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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File No.: 1-13936
BOSTONFED BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1940834
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
17 NEW ENGLAND EXECUTIVE PARK, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 273-0300
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
THE AMERICAN STOCK EXCHANGE
(Name of exchange on which registered)
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 .
-------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ---------
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant, i.e., persons other than directors and
executive officers of the registrant is $104.8 million and is based upon the
last sales price as quoted on the American Stock Exchange for March 6, 1998.
The number of shares of Common Stock outstanding as of March 6, 1998 is
5,492,637.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
PART I PAGE
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<S> <C> <C> <C>
Item 1. Business............................................. 3
Item 2. Properties........................................... 41
Item 3. Legal Proceedings.................................... 41
Item 4. Submission of Matters to a Vote Security Holders..... 41
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters................................. 42
Item 6. Selected Financial Data.............................. 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 42
Item 7A. Quantitative and Qualitative Disclosure About
Market Risks......................................... 42
Item 8. Financial Statements and Supplementary Data ......... 42
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.................. 42
PART III
Item 10. Directors and Executive Officers of the Registrant... 42
Item 11. Executive Compensation............................... 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................... 43
Item 13. Certain Relationships and Related Transactions....... 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................. 43
SIGNATURES ..................................................... 45
</TABLE>
2
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PART I
ITEM 1. BUSINESS.
GENERAL
BostonFed Bancorp, Inc. (also referred to as the "Company" or "Registrant")
was incorporated under Delaware law on July 11, 1995, and subsequently became
the holding company for Boston Federal Savings Bank ("BFS"). On October 24,
1995, BFS completed its conversion from a mutual savings bank to a stock form of
ownership, while simultaneously, the Company issued 6,589,617 shares of common
stock utilizing a portion of the proceeds to acquire all of the stock of BFS. On
February 7, 1997, the Company acquired Broadway National Bank ("BNB"), using the
purchase method of accounting, at a cost of approximately $22 million.
The Company's business is conducted primarily through its ownership of BFS
and BNB (collectively, the "Banks"). BFS's administrative branch office is
located in Burlington, Massachusetts and its seven other branch offices are
located in Arlington, Bedford, Billerica, Boston, Lexington, Peabody and
Wellesley, all of which are in the greater Boston metropolitan area. As the
result of its acquisition of BNB, the Company added two banking offices (Chelsea
and Revere) to its franchise in the greater Boston metropolitan area. As a
result of the acquisition of BNB, a nationally chartered commercial bank, the
Company became a multi-bank holding company subject to regulation by the Federal
Reserve Bank ("FRB"). Prior to its acquisition of BNB, the Company was a savings
and loan holding company regulated by the Office of Thrift Supervision ("OTS")
and, as a result, was not subject to any significant restrictions on the types
of business activities in which it could engage. As a bank holding company, the
Company is subject to certain restrictions and requirements imposed by the FRB
on the activities in which the Company may engage and the assets in which the
Company may invest. The Company also remains subject to regulations of the
Office of Thrift Supervision ("OTS") for the first three years following the
initial public offering. See "Regulation and Supervision Holding Company
Regulation." 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 and results of
operations at and for the years ended December 31, 1997, include information and
data related to BNB only from February 8, 1997 to December 31, 1997.
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 commercial real estate,
construction and land, multi-family mortgage, equity lines of credit and
consumer loans. 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 retail deposits, wholesale brokered deposits, principal and interest
payments on loans, investments and mortgage-backed securities, Federal Home Loan
Bank-Boston ("FHLB") advances, repurchase agreements and proceeds from the sale
of loans.
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MARKET AREA AND COMPETITION
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial products and services to
meet the needs of the communities it serves. The Company's deposit gathering is
concentrated in the communities surrounding its offices while its lending base
extends throughout eastern Massachusetts and, to a lesser extent, other areas of
New England.
The Company faces significant competition both in generating loans and in
attracting deposits. The Boston metropolitan area is a highly competitive
market. The Company's share of deposits and loan originations in eastern
Massachusetts amounts to less than one percent. The Company faces direct
competition from a significant number of financial institutions operating in its
market area, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, mortgage
banking companies, credit unions and insurance companies. Its most direct
competition for deposits has historically come from savings and commercial
banks. In addition, the Company faces increasing competition for deposits from
non-bank institutions such as brokerage firms and insurance companies in such
instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Company's loan portfolio consists primarily
of first mortgage loans secured by one- to four-family residences. At December
31, 1997, the Company had total loans outstanding, including mortgage loans held
for sale, of $815.3 million, of which $702.1 million were one- to four-family,
residential mortgage loans, or 86.1% of the Company's total loans. At such date,
the remainder of the loan portfolio consisted of: $18.9 million of multi-family
residential loans, or 2.3% of total loans; $36.4 million of commercial real
estate loans, or 4.5% of total loans; $20.5 million of construction and land
loans, or 2.5% of total loans; and other loans, primarily home equity lines of
credit, of $37.5 million or 4.6% of total loans. The Company had $9.8 million of
mortgage loans held for sale at December 31, 1997 consisting of one- to
four-family fixed and variable-rate mortgage loans. At that same date, 75.9% of
the Company's mortgage loans had adjustable interest rates, most of which are
indexed to the one-year Constant Maturity Treasury ("CMT") Index.
The types of loans that the Company may originate are subject to federal
and state laws and regulations. Interest rates charged by the Company on loans
are affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, and legislative tax
policies.
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The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family (1).... $702,102 86.11% $607,792 88.00% $447,033 85.44% $427,716 84.77%
Multi-family............... 18,874 2.32 21,381 3.10 27,986 5.35 29,212 5.79
Commercial real estate....... 36,400 4.46 28,136 4.07 26,412 5.05 28,714 5.69
Construction and land........ 20,497 2.51 12,532 1.81 3,435 .66 3,450 0.68
Other loans2................... 37,465 4.60 20,850 3.02 18,343 3.50 15,504 3.07
-------- ------ ------- ------ -------- ------ ------- ------
Total loans.............. 815,338 100.00% 690,691 100.00% 523,209 100.00% 504,596 100.00%
====== ====== ====== ======
Less:
Allowance for loan losses.... (6,600) (4,400) (4,275) (3,700)
Construction loans in
process.................... (8,527) (6,936) (805) (1,076)
Net unearned discount on
loans purchased............ (114) (163) (262) (525)
Deferred loan origination
(fees) costs............... 1,448 1,448 560 96
-------- -------- -------- --------
Loans, net and mortgage
loans held for sale...... $801,545 $680,640 $518,427 $499,389
======== ======== ======== ========
- ---------------
<CAPTION>
1993
- ------------------------------------------------------------
PERCENT
AMOUNT OF TOTAL
- ------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------
<S> <C> <C>
Mortgage Loans:
Residential:
One- to four-family1....... $340,584 81.57%
Multi-family............... 30,418 7.28
Commercial real estate....... 24,548 5.88
Construction and land........ 4,704 1.13
Other loans2................... 17,276 4.14
------- ------
Total loans.............. 417,530 100.00%
======
Less:
Allowance for loan losses.... (4,450)
Construction loans in (1,175)
process....................
Net unearned discount on (489)
loans purchased............
Deferred loan origination 150
(fees) costs............... -------
Loans, net and mortgage $411,566
loans held for sale..... ========
- -----------------------------------
</TABLE>
1 Includes mortgage loans held for sale of $9.8 million, $4.0 million, $8.9
million, $316,000 and $25.9 million at December 31, 1997, 1996, 1995, 1994
and 1993, respectively.
2 These loans primarily consist of one- to four-family lines of credit
secured by mostly second mortgages which amounted to $28.1 million, $17.4
million, $14.9 million, $12.8 million and $12.0 million at December 31,
1997, 1996, 1995, 1994 and 1993, respectively.
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LOAN MATURITY. The following table shows the remaining contractual maturity
of the Company's loans at December 31, 1997. There were $9.8 million of mortgage
loans held for sale at December 31, 1997. The table does not include the effect
of future principal prepayments. Principal prepayments on total loans were
$167.2 million, $95.4 million and $57.8 million for the years ended December 31,
1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
At December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION OTHER TOTAL
FAMILY FAMILY REAL ESTATE AND LAND LOANS LOANS
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less............................... $ 1,991 $ 61 $ 997 $12,185 $ 2,707 $ 17,941
After one year:
More than one year to three years........... 9,582 327 1,092 7,761 5,315 24,077
More than three years to five years......... 13,129 290 338 -- 4,772 18,529
More than five years to 10 years............ 57,900 1,480 537 -- 22,921 82,838
More than 10 years to 20 years.............. 108,605 4,820 13,593 111 1,338 128,467
More than 20 years.......................... 510,895 11,896 19,843 440 412 543,486
-------- ------- ------- ------- ------- -------
Total due after one year.................... 700,111 18,813 35,403 8,312 34,758 797,397
-------- ------- ------- ------- ------- -------
Total amount due............................ $702,102 $18,874 $36,400 $20,497 $37,465 815,338
======== ======= ======= ======= =======
Less:
Allowance for loan losses............ (6,600)
Construction loans in process........ (8,527)
Net unearned discount on loans
purchased .................... (114)
Deferred loan origination costs...... 1,448
--------
Loans, net, and mortgage loans held for sale 801,545
Mortgage loans held for sale................ (9,817)
--------
Loans, net.................................. $791,728
========
</TABLE>
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The following table sets forth at December 31, 1997 the dollar amount of
loans contractually due after December 31, 1998, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1998
----------------------------------------
FIXED ADJUSTABLE TOTAL
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family........... $169,923 $530,188 $700,111
Multi-family.................. 1,700 17,113 18,813
Commercial real estate.......... 2,089 33,314 35,403
Construction and land........... 183 8,129 8,312
Other loans........................ 4,574 30,184 34,758
-------- -------- --------
Total loans ................ $178,469 $618,928 $797,397
======== ======== ========
</TABLE>
ORIGINATION, SALE, SERVICING AND PURCHASE OF LOANS. The Company's mortgage
lending activities are conducted primarily by its commissioned loan personnel,
through its ten branch offices, and through wholesale brokers and other
financial institutions approved by the Company. All loans originated by the
Company, either through internal sources or through wholesale brokers or other
correspondent financial institutions are underwritten by the Company pursuant to
the Company's policies and procedures. The Company originates both
adjustable-rate and fixed-rate mortgage loans. The Company's ability to
originate loans is dependent upon the relative customer demand for fixed-rate or
adjustable-rate loans, which is affected by the current and expected future
level of interest rates. While the Company has in the past, from time to time,
sold adjustable-rate one- to four-family loans, it is currently the general
policy of the Company to sell a substantial majority of the one- to four-family
fixed-rate mortgage loans with maturities over ten years that it originates and
to retain a substantial majority of adjustable-rate and fixed-rate loans with
maturities of ten years or less of the one- to four-family mortgage loans which
it originates. The Company retains the servicing of loans sold in most cases. At
December 31, 1997, the Company serviced $549.4 million of loans for others. The
Company recognizes, at the time of sale, the cash gain or loss on the sale of
the loans based on the difference between the net cash proceeds received and the
carrying value of the loans sold. See "- Lending Activities - Loan Servicing."
At December 31, 1997, the Company had $9.8 million of mortgage loans held for
sale consisting of fixed and adjustable-rate one- to four-family loans. The
Company has, in the past, from time to time, purchased loans or participations
of loans, primarily one- to four-family mortgage loans, and had $7.3 million of
purchased loans at December 31, 1997. With the exception of purchases of loans
from correspondent financial institutions, which are underwritten pursuant to
the Company's policies and closed in the name of the correspondent financial
institution but immediately purchased by the Company for its mortgage banking
activities, the Company currently does not purchase loans or participate in
loans.
The Company engages in certain hedging activities to facilitate the sale of
its originated and purchased mortgage loans in an attempt to minimize interest
rate risk from the time the loan commitments are made to the time until the
loans are securitized or packaged and sold. The Company currently utilizes
forward loan sale commitment contracts with Fannie Mae ("FNMA"), Freddie Mac
("FHLMC"), and other
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approved investors as its method of hedging loan sales in an attempt to protect
the Company from fluctuations in market interest rates. Generally, the Company
will enter into contracts to deliver loans or agency mortgage-backed securities
to purchasers at a future date for a specified price while the Company
simultaneously processes and closes loans, thereby protecting the price of
currently processed loans from interest rate fluctuations that may occur from
the time the interest rate on the loan is fixed to the time of sale. As loans
are closed and funded, they may also be pooled to create mortgage-backed
securities which will be delivered to fulfill the forward commitment contracts.
The amount of forward coverage of the "pipeline" of mortgages is set on a
day-to-day basis by an operating officer, within policy guidelines, based on the
Company's assessment of the general direction of interest rates and levels of
mortgage-origination activity. For the year ended December 31, 1997, the Company
had $1.1 million in net gains attributable to the sale of loans. These gains
were primarily the result of implementation of FASB 122, "Accounting for
Mortgage Servicing Rights."
The following table sets forth the Company's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1997 1996 1995
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net loans:
Beginning balance.................................... $ 676,670 $509,496 $499,073
Loans originated:
One- to four-family........................... 321,039 362,534 146,303
Multi-family.................................. 869 4,204 440
Commercial real estate........................ 7,294 5,942 906
Construction and land......................... 16,870 11,638 5,728
Other(1)...................................... 34,055 16,124 11,356
---------- -------- --------
Total loans originated........................ 380,127 400,442 164,733
Loans purchased2................................. 17,013 46,208 6,356
Loans from BNB acquisition....................... 66,093 -- --
---------- -------- --------
Total..................................... 1,139,903 956,146 670,162
Less:
Principal repayments and other, net.............. (226,143) (122,346) (77,937)
Loan charge-offs, net............................ (116) (1,169) (3,039)
Sale of mortgage loans........................... (111,566) (148,025) (69,426)
Transfer of mortgage loans to real estate owned.. (533) (3,966) (1,333)
---------- -------- --------
Loans, net and mortgage loans held for sale.......... 801,545 680,640 518,427
Mortgage loans held for sale..................... (9,817) (3,970) (8,931)
---------- -------- --------
Loans, net .......................................... $ 791,728 $676,670 $509,496
========== ======== ========
</TABLE>
- ---------------------------
1 Other loans primarily consist of one- to four-family lines of credit
secured by mortgages. The amounts indicated primarily include new amounts
drawn on such home-equity lines of credit during the periods presented.
2 Includes loans purchased from correspondent financial institutions which
are underwritten pursuant to the Company's policies and closed in the name
of the financial institution but immediately purchased by the Company for
its mortgage banking activities.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Company offers both fixed-rate
and adjustable-rate mortgage loans secured by one- to four-family residences
located in the Company's primary market area, with maturities of up to thirty
years. Substantially all of such loans are secured by property located in the
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Company's primary market area. Loan originations are obtained at the Company's
branch offices and from the Company's commissioned loan representatives,
correspondent banking relationships and wholesale brokers and their contacts
with the local real estate industry, existing or past customers, and members of
the local communities.
At December 31, 1997, the Company's total loans outstanding were $815.3
million, of which $702.1 million, or 86.1%, were one- to four-family residential
mortgage loans, most of which were primarily owner-occupied properties. Of the
one- to four-family residential mortgage loans outstanding at that date, 25.5%
were fixed-rate loans, and 74.5% were adjustable-rate mortgage loans. The
interest rates for the majority of the Company's adjustable-rate mortgage loans
are indexed to the Constant Maturity Treasury Index (the "CMT Index"). The
Company currently offers fixed-rate mortgage loans with amortization periods of
five to thirty years. The Company currently offers a number of adjustable-rate
mortgage loan programs with interest rates which adjust annually with
amortization schedules of ten to thirty years. The Company's adjustable-rate
mortgage loans are originated with interest rates which are fixed for an initial
period of one, three, five or seven years and at the end of such period will
adjust thereafter either annually or a greater period according to their terms.
The Company's one- to four-family adjustable-rate loan products generally
reprice based on a margin, currently 287 to 325 basis points, over the CMT Index
for the Treasury security of a maturity which is comparable to the interest
adjustment period for the loan. Generally, all of the Company's adjustable-rate
mortgage loans provide for periodic (generally 2%) and overall caps (generally
6%) on the increase or decrease in interest rate at any adjustment date and over
the life of the loan. Included in the Company's adjustable-rate mortgage loan
portfolio is a type of adjustable-rate loan which was originated at an interest
rate below the fully-indexed rate and which limits the adjustment of the
interest rate to 1% annually and 6% over the life of the loan. The Company also
offers a single-family loan product which has been popular with its customers
consisting of a fixed-rate loan up to the conforming FNMA/FHLMC limit of
$227,000 coupled with a second mortgage adjustable-rate loan for the amount of
the loan in excess of the FNMA/FHLMC limit. After origination, the Company will
typically sell the fixed-rate portion of the loan (to FNMA/FHLMC) and retain the
adjustable-rate second mortgage portion of the loan for its portfolio. During
1997, the Company's retained portion of this loan product was $4.1 million, or
1.1% of total originations.
The Company generally originates one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or the selling
price of the property securing the loan and up to 95% of the appraised value or
selling price if private mortgage insurance is obtained on the portion of the
loan in excess of 75% of the lesser of the appraised value or selling price.
However, the Company may originate single-family owner-occupied mortgage loans
in amounts up to 85% of the lesser of the appraised value or selling price
without private mortgage insurance. Mortgage loans originated by the Company
generally include due-on-sale clauses which provide the Company with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Company's consent.
Due-on-sale clauses are an important means of adjusting the rates on the
Company's fixed-rate mortgage loan portfolio and the Company has generally
exercised its rights under these clauses.
MULTI-FAMILY MORTGAGE LENDING. The Company originates multi-family mortgage
loans generally secured by 5 to 120 unit apartment buildings located in the
Company's primary market area. The Company currently originates multi-family
loans on a limited and selective basis. In reaching its decision on whether to
make a multi-family loan, the Company considers the value of the underlying
property as well as the qualifications of the borrower. Other factors relating
to the property to be considered are: the net operating income of the mortgaged
premises before debt service and depreciation; the debt service ratio (the ratio
of earnings before debt service to debt service); and the ratio of loan amount
to appraised value. The Company generally requires a debt service ratio of 115%
or greater. Pursuant to the Company's current underwriting policies, a
multi-family mortgage loan may only be made in an amount up to 85% of the
appraised value of the underlying property to a maximum amount of $4.0 million.
However, generally loans are not granted
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which exceed 80% of the appraised value. Generally, all multi-family loans made
to corporations, partnerships and other business entities require personal
guarantees by the principal borrowers. On an exception basis, the Company may
not require a personal guarantee on such loans depending on the creditworthiness
of the borrower and amount of the down payment.
When evaluating the qualifications of the borrower for a multi-family loan,
the Company considers the financial resources and income level of the borrower,
the borrower's experience in owning or managing similar property, and the
Company's lending experience with the borrower. The Company's underwriting
guidelines require that the borrower be able to demonstrate strong management
skills and the ability to maintain the property from current rental income. The
borrower is required to present evidence of the ability to repay the mortgage
and a history of making mortgage payments on a timely basis. In making its
assessment of the creditworthiness of the borrower, the Company generally
reviews the financial statements, employment and credit history of the borrower,
as well as other related documentation. The Company's multi-family loan
portfolio at December 31, 1997, totalled $18.9 million or 2.3% of total loans.
The Company's largest multi-family loan at December 31, 1997, was a $3.4 million
performing loan secured by a 118 unit apartment complex located in Malden,
Massachusetts.
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured by
multi-family properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to the then prevailing conditions in the real estate market or
the economy. The Company seeks to minimize these risks through its underwriting
policies.
