUTED> .68
<YIELD-ACTUAL> 3.28
<LOANS-NON> 1,491
<LOANS-PAST> 0
<LOANS-TROUBLED> 214
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,600
<CHARGE-OFFS> 178
<RECOVERIES> 292
<ALLOWANCE-CLOSE> 7,459
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,459
</TABLE>