COMMERCIAL REAL ESTATE LENDING. The Company originates commercial real
estate loans that are secured by properties generally used for business purposes
such as small office buildings or retail facilities located in the Company's
primary market area. The Company's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of 85% of
the appraised value of the property, or the Company's current loan limit which
is $4.0 million. However, generally loans are not granted which exceed 80% of
the appraised value. The Company currently originates commercial real estate
loans with terms of up to thirty years the majority of which contain
adjustable-rates and are indexed to the CMT Index. The Company's underwriting
standards and procedures are similar to those applicable to its multi-family
loans, whereby the Company considers the net operating income of the property
and the borrower's expertise, credit history and profitability. The Company has
generally required that the properties securing commercial real estate loans
have debt service coverage ratios of at least 115%. Generally, all commercial
real estate loans made to corporations, partnerships and other business entities
require personal guarantees by the principal borrowers. On an exception basis,
the Company may not require a personal guarantee on such loans depending on the
creditworthiness of the borrowers and the amount of the down payment. The
Company's commercial real estate loan portfolio at December 31, 1997 was $36.4
million, or 4.5% of total loans. The largest commercial real estate loan in the
Company's portfolio at December 31, 1997 was a $2.8 million performing loan
secured by an office building located in Watertown, Massachusetts.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than one- to four-family residential mortgage
loans. Because payments on loans secured by commercial real estate properties
are often dependent on successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to the then
prevailing conditions in the real estate market or the economy. The Company
seeks to minimize these risks through its underwriting standards.
CONSTRUCTION AND LAND LENDING. The Company originates loans for the
acquisition and development of property to licensed and experienced contractors
in its primary market area. The Company's
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construction loans primarily have been made to finance the construction of one-
to four-family, owner-occupied residential properties. While the Company
originates loans secured by raw land, the Company generally does not originate
such loans unless the borrower has also secured financing with the Company for
the construction of structures on the property. These loans are primarily
adjustable-rate loans with maturities of less than two years. Construction and
land mortgage loans are originated in amounts up to 75% of the lesser of the
appraised value of the property, as improved, or sales price, unless such loan
is for the construction of a residential property which cannot exceed an 80%
loan to value ("LTV") ratio. Proceeds of such loans are dispersed as phases of
the construction are completed. Generally, if the borrower is a corporation,
partnership or other business entity, personal guarantees by the principal
borrowers are required. However, personal guarantees may not be required on such
loans depending on the creditworthiness of the borrower and amount of the down
payment. The Company's current loan limit is $4.0 million. The Company's largest
construction and land loan at December 31, 1997 was a performing loan with a
$4.0 million revolving line of credit with a carrying balance of $2.0 million
and secured by the remaining 60 lots in a 70 unit residential subdivision in
Southborough, Massachusetts. At December 31, 1997, the Company had $20.5 million
of construction and land loans which amounted to 2.5% of the Company's total
loan portfolio. Working with experienced land developers in the local community,
the Company will continue to expand this area of its lending business.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the Company
may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.
OTHER LENDING. Other loans at December 31, 1997, amounting to $37.5 million
or 4.6% of the Company's total loan portfolio, consisted primarily of home
equity and improvement loans, and, to a significantly lesser extent, new and
used automobile loans originated by the Company, personal loans, student loans,
business loans and loans secured by savings accounts. Such loans are generally
originated in the Company's primary market area and generally are secured by
real estate, personal property, savings accounts and automobiles. These loans
are shorter term and generally contain higher interest rates than residential
mortgage loans.
Substantially all of the Company's home equity lines of credit are
primarily secured by second mortgages on one- to two-family residences located
in the Company's primary market area. At December 31, 1997, these loans totalled
$28.1 million, or 3.4% of the Company's total loans and 74.9% of other loans.
Generally, under the terms of the Company's home equity lines of credit,
borrowers have the ability to draw on such lines and repay outstanding principal
and interest on a monthly basis on a certain percentage of the outstanding
principal over a period of up to ten years and, thereafter, the outstanding
balance drawn on such lines is converted to an adjustable-rate loan with terms
of up to ten years. The underwriting standards employed by the Company for these
loans include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment and, additionally, from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are
11
<PAGE> 12
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans in the event of a default.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. Such limits are
included in a matrix with the corresponding level of authority requirements. At
BFS, Board of Directors' approval is required on all one- to four-family loans
in excess of $1.5 million and on all commercial real estate, multi-family and
non-owner occupied construction loans in excess of $2.0 million. At BNB, a
similar matrix has been established and Board of Directors' approval is required
on all loans in excess of $400,000.
Pursuant to OTS and Office of the Comptroller of the Currency ("OCC")
regulations, loans to one borrower cannot, subject to certain exceptions, exceed
15% of the Bank's unimpaired capital and surplus. At December 31, 1997, the
loans to one borrower limit was $8.3 million and $1.9 million for BFS and BNB,
respectively.
LOAN SERVICING. The Company also services mortgage loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
All of the loans currently being serviced for others are loans which have been
sold by the Company. At December 31, 1997, the Company was servicing $549.4
million of loans for others. The gross servicing fee income from loans
originated and purchased is generally .25% to .38% of the total balance of the
loan serviced. The Company currently does not purchase servicing rights related
to mortgage loans originated by other institutions. The Company recognizes the
present value of the servicing income, net of servicing expenses, attributable
to servicing rights upon sale of the loan. The Company amortizes the capitalized
mortgage servicing rights using a method which approximates the level yield
method in proportion to, and over the period of, estimated net servicing income.
The Company reviews prepayment activity on its serviced loans at least quarterly
and adjusts its capitalized mortgage servicing rights amortization schedule
accordingly. As of December 31, 1997, the Company had $1.8 million of
capitalized mortgage servicing rights.
NONPERFORMING AND PROBLEM ASSETS.
CLASSIFIED ASSETS. Federal regulations and the Company's Asset
Classification Policy require that the Company utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. The Company has incorporated the OTS and OCC internal asset
classifications for BFS and BNB, respectively, as a part of its credit
monitoring system. The Company currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
12
<PAGE> 13
When an insured institution classifies one or more assets, or portions
thereof, as "Substandard" or "Doubtful," it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
BFS's and BNB's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS and OCC,
respectively, which can order the establishment of additional general or
specific loss allowances. The OTS and OCC, in conjunction with the other federal
banking agencies, have adopted an interagency policy statement on the allowance
for loan and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. As a result of the declines in local and regional real
estate market values and the significant losses experienced by many financial
institutions just a few years ago, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of institutions by the OTS, OCC and the
Federal Deposit Insurance Corporation ("FDIC"). While the Company believes that
it has established an adequate allowance for loan losses, there can be no
assurance that regulators, in reviewing the Company's loan portfolio, will not
request the Company to materially increase its allowance for loan losses,
thereby negatively affecting the Company's financial condition and earnings at
that time. Although management believes that, based on information currently
available to it, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
BFS's Asset Classification Committee reviews and classifies assets on a
quarterly basis and reports the results of its review to the Board of Directors.
BNB's assets are reviewed by a non-lending officer who reports classifications
to the BNB Board on a quarterly basis. The Company classifies assets in
accordance with the management guidelines described above. At December 31, 1997,
the Company had, on a consolidated basis, $3.6 million of assets designated as
"Special Mention," $5.8 million of assets designated as "Substandard," no assets
designated as "Doubtful" and $2.2 million of assets designated as "Loss." All
assets classified as "Loss" have been charged off for financial statement
purposes. Included in these amounts was $1.4 million in non-performing loans at
December 31, 1997. In the opinion of management, the remaining special mention
and "Substandard" loans of $8.0 million evidence one or more weaknesses or
potential weaknesses and, depending on the regional economy and other factors,
may become non-performing assets in future periods.
13
<PAGE> 14
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential:
One- to four-family..... 36 $3,313 14 $865 15 $1,481 24 $1,463
Multi-family............ -- -- -- -- 1 60 -- --
Commercial real estate....... -- -- 3 21 -- -- -- --
Construction and land........ -- -- -- -- -- -- -- --
Other loans.................. 6 139 3 6 4 56 3 14
-- ------ -- ---- -- ------ -- ------
Total........................ 42 $3,452 20 $892 20 $1,597 27 $1,477
== ====== == ==== == ====== == ======
Delinquent loans to loans,
net and mortgage loans
held for sale........... 0.43% 0.11% 0.23% 0.22%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
- -----------------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
- -----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential:
One- to four-family........ 11 $ 923 23 $1,178
Multi-family............... -- -- 1 720
Commercial real estate.......... 1 202 4 2,693
Construction and land........... -- -- -- --
Other loans..................... -- -- -- --
-- ------ -- ------
Total........................... 12 $1,125 28 $4,591
== ====== == ======
Delinquent loans to loans, net
and mortgage loans held
for sale .................. 0.22% 0.89%
</TABLE>
14
<PAGE> 15
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS. The following table sets
forth information regarding non-accrual loans, restructured loans and real
estate owned ("REO"). At December 31, 1997, restructured loans totalled
$369,000, consisting of 3 loans, and REO, net, totalled $195,000, consisting of
6 properties. It is the policy of the Company to cease accruing interest on
loans 90 days or more past due and charging off all accrued interest. For the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, the amount of
additional interest income that would have been recognized on non-accrual loans
if such loans had continued to perform in accordance with their contractual
terms was $146,000, $103,000, $303,000, $281,000 and $421,000, respectively. For
the same periods, the difference between the amount of interest income which
would have been recognized on restructured loans if such loans were performing
in accordance with their regular terms and amounts recognized was $1,000,
$73,000, $77,000, $294,000 and $461,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family...................... $ 941 $1,463 $1,195 $ 848 $ 2,088
Multi-family............................. -- -- 745 546 --
Construction and land...................... -- -- -- -- 738
Commercial real estate..................... 458 25 3,312 2,126 --
Other loans................................ 6 14 -- 51 14
------ ------ ------ ------ -------
Total.................................... 1,405 1,502 5,252 3,571 2,840
Real estate owned, net (1)................... 195 2,668 971 387 3,103
------ ------ ------ ------ -------
Total non-performing assets.............. 1,600 4,170 6,223 3,958 5,943
Restructured loans........................... 369 2,489 2,941 4,834 4,668
------ ------ ------ ------ -------
Total risk elements.......................... $1,969 $6,659 $9,164 $8,792 $10,611
====== ====== ====== ====== =======
Allowance for loan losses as a percent
of loans(2)................................ 0.82% 0.64% 0.82% 0.74% 1.07%
Allowance for loan losses as a percent
of non-performing loans (3)................ 469.75 293.02 81.40 103.61 156.69
Non-performing loans as a percent 0.17
of loans (2,3)............................. 0.22 1.00 0.71 0.68
Non-performing assets as a percent 0.16
of total assets4........................... 0.51 0.97 0.68 1.19
</TABLE>
- ------------------------------------------------------
1 Loans includes loans, net and mortgage loans held for sale, excluding
allowance for loan losses.
2 Non-performing loans consist of all 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectability of interest or principal.
3 REO balances are shown net of related valuation allowances.
4 Non-performing assets consist of non-performing loans and REO.
15
<PAGE> 16
The Company adopted a new accounting method for measuring loan impairment
on January 1, 1995. Adoption of this accounting standard did not have a material
effect on the comparability of the above tables. At December 31, 1997, loans
which were characterized as impaired pursuant to SFAS 114 and 118 totalled $2.1
million. All of the $2.1 million in impaired loans have been measured using the
fair value of the collateral method. During the year ended December 31, 1997,
the average recorded value of impaired loans was $3.8 million, $139,000 of
interest income was recognized, all of which was recorded on a cash basis, and
$286,000 of interest income would have been recognized under original terms.
<TABLE>
<CAPTION>
AT DECEMBER 31,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Impaired loans:
Residential real estate:
One- to four-family $ 999 $1,763 $2,828
Multi-family 316 2,271 1,367
Construction and land -- -- --
Commercial real estate 677 246 4,062
Other loans 99 112 99
Impaired loan valuation allowance -- -- (618)
------ ------ ------
Total $2,091 $4,392 $7,738
====== ====== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. Amounts provided for fiscal
years 1997, 1996, 1995, 1994 and 1993 were $1.7 million, $1.3 million, $3.6
million, $283,000 and $3.9 million, respectively. During the year ended 1997,
there were recoveries of $399,000 and charge-offs of $515,000 made against this
allowance. The allowance is based upon a number of factors, including current
economic conditions, actual loss experience and industry trends. 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 judgments different from those of management. As of December 31,
1997, the Company's allowance for loan losses was 0.82% of total loans as
compared to 0.64% as of December 31, 1996. Management believes this increased
coverage ratio is prudent due to the balance increase in the combined total of
construction and land, commercial real estate, home equity and improvement and
consumer loans. These combined total balances increased from $59.8 million at
December 31, 1996 to $91.5 million at December 31, 1997, an increase of 53% due
in large part to the inclusion of BNB's balances. The Company had non-accrual
loans of $1.4 million and $1.5 million at December 31, 1997 and December 31,
1996, respectively. The Company will continue to monitor and modify its
allowance for loan losses as conditions dictate. While management believes the
Company's allowance for loan losses is sufficient to cover losses inherent in
its loan portfolio at this time, no assurances can be given that the Company's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Company or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
16
<PAGE> 17
The following table sets forth activity in the Company's allowance for
loan losses for the periods set forth in the following table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $4,400 $4,275 $3,700 $4,450 $4,381
BNB allowance for loan losses
at acquisition date...................... 620 -- -- -- --
Provision for loan losses................... 1,696 1,294 3,614 283 3,918
Charge-offs:
Real estate loans:
Residential:
One- to four-family..................... 370 387 550 711 2,114
Multi-family............................ 84 263 483 251 1,114
Commercial................................ 45 664 2,297 200 805
Construction and land..................... -- -- -- -- 4
Other..................................... 16 198 194 56 17
------ ------ ------ ------ ------
Total.................................. 515 1,512 3,524 1,218 4,054
Recoveries.................................. 399 343 485 185 205
------ ------ ------ ------ ------
Balance at end of period.................... $6,600 $4,400 $4,275 $3,700 $4,450
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period............. 0.02% 0.19% 0.60% 0.23% 0.94%
==== ==== ==== ==== ====
</TABLE>
17
<PAGE> 18
The following tables set forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
- ------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Residential:
One- to four-family. $1,997 30.26% 86.11% $1,899 43.16% 88.00%
Multi-family........ 206 3.12 2.32 274 6.23 3.10
Commercial real estate 369 5.59 4.46 451 10.25 4.07
Construction and land. 152 2.30 2.51 463 10.52 1.81
Other loans........... 266 4.03 4.60 61 1.39 3.02
Unallocated........... 3,610 54.70 -- 1,252 28.45 --
------ ------ ------- ------ ------- ------
Total allowance
for loan losses. $6,600 100.00% 100.00% $4,400 100.00% 100.00%
====== ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF LOANS OF OF LOANS OF OF LOANS
ALLOWANCE IN EACH ALLOWANCE IN EACH ALLOWANCE IN EACH
TO CATEGORY TO CATEGORY TO CATEGORY
TOTAL TO TOTAL TOTAL TO TOTAL TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential:
One- to four family $1,974 46.18% 85.44% $1,309 35.38% 84.77% $1,467 32.97% 81.57%
Multi-family........ 373 8.72 5.35 393 10.62 5.79 369 8.29 7.28
Commercial real
estate.............. 1,285 30.06 5.05 655 17.70 5.69 646 14.52 5.88
Construction and land 580 13.57 0.66 416 11.24 0.68 594 13.35 1.13
Other loans.......... 47 1.10 3.50 92 2.49 3.07 98 2.20 4.14
Unallocated.......... 16 0.37 -- 835 22.57 -- 1,276 28.67 --
------ ------- ------ ----- ------ ----- ------ ------ ------
Total allowance
for loan losses.. $4,275 100.00% 100.00% $3,700 100.00% 100.00% $4,450 100.00% 100.00%
====== ======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
18
<PAGE> 19
REAL ESTATE OWNED
At December 31, 1997, the Company had $195,000 of real estate owned, net of
valuation allowances. When the Company acquires property through foreclosure or
deed in lieu of foreclosure, it is initially recorded at the lower of the
recorded investment in the corresponding loan or the fair value of the related
assets at the date of foreclosure, less costs to sell. Thereafter, if there is a
further deterioration in value, the Company provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the Company to have obtained an appraisal on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the Company's
policy to require appraisals on a periodic basis on foreclosed properties and
conduct periodic inspections on foreclosed properties.
INVESTMENT ACTIVITIES
The investment policy of the Company, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Company's lending activities. Generally, the
Company's investment policy is more restrictive than the OTS and OCC regulations
allow and, accordingly, the Company has invested primarily in U.S. Government
and Agency securities, FDIC insured certificates of deposit, mutual funds which
qualify as liquid assets under the OTS regulations, federal funds and U.S.
government sponsored agency issued mortgage-backed securities. As required by
SFAS 115, the Company has established an investment portfolio of securities that
are categorized as held to maturity, available for sale or held for trading. The
Company does not currently maintain a portfolio of securities categorized as
held for trading. The substantial majority of the Company's investment and
mortgage-backed securities are purchased for the held to maturity portfolio
which such portfolio totalled $59.0 million, or 6.1% of assets. At December 31,
1997, the available for sale portfolio totalled $50.9 million or 5.2% of the
Company's assets. The investment policy provides different management levels of
approval, from the investment officer up to and including the Board of
Directors, depending on the size of purchase or sale and monthly cumulative
purchase or sale amounts. Generally, pursuant to the Company's policies, the
Board must provide prior approval for all individual securities investments over
$10.0 million and approval for all monthly purchases which aggregate $25.0
million or more.BFS's Investment Committee and BNB's Board are provided with
summaries of the held to maturity and available for sale investment portfolios
of BFS and BNB, respectively, on a quarterly basis.
At December 31, 1997, the Company had invested $57.5 million in
mortgage-backed securities, or 5.9% of total assets, which were guaranteed by
GNMA, insured by either FNMA or FHLMC or privately issued. Of the $57.5 million,
$33.0 million were GNMA securities, of which $29.2 million were adjustable-rate
with 1% maximum annual rate adjustments and lifetime maximum interest rates of
10% to 13%. Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby reducing the net
yield on such securities. There is also reinvestment risk associated with the
cash flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates. At December 31, 1997, mortgage-backed
securities available for sale and held-to-maturity amounted to $19.1 million and
$38.4 million, respectively.
19
<PAGE> 20
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA (1, 2)................................ $33,106 57.60% $40,321 60.53% $44,385 75.24%
FHLMC (3, 4)............................... 9,544 16.60 11,239 16.87 13,092 22.20
FNMA............................ .......... 894 1.56 1,147 1.72 1,512 2.56
Privately issued collateralized
mortgage obligations ................... 13,931 24.24 13,905 20.88 -- --
------- ------ ------- ------ ------ ------
Total mortgage-backed securities........ 57,475 100.00% 66,612 100.00% 58,989 100.00%
====== ====== ======
Less:
Mortgage-backed securities available for
sale - GNMA (3)............................ 10,681 13,710 12,605
Mortgage-backed securities available
for sale - FHLMC (4)....................... 8,444 9,883 11,268
------ ------ ------
Mortgage-backed securities
held to maturity........................ $38,350 $43,019 $35,116
======= ======= =======
</TABLE>
- --------------------
1 Includes $213,000, $341,000 and $527,000 of unamortized premiums related to
GNMA securities as of December 31, 1997, 1996 and 1995, respectively.
2 Is net of unrealized gain of $128,000 at December 31, 1997.
3 Includes $144,000, $187,000 and $234,000 of unamortized premiums related to
FHLMC securities as of December 31, 1997, 1996 and 1995, respectively.
4 Is net of unrealized loss of $10,000 at December 31, 1997.
20
<PAGE> 21
The following tables set forth the Company's mortgage-backed securities
activities for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance .................................... $66,612 $58,989 $39,801
Mortgage-backed securities purchased:
Available for sale............................... -- 10,666 23,873
Held to maturity................................. -- 13,891 --
Less:
Sale of mortgage-backed securities
available for sale ............................ (1,084) (10,614) --
Principal repayments ............................ (8,448) (5,934) (4,586)
Change in unrealized gains (losses).............. 440 (322) --
Accretion of premium, net of discount............ (45) (64) (99)
------- ------- -------
Ending balance........................................ $57,475 $66,612 $58,989
======= ======== =======
</TABLE>
The following table sets forth certain information regarding the carrying
amount and fair values of the Company's mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Held to maturity:
FNMA.......................... $ 894 $ 902 $ 1,147 $ 1,129 $ 1,512 $ 1,531
FHLMC......................... 1,100 1,108 1,356 1,330 1,824 1,830
GNMA.......................... 22,425 22,858 26,611 26,696 31,780 32,286
Privately issued collateralized
mortgage obligations........ 13,931 14,035 13,905 13,878 -- --
------- ------ ------ ------ ------ -------
Total held to maturity...... 38,350 38,903 43,019 43,033 35,116 35,647
------- ------ ------ ------ ------ -------
Available for sale:
GNMA.......................... 10,681 10,681 13,710 13,710 12,605 12,605
FHLMC......................... 8,444 8,444 9,883 9,883 11,268 11,268
------- ------ ------ ------ ------ -------
Total available for sale.... 19,125 19,125 23,593 23,593 23,873 23,873
------- ------ ------ ------ ------ -------
Total mortgage-backed
securities.................. $57,475 $58,028 $66,612 $66,626 $58,989 $59,520
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the carrying
amount and fair values of the Company's short-term investments and investment
securities at the dates indicated:
21
<PAGE> 22
<TABLE>
<CAPTION>
AT DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Overnight federal funds sold and short-term
investments................................. $ 3,448 $ 3,448 $ 2,943 $ 2,943 $10,460 $10,460
Investment securities:
Held to maturity:
Certificates of deposit................. -- -- 250 250 495 495
U.S. Government obligations, federal
agency obligations, and other
obligations........................... 20,630 20,630 18,920 18,795 16,309 16,411
------- ------- ------- ------- ------- -------
Total held to maturity...................... 20,630 20,630 19,170 19,045 16,804 16,906
------- ------- ------- ------- ------- -------
Available for sale:
U.S. Government obligations, federal
agency obligations, and other
obligations.......................... 30,617 30,617 -- -- -- --
Cash management fund1.................. 1,150 1,150 1,085 1,085 1,022 1,022
------- ------- ------- ------- ------- -------
Total available for sale............. 31,767 31,767 1,085 1,085 1,022 1,022
------- ------- ------- ------- ------- -------
Total investment securities................. $55,845 $55,845 $23,198 $23,073 $28,286 $28,388
======= ======= ======= ======= ======= =======
</TABLE>
- ------------------------
1 Consists of securities issued by an institutional mutual fund which primarily
invests in short-term U.S. Government securities.
22
<PAGE> 23
The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of the Company's
short-term investments, investment securities and mortgage-backed securities as
of December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Overnight federal funds sold and short-term
investments. $ 3,448 5.30% $ -- --% $ -- --%
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations.......... 5,939 5.67 13,691 6.38 1,000 7.01
------- ------
Total held to maturity..................... 5,939 5.67 13,691 6.38 1,000 7.01
------ ------
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations........... 7,994 5.87 22,623 6.32 -- --
Cash management fund (1)....................... 1,150 5.93 -- -- -- --
------ ------ ------
Total available for sale..................... 9,144 5.88 22,623 6.32 -- --
------ ------ ------
Total investment securities......................... $18,531 5.70% $36,314 6.34% $1,000 7.01%
======= ===== ======= ===== ======
Mortgage-backed securities:
Held to maturity:
FNMA........................................... $ -- --% $ 813 7.0% $ -- --%
GNMA........................................... -- -- 137 6.50 3,126 8.19
FHLMC.......................................... -- -- 1,100 7.0 -- --
Privately issued collateralized -- -- -- -- -- --
mortgage obligation..........................
------ ------ ------
Total held to maturity....................... -- -- 2,050 6.97 3,126 8.19
------ ------ ------
Available for sale:
GNMA........................................... -- -- -- -- -- --
FHLMC.......................................... -- -- -- -- -- --
-------- ------ -----
Total held for sale.......................... -- -- -- -- -- --
-------- ------
Total mortgage-backed securities.................... $ -- --% $2,050 6.97% $3,126 8.19%
======== ===== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------
MORE THAN TEN YEARS TOTAL
- ------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD
- --------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Daily federal funds sold and short-term investments. $ -- --% $ 3,448 5.30%
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations.......... -- -- 20,630 6.19
------- -------
Total held to maturity..................... -- -- 20,630 6.19
------- ------
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations........... -- -- 30,617 6.19
Cash management fund (1)....................... -- -- 1,150 5.93
------- ------
Total available for sale..................... -- -- 31,767 6.18
------- ------
Total investment securities......................... $ -- --% $55,845 6.13%
======= === ======= ====
Mortgage-backed securities:
Held to maturity:
FNMA........................................... $ 81 7.61% $ 894 7.06%
GNMA........................................... 19,162 6.96 22,425 7.13
FHLMC.......................................... -- -- 1,100 7.00
Privately issued collateralized
mortgage obligation.......................... 13,931 7.16 13,931 7.16
------- ------
Total held to maturity....................... 33,174 7.05 38,350 7.14
------ ------
Available for sale:
GNMA........................................... 10,681 6.34 10,681 6.34
FHLMC.......................................... 8,444 7.00 8,444 7.00
------ ------
Total held for sale.......................... 19,125 6.63 19,125 6.63
------ ------
Total mortgage-backed securities.................... $52,299 6.89% $57,475 6.97%
======= ==== ======= ====
</TABLE>
- ---------------------------------
1 Consists of securities issued by an institutional mutual fund which primarily
invests in short-term U.S. Government securities.
23
<PAGE> 24
SOURCES OF FUNDS
GENERAL. Retail deposits, wholesale brokered deposits, loan repayments and
prepayments, proceeds from sales of loans, cash flows generated from operations
and FHLB advances are the primary sources of the Company's funds for use in
lending, investing and for other general purposes.
DEPOSITS. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of savings, NOW
accounts, checking accounts, money market accounts and certificate accounts. For
the year ended December 31, 1997, core deposits represented 57.7% of total
average deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. The Company's deposits are obtained predominantly from the
areas in which its branch offices are located. The Company relies primarily on
customer service and long-standing relationships with customers to attract and
retain these deposits; however, market interest rates and rates offered by
competing financial institutions significantly affect the Company's ability to
attract and retain deposits. The Company uses traditional means of advertising
its deposit products, including radio and print media and generally does not
solicit deposits from outside its market area except through the use of
wholesale brokered deposits which provided $75 million of deposits during 1997
for terms of two to three years.
The following table presents the deposit activity of the Company for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)........................... $47,355 $(6,425) $ (9,179)
Interest credited on deposit accounts................ 18,626 16,139 15,119
Deposits acquired from BNB acquisition............... 125,022 -- --
-------- ------- --------
Total increase (decrease) in deposit accounts........ $191,003 $9,714 $ 5,940
======== ======= ========
</TABLE>
At December 31, 1997, the Company had $19.0 million in certificate
accounts in amounts of $100,000 or more (excluding wholesale deposits) maturing
as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- ----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............................... % 6,428 5.27%
Over 3 through 6 months............................ 4,345 5.60
Over 6 through 12 months........................... 3,499 5.42
Over 12 months..................................... 4,688 5.80
------- -----
Total.............................................. $18,960 5.51%
======= =====
</TABLE>
24
<PAGE> 25
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average rates on
each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
AVERAGE AVERAGE NOMINAL AVERAGE AVERAGE NOMINAL AVERAGE AVERAGE NOMINAL
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposit
accounts................... $61,800 11.18% 2.95% $46,540 11.10% 3.00% $49,693 11.89% 2.96%
Savings accounts........... 116,247 21.03 2.43 90,763 21.63 2.44 99,498 23.81 2.50
NOW accounts............... 96,590 17.47 1.11 66,336 15.82 1.34 65,661 15.71 1.42
Non-interest-bearing
accounts................... 41,017 7.42 -- 16,177 3.86 -- 14,016 3.35 --
-------- ----- ------- ----- ------- -----
Total................. 315,654 57.10 1.81 219,816 52.41 2.05 228,868 54.76 2.14
-------- ----- ------- ----- ------- -----
Certificate accounts:
Less than six months...... 33,573 6.07 5.16 23,748 5.66 4.97 16,682 3.99 4.75
Over six through 12 months. 54,876 9.93 5.41 49,259 11.74 5.49 41,343 9.89 5.50
Over 12 through 36 months.. 94,157 17.04 5.99 70,849 16.90 5.78 75,445 18.05 5.38
Over 36 months............ 6,859 1.24 5.43 6,973 1.66 5.41 6,670 1.60 5.38
IRA/KEOGH................. 47,650 8.62 5.78 48,769 11.63 5.82 48,940 11.71 5.61
-------- ----- ------- ----- ------- -----
Total certificate accounts 237,115 42.90 199,598 47.59 5.61 189,080 45.24 5.41
-------- ----- ------- ----- ---- ------- -----
Total average deposits... $552,769 100.00% 3.47% $419,414 100.00% 3.74% $417,948 100.00% 3.62%
======== ====== ======== ====== ======== ======
</TABLE>
Note: Average balances for 1997 and 1996 are calculated on a daily basis, while
average balances for 1995 are based on average monthly balances.
25
<PAGE> 26
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1997 AT DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............ $ 1,367 $ -- $ -- $ -- $ -- $ 1,367 $ 1,486 $ 1,977
4.01 to 5.00%......... 1,521 364 -- -- -- 1,885 1,630 16,130
5.01 to 6.00%......... 128,058 37,397 17,243 20,681 102 203,481 151,893 101,060
6.01 to 7.00%......... 6,223 14,029 52,236 2,829 1,485 76,802 45,021 76,878
7.01 to 8.00%......... -- 94 -- -- -- 94 94 129
-------- ------- ------- ------ ------ --------- -------- --------
Total.............. $137,169 $51,884 $69,479 $23,510 $1,587 $283,629 $200,124 $196,174
======== ======= ======= ======= ====== ======== ======== ========
</TABLE>
BORROWINGS. The Company utilizes advances from the FHLB as an alternative
to retail deposits to fund its operations and may do so in the future as part of
its operating strategy. These FHLB advances are collateralized primarily by
certain of the Company's mortgage loans and mortgage-backed securities and
secondarily by the Company's investment in capital stock of the FHLB. FHLB
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB will advance to member institutions, including the Company, fluctuates from
time to time in accordance with the policies of the OTS, OCC and the FHLB. See
"Regulation - Federal Home Loan Bank System." During the year ended December 31,
1997, the Company repaid net of borrowings $40.0 million from the FHLB. At
December 31, 1997, the Company had $256.5 million in outstanding advances from
the FHLB and $7.1 million in repurchase agreements.
26
<PAGE> 27
The following tables set forth certain information regarding the Company's
borrowed funds and repurchase agreements at or for the periods ended on the
dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............................ $287,128 $217,628 $133,268
Maximum amount outstanding at
any month-end during the period..................... $310,792 $303,374 $148,274
Balance outstanding at end of period................... $256,500 $296,500 $119,909
Weighted average interest rate
during the period................................... 6.00% 5.86% 6.30%
Weighted average interest rate at end
of period.......................................... 5.96 5.88% 5.95%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase:
Average balance outstanding............................ $11,948 $7,496
Maximum amount outstanding at
any month-end during the period..................... $21,861 $10,016
Balance outstanding at end of period................... $7,140 $ 3,500
Weighted average interest rate
during the period................................... 5.62% 5.53%
Weighted average interest rate at end
of period.......................................... 5.98% 5.45%
</TABLE>
SUBSIDIARY ACTIVITIES
Leader Corporation ("Leader Corp.") and BFS Service Corp., both
incorporated under Massachusetts law, are wholly owned subsidiaries of BFS while
Aygro Corp., also incorporated under Massachusetts law, is a wholly owned
subsidiary of BNB. Leader Corporation owns Connelly Hill Limited Partnership,
which sold its only parcel of land to a developer on January 31, 1997. The sale
resulted in a gain of approximately $800,000.
In 1994, BFS, through Leader Corp., permitted Liberty Financial, a third
party securities broker, to offer various uninsured investment products to BFS's
customers. Leader Corp. entered into a contract with
27
<PAGE> 28
such third party brokerage concern to perform brokerage services in segregated
areas of BFS's branches. Under this contract, Liberty Financial leases space
from BFS at three of BFS's branch locations, pays rent and a percentage of sales
to Leader Corp.
At December 31, 1997, Leader Corp. had a retained deficit of $637,000 and
for the years ended December 31, 1997 and 1996 had net income of $753,000 and a
net loss of $38,000, respectively.
During 1997, BFS Service Corp. and Aygro Corp. were activated in order to
establish BFS Preferred Capital Corp. ("BFSPCC") and BNB Preferred Capital Corp.
("BNBPCC"), respectively. BFSPCC and BNBPCC are real estate investment trusts
organized under Massachusetts law and satisfy the requirements of Section 856 of
the Internal Revenue Code of 1986, as amended.
PERSONNEL
As of December 31, 1997, the Company had 231 authorized full-time employee
positions and 70 authorized part-time employee positions, for a total of
approximately 261 full time equivalents. The employees are not represented by a
collective bargaining unit and the Company considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
GENERAL
As a result of the Company's acquisition of BNB in February 1997, the
Company became a bank holding company and ceased to be a savings and loan
holding company. The Company, as a bank holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Federal Reserve Board ("FRB") under the Bank Holding Company Act of 1956, as
amended ("BHCA"). In addition, the activities of savings institutions, such as
BFS, are governed by the Home Owner=s Loan Act ("HOLA") and the Federal Deposit
Insurance Act ("FDI Act"). The activities of national banks are generally
governed by the National Bank Act and the FDI Act.
BFS is subject to extensive regulation, examination and supervision by the
OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. BFS
is a member of the Federal Home Loan Bank System and its deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. BFS must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with or acquisitions of other institutions. BNB is subject to extensive
regulation, examination and supervision by and reporting with the OCC, as its
primary federal regulator, and the FDIC, as the deposit insurer. BNB is a member
of the Bank Insurance Fund ("BIF") managed by the FDIC. The OTS and/or the FDIC
conduct periodic examinations to test BFS's safety and soundness and compliance
with various regulatory requirements and the OCC and/or FDIC conduct similar
examinations of BNB. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
OCC, the FDIC or the Congress, could have a material adverse impact on the
Company, BFS and/or BNB and their operations. Certain of the regulatory
requirements applicable to BFS, BNB and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to depository
28
<PAGE> 29
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on BFS, BNB and the Company.
HOLDING COMPANY REGULATION
FEDERAL REGULATION. Due to its control of BNB, the Company is subject to
examination, regulation, and periodic reporting under the BHCA, as administered
by the FRB.
The Company is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company or
merge with another bank holding company. Prior FRB approval will also be
required for the Company to acquire direct or indirect ownership or control of
any voting securities of any bank or bank holding company if, after giving
effect to such acquisition, the Company would, directly or indirectly, own or
control more than 5% of any class of voting shares of such bank or bank holding
company. In evaluating such transactions, the FRB considers such matters as the
financial and managerial resources of and future prospects of the companies
involved, competitive factors and the convenience and needs of the communities
to be served. Bank holding companies may acquire additional banks in any state,
subject to certain restrictions such as deposit concentration limits. In
addition to the approval of the FRB, before any bank acquisition can be
completed, prior approval may also be required to be obtained from other
agencies having supervisory jurisdiction over BFS to be acquired.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting securities of
any company engaged in, non-banking activities. One of the principal exceptions
to this prohibition is for activities found by the FRB to be so closely related
to banking or managing or controlling banks to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
closely related to banking are: (i) making or servicing loans; (ii) performing
certain data processing services; (iii) providing discount brokerage services;
(iv) acting as fiduciary, investment or financial advisor; (v) finance leasing
personal or real property; (vi) making investments in corporations or projects
designed primarily to promote community welfare; and (vii) acquiring a savings
association, like BFS, provided that the savings association only engages in
activities permitted bank holding companies. The FRB has adopted capital
adequacy guidelines for bank holding companies (on a consolidated basis)
substantially similar to those of the OTS for BFS and the OCC for BNB. See
"Capital Requirements." The Company's total and Tier 1 capital exceeds these
requirements.
Bank holding companies are generally required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. The FRB has now adopted an exception to this approval
requirement for well-capitalized bank holding companies that meet certain other
conditions.
The FRB has issued a policy statement regarding the payment of dividends by
bank holding companies. In general, the FRB's policies provide that dividends
should be paid only out of current earnings and only if the prospective rate of
earnings retention by the Bank holding company appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FRB's policies also require that a bank holding company serve as a source of
financial strength to its subsidiary banks by standing ready to use available
resources to provide adequate capital funds to those banks during periods of
financial stress or adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks where necessary. These regulatory policies could affect the
ability of the Company to pay dividends or otherwise engage in capital
distributions.
29
<PAGE> 30
The status of the Company as a registered bank holding company under the
BHCA does not exempt it from certain Federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the Federal securities laws.
Under the FDI Act, depository institutions are potentially liable to the
FDIC for losses suffered or anticipated by the FDIC in connection with the
default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of default. This applies
to depository institutions controlled by the same bank holding company.
The Company and its subsidiaries will be affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for the management of the
Company to accurately predict future changes in monetary policy or the effect of
such changes on the business or financial condition of the Company, BFS or BNB.
STATE REGULATION. The Company is also a "bank holding company" within the
meaning of the Massachusetts bank holding company laws. The prior approval of
the Massachusetts Board of Bank Incorporation is required before the Company may
acquire all or substantially all of the assets of any depository institution (or
holding company thereof), merge with a holding company of a depository
institution or acquire more than 5% of the voting stock of a depository
institution or holding company thereof.
ACQUISITION OF THE HOLDING COMPANY
FEDERAL REGULATION. Under the Federal Change in Bank Control Act ("CIBCA"),
a notice must be submitted to the FRB if any person (including a company), or
group acting in concert, seeks to acquire 10% or more of the Company's
outstanding voting stock, unless the FRB has found that the acquisition will not
result in a change in control of the Company. Under the CIBCA, the FRB has 60
days from the filing of a complete notice to act, taking into consideration
certain factors, including the financial and managerial resources of the
acquirer and the anti-trust effects of the acquisition.
Under the BHCA, any company would be required to obtain prior approval from
the FRB before it may obtain "control" of the Company within the meaning of the
BHCA. Control generally is defined to mean the ownership or power to vote 25
percent or more of any class of voting securities of the Company or the ability
to control in any manner the election of a majority of the Company's directors.
An existing bank holding company would be required to obtain the FRB's prior
approval under the BHCA before acquiring more than 5% of the Company's voting
stock. See "Holding Company Regulation." Approval of the Board of Bank
Incorporation may also be required for acquisition of the Company under some
circumstances.
FEDERAL BANKING REGULATIONS
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below establish, in
effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMELS financial
institution examination rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core (or Tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
30
<PAGE> 31
deduct investments in and loans to subsidiaries engaged in activities as a
principle not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
National Banks are required by OCC regulation to maintain leverage (core)
capital at least equal to 4% (3% for institutions receiving the highest rating
on the CAMELS financial institution examination rating system) and an 8%
risk-based capital ratio. National banks are subject to identical requirements
as savings institutions under the prompt corrective action standards. Both the
OTS and the OCC have the discretion to establish higher capital requirements on
a case-by-case basis where deemed appropriate in the circumstances of a
particular institution.
The Company is subject to consolidated capital requirements pursuant to the
regulations of the FRB. Generally, a bank holding company must have a
consolidated ratio of core (Tier 1) capital to total assets of at least 3% if it
receives the FRB's highest examination rating and 4% otherwise. A bank holding
company also must maintain a total capital to risk-based assets ratio of at
least 8% and a Tier 1 (core) capital to risk-based assets ratio of at least 4%.
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The following table presents BFS's and BNB's capital position at December
31, 1997 relative to fully phased-in regulatory requirements.
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
- --------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Risk-based Total Capital:
BFS.................................... $54,731 11.9% $36,758 8.0% $45,948 10.0%
BNB.................................... 9,477 16.4 4,618 8.0 5,772 10.0
Core Capital:
BFS.................................... 48,987 5.9 24,952 3.0 41,586 5.0
BNB.................................... 8,799 7.4 4,753 4.0 5,941 5.0
Risk-based Tier I Capital:
BFS....................................
BNB.................................... 8,799 15.2 2,309 4.0 3,463 6.0
Tangible Capital:
BFS.................................... 48,987 5.9 12,476 1.5 41,586 5.0
As of December 31, 1996 (BFS only):
Risk-weighted capital.................... 58,310 13.2 35,301 8.0 44,060 10.0
Core capital............................. 53,910 6.8 23,868 3.0 39,780 5.0
Tangible capital......................... 53,910 6.8 11,934 1.5 39,780 5.0
</TABLE>
The Company's regulatory capital ratios at December 31, 1997 were 8.2%,
15.2% and 16.5% for Tier 1 leverage ratio, Tier 1 risk-based capital ratio and
total capital ratio, respectively.
PROMPT CORRECTIVE REGULATORY ACTION. Under the prompt corrective action
regulations, the OTS with respect to savings associations and the OCC with
respect to national banks, are required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a depository institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the appropriate regulator to
meet a specific capital level. An institution generally is considered
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is at
least 4%, and its ratio of core capital to total assets is at least 4% (3% if
the institution receives the highest CAMELS rating). An institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." An
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and an institution that has a
tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with and approved by the applicable
regulatory agency within 45 days of the date an institution receives notice that
it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be
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<PAGE> 33
guaranteed by any parent holding company. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The appropriate
agency could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of BFS are presently insured by the
SAIF and BNB is a member of the BIF. Both the SAIF and the BIF are statutorily
required to be capitalized to a 1.25% of insured reserve deposits ratio. Until
recently, members of the SAIF and BIF were paying average deposit insurance
premiums of between 24 and 25 basis points. The BIF met the required reserve in
1995, whereas the SAIF was not expected to meet or exceed the required level
until 2002 at the earliest. This situation was primarily due to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual administration fee of only $2,000. With respect to
SAIF member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential continued, it may have
had adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as BFS were placed at a substantial competitive disadvantage to
BIF members with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including BFS, to recapitalize
the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of
65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment
was recognized by BFS as an expense in the quarter ended September 30, 1996 and
was tax deductible. The SAIF Special Assessment recorded by BFS amounted to $2.7
million on a pre-tax basis and approximately $1.6 million on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits,
including those held by BNB, were assessed for a FICO payment of 1.3 basis
points, while SAIF deposits pay 6.48 basis points. Full pro rata sharing of the
FICO payments between BIF and SAIF members will occur on the earlier of January
1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that
the BIF and SAIF will be merged on January 1, 1999, provided no savings
associations remain as of that time. See "Thrift Rechartering Legislation" which
is discussed elsewhere herein.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
BFS's assessment rate for fiscal 1997 ranged from 6 to 7 basis points and
the premium paid for this period was $283,000. BNB paid $13,000 to the FDIC for
1997. A significant increase in FDIC insurance
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<PAGE> 34
premiums would likely have an adverse effect on the operating expenses and
results of operations of BFS and/or BNB.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the regulators.
The management of BFS and BNB does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and merge the OTS with the OCC have been introduced in Congress. The
Company is unable to predict whether such legislation will be enacted, the
extent to which the legislation will restrict or disrupt its operations or those
of its subsidiaries or whether the BIF and SAIF funds will eventually merge.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to limits on loans to one borrower. Generally, savings institutions may
not make a loan or extend credit to a single or related group of borrowers in
excess of 15% of its unimpaired capital, surplus, and allowable general
valuation allowance. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion. National banks are generally subject to similar loan to one borrower
limits. At December 31, 1997, BFS's limit on loans to one borrower was $8.3
million and BNB's limit was $1.9 million. At December 31, 1997, BFS's largest
aggregate outstanding balance of loans to one borrower was $4.0 million and
BNB's largest aggregate outstanding balance of loans to one borrower was $1.3
million.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to either meet
the definition of a "domestic building and loan association," as that term is
defined in the Internal Revenue Code or maintain at least 65% of its "portfolio
assets" (total assets less: (i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property
used to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities) in at least 9 months out of each 12 month period. Recent legislation
has increased the extent to which credit card loans, education loans and small
business loans qualify as "qualified thrift investments."
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1997, BFS maintained in excess of 65% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
National banks are not subject to the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after
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<PAGE> 35
a proposed capital distribution ("Tier 1 Bank") and has not been advised by the
OTS that it is in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during a calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
income for the previous four quarters. Any additional capital distributions
would require prior regulatory approval. In the event BFS's capital fell below
its regulatory requirements or the OTS notified it that it was in need of more
than normal supervision, BFS's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. At December 31, 1997, BFS was a Tier 1 Bank.
National banks may not pay dividends out of their permanent capital and may
not, without OCC approval, pay dividends in excess of the total of the Bank's
retained net income for the year combined with retained net income for the prior
two years. A national bank may not pay a dividend that would cause it to fall
below regulatory capital standards.
LIQUIDITY. BFS is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. Monetary penalties may
be imposed for failure to meet these liquidity requirements. BFS's liquidity
ratio for December 31, 1997 was 5.7%, which exceeded the applicable
requirement. BFS has never been subjected to monetary penalties for failure to
meet its liquidity requirements. BNB, under OCC regulations, is not subject to
separate regulatory liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in BFS's latest quarterly
thrift financial report. The assessments paid by BFS for the fiscal year ended
December 31, 1997 totalled $166,000.
National banks pay semi-annual assessments to the OCC to fund its
operations based on asset size. Such assessments for BNB amounted to $45,000 for
the year ended December 31, 1997.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions. This permits federal savings institutions to
establish interstate networks and to geographically diversify their loan
portfolios and lines of business. The OTS authority preempts any state law
purporting to regulate branching by federal savings institutions.
National banks are authorized to establish branches within the state in
which they are headquartered to the extent state law allows branching by state
banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Act") provides for interstate branching for national banks, effective June
1, 1997. Under the Act, interstate branching by merger was authorized on June 1,
1997 unless the state in which the Bank is to branch has enacted a law opting
out of interstate branching. De novo interstate branching is permitted by the
Act to the extent the state into which BFS is to branch has enacted a law
authorizing out-of-state banks to establish de novo branches.
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<PAGE> 36
TRANSACTIONS WITH RELATED PARTIES. The authority of a depository
institution to engage in transactions with related parties or "affiliates"
(e.g., any company that controls or is under common control with an institution,
including the Company) is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). Section 23A limits the aggregate amount of covered transactions
with any individual affiliate to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally provides
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions like BFS are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary. Certain transaction between
sister institutions in a holding company are exempt from these requirements.
The authority of BFS and BNB to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception to this requirement for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amount of loans
that institutions may make to insiders based, in part, on the institution's
capital position and requires certain board approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions, the OCC has primary enforcement
authority over national banks and both agencies have the authority to bring
actions against the respective institutions and all institution-affiliated
parties, including stockholders, and any attorneys, appraisers and accountants
who knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of
officers and/or directors to institution of receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or even $1 million per day in
especially egregious cases. Under the FDI Act, the FDIC has the authority to
recommend to OTS that enforcement action be taken with respect to a particular
savings institution or the OCC with respect to a national bank. If action is not
taken by the agency, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
The FRB has similar enforcement authority with respect to the Company.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the
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<PAGE> 37
agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans when such plans are required.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 1997, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $49.3
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $49.3 million, the
reserve requirement is $1.6 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Company is in compliance
with the foregoing requirements. Effective December 16, 1997, the Federal
Reserve amended the Reserve Requirements as follows: the amount of transaction
accounts subject to a reserve requirement ratio of 3% decreased from $49.3
million to $47.8 million and the amount of reservable liabilities that is
exempted from reserve requirements will increase from $4.4 million to $4.7
million. The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed on
savings institutions by the OTS. BFS and BNB are also in compliance with these
requirements.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Banks report their federal income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly BFS's reserve for bad debts discussed below.
BNB also reports its income on a consolidated basis with the Company and BFS
effective February 8, 1997. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Banks or the Company. BFS was audited by the IRS
during 1996, and covered the tax years 1991, 1992 and 1993. For its 1997 taxable
year, the Company is subject to a maximum federal income tax rate of 35%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
Under the Small Business Job Protection Act of 1996 (the "1996 Act"), for
its current and future taxable years, BFS is not permitted to make additions to
its tax bad debt reserves. In addition, BFS is required to recapture (i.e., take
into income) over a six year period the excess of the balance of its tax bad
debt reserves as of December 31, 1995 other than its supplemental reserve for
losses on loans, if any over the balance of such reserves as of December 31,
1987. The Company has previously recorded a deferred tax
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liability equal to the bad debt recapture and as such, the new rules will have
no effect on net income or income tax expense.
DISTRIBUTIONS. Under 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 (including the balance
of its reserves as of December 31, 1987) to the extent thereof, and then from
its supplemental reserve for losses on loans, to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in BFS's income. Non-dividend distributions include
distributions in excess of BFS's 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 will not be so included in
BFS's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if BFS makes a non-dividend distribution to
the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. BFS does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves. The bad debt
reserves subject to recapture amount to $13.3 million for which no deferred
taxes have been provided.
SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
STATE AND LOCAL TAXATION
COMMONWEALTH OF MASSACHUSETTS. On July 27, 1995, the Governor of
Massachusetts approved legislation to reduce the tax rate applicable to
financial institutions, including savings banks, from 12.54% on their net income
to 10.50% on their net income apportioned to Massachusetts. The reduced rate is
to be phased-in over a five year period whereby the rates are 12.13% for 1995,
11.72% for 1996, 11.32% for 1997, 10.91% for 1998 and 10.50% for 1999. Net
income for years beginning before January 1, 1999 includes gross income as
defined under the provisions of the Internal Revenue Code, plus interest from
bonds, notes and evidences of indebtedness of any state, including
Massachusetts, less the deductions, excluding the deductions for dividends
received, state taxes, and losses sustained in other taxable years, as defined
under the provisions of the Internal Revenue Code. For taxable years beginning
on or after January 1, 1999, the definition of state taxable income is modified
to allow a deduction for ninety-five percent of dividends received from stock
where a bank owns fifteen percent or more of the voting stock of the institution
paying the dividend and to allow deductions from certain expenses allocated to
federally tax exempt obligations. Subsidiary corporations of BFS conducting
business in Massachusetts must file separate Massachusetts state tax returns and
are taxed as financial institutions, with certain modifications and
grandfathering for taxable years before 1995. The net worth or tangible property
of such subsidiaries is taxed at a rate of 0.26%. Such subsidiaries may file
consolidated tax returns on the net earnings portion of the corporate tax.
Corporations which qualify as "securities corporations," as defined by the
Massachusetts tax code, are taxed at a special rate of 0.33% of their gross
income if they qualify as a "bank-holding company" under the Massachusetts tax
code. The Company has applied for and received approval to be taxed at this
reduced
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tax rate as long as it is exclusively engaged in activities of a "securities
corporation." The Company believes it will continue to qualify as a securities
corporation because a separate subsidiary was formed to make the loan to BFS's
Employee Stock Ownership Plan and the Company's other activities qualify as
activities permissible for a securities corporation. If the Company fails to so
qualify, however, it will be taxed as a financial institution at a rate of
10.50%, rather than at the phased-in rates, beginning with fiscal 1995.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") 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 in the years beginning after
December 31, 1997. The adoption of SFAS 125 did not have a material impact on
the consolidated financial statements. The adoption of SFAS 127 is not expected
to have a material impact on the consolidated financial statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure", which is
effective for 1997 financial statements. The Company's disclosures currently
comply with the provisions of this statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the 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 Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), 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. SFAS 131 requires a company to disclose
certain income statement and balance sheet information by operating segment, as
well as provide a reconciliation of operating segment information to the
Company's consolidated balances. SFAS 131 is effective for the 1998 annual
financial statements.
FEDERAL SECURITIES LAWS
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The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
Shares of the common stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed in any three-month period the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
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ITEM 2. PROPERTIES.
The Company conducts its business through an administrative and full
service office located in Burlington and 9 other full service branch offices.
The Company believes its current facilities are adequate to meet the present and
immediately foreseeable needs of the Company.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE OF
LEASED YEAR DATE OF PROPERTY OR LEASEHOLD
OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADMINISTRATIVE/BRANCH/HOME OFFICE:
17 New England Executive Park Leased 1988 November 1998 (1) $1,578
Burlington, MA 01803
BRANCH OFFICES:
980 Massachusetts Avenue Owned 1976 -- 515
Arlington, MA 02174
60 The Great Road Owned 1971 -- 434
Bedford, MA 01730
459 Boston Road Owned 1972 -- 410
Billerica, MA 01821
75 Federal Street Leased 1988 September 1998 (1) 121
Boston, MA 02110
457 Broadway Owned 1969 697
Chelsea, MA 02150
1840 Massachusetts Avenue Owned 1960 -- 1,185
Lexington, MA 02173
31 Cross Street Owned 1971 -- 540
Peabody, MA 01960
411 Broadway Owned 1977 -- 1,154
Revere, MA 02150
200 Linden Street Leased 1973 November 1998 (1) 208
Wellesley, MA 02181
------
Total............................. $6,842
======
</TABLE>
- --------------------
1 The Company has options to renew these leases which range from 5 to 15
years.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
41
<PAGE> 42
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" in the
Registrant's 1997 Annual Report to Stockholders on pages 63 - 64 and is
incorporated herein by reference. Information relating to dividend restrictions
for Registrant's common stock appears under "Regulation and Supervision."
ITEM 6. SELECTED FINANCIAL DATA.
The above-captioned information appears under "Selected Financial Data" of
the Corporation in the Registrant's 1997 Annual Report to Stockholders on pages
6 and 7 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The above-captioned information appears under "Management Discussion and
Analysis of Financial Condition and Results of Operation" in the Registrant's
1997 Annual Report to Stockholders on pages 9 through 22 and is incorporated
herein by reference.
ITEMS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
The above captioned information appears under the heading AMarket Risk and
Management of Interest Rate Risk in the Registrant's 1997 Annual Report to
Stockholders on pages 11 through 13 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of BostonFed Bancorp, Inc. and its
subsidiaries, together with the report thereon by KPMG Peat Marwick LLP appears
in the Registrant's 1997 Annual Report to Stockholders on pages 23 through 62
and are incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 29, 1998 at
pages 4 through 6.
42
<PAGE> 43
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 29, 1998 at pages 7 through 14.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 29, 1998,
at pages 2 through 5.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 29, 1998, at page 14.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are
incorporated by reference to the following indicated pages of
the 1997 Annual Report to Stockholders:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report.................................... 23
Consolidated Balance Sheets as of
December 31, 1997 and 1996.................................... 24
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.............................. 25
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995.............. 26-28
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995........................ 29-30
Notes to Consolidated Financial Statements...................... 31-62
</TABLE>
The remaining information appearing in the Annual Report to Stockholder is
not deemed to be filed as part of this report, except as expressly provided
herein.
43
<PAGE> 44
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Restated Certificate of Incorporation of BostonFed Bancorp, Inc.*
3.2 Bylaws of BostonFed Bancorp, Inc.*
4.0 Stock Certificate of BostonFed Bancorp, Inc.*
10.1 Employment Agreement between BFS and David F. Holland and
Employment Agreement between the Company and David F. Holland*
10.2 Employment Agreement between Bank and David P. Conley and
Employment Agreement between the Company and David P. Conley*
10.3 Employment Agreement between Bank and John A. Simas and
Employment Agreement between the Company and John A. Simas*
10.4 Form of Change in Control Agreement between BFS and Executive
and between the Company and Executive*
10.5 Boston Federal Savings Bank Employee Severance Compensation Plan*
10.6 Employee Stock Ownership Plan and Trust*
10.7 BostonFed Bancorp, Inc. 1996 Stock-Based Incentive Plan**
10.8 BostonFed Bancorp, Inc. 1997 Stock Option Plan***
11.0 Computation of earnings per share (see consolidated statement of
Income on page 25 of Annual Report)
13.0 1997 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
23.0 Consent of Independent Accountant (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99.0 Proxy Statement for 1998 Annual Meeting (previously filed on
March 27, 1998)
-----------------------------
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, and any amendments
thereto, originally filed on July 21, 1995, as amended and declared
effective on September 11, 1995. Registration No. 33-94860.
** Incorporated herein by reference into this document from the Proxy
Statement for the 1996 Annual Meeting of Stockholders dated March
20, 1996.
*** Incorporated herein by reference into this document from the Proxy
Statement for the 1997 Annual Meeting of Stockholders dated March
28, 1997.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company in the last
quarter of 1997.
44
<PAGE> 45
SIGNATURES Pursuant to the requirements of Section 13 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.
By:/s/ David F. Holland
------------------------
David F. Holland
President and Chief Executive Officer
DATED: 3/30/98
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
3/30/98
/s/ David F. Holland President, Chief Executive Officer ---------------
- ------------------------- and Chairman of the Board
David F. Holland
3/30/98
/s/ David P. Conley Director, Executive Vice President, ---------------
- ------------------------- Assistant Treasurer and Assistant Secretary
David P. Conley
3/30/98
/s/ John A. Simas Executive Vice President, ---------------
- ------------------------- Corporate Secretary and Chief Financial
John A. Simas Officer (Principal accounting officer)
3/30/98
/s/ Edward P. Callahan Director ---------------
- -------------------------
Edward P. Callahan
3/30/98
/s/ Richard J. Dennis, Sr. Director ---------------
- -------------------------
Richard J. Dennis, Sr.
3/30/98
/s/ Charles R. Kent Director ---------------
- ------------------------
Charles R. Kent
3/30/98
/s/ W. Robert Mill Director ---------------
- ------------------------
W. Robert Mill
3/30/98
/s/ Irwin W. Sizer Director ---------------
- ------------------------
Irwin W. Sizer
</TABLE>
45
<PAGE> 1
Exhibit 13.0
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. Prior to October 24, 1995, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of the
Bank.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets..................................... $974,680 $820,567 $640,752 $583,645 $498,812
Investment securities available for sale(1)...... 31,767 1,085 1,022 -- 3,987
Investment securities held to maturity(1)........ 20,630 19,170 16,906 14,784 10,970
Mortgage-backed securities available for
sale(1)........................................ 19,125 23,593 23,873 -- --
Mortgage-backed securities held to maturity(1)... 38,350 43,019 35,116 39,801 45,232
Mortgage loans held for sale..................... 9,817 3,970 8,931 316 25,851
Loans, net....................................... 791,728 676,670 509,496 499,073 385,715
Allowance for loan losses........................ 6,600 4,400 4,275 3,700 4,450
Deposit accounts................................. 619,821 428,818 419,104 413,164 436,898
Borrowed funds................................... 263,640 300,000 126,909 135,031 30,881
Stockholders' equity............................. 81,611 86,355 90,701 30,047 26,017
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.................................. $ 68,037 $ 52,678 $ 42,454 $ 36,527 $ 36,377
Interest expense................................. 37,129 28,891 23,552 17,022 16,835
-------- -------- -------- -------- --------
Net interest income......................... 30,908 23,787 18,902 19,505 19,542
Provision for loan losses................... 1,696 1,294 3,614 283 3,918
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses.................................... 29,212 22,493 15,288 19,222 15,624
Total non-interest income........................ 4,806 3,567 2,672 1,640 4,320
Total non-interest expense....................... 21,458 21,040 16,009 14,531 16,510
-------- -------- -------- -------- --------
Income before income taxes....................... 12,560 5,020 1,951 6,331 3,434
Income tax expense (benefit)..................... 5,505 2,083 815 2,320 (380)
-------- -------- -------- -------- --------
Net income....................................... $ 7,055 $ 2,937 $ 1,136 $ 4,011 $ 3,814
======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 2
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SELECTED FINANCIAL RATIOS AND DECEMBER 31,
OTHER DATA ------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets.............................. 0.75% 0.40% 0.19% 0.75% 0.74%
Return on average stockholders' equity................ 8.21 3.21 2.57 14.53 16.06
Dividend payout ratio................................. 20.31 31.25 NM NM NM
Average stockholders' equity to average assets........ 9.11 12.35 7.36 5.16 4.61
Stockholders' equity to total assets at end of
period.............................................. 8.37 10.52 14.16 5.15 5.22
Average interest rate spread(3)....................... 2.94 2.79 2.98 3.69 3.93
Net interest margin(4)................................ 3.42 3.34 3.28 3.82 4.04
Average interest-earning assets to average
interest-bearing liabilities........................ 111.53 113.40 107.40 104.16 103.06
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
loans(5)(6).................................... 0.17 0.22 1.00 0.71 0.68
Non-performing assets as a percent of total
assets(6)...................................... 0.16 0.51 0.97 0.68 1.19
Allowance for loan losses as a percent of
loans(5)....................................... 0.82 0.64 0.82 0.74 1.07
Allowance for loan losses as a percent of
non-performing loans(6)........................ 469.75 293.02 81.40 103.61 156.69
NUMBER OF FULL-SERVICE CUSTOMER FACILITIES............ 10 8 8 8 8
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD (IN
THOUSANDS).......................................... 5,520 6,260 6,590 -- --
PER SHARE DATA:
Basic earnings per common share.................. $ 1.28 $ 0.48 $ NM -- --
Diluted earnings per common share................ 1.24 0.48 NM -- --
Dividends per common share....................... 0.26 0.15 NM -- --
Book value per common share at end of period..... 15.72 14.75 14.78 -- --
Market value per common share at end of period... 21.88 14.75 11.75 -- --
</TABLE>
- ---------------
(1) The balance does not include FHLB-Boston stock.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
With the exception of end of period ratios, ratios for 1996 are based on
average daily balances while prior years are based on average monthly
balances.
(3) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) Loans includes loans, net, and mortgage loans held for sale, excluding the
allowance for loan losses.
(6) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of all loans 90 days or more past due
and other loans which have been identified by the Company as presenting
uncertainty with respect to the collectibility of interest or principal. It
is the Bank's policy to cease accruing interest on all such loans.
NM -- Not Meaningful /Earnings per share is not presented for the period of
October 24, 1995 (the day of conversion to stock-ownership) through December
31, 1995 as the earnings per share calculation for the sixty-nine day period
was not meaningful. Earnings per share is not presented for the periods
prior to the conversion to stock form, as the Bank was a mutual savings bank
and no stock was outstanding.
7
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
BostonFed Bancorp, Inc. (the "Company") was incorporated in Delaware on
July 11, 1995. On October 24, 1995 it became the holding company for Boston
Federal Savings Bank ("BFS") when it issued 6,589,617 shares of common stock,
utilizing a portion of the proceeds to acquire all of the outstanding stock of
BFS which simultaneously completed its conversion from a mutual savings bank to
a stock form of ownership. On February 7, 1997, the Company acquired Broadway
National Bank, ("BNB"), using the purchase method of accounting, at a cost of
approximately $22 million.
The Company's business has been conducted primarily through its ownership
of BFS and BNB, (collectively the "Banks"). BFS operates its
administrative/branch office located in Burlington, Massachusetts and its seven
other branch offices located in Arlington, Bedford, Billerica, Boston,
Lexington, Peabody and Wellesley, all of which are located in the greater Boston
metropolitan area, and BNB operates two banking offices (Chelsea and Revere)
which are also in the greater Boston metropolitan area. The Company's primary
business is attracting retail deposits from the general public and investing
those deposits and other borrowed funds in loans, mortgage-backed securities,
U.S. Government and federal agency securities and other 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 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, investments, mortgage-backed securities, Federal
Home Loan Bank of Boston ("FHLB") advances, repurchase agreements and proceeds
from the sale of loans.
The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses, real estate operations expense, investment
and loan sale activities and loan servicing. The Company's non-interest expense
principally consists of compensation and benefits, occupancy and equipment
expense, deposit insurance premiums, advertising, data processing expense, real
estate operations and other expenses. Results of operations of the Company are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities.
As a result of the acquisition of BNB, the Company became a bank holding
company subject to regulation by the Federal Reserve Bank ("FRB") and for the
first three years following the initial public offering is also subject to the
regulations of the Office of Thrift Supervision, ("OTS"). BFS continues to be
regulated by the OTS and BNB continues to be regulated by the Office of the
Comptroller of the Currency ("OCC"). 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 and results of operations at and for the years ended
December 31, 1997 and 1996, include information and data related to BNB only
from February 8, 1997 to December 31, 1997.
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, 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
the required minimum levels of liquid assets at BFS as defined by Office of
Thrift Supervision ("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 BFS's deposits and short-term borrowings. BFS's
currently
9
<PAGE> 4
required liquidity ratio is 4%, but at December 31, 1996, the required liquidity
ratio was 5%. At December 31, 1997 and 1996, BFS's liquidity ratio was 5.3% and
8.0% respectively. Management has maintained liquidity close 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 or
repurchase agreements. 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 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 December 31, 1997, cash,
short-term investments and investment securities available for sale totaled
$56.5 million or 5.8% of 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
arise, including FHLB advances and wholesale brokered deposits and repurchase
agreements (collateralized borrowings). At December 31, 1997, the Company had
$256.5 million in advances outstanding from the FHLB and had, with existing
collateral, an additional $181.7 million in overall borrowing capacity from the
FHLB. The Company also borrowed $7.1 million through a repurchase agreement. The
Company generally avoids paying the highest deposit rates in its market and
accordingly utilizes alternative sources of funds such as FHLB advances,
repurchase agreements and wholesale brokered deposits to supplement cash flow
needs.
At December 31, 1997, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $68.5 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 December 31, 1997, totaled $137.5 million. The
Company expects that a substantial majority of the maturing certificate accounts
will be retained by the Company at maturity.
At the time of conversion, BFS was required to establish a liquidation
account in an amount equal to its retained earnings as of June 30, 1995. The
liquidation account will be reduced to the extent that eligible account holders
reduce their qualifying deposits. In the unlikely event of a complete
liquidation of BFS, each eligible account holder will be entitled to receive a
distribution from the liquidation account. BFS is not permitted to declare or
pay dividends on its capital stock, or repurchase any of its outstanding stock,
if the effect thereof would cause its stockholders' equity to be reduced below
the amount required for the liquidation account or applicable regulatory capital
requirements. The balance of the liquidation account at December 31, 1997 was
approximately $11.1 million.
Prior to the Company's acquisition of BNB, the Company, as a savings and
loan holding company, was not required to maintain a minimum level of capital
for regulatory purposes. As a result of the Company's acquisition of BNB and its
resultant status as a bank holding company, the Company is required to maintain
a ratio of capital to assets, on a consolidated basis, which is substantially
equal to that required to be maintained by the Banks. At December 31, 1997, the
consolidated capital to assets ratio of the Company was 8.4%, which exceeded the
minimum regulatory capital requirements for the Company. As of December 31,
1997, BFS exceeded all of its regulatory capital requirements with tangible,
core and risk-based capital ratios of 5.9%, 5.9% and 11.9%, respectively,
compared to the minimum regulatory requirements of 1.5%, 3.0% and 8.0%,
respectively. BNB also exceeded the minimum regulatory capital requirements with
leverage capital, risk-based tier 1 capital and risk-based total capital ratios
of 7.4%, 15.2% and 16.4%, respectively, compared to the minimum regulatory
requirements of 4.0%, 4.0% and 8.0%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
10
<PAGE> 5
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 meets frequently and 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 short-term 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 such as wholesale brokered deposits and utilizing FHLB
advances to replace short-term, rate sensitive, retail 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, 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, or reduce, its net interest
income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The Gap Table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three-month period and
subsequent selected time intervals. Annual prepayment rates for adjustable-rate
and fixed-rate residential loans are assumed to be 20.1% and 15.7%,
respectively. Annual prepayment rates for adjustable-rate and fixed-rate
mortgage-backed securities are assumed to be 13.8% and 14.8%, respectively.
Money market deposit accounts are assumed to be immediately rate-sensitive,
while passbook accounts and negotiable order of withdrawal ("NOW") accounts are
assumed to have decay rates of 12% annually. These assumptions may or may not be
indicative of actual prepayment and withdrawals experienced by the Company. The
table does not necessarily indicate the impact of general interest
11
<PAGE> 6
rate movements on the Company's net interest income because the actual
repricing dates of various assets and liabilities is subject to customer
discretion and competitive and other pressures and, therefore, actual experience
may vary from that indicated.
The following table shows the gap position of the Company at December 31,
1997:
<TABLE>
<CAPTION>
3 MORE THAN MORE THAN MORE THAN MORE THAN MORE
MONTHS 3 MONTHS 6 MONTHS 1 YEAR TO 3 YEARS TO THAN TOTAL
OR LESS TO 6 MONTHS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS AMOUNT
------- ----------- --------- --------- ---------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Short-term investments......... $ 3,430 $ 8 $ 5 $ 0 $ 5 $ 0 $ 3,448
Investment securities.......... 11,602 4,003 10,174 23,110 3,508 0 52,397
Fixed Rate Loans(1)............ 10,884 10,349 19,703 58,082 33,850 46,527 179,395
Adjustable Rate Loans(1)....... 110,461 69,526 147,448 185,513 110,983 3,414 627,345
Mortgage-backed securities..... 20,991 9,250 5,858 13,765 7,435 176 57,475
Stock in FHLB-Boston........... 16,613 0 0 0 0 0 16,613
-------- ------- -------- -------- -------- -------- --------
Total interest-earning
assets.............. 173,981 93,136 183,188 280,470 155,781 50,117 936,673
-------- ------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Money market deposit
accounts..................... 61,546 0 0 0 0 0 61,546
Savings accounts............... 3,526 3,526 7,052 28,203 28,203 46,348 116,858
NOW accounts................... 3,199 3,199 6,399 25,594 25,594 42,652 106,637
Certificate accounts........... 52,492 37,185 47,843 141,012 5,097 0 283,629
FHLB Advances.................. 42,000 27,000 49,000 127,500 11,000 0 256,500
Securities sold under agreement
to repurchase................ 7,140 0 0 0 0 0 7,140
-------- ------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities......... 169,903 70,910 110,294 322,309 69,894 89,000 832,310
-------- ------- -------- -------- -------- -------- --------
Interest-earning assets less
interest-bearing
liabilities.................. $ 4,078 $22,226 $ 72,894 $(41,839) $ 85,887 $(38,883) $104,363
======== ======= ======== ======== ======== ======== ========
Cumulative interest rate
sensitivity gap.............. $ 4,078 $26,304 $ 99,198 $ 57,359 $143,246 $104,363 $104,363
======== ======= ======== ======== ======== ======== ========
Cumulative interest rate gap as
a percentage of total assets
at December 31, 1997......... 0.42% 2.70% 10.18% 5.88% 14.70% 10.71%
Cumulative interest rate gap as
a percentage of total
interest-earning assets at
December 31, 1997............ 0.44% 2.81% 10.59% 6.12% 15.29% 11.14%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at December 31,
1997......................... 102.40% 110.92% 128.25% 108.52% 119.27% 112.54%
</TABLE>
- ---------------
(1) Includes totals loans net of non-performing loans.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. 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.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the
12
<PAGE> 7
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. The Company's Board of Directors has
established certain NPV maximum percentage change limits by interest rate shock.
These approved limits are included in the following table. The Company is
operating within the maximum limits imposed by the Board of Directors. The OTS
also produces a similar analysis using its own model, based upon data submitted
on the Company's quarterly Thrift Financial Reports for BFS, the results of
which may vary from the Company's internal model primarily due to differences in
assumptions utilized between the Company's internal model and the OTS model,
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. For purposes of the NPV table, prepayment speeds similar to those used in
the Gap table were used, reinvestment rates were those in effect for similar
products currently being offered and rates on core deposits were modified to
reflect recent trends. The following table sets forth the Company's NPV as of
December 31, 1997, as calculated by the Company.
<TABLE>
<CAPTION>
RATES
IN BASIS NET PORTFOLIO VALUE
POINTS ---------------------------------------------
(RATE $ $ % BOARD NPV
SHOCK) AMOUNT CHANGE CHANGE LIMITS % RATIO
-------- ------- ------- ------ -------- -----
(DOLLAR IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400................... 76,878 (24,583) (24.2) (30.0) 7.9
300................... 85,462 (15,999) (15.8) (25.0) 8.8
200................... 91,425 (10,036) (9.9) (20.0) 9.4
100................... 97,847 (3,614) (3.6) (10.0) 10.0
Static................ 101,461 10.4
(100)................. 107,732 6,271 6.2 (10.0) 11.1
(200)................. 110,465 9,004 8.9 (20.0) 11.3
(300)................. 111,689 10,228 10.1 (25.0) 11.5
(400)................. 113,447 11,986 11.8 (30.0) 11.6
</TABLE>
As in the case with the Gap Table, 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 presented 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.
During 1997, the Company continued to follow its past practice of selling,
while generally retaining the servicing rights, certain fixed-rate and
adjustable-rate mortgage loans which were either sold as whole loans or, prior
to sale, converted to mortgage-backed securities. In conjunction with this
mortgage banking activity, the Company uses forward contracts in order to reduce
exposure to interest rate risk. The amount of forward coverage of the "pipeline"
of mortgages is set on a day-to-day basis by an operating officer, within policy
guidelines, based on the Company's assessment of the general direction of
interest rates and the levels of mortgage origination activity.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
The following table sets forth certain information relating to the Company
for the years ended December 31, 1997, 1996 and 1995. The average yields and
costs are derived by dividing income or expense by the average balance of
interest earning assets or interest bearing liabilities, respectively, for the
periods shown. For 1997 and 1996, the average balance data is derived from daily
balances and for 1995, average balance data is derived from average month-end
balances. Management does not believe that the use of average monthly balances
in 1995 instead of average daily balances has caused any material differences in
the information presented. The yields and costs include fees, premiums and
discounts which are considered adjustments to yields.
13
<PAGE> 8
<TABLE>
<CAPTION>
AT FOR THE YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------------------
1997 1997 1996
----------------- ----------------------------- -------------------
AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST
-------- ------ -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Investment securities(1).......... $ 72,458 6.21% $ 82,701 $ 5,003 6.05% $ 36,678 $ 2,167
Loan, net and mortgage loans held
for sale(2)..................... 801,545 7.83 759,312 58,805 7.74 603,585 45,513
Mortgage-backed securities(3)..... 57,475 6.97 62,265 4,229 6.79 72,287 4,998
-------- -------- ------- -------- -------
Total interest-earning assets... 931,478 7.65 904,278 68,037 7.52 712,550 52,678
---- ------- ---- -------
Non-interest-earning assets........ 43,202 39,770 28,354
-------- -------- --------
Total assets.................... $974,680 $944,048 $740,904
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing Liabilities:
Money market deposit accounts..... $ 61,546 2.92 $ 61,800 1,822 2.95 $ 46,540 1,395
Savings accounts.................. 116,858 2.50 116,247 2,826 2.43 90,763 2,219
NOW accounts...................... 106,637 1.13 96,590 1,071 1.11 66,336 890
Certificate accounts.............. 283,629 5.82 237,115 13,457 5.68 199,598 11,194
-------- -------- ------- -------- -------
Total........................... 568,670 3.94 511,752 19,176 3.75 403,237 15,698
Borrowed Funds(4).................. 263,640 5.95 299,076 17,953 6.00 225,124 13,193
-------- -------- ------- -------- -------
Total interest-bearing
liabilities................... 832,310 4.58 810,828 37,129 4.58 628,361 28,891
---- ------- ---- -------
Non-interest-bearing liabilities... 60,759 47,264 21,030
-------- -------- --------
Total liabilities............... 893,069 858,092 649,391
-------- -------- --------
Stockholders' equity............... 81,611 85,956 91,513
-------- -------- --------
Total liabilities and
stockholders' equity............... $974,680 $944,048 $740,904
======== ======== ========
Net interest rate spread(5)........ 3.07% $30,908 2.94% $23,787
==== ======= ==== =======
Net interest margin(6)............. 3.42%
====
Ratio of interest-earning assets to
interest-bearing liabilities...... 111.91% 111.53% 113.40%
======== ======== ========
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995
------- -----------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Investment securities(1).......... 5.91% $ 33,558 $ 1,945 5.80%
Loan, net and mortgage loans held
for sale(2)..................... 7.54 503,920 38,079 7.56
Mortgage-backed securities(3)..... 6.91 39,454 2,430 6.16
-------- -------
Total interest-earning assets... 7.39 576,932 42,454 7.36
---- ------- ----
Non-interest-earning assets........ 23,590
--------
Total assets.................... $600,522
========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing Liabilities:
Money market deposit accounts..... 3.00 $ 49,693 1,472 2.96
Savings accounts.................. 2.44 99,498 2,485 2.50
NOW accounts...................... 1.34 65,661 931 1.42
Certificate accounts.............. 5.61 189,080 10,235 5.41
-------- -------
Total........................... 3.89 403,932 15,123 3.74
Borrowed Funds(4).................. 5.86 133,268 8,429 6.32
-------- -------
Total interest-bearing
liabilities................... 4.60 537,200 23,552 4.38
---- ------- ----
Non-interest-bearing liabilities... 19,145
--------
Total liabilities............... 556,345
--------
Stockholders' equity............... 44,177
--------
Total liabilities and
stockholders' equity............... $600,522
========
Net interest rate spread(5)........ 2.79% $18,902 2.98%
==== ======= ====
Net interest margin(6)............. 3.34% 3.28%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities...... 107.40%
========
</TABLE>
- ---------------
(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 5.98%, 5.81%, and 6.31%
for the years ended December 31, 1997, 1996 and 1995, 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.
Note: Average balances for 1997 and 1996 are calculated on a daily basis, while
average balances for 1995 are based on average monthly balances.
14
<PAGE> 9
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated to
changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- -------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
---------------- ----------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment
securities........ $2,720 $ 116 $ 2,836 $ 181 $ 41 $ 222
Loans, net and
mortgage loans
held for sale..... 11,742 1,550 13,292 7,535 (101) 7,434
Mortgage-backed
securities........ (693) (76) (769) 2,023 545 2,568
------ ------ ------- ------ ------- ------
Total interest-
earning
assets.......... 13,769 1,590 15,359 9,739 485 10,224
------ ------ ------- ------ ------- ------
INTEREST-BEARING LIABILITIES:
Money market deposit
accounts.......... 458 (31) 427 (93) 16 (77)
Savings accounts.... 622 (15) 607 (218) (9) (227)
NOW accounts........ 405 (224) 181 10 (51) (41)
Certificate
accounts.......... 2,104 159 2,263 569 351 920
------ ------ ------- ------ ------- ------
Total............. 3,589 (111) 3,478 268 307 575
Borrowed funds...... 4,334 426 4,760 5,805 (1,041) 4,764
------ ------ ------- ------ ------- ------
Total interest-
bearing
liabilities..... 7,923 315 8,238 6,073 (734) 5,339
------ ------ ------- ------ ------- ------
Net change in net
interest income..... $5,846 $1,275 $ 7,121 $3,666 $ 1,219 $4,885
====== ====== ======= ====== ======= ======
</TABLE>
ASSET QUALITY
The following table sets forth information regarding non-performing assets,
which consist of: non-performing loans and real estate owned ("REO"). In
addition to identifying non-performing loans, as discussed below, the Company
identifies loans that are characterized as "impaired" pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of
a Loan -- Income Recognition and Disclosure. Accordingly, loans categorized as
"impaired" include non-performing loans as well as other identified loans. At
December 31, 1997, non-performing loans totaled $1.4 million, (all of which are
included in the balance of impaired loans), impaired loans totaled $2.1 million,
consisting of 34 loans, and REO totaled $195,000, consisting of six properties.
It is the policy of the Company to cease accruing interest on loans 90 days or
more past due and charging off all accrued interest. For the years ended
December 31, 1997, 1996, and 1995, the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $146,000, $103,000, and
$303,000, respectively. For the same periods, the difference between the amount
of interest income which would have been recognized on other impaired loans if
such loans were performing in accordance with their regular terms and actual
amounts recognized was $1,000, $73,000, and $77,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NON-PERFORMING LOANS:
Residential real estate:
One- to four-family............... $ 941 $1,463 $1,195
Multi-family...................... -- -- 745
Commercial real estate.............. 458 25 3,312
Other Loans......................... 6 14 --
------ ------ ------
Total........................... 1,405 1,502 5,252
Real estate owned, net(3)............. 195 2,668 971
------ ------ ------
Total non-performing assets..... 1,600 4,170 6,223
Restructured loans.................... 369 2,489 2,941
------ ------ ------
Total risk elements................... $1,969 $6,659 $9,164
====== ====== ======
Allowance for loan losses as a percent
of loans(1)......................... 0.82% 0.64% 0.82%
Allowance for loan losses as a percent
of non-performing loans(2).......... 469.75 293.02 81.40
Non-performing loans as a percent of
loans(1)(2)......................... 0.17 0.22 1.00
Non-performing assets as a percent of
total assets(4)..................... 0.16 0.51 0.97
</TABLE>
- ---------------
(1) Loans includes loans, net and mortgage loans held for sale, excluding
allowance for loan losses.
(2) Non-performing loans consist of all 90 days or more past due and other loans
which have been identified by the Company as presenting uncertainty with
respect to the collectability of interest or principal.
(3) REO balances are shown net of related valuation allowances.
(4) Non-performing assets consist of non-performing loans and real estate owned
(REO).
15
<PAGE> 10
At December 31, 1997, loans that were characterized as impaired totaled
$2.1 million. All of the impaired loans have been measured using the fair value
of the collateral method. During the year ended December 31, 1997, the average
recorded value of impaired loans was $3.8 million, $139,000 of interest income
was recognized and $286,000 of interest income would have been recognized under
original terms. The composition of impaired loans by type is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Impaired loans:
Residential real estate
One- to four-family......... $ 999 $1,763
Multi-family................ 316 2,271
Commercial real estate......... 677 246
Other loans.................... 99 112
------ ------
Total impaired loans... $2,091 $4,392
====== ======
</TABLE>
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the national and regional economy. The allowance for loan losses
is maintained at an amount management considers adequate to cover estimated
losses in loans which are deemed probable and estimable based on information
currently known to management. Management's analysis of the adequacy of the
allowance is based upon consideration of a number of factors, including current
economic conditions, actual loss experience and industry trends. 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 judgments different from those of management. Amounts provided for
the years 1997, 1996 and 1995 were $1.7 million, $1.3 million and $3.6 million,
respectively. During the year ended December 31, 1997, there were recoveries of
$399,000 credited to, and charge-offs of $515,000 taken against this allowance.
As of December 31, 1997, the Company's allowance for loan losses was .82% of
total loans compared to .64% as of December 31, 1996. Management believes this
increased coverage ratio is prudent due to the balance increase in the combined
total of construction and land, commercial real estate, home equity and
improvement and consumer loans. These combined total balances increased from
$59.8 million at December 31, 1996 to $91.5 million at December 31, 1997, an
increase of 53%, due in large part to the inclusion of BNB's balances. These
loans aggregated to 11.6% and 8.8% of the total loans, net, at December 31, 1997
and 1996, respectively. The Company had non-performing loans of $1.4 million and
$1.5 million at December 31, 1997 and December 31, 1996, respectively. The
Company will continue to monitor and modify its allowance for loan losses as
conditions dictate. While management believes the Company's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that the Company's level of allowance for loan
losses will be sufficient to cover future loan losses incurred by the Company or
that future adjustments to the allowance for loan losses will not be necessary
if economic and other conditions differ substantially from the economic and
other conditions used by management to determine the current level of allowance
for loan losses.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period............... $4,400 $4,275 $3,700 $4,450 $4,381
BNB allowance for loan
losses at acquisition
date................. 620 -- -- -- --
Provision for loan
losses............... 1,696 1,294 3,614 283 3,918
Charge-offs:
One- to
four-family........ 370 387 550 711 2,114
Multi-family......... 84 263 483 251 1,114
Commercial........... 45 664 2,297 200 805
Construction and
land............... 0 0 0 0 4
Other.................. 16 198 194 56 17
------ ------ ------ ------ ------
Total.......... 515 1,512 3,524 1,218 4,054
Recoveries............. 399 343 485 185 205
------ ------ ------ ------ ------
Balance at end of
period............... $6,600 $4,400 $4,275 $3,700 $4,450
====== ====== ====== ====== ======
Ratio of net
charge-offs during
the period to average
loans outstanding
during the period.... 0.02% 0.19% 0.60% 0.23% 0.94%
====== ====== ====== ====== ======
</TABLE>
The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. The most severe
classification before a charge-off is required is "sub-standard." At December
31, 1997, 1996 and 1995, the Company classified (excluding REO) $5.8 million,
$3.8 million and $8.3 million of sub-standard assets, respectively. Included in
these amounts were $1.4 million, $1.5 million and $5.3 million in non-performing
assets, respectively. In the opinion of management, the performing sub-standard
loans
16
<PAGE> 11
evidence one or more weaknesses or potential weaknesses and, depending on the
regional economy and other factors, may become non-performing assets in future
periods.
The preceding and following discussion may contain certain forward-looking
statements which are based on management's current expectations regarding
economic, legislative, and regulatory issues that may impact the Company's
earnings in future periods. Factors that could cause future results to vary
materially from current management expectations include, but are not limited to,
general economic conditions, changes in interest rates, deposit flows, real
estate values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory and technological factors affecting the
Company's operations, pricing, products and services. In particular, these
issues may impact management's estimates used in evaluating market risk and
interest rate risk in its GAP and NPV tables, loan loss provisions,
classification of assets, Year 2000 issues, accounting estimates and other
estimates used throughout this discussion.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996.
CHANGES IN FINANCIAL CONDITION
Assets at December 31, 1997 totaled $974.7 million, an increase of $154.1
million, or 18.8%, compared to $820.6 million at December 31, 1996. Asset growth
was primarily attributable to the acquisition of BNB and growth in loans, net,
at BFS. This growth at BFS was primarily due to increased originations of
adjustable-rate and ten to fifteen year fixed-rate one- to four-family mortgage
loans which combined with BNB's portfolio caused loans, net, to increase by
$115.1 million to a balance of $791.7 million at December 31, 1997, compared to
a balance of $676.7 million at December 31, 1996. Volatility in market interest
rates and a generally falling interest rate environment in the second half of
1997 reduced customer demand for adjustable-rate loans and increased demand for
longer term, fixed-rate loan products, the bulk of which were sold in the
secondary market. Shorter term loans, generally 15 year or less, were originated
for portfolio. Deposit accounts increased by $191.0 million from a balance of
$428.8 million at December 31, 1996 to a balance of $619.8 million at December
31, 1997. Of the increase, $125.0 million is attributable to the acquisition of
BNB while the balance represents growth in BFS's deposit balances, $75.0 million
of which were obtained through the wholesale certificates of deposit broker
market. BFS obtained these funds for terms of two to three years and the funds
were used primarily to support the growth in loans, net. Mortgage-backed
securities decreased by $9.1 million, or 13.7%, from a balance of $66.6 million
at December 31, 1996 to a balance of $57.5 million at December 31, 1997.
Mortgage loans held for sale totaled $9.8 million at December 31, 1997, compared
to $4.0 million at December 31, 1996. FHLB advances decreased $40.0 million to a
balance of $256.5 million at December 31, 1997, compared to $296.5 million at
December 31, 1996 as funds from the brokered certificates of deposit mentioned
above were also used to repay FHLB advances. Total stockholders' equity was
$81.6 million at December 31, 1997 or $15.72 per share, compared to $86.4
million or $14.75 per share at December 31, 1996. The decrease in total
stockholders' equity during the year ended December 31, 1997 was primarily due
to the combined effects of the completion of the second and third and
commencement of the fourth 5% stock repurchase programs and dividends paid,
during the year ended December 31, 1997, offset by the change in market
valuation, net of taxes, of the available-for-sale securities portfolio, net
income and the amortization of the Stock-based Incentive Plans. The
stockholders' equity to total assets ratio of the Company was 8.4% at December
31, 1997 and 10.5% at December 31, 1996.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 1997 was $7.1 million, or $1.28
basic earnings per share and $1.24 diluted earnings per share, compared to $2.9
million, or $.48 basic and diluted earnings per share for the comparable period
in 1996. Net income for the year ended December 31, 1996 was adversely impacted
by the one time $2.7 million (approximately $1.6 million after tax, or $.26 per
share) special assessment for the recapitalization of the Savings Association
Insurance Fund ("SAIF"). The improved net income increased the return on average
assets to .75% and the return on average stockholders' equity to 8.21% during
the year ended December 31, 1997, compared to .40% and 3.21%, respectively, for
the year ended December 31, 1996. Excluding the SAIF special assessment, the
return on average assets was .61% and the return on average stockholders' equity
was 4.96% for the year ended December 31, 1996. The increase was primarily
attributable to higher net interest income, due to increased balances of
interest earning assets,
17
<PAGE> 12
some of which had higher margins from the BNB acquisition, earnings from real
estate operations and the non-repetition of the one-time $1.6 million after tax
special assessment for the recapitalization of the SAIF. The net interest margin
in 1997 increased to 3.42% from 3.34% during 1996. The improvement in the net
interest margin in 1997 was primarily due to the impact of the acquisition of
BNB which, like most commercial banks, earns a wider margin than thrifts such as
BFS.
Interest Income
Total interest income for the year ended December 31, 1997 increased by
$15.4 million to $68.0 million compared to $52.7 million for the year ended
December 31, 1996. Interest on loans increased by $13.3 million, or 29.2%, to
$58.8 million, during 1997 compared to $45.5 million during 1996. The increase
in interest income in 1997 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $603.6 million for 1996 to $759.3 million for 1997. Approximately
$66 million of such growth was due to the acquisition of BNB. The increased
average loan, net, balances generated an additional $11.7 million of interest
earned while improved yields increased interest earned on loans, net, by $1.6
million. The improved yields were generally the result of increasing rate
adjustments to BFS's adjustable-rate loan portfolio, much of which had been
originated at discounted rates in prior years. Additionally, as interest rates
declined in the second half of 1997, BFS increased the volume of shorter-term,
(ten to fifteen years), higher yielding fixed-rate loans. The loan portfolio
average loan yield was increased 7.74% for 1997 compared to an average yield of
7.54% for 1996. Interest income on investment securities and overnight federal
funds sold increased by $2.8 million to $5.0 million for the year ended December
31, 1997, compared to $2.2 million for the year ended December 31, 1996. The
primary reason for the increase is due to higher average balances of investment
securities due to the acquisition of BNB. Interest income on mortgage-backed
securities decreased by $769,000 for the year ended December 31, 1997 due
primarily to a decrease in average balances compared to the prior year. Average
balances decreased by $10.0 million from an average of $72.3 million during 1996
to an average $62.3 million during 1997. The majority of the mortgage-backed
securities held in 1997 were adjustable GNMA securities. The yields on
mortgage-backed securities decreased from an average yield of 6.91% in 1996 to
6.79% in 1997, resulting in a decrease in interest earned on such securities in
1997 of $76,000, compared to 1996.
Interest Expense
Interest expense increased by $8.2 million, or 28.4%, for the year ended
December 31, 1997 to $37.1 million compared to $28.9 million for the year ended
December 31, 1996. The increase in interest expense for the year ended December
31, 1997 was due to higher interest expense on both deposits and borrowed funds.
Borrowed funds consisted primarily of FHLB advances and were used primarily to
fund loan portfolio growth. Higher average balances of borrowed funds resulted
in a $4.3 million increase in interest expense, while a 14 basis point increase
in the cost of borrowings resulted in a $426,000 increase in interest expense.
The average cost of borrowings for the year ended December 31, 1997 was 6.0%
compared to an average cost of 5.86% for the prior year. Interest expense on
deposit accounts increased by $3.5 million for the year ended December 31, 1997
due primarily to the effects of higher average balances of $511.8 million for
the year ended December 31, 1997 compared to average deposit balances of $403.2
million for the prior year. The increased average balances were primarily
attributable to the acquisition of BNB and BFS's acquisition of wholesale
brokered deposits. The average cost of deposit accounts decreased from 3.89% for
the year ended December 31, 1996 to an average cost of 3.75% for the current
year. A major contributing factor in lowering the cost of savings was the
addition of BNB's savings portfolio which consisted entirely of lower costing
core deposit accounts. BNB had not been offering certificates of deposit to its
customers, as its previous lending needs did not necessitate such savings
products.
Provision for Loan Losses
During 1997, the provision for loan losses was increased to $1.7 million
from the prior year provision of $1.3 million. The higher provision was based on
management's evaluation of the growth and change in composition of the Company's
loan portfolio, existing real estate market conditions, the level of charge-offs
and classified assets. Total non-performing loans decreased to $1.4 million, or
.17% of loans at December 31, 1997 from $1.5 million, or .22% at December 31,
1996. Net charge-offs also decreased, amounting to $116,000, or .02% of average
loans outstanding during 1997 compared with 1996's net charge-off total of $1.2
million or .19% of average loans outstanding. The allowance for loan losses as a
percentage of total loans was 0.82% at December 31, 1997 compared to .64% at
Decem-
18
<PAGE> 13
ber 31, 1996. As a percentage of total non-performing loans, the allowance for
loan losses was 469.8% at December 31, 1997, compared to 293.0% a year earlier.
See "Asset Quality" included elsewhere herein.
Non-Interest Income
Total non-interest income increased to $4.8 million for the year ended
December 31, 1997 from $3.6 million for the year ended December 31, 1996. The
primary contributing factors were increased gains on the sale of loans and
higher deposit service fees. The $1.1 million gain on sale of loans during the
current year exceeded the $668,000 for the prior year, primarily due to more
favorable market pricing of loans sold in the secondary market during 1997. The
improved gain on sale of loans was realized despite a reduction in the volume of
loans sold during 1997. Deposit service fees improved to $1.7 million for the
year ended December 31, 1997, compared to $1.1 million for the prior year due to
the inclusion of BNB's deposit service fees and continued growth in BFS's
transaction accounts and service fees collected thereon during 1997.
Non-Interest Expense
Total non-interest expense for the year ended December 31, 1997 was $21.5
million, compared to $21.0 million for 1996. Excluding the SAIF special
assessment of $2.7 million during 1996, non-interest expenses increased by $3.2
million or 17.5%. The primary components of this increase were compensation and
benefits expenses and occupancy and equipment expenses, offset somewhat by
reduced deposit insurance premiums and income from real estate operations.
Compensation and benefits expense for the year ended December 31, 1997 amounted
to $13.5 million, compared to $9.8 million for the prior year. The primary
reasons for this increase of $3.7 million was the inclusion of $2.2 million of
BNB's compensation expenses, a $468,000 increase in the ESOP expense resulting
from appreciation in the Company's stock, and the establishment of a short-term
incentive plan. Occupancy and equipment expense increased from $2.5 million for
the year ended December 31, 1996 to $3.1 million for the year ended December 31,
1997, due essentially to the addition of BNB's expenses. The Company's Federal
Deposit Insurance Premiums were lower this year, $293,000 compared to last
year's total of $916,000 due to the benefits of the Company's payment of the
non-recurring special assessment of $2.7 million to the SAIF in 1996. Data
processing expense increased from $600,000 for the year ended December 31, 1996
to $968,000 for the current year due primarily to the added cost of BNB's data
processing. Real estate operations provided income of $1.2 million during the
year ended December 31, 1997, compared to an expense for the prior year. The two
main contributing factors to the current year's income from real estate
operations are the sale of a land sub-division owned by a subsidiary of BFS and
recoveries from the sale of real estate owned, owing to improvement in general
real estate market conditions during 1997. Other non-interest expense increased
to $4.1 million for the year ended December 31, 1997 from $3.4 million for the
prior year due to the inclusion of BNB's miscellaneous expenses.
Income Taxes
Income tax expense was $5.5 million for the year ended December 31, 1997
(resulting in an effective tax rate of 43.8%), compared to a tax expense of $2.1
million for the year ended December 31, 1996 (resulting in an effective tax rate
of 41.5%). The increase in income tax expense is primarily attributable to an
increase in pre-tax earnings while the slightly higher effective rate is due
primarily to the non-deductibility of the appreciation of the allocated ESOP
shares.
Year 2000 Project
Included in other non-interest expenses in 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 Company has completed its assessment of Year 2000
issues, developed a plan, and arranged for the required resources to complete
the necessary remediation efforts.
The Company will utilize both internal and external resources to reprogram,
or replace and test hardware and software for Year 2000 modifications. The
Company plans to complete changes and testing for mission critical systems by
December 31, 1998, a date prior to any impact on its operating systems. Testing
of non-critical applications will continue into 1999 and will be completed prior
to any impact on operating systems. The total cost of the Year 2000 project is
estimated at $300,000 to $500,000. Through December 31, 1997 the Company
expensed approximately $50,000 toward the assessment and remediation efforts of
the Year 2000 project. The Company will incur costs through the Year 2000, but
does not anticipate that material incremental costs will be incurred in any
single period.
19
<PAGE> 14
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 resources.
The Company has initiated formal communications with all of its significant
vendors and service providers to determine the extent to which the Company is
vulnerable to any failure of those third parties to remedy their own Year 2000
issues. The Company's total Year 2000 project costs and estimates to complete
include the estimated costs and time associated with the impact of third-party
Year 2000 issues, based on information currently available. However, there can
be no guarantee that the systems of other companies on which the companies
systems rely will be remediated in a timely manner or that there will be no
adverse effect on the Company's systems. Therefore, the Company could possibly
be negatively impacted to the extent that other entities not affiliated with the
Company are unsuccessful in properly addressing this issue.
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.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995.
CHANGES IN FINANCIAL CONDITION
Assets at December 31, 1996 totaled $820.6 million, an increase of $179.8
million, or 28.1%, compared to $640.8 million at December 31, 1995. This growth
was primarily due to increased originations of adjustable-rate one- to
four-family mortgage loans which caused loans, net, to increase by $167.2
million to a balance of $676.7 million at December 31, 1996, compared to a
balance of $509.5 million at December 31, 1995. Volatility in market interest
rates and a generally rising interest rate environment in 1996 caused customer
preference to shift to adjustable-rate loan products and the demand for fixed-
rate products declined. Deposits increased $9.7 million to $428.8 million at
December 31, 1996 compared to $419.1 million as of December 31, 1995, due
primarily to interest credited to accounts during the year. The Company funded
the increase in loans, net, primarily by borrowing short- and long-term funds
from the FHLB. Mortgage-backed securities increased by $7.6 million, or 12.9%,
from a balance of $59.0 million at December 31, 1995 to a balance of $66.6
million at December 31, 1996. Mortgage loans held for sale totaled $4.0 million
at December 31, 1996, compared to $8.9 million at December 31, 1995. FHLB
advances increased $176.6 million to a balance of $296.5 million at December 31,
1996, compared to $119.9 million at December 31, 1995. Total stockholders'
equity at December 31, 1996 totaled $86.4 million, or $14.75 book value per
share and 10.5% of total assets, compared to $90.7 million, or $14.78 book value
per share and 14.2% of total assets at December 31, 1995. The decrease in total
stockholders' equity is due to the combined effects of the contribution to the
Company's 1995 Stock-Based Incentive Plan Trust (the "SIP") to fund the SIP's
purchase of 4% of the Company's common stock (net of amortization), the
completion of a 5% stock repurchase program, the change in market valuation (net
of taxes), of the available-for-sale securities portfolio and dividends paid,
offset by net income.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 1996 was $2.9 million, or $.48
basic and diluted earnings per share, an increase of $1.8 million or 164%, from
the $1.1 million (with earnings per share not applicable) for the year ended
December 31, 1995. The increase was primarily attributable to higher net
interest income, due to increased balances of interest earning assets and a
lower provision for loan losses, which were partially offset by the one-time
$2.7 million (approximately $1.6 million after tax) special assessment for the
recapitalization of the SAIF as a result of federal legislation enacted in late
1996. Excluding such non-recurring SAIF special assessment, net income for the
year would have been $4.5 million or $.73 basic and diluted earnings per share,
a 309% increase over 1995's net income of $1.1 million, with earnings per share
not meaningful since the Company did not have any stock outstanding until
October 24, 1995. The net interest margin in 1996 increased to 3.34% from 3.28%
during 1995. The improvement in the net interest margin in 1996 was primarily
due to the impact of the Company's utilization of net conver-
20
<PAGE> 15
sion proceeds for a full year in 1996 compared to approximately two months in
1995.
Interest Income
Total interest income for the year ended December 31, 1996 increased by
$10.2 million to $52.7 million compared to $42.5 million for the year ended
December 31, 1995. Interest on loans increased by $7.4 million, or 19.4%, to
$45.5 million, during 1996 compared to $38.1 million during 1995. The increase
in interest income in 1996 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $503.9 million for 1995 to $603.6 million for 1996. The increased
average loan balances generated an additional $7.5 million of interest earned
which was partially offset by reduced earnings of $101,000 due to increased
origination of the Company's discounted adjustable-rate loans which resulted in
an overall decline in yields for the loan portfolio whereby the average loan
yield was reduced to 7.54% for 1996 compared to an average of 7.56% for 1995.
Interest income on mortgage-backed securities increased by $2.6 million for the
year ended December 31, 1996 due primarily to an increase in average balances
compared to the prior year. Average balances increased by $32.8 million from an
average of $39.5 million during 1995 to an average $72.3 million during 1996.
The majority of the mortgage-backed securities held in 1996 were adjustable GNMA
securities. The yields on mortgage-backed securities increased from an average
yield of 6.16% in 1995 to 6.91% in 1996, resulting in an increase in interest
earned on such securities in 1996 of $545,000, compared to 1995.
Interest Expense
Interest expense increased by $5.3 million, or 22.5%, for the year ended
December 31, 1996 to $28.9 million compared to $23.6 million for the year ended
December 31, 1995. The primary cause of the increase in interest expense for the
year ended December 31, 1996 was interest expense on borrowed funds consisting
primarily of FHLB advances and to a lesser extent, repurchase agreements which
were used primarily to fund adjustable-rate loans originated for portfolio
during 1996. Interest expense on deposit accounts increased by $575,000 for the
year ended December 31, 1996 due primarily to the effects of higher deposit
rates during the year, caused by a shift of regular savings deposits into higher
yielding certificates of deposit. Average deposit balances were $403.2 million
during the year ended December 31, 1996, compared to $403.9 million for the
prior year, a decrease of $695,000. For the year ended December 31, 1996,
interest expense on borrowed funds was $13.2 million compared to $8.4 million
the prior year, an increase of $4.8 million, or 57.1%. While the average cost of
borrowed funds declined by 46 basis points, from an average of 6.32% for the
year ended December 31, 1995 to 5.86% for 1996, causing interest expense on FHLB
advances to decrease by $1.0 million, the average balances increased from an
average borrowed money balance of $133.3 million in 1995 to an average of $225.1
million in 1996. The higher average balances increased interest expense on
borrowed funds by $5.8 million in 1996 compared to 1995.
Provision for Loan Losses
During 1996, the provision for loan losses was reduced to $1.3 million from
the prior year $3.6 million. The lower provision was based on management's
evaluation of existing real estate market conditions, improvement in the level
of charge-offs and classified assets as well as a stabilization of general
economic conditions in the Company's market area. Total non-performing loans
decreased to $1.5 million, or .22% of loans at December 31, 1996 from $5.3
million, or 1.00% at December 31, 1995. Net charge-offs also decreased,
amounting to $1.2 million, or .19% of average loans outstanding during 1996
compared with 1995's total of $3.0 million or .60% of average loans outstanding.
The allowance for loan losses as a percentage of total loans was 0.64% at
December 31, 1996 compared to .82% at December 31, 1995. As a percentage of
total non-performing loans, the allowance for loan losses was 293.0% at December
31, 1996, compared to 81.4% a year earlier. See "Asset Quality" included
elsewhere herein.
Non-Interest Income
Total non-interest income increased to $3.6 million for the year ended
December 31, 1996 from $2.7 million for the year ended December 31, 1995. The
primary contributing factors were increased gains on the sale of loans and
higher transaction account service fees. The $668,000 gain on sale of loans
during the current year exceeded the $214,000 for the prior year due mostly to
the implementation of Statement of Financial Accounting Standards ("SFAS") No.
122, Accounting for Mortgage Servicing Rights, as of January 1, 1996. Deposit
service fees improved to $1.1 million for the year ended December 31, 1996,
compared to $668,000 for the prior year due to continued growth in transaction
accounts and service fees collected thereon during 1996.
21
<PAGE> 16
Non-Interest Expense
Total non-interest expense for the year ended December 31, 1996 was $21.0
million, compared to $16.0 million for 1995. The increase of $5.0 million, or
31.3%, was primarily attributable to the SAIF special assessment of $2.7
million, increased compensation and benefits expenses, occupancy and equipment
expenses and other expenses. Compensation and benefits expense for the year
ended December 31, 1996 amounted to $9.8 million, compared to $8.4 million for
the prior year. The primary reason for the increase is the SIP expense, which
amounted to $1.1 million, (including $187,000 in market value appreciation).
Office occupancy and equipment expense increased from $2.2 million for the year
ended December 31, 1995 to $2.5 million for the year ended December 31, 1996,
due to higher costs incurred for the new data processing service and the costs
of new automation equipment placed in service during the current year. While the
Company's Federal Deposit Insurance Premiums were slightly lower this year, the
Company paid a non-recurring special assessment of $2.7 million. Other
non-interest expense increased to $3.4 million for the year ended December 31,
1996 from $2.6 million for the prior year due to increased costs of temporary
help and supplies (both due to high lending volumes), and other operating
expenses.
Income Taxes
Income tax expense was $2.1 million for the year ended December 31, 1996
(resulting in an effective tax rate of 41.5%), compared to a tax expense of
$815,000 for the year ended December 31, 1995 (resulting in an effective tax
rate of 41.8%). The increase in income tax expense is primarily attributable to
an increase in pre-tax earnings.
Impact of New Accounting Standards
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 income 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 the 1998 annual financial statements.
22
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
BostonFed Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of BostonFed
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BostonFed Bancorp,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in note 1, the Company changed its method of accounting for
mortgage servicing rights effective January 1, 1996.
Boston, Massachusetts
January 20, 1998
23
<PAGE> 18
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands Except Share Data)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
Cash and due from banks (note 1) $ 21,242 15,335
Overnight federal funds sold 3,330 2,930
Short-term investments (note 1) 118 13
--------- --------
Total cash and cash equivalents 24,690 18,278
Investment securities available for sale (amortized cost of $31,554 at 1997
and $1,085 at 1996) (note 4) 31,767 1,085
Investment securities held to maturity (fair value of $20,630 at 1997 and
$19,045 at 1996) (notes 5 and 14) 20,630 19,170
Mortgage-backed securities available for sale (amortized cost of $19,007
at 1997 and $23,915 at 1996) (notes 4, 13 and 14) 19,125 23,593
Mortgage-backed securities held to maturity (fair value of $38,903 at 1997
and $43,033 at 1996) (notes 5 and 14) 38,350 43,019
Mortgage loans held for sale 9,817 3,970
Loans, net of allowance for loan losses of $6,600 at 1997 and $4,400 at
1996 (notes 6, 7 and 14) 791,728 676,670
Accrued interest receivable (notes 8 and 13) 5,163 4,067
Stock in FHLB of Boston, at cost (note 14) 16,613 16,295
Premises and equipment, net (note 9) 6,842 4,979
Real estate held for sale or development (note 10) -- 874
Real estate owned (note 11) 195 2,668
Deferred income tax asset, net (note 15) 2,020 1,537
Prepaid expenses and other assets (notes 6 and 20) 7,740 4,362
--------- --------
Total assets $ 974,680 820,567
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts (note 12) $ 619,821 428,818
Securities sold under agreements to repurchase (note 13) 7,140 3,500
Federal Home Loan Bank advances (note 14) 256,500 296,500
Advance payments by borrowers for taxes and insurance 3,133 2,100
Accrued expenses and other liabilities 6,475 3,294
--------- --------
Total liabilities 893,069 734,212
--------- --------
Commitments and contingencies (notes 3, 4, 5, 7, 9, 16, 17, 18 and 19)
Stockholders' equity (notes 2, 3 and 16):
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 issued at 1997 and 1996 66 66
Additional paid-in capital 65,282 64,461
Retained earnings 38,645 33,131
Net unrealized gain (loss) on investments available for sale 242 (322)
Treasury stock, at cost (1,069,180 and 329,300 shares at 1997 and 1996) (18,146) (4,739)
Unallocated ESOP shares (3,174) (3,929)
Unearned 1996 Stock-Based Incentive Plan (1,304) (2,313)
--------- --------
Total stockholders' equity 81,611 86,355
--------- --------
Total liabilities and stockholders' equity $ 974,680 820,567
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 19
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except per Share Data)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans (note 6) $ 58,805 45,513 38,079
Mortgage-backed securities 4,229 4,998 2,430
Investment securities 4,736 2,001 1,652
Federal funds sold 267 166 293
-------- ------- ------
Total interest income 68,037 52,678 42,454
-------- ------- ------
Interest expense:
Deposit accounts (note 12) 19,176 15,698 15,123
Borrowed funds (notes 13 and 14) 17,953 13,193 8,429
-------- ------- ------
Total interest expense 37,129 28,891 23,552
-------- ------- ------
Net interest income 30,908 23,787 18,902
Provision for loan losses (note 7) 1,696 1,294 3,614
-------- ------- ------
Net interest income after provision for loan losses 29,212 22,493 15,288
-------- ------- ------
Non-interest income:
Loan processing and servicing fees (note 6) 1,241 1,330 1,318
Deposit service fees 1,710 1,140 668
Gain on sale of loans 1,114 668 214
Gain (loss) on sale of investments (note 4) (18) (11) 32
Other 759 440 440
-------- ------- ------
Total non-interest income 4,806 3,567 2,672
-------- ------- ------
Non-interest expense:
Compensation and benefits (note 16) 13,543 9,841 8,423
Occupancy and equipment 3,087 2,479 2,231
Deposit insurance premiums 293 916 947
Advertising expense 682 588 736
Data processing 968 600 615
Real estate operations (notes 10 and 11) (1,230) 561 448
SAIF special assessment (note 3) -- 2,670 --
Other 4,115 3,385 2,609
-------- ------- ------
Total non-interest expense 21,458 21,040 16,009
-------- ------- ------
Income before income taxes 12,560 5,020 1,951
Income tax expense (note 15) 5,505 2,083 815
-------- ------- ------
Net income $ 7,055 2,937 1,136
======== ======= ======
Basic earnings per share $ 1.28 .48 NM
======== ======= ======
Diluted earnings per share $ 1.24 .48 NM
======== ======= ======
Weighted average shares outstanding - basic 5,505 6,118 NM
======== ======= ======
Weighted average shares outstanding - diluted 5,690 6,128 NM
======== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 20
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Shares of Additional investments
Preferred common Common paid-in Retained Treasury available
stock stock stock capital earnings stock for sale, net
----- ----- ----- ------- -------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ -- $ -- $ -- $ -- $ 30,047 $ -- $ --
Stock issued pursuant to initial
common stock offering -- 6,590 66 63,855 -- -- --
Common stock acquired by ESOP -- -- -- -- -- -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- --
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- -- 132 -- -- --
Net income -- -- -- -- 1,136 -- --
---- ------ ---- ------- ------- ---- -----
Balance at December 31, 1995 -- 6,590 66 63,987 31,183 -- --
</TABLE>
<TABLE>
<CAPTION>
Unearned
Unallocated Stock-Based Total
ESOP Incentive stockholders'
shares Plan ("SIP") equity
------ ------------ ------
<S> <C> <C> <C>
Balance at December 31, 1994 -- -- 30,047
Stock issued pursuant to initial
common stock offering -- -- 63,921
Common stock acquired by ESOP (5,290) -- (5,290)
Reduction in unallocated ESOP
shares charged to expense 755 -- 755
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 132
Net income -- -- 1,136
------ ---- ------
Balance at December 31, 1995 (4,535) -- 90,701
</TABLE>
(Continued)
26
<PAGE> 21
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
(In Thousands, Except Share Data)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Shares of Additional investments
Preferred common Common paid-in Retained Treasury available
stock stock stock capital earnings stock for sale, net
----- ----- ----- ------- -------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock repurchased
(329,300 shares at an average
price of $14.39 per share) -- -- -- -- -- (4,739) --
Cash dividends declared and paid
(.15 per share) -- -- -- -- (989) -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- --
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- -- 474 -- -- --
Common stock acquired for SIP -- -- -- -- -- -- --
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- --
Changes in net unrealized loss in
investments available for sale,
net -- -- -- -- -- -- (322)
Net income -- -- -- -- 2,937 -- --
-- ----- -- ------ ------- ------ ----
Balance at December 31, 1996 -- 6,590 66 64,461 33,131 (4,739) (322)
</TABLE>
<TABLE>
<CAPTION>
Unearned
Unallocated Stock-Based Total
ESOP Incentive stockholders'
shares Plan ("SIP") equity
------ ------------ ------
<S> <C> <C> <C>
Common stock repurchased
(329,300 shares at an average
price of $14.39 per share) -- -- (4,739)
Cash dividends declared and paid
(.15 per share) -- -- (989)
Reduction in unallocated ESOP
shares charged to expense 606 -- 606
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 474
Common stock acquired for SIP -- (3,230) (3,230)
Earned portion of SIP shares
charged to expense -- 917 917
Changes in net unrealized loss in
investments available for sale,
net -- -- (322)
Net income -- -- 2,937
------ ------ -------
Balance at December 31, 1996 (3,929) (2,313) 86,355
</TABLE>
(Continued)
27
<PAGE> 22
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
(In Thousands, Except Share Data)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Shares of Additional investments
Preferred common Common paid-in Retained Treasury available
stock stock stock capital earnings stock for sale, net
----- ----- ----- ------- -------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock repurchased
(739,880 shares at an average
price of $18.12 per share) -- -- -- -- -- (13,407) --
Cash dividends declared and paid
(.26 per share) -- -- -- -- (1,541) -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- --
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- -- 821 -- -- --
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- --
Changes in net unrealized loss in
investments available for sale,
net -- -- -- -- -- -- 564
Net income -- -- 7,055 -- --
------ ----- ------ ------ ------- ------- ---
Balance at December 31, 1997 $ -- 6,590 $ 66 65,282 38,645 (18,146) 242
====== ===== ====== ====== ======= ======= ===
</TABLE>
<TABLE>
<CAPTION>
Unearned
Unallocated Stock-Based Total
ESOP Incentive stockholders'
shares Plan ("SIP") equity
------ ------------ ------
<S> <C> <C> <C>
Common stock repurchased
(739,880 shares at an average
price of $18.12 per share) -- -- (13,407)
Cash dividends declared and paid
(.26 per share) -- -- (1,541)
Reduction in unallocated ESOP
shares charged to expense 755 -- 755
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 821
Earned portion of SIP shares
charged to expense -- 1,009 1,009
Changes in net unrealized loss in
investments available for sale,
net -- -- 564
Net income -- -- 7,055
------ ------ -------
Balance at December 31, 1997 (3,174) (1,304) 81,611
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 23
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 7,055 2,937 1,136
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 963 1,034 1,109
Earned SIP shares 1,009 917 --
Reduction in unallocated ESOP shares 755 606 755
Appreciation in fair value of shares charged to expense for
compensation plans 821 474 132
Provision for loan losses 1,696 1,294 3,614
Recovery (provision) for valuation allowance for real estate owned (350) 335 246
Loans originated for sale (117,413) (143,064) (78,041)
Proceeds from sale of loans 112,680 148,693 69,640
Net loss (gain) on sale of investment securities 18 11 (32)
Gain on sale of real estate held for sale or development, net (854) -- (167)
Decrease (increase) in deferred income taxes (483) 575 49
Loss on sale of real estate acquired through foreclosure 189 44 --
Gain on sale of loans (1,114) (668) (214)
Increase in accrued interest receivable (240) (371) (694)
Increase (decrease) in minority interest -- -- (226)
Decrease (increase) in prepaid expenses and other assets 3,066 (1,452) (105)
Increase (decrease) in accrued expenses and other liabilities 795 787 (935)
--------- ---------- ----------
Net cash provided by (used in) operating activities 8,593 12,152 (3,733)
--------- ---------- ----------
Cash flows from investing activities:
Net cash of acquired institution 11,908 -- --
Proceeds from sales of investment securities available for sale 14,008 -- 3,096
Proceeds from sale of mortgage-backed securities available for sale 1,084 10,614 --
Proceeds from maturities of investment securities available for sale 4,000 -- --
Proceeds from maturities of investment securities held to maturity 9,100 1,745 3,279
Purchase of investment securities available for sale (13,013) (63) (4,088)
Purchase of investment securities held to maturity (5,900) (9,992) (8,710)
Purchase of mortgage-backed securities available for sale -- (10,666) (23,873)
Purchase of mortgage-backed securities held to maturity -- (13,891) --
Principal repayments on investment securities held to maturity -- 6,009 3,340
Principal repayments on mortgage-backed securities held to maturity 4,641 5,934 4,586
Principal repayments on mortgage-backed securities available for sale 3,807 -- --
Increase in portfolio loans, net (51,194) (172,557) (15,691)
Purchase of FHLB stock (249) (7,921) (743)
Purchases of premises and equipment (956) (617) (1,490)
Proceeds from sale of real estate held for sale or development 2,058 -- 200
Additional investment in real estate held for sale or development -- -- (4)
Proceeds from sale of real estate owned 3,167 2,249 596
Additional investments in real estate owned -- (359) (93)
--------- ---------- ----------
Net cash used in investing activities (17,539) (189,515) (39,595)
--------- ---------- ----------
</TABLE>
(Continued)
29
<PAGE> 24
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposits accounts $ 65,981 9,714 5,940
Proceeds from securities sold under agreement to repurchase 7,140 2,973 7,000
Repayments of securities sold under agreement to repurchase (3,500) (6,473) --
Proceeds from Federal Home Loan Bank advances 276,200 670,304 461,029
Repayments of Federal Home Loan Bank advances (316,200) (493,713) (476,151)
Increase (decrease) in advance payments by borrowers for taxes
and insurance 685 569 (204)
Net proceeds from common stock issued pursuant to initial
public offering -- -- 63,921
Cash dividends paid (1,541) (989) --
Common stock repurchased (13,407) (4,739) --
Payments to acquire common stock for ESOP -- -- (5,290)
Purchase of common stock for SIP -- (3,230) --
--------- -------- --------
Net cash provided by financing activities 15,358 174,416 56,245
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,412 (2,947) 12,917
Cash and cash equivalents at beginning of year 18,278 21,225 8,308
--------- -------- --------
Cash and cash equivalents at end of year $ 24,690 18,278 21,225
========= ======== ========
Supplemental disclosure of cash flow information:
Payments during the year for:
Interest $ 36,746 27,889 23,803
========= ======== ========
Taxes $ 4,688 1,664 1,293
========= ======== ========
Supplemental schedule of noncash investing activities:
Transfers of mortgage loans to real estate owned $ 533 3,966 1,333
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 25
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
As more fully described in note 2, Boston Federal Savings Bank ("BFS")
converted from a mutual savings bank to a capital stock savings bank on
October 24, 1995. As part of the conversion, BostonFed Bancorp, Inc.
(the "Company") was formed, acquired all of BFS's conversion stock, and
issued its common stock in a subscription offering. The Company
acquired Broadway National Bank ("BNB"), effective the close of
business February 7, 1997, which was accounted for using the purchase
method of accounting.
The Company provides a variety of loan and deposit services to its
customers through a network of ten locations. The Company's deposit
gathering is concentrated in the communities surrounding its ten
offices located in the greater Boston metropolitan area, municipalities
of Arlington, Bedford, Billerica, Boston, Burlington, Chelsea,
Lexington, Peabody, Revere and Wellesley. The Company is subject to
competition from other financial institutions including commercial
banks, other savings banks, credit unions, mortgage banking companies
and other financial service providers. The Company is subject to the
regulations of the Federal Reserve Bank ("FRB") and for the first three
years following the initial public offering is also subject to the
regulations of the Office of Thrift Supervision ("OTS"). BFS is also
subject to the regulations of, and periodic examination by, the OTS.
BNB, a national chartered commercial bank, is subject to the
regulations of, and periodic examination by the Office of the
Comptroller of the Currency ("OCC"). The Federal Deposit Insurance
Corporation ("FDIC") insures the deposits of BFS through the Saving
Association Insurance Fund ("SAIF") and insures the deposits of BNB
through the Bank Insurance Fund ("BIF").
In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as
of the dates of the balance sheets, and income and expense for the
periods. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change relate to the
valuation allowance for deferred tax assets and the determination of
the allowance for loan losses and valuation of real estate owned.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: Boston Federal Savings
Bank, Broadway National Bank and B.F. Funding Corporation ("B.F.
Funding").
Boston Federal Savings Bank includes its wholly-owned subsidiaries, Leader
Corporation and BFS Service Corporation. Broadway National Bank
includes its wholly-owned subsidiary, Aygro Corporation. B.F. Funding
is a business corporation formed at the direction of the Company under
the laws of the Commonwealth of Massachusetts on August 25, 1995. B.F.
Funding was established to lend funds to a Company sponsored employee
stock ownership plan trust for the purchase of stock at the initial
public offering. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Certain amounts previously reported have been reclassified to conform to
the current year's presentation.
(Continued)
31
<PAGE> 26
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash and Due from Banks
BFS and BNB are required to maintain cash and reserve balances with the
Federal Reserve Bank. Such reserve is calculated based upon deposit
levels and amounted to $4,912 and $1,228 at BFS and BNB, respectively,
at December 31, 1997.
Short-Term Investments
Short-term investments represent certificates of deposit with original
maturities of 90 days or less. These investments are stated at cost
which approximates market value.
Investment and Mortgage-backed Securities
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at
amortized cost; debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading and reported at fair value, with unrealized gains
and losses included in earnings; and debt and equity securities not
classified as either held-to-maturity or trading are classified as
available-for-sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component
of stockholders' equity, net of related income taxes.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income by use of the interest method
adjusted for prepayments. If a decline in fair value below the
amortized cost basis of an investment or mortgage-backed security is
judged to be other than temporary, the cost basis of the investment is
written down to fair value as a new cost basis and the amount of the
write-down is included as a charge against income. Gains and losses on
the sale of investment and mortgage-backed securities are recognized at
the time of sale on a specific identification basis.
Loans
Loans are reported at the principal amount outstanding, reduced by
unamortized discounts and net deferred loan origination fees. Loans
held for sale are carried at the lower of aggregate cost or market
value, considering loan production and sales commitments and deferred
fees. Generally, all longer term (typically mortgage loans with terms
in excess of ten years) fixed-rate residential single-family mortgage
loans are originated for sale and adjustable-rate loans are originated
both for portfolio and for sale. Occasionally, the Company generates
fixed-rate loans which are designated for portfolio at the time of
origination.
Discounts and premiums on loans are recognized as income using the
interest method over the remaining contractual term to maturity of the
loans adjusted for prepayments.
Loan origination fees are offset with related direct incremental loan
origination costs and the resulting net amount is deferred and
amortized to interest income over the contractual life of the
associated loan using the interest method. Net deferred amounts on
loans sold are included in determining the gain or loss on the sale
when the related loans are sold.
The Company sells mortgage loans for cash proceeds approximately equal to
the principal amount of loans sold, but with yields to investors which
reflect current market rates. Gain or loss is recognized at the time of
sale.
(Continued)
32
<PAGE> 27
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company adopted the provisions of SFAS No. 122, Accounting for
Mortgage Servicing Right, which amends SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, on January 1, 1996. The Statement
requires that a mortgage banking enterprise recognize as separate
assets, rights to service mortgage loans for others, regardless of how
those servicing rights are acquired. As a result of adopting SFAS No.
122, the net gain on sale of loans increased $1,095 for the year ended
December 31, 1996.
Capitalized mortgage servicing rights are recognized, based on the
allocated fair value of the rights to service mortgage loans for
others. Mortgage servicing rights are amortized to loan processing and
servicing fee income using a method which approximates the level yield
method in proportion to, and over the period of, estimated net
servicing income. Mortgage servicing rights are assessed for impairment
based on the fair value of those rights. Prepayment experience on
mortgage servicing rights is reviewed periodically and, when actual
repayments exceed estimated prepayments, the balance of the mortgage
servicing asset is adjusted by a charge to earnings. Any impairment in
the fair value of those mortgage servicing assets is recognized by a
charge to earnings through a valuation allowance. The risk
characteristics of the underlying loans used to measure impairment
include interest rate and loan origination date.
Accrual of interest on loans is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest
have become contractually past due 90 days or more. Interest received
on non-accrual loans is applied against the principal balance and all
amortization of deferred fees is discontinued. Accrual is generally not
resumed until the loan is brought current, the loan becomes well
secured and in the process of collection and, in either case, when
concern no longer exists as to the collectibility of principal or
interest.
Impaired loans are commercial real estate, multi-family, and non-accrual
mortgage and consumer and other loans, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, for which it is probable that the Company will not be able
to collect all amounts due in accordance with the contractual terms of
the loan agreement. Impaired loans, except those loans that are
accounted for at fair value or at lower of cost or fair value, are
accounted for at the present value of the expected future cash flows
discounted at the loan's effective interest rate or as a practical
expedient in the case of collateralized loans, the lower of the fair
value of the collateral or the recorded amount of the loan. Management
considers the payment status, net worth and earnings potential of the
borrower, and the value and cash flow of the collateral as factors to
determine if a loan will be paid in accordance with its contractual
terms. Management does not set any minimum delay of payments as a
factor in reviewing for impaired classification. Impaired loans are
charged off when management believes that the collectibility of the
loan's principal is remote. Classification of a loan as in-substance
foreclosure is made only when a lender is in substantive possession of
the collateral.
Allowance for Loan Losses
The Company maintains an allowance for probable losses that are inherent
in the Company's loan portfolio. The allowance for loan losses is
established through a provision for loan losses charged to operations.
Loan losses are charged against the allowance when management
determines that the collectibility of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the
allowance.
(Continued)
33
<PAGE> 28
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Management believes the allowance is adequate to absorb probable loan
losses. Factors considered in evaluating the adequacy of the allowance
include trends in loan delinquencies and charge-offs, current economic
conditions and their effect on borrowers' ability to pay, underwriting
standards by loan type, mix and balance of the portfolio, and the
performance of individual loans in relation to contract terms. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to
them at the time of their examination.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio is affected by
changes in market conditions.
Goodwill
Goodwill is amortized on a straight-line basis over fifteen years.
Goodwill is reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the asset.
Premises and Equipment
Premises and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets (3 to 40
years). Amortization of leasehold improvements is provided over the
life of the related leases by use of the straight-line method. Rental
income on leased facilities is included as a reduction of occupancy and
equipment expense.
Real Estate Held for Sale or Development
Real estate held for sale or development is carried at the lower of cost
or estimated net realizable value. Acquisition and development costs,
including interest, are capitalized. The Company's investments in real
estate are usually made on a joint venture basis. For each project the
Company maintains a controlling interest. Factors similar to those
considered in the evaluation of the allowance for loan losses,
including regulatory agency requirements, are considered in the
evaluation of the net realizable value of real estate held for sale or
development. As of December 31, 1997 the Company had no real estate
held for sale or development.
Real Estate Owned
Real estate owned is acquired through foreclosure or by accepting a deed
in lieu of foreclosure. Real estate owned is recorded at the lower of
the carrying value of the loan or the fair value, less disposal costs,
of the property constructively or actually received, thereby
establishing a new cost basis. Subsequent write-downs are recorded if
the cost basis exceeds current net fair value. Related operating costs,
net of rental income, are reflected in operations when incurred.
Factors similar to those considered in the evaluation of the allowance
for loan losses, including regulatory agency requirements, are
considered in the evaluation of the net fair value of real estate
owned.
(Continued)
34
<PAGE> 29
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis
and the tax basis of BFS's assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be realized or settled. BFS's deferred tax asset is
reviewed periodically and adjustments to such asset are recognized as
deferred income tax expense or benefit based on management's judgments
relating to the realizability of such asset. A valuation allowance
related to deferred tax assets is recognized when, in management's
judgment, it is more likely than not that all, or a portion of such
deferred tax assets will not be realized.
Pension
Pension cost is recognized over the employees' approximate service period.
Employee Benefits
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). The Statement encourages companies to adopt
a new accounting method based on the estimated fair value of employee
stock options and other stock awards under which compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. The Company continues to follow APB
Opinion No. 25, Accounting for Stock Issued to Employees. See footnote
16 for the expanded disclosures required by SFAS 123 regarding pro
forma net income and earnings per share.
Earnings Per Share
For 1997, the Company adopted SFAS No. 128, "Earnings per Share". This
Statement specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS"). SFAS No. 128 simplifies
the standards for computing EPS previously found in APB Opinion No. 15
and makes them comparable to international EPS standards. The Statement
replaces the presentation of primary EPS with basis EPS, requires dual
presentation of basic and diluted EPS on the face of the statement of
income, and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The adoption of this pronouncement also
requires restatement of all prior year EPS data presented.
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during
the year adjusted for the weighted average number of unallocated shares
held by the Employee Stock Ownership Plan ("ESOP") and the 1996
Stock-Based Incentive Plan ("SIP"). Diluted earnings per share reflects
the effect to weighted average shares outstanding of the number of
additional shares outstanding if dilutive stock options were converted
into common stock using the treasury stock method.
A reconciliation of the weighted average shares outstanding for the year
ended December 31 follows (In Thousands):
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Basic shares 5,505 6,118
Dilutive impact of stock options 185 10
----- -----
Diluted shares 5,690 6,128
===== =====
</TABLE>
(Continued)
35
<PAGE> 30
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Earnings per share is not presented for the period of October 24, 1995
(the date of conversion to a stock savings bank) through December 31,
1995 as the earnings per share calculation for the sixty-nine day
period was not meaningful. Earnings per share is not presented for the
periods prior to the conversion to stock form, as BFS was a mutual
savings bank and no Company stock was outstanding.
Recent Accounting Pronouncements
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 was 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 in the years beginning
after December 31, 1997. The adoption of SFAS 125 did not have a
material impact on the consolidated financial statements. The adoption
of SFAS No. 127 is not expected to have a material impact on the
consolidated financial statements.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which is effective for the 1997 financial
statements. The Company'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 income 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 the 1998 annual financial statements.
(Continued)
36
<PAGE> 31
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) CONVERSION TO STOCK FORM OF OWNERSHIP (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
The Company is a business corporation formed at the direction of BFS under
the laws of Delaware on July 11, 1995. On October 24, 1995, (i) BFS
converted from a federally chartered mutual savings bank to a
federally chartered stock savings bank, (ii) BFS issued all of its
outstanding capital stock to the Company and (iii) the Company
consummated its initial public offering of common stock, par value
$.01 per share (the "Common Stock"), by selling 6,589,617 shares of
Common Stock at a price of $10.00 per share to BFS's Employee Stock
Ownership Plan ("ESOP") and to certain of BFS's eligible account
holders who had subscribed for such shares (collectively, the
"Conversion"). The Conversion resulted in net proceeds of $63.9
million, after expenses of $2.0 million. Net proceeds of $31 million
were invested in BFS to increase BFS's tangible capital to 10% of
BFS's total adjusted assets.
Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, BFS
established a liquidation account at the time of conversion in an
amount equal to the retained earnings of BFS as of the date of its
latest balance sheet date, June 30, 1995, contained in the final
Prospectus used in connection with the Conversion. In the unlikely
event of a complete liquidation of BFS (and only in such an event),
eligible depositors who continue to maintain accounts at BFS shall be
entitled to receive a distribution from the liquidation account. The
total amount of the liquidation account is decreased if the balances
of eligible depositors decrease on the annual determination dates. The
liquidation account approximated $11.1 million (unaudited) at December
31, 1997.
The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory
requirements.
In addition to the 17,000,000 authorized shares of common stock, the
Company authorized 1,000,000 shares of preferred stock with a par
value of $0.01 per share (the "Preferred Stock"). The Board of
Directors is authorized, subject to any limitations by law, to provide
for the issuance of the shares of preferred stock in series, to
establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences, and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. As of December 31, 1997 there
were no shares of preferred stock issued.
(3) STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
BFS and BNB are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, BFS and BNB must meet specific capital guidelines
that involve quantitative measures of BFS's and BNB's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. BFS's and BNB's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require BFS and BNB to maintain minimum amounts and ratios (set forth
in the table below) of risk-weighted, core and tangible capital (as
defined). Management represents, as of December 31, 1997, that BFS and
BNB meets all capital adequacy requirements to which it is subject.
(Continued)
37
<PAGE> 32
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of June 9, 1997, the most recent notification from the OTS categorized
BFS as "well capitalized" by regulatory definition. As of May 31,
1997, the most recent notification from the OCC categorized BNB as
"well capitalized." Under "capital adequacy" guidelines and the
regulatory framework to be categorized as "well capitalized" BFS and
BNB must maintain minimum risk-weighted capital, core capital,
leverage, and tangible ratios as set forth in the table. As of
December 31, 1997, BFS and BNB are categorized as "well capitalized"
based on their ratios of risk-weighted core and tangible capital.
These regulatory capital requirements are set forth in terms of (1)
Risk-based Total Capital (Total Capital to Risk Weighted Assets), (2)
Core Capital (Tier I Capital to Adjusted Tangible Assets), (3)
Risk-based Tier I Capital (Tier I Capital to Risk Weighted Assets),
(4) Tangible Capital (Tier I Capital to Tangible Assets), and (5)
Leverage Capital (Tier I Capital to Average Assets).
BFS's and BNB's actual capital amounts and ratios are presented in the
table.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Regulatory
Actual Purposes Definitions
------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Risk-based Total Capital:
BFS $54,731 11.9% $36,758 8.0% $45,948 10.0%
BNB 9,477 16.4 4,618 8.0 5,772 10.0
Core Capital:
BFS 48,987 5.9 24,952 3.0 41,586 5.0
Risk-based Tier I Capital:
BNB 8,799 15.2 2,309 4.0 3,463 6.0
Tangible Capital:
BFS 48,987 5.9 12,476 1.5 41,586 5.0
Leverage Capital:
BNB 8,799 7.4 4,753 4.0 5,941 5.0
As of December 31, 1996 (BFS only):
Risk-weighted capital $58,310 13.2% $35,301 8.0% $44,060 10.0%
Core capital 53,910 6.8 23,868 3.0 39,780 5.0
Tangible capital 53,910 6.8 11,934 1.5 39,780 5.0
</TABLE>
At December 31, 1997 and 1996, the consolidated capital to assets ratio
was 8.4% and 10.5%, respectively, which exceeded the minimum capital
requirements for the Company. During 1997, the Company's Board of
Directors approved a program to repurchase up to 892,876 or
approximately 15% of its outstanding common shares. The Company plans
to hold the repurchased shares as treasury stock to be used for
general company purposes. During the year ended December 31, 1997,
739,800 shares were repurchased under this program at a total cost of
$13.4 million.
BFS's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. On September 30, 1996, the President signed into
law the Deposit Insurance Funds Act of 1996 (the "Act"). Among other
provisions, the Act empowers the Board of Directors of the FDIC to
impose a special assessment on "SAIF-assessable deposits" as of March
31, 1995 of depository institutions to recapitalize the SAIF. BFS was
assessed a rate of 65.7 cents per $100 of SAIF-assessable deposits.
BFS recorded a charge to SAIF special assessment expense of $2.7
million on September 30, 1996.
(Continued)
38
<PAGE> 33
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE (DOLLARS IN
THOUSANDS)
The amortized cost and fair values of investment and mortgage-backed
securities available for sale are shown below by contractual maturity:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
Cash management funds $ 1,150 -- -- 1,150
U.S. Government, federal agency
and other obligations:
Maturing within 1 year 7,987 14 (7) 7,994
Maturing after 1 year but
within 5 years 22,417 206 -- 22,623
------- --- --- ------
Total investment securities $31,554 220 (7) 31,767
======= === === ======
Mortgage-backed securities:
Maturing after 5 years but
within 10 years $ 8,454 -- (10) 8,444
Maturing after 10 years 10,553 151 (23) 10,681
------- --- --- ------
Total mortgage-backed
securities $19,007 151 (33) 19,125
======= === === ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
Cash management fund $ 1,085 -- -- 1,085
======= === ==== ======
Mortgage-backed securities:
Maturing after 5 years but
within 10 years $10,036 -- (153) 9,883
Maturing after 10 years 13,879 -- (169) 13,710
------- --- ---- ------
Total mortgage-backed
securities $23,915 -- (322) 23,593
======= === ==== ======
</TABLE>
Maturities of mortgage-backed securities are shown at final contractual maturity
but are expected to have shorter lives because borrowers have the right to
prepay obligations without prepayment penalties.
(Continued)
39
<PAGE> 34
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
U.S. agency notes with an amortized cost of $2,000 and a fair value of
$1,996 at December 31, 1997 were pledged to provide collateral for
customer and the Company's employee tax withholdings that are to be
remitted to the federal government in excess of the $100 of
withholdings insured by the FDIC.
At December 31, 1997, mortgage-backed securities with book value of
$7,414 and fair value of $7,534 were pledged as collateral for
securities sold under agreement to repurchase.
Included in U.S. government, federal agency and other obligations are
investments with callable features that can be called prior to final
maturity with an amortized cost of $2,973 and fair value of $2,994 at
December 31, 1997.
The composition by issuer of mortgage-backed securities available for sale
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996
-------------------- ---------------------
Amortized Fair Amortized Fair
cost value cost value
<S> <C> <C> <C> <C>
FHLMC $ 8,454 8,444 10,036 9,883
GNMA 10,553 10,681 13,879 13,710
------- ------ ------ ------
$19,007 19,125 23,915 23,593
======= ====== ====== ======
</TABLE>
Proceeds from the sale of investment securities and mortgage-backed
securities available for sale amounted to $15,092, $10,614 and $3,096
in 1997, 1996 and 1995, respectively. Realized losses on investment
securities and mortgage-backed securities available for sale were $18,
$11 and $5 in 1997, 1996 and 1995, respectively. Realized gains
amounted to $37 in 1995.
(Continued)
40
<PAGE> 35
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY (DOLLARS IN
THOUSANDS)
The amortized cost and fair values of investment and mortgage-backed
securities held to maturity are shown below by contractual maturity:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
U.S. government, federal
agency and other obligations:
Maturing within one year $ 5,939 7 (19) 5,927
Maturing after 1 year but
within 5 years 13,691 49 (44) 13,696
Maturing after 5 years but
within 10 years 1,000 7 -- 1,007
------- ---- ---- ------
Total investment securities $20,630 63 (63) 20,630
======= ==== ==== ======
Mortgage-backed securities:
Maturing after 1 year but
within 5 years $ 2,050 14 (1) 2,063
Maturing after 5 years but
within 10 years 3,126 132 -- 3,258
Maturing after 10 years 33,174 410 (2) 33,582
------- ---- ---- ------
Total mortgage-backed securities $38,350 556 (3) 38,903
======= ==== ==== ======
<CAPTION>
December 31, 1996
----------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
Investment securities:
U.S. government, federal
agency and other obligations:
Maturing within one year $ 2,004 -- (3) 2,001
Maturing after 1 year but
within 5 years 15,916 43 (167) 15,792
Maturing after 5 years but
within 10 years 1,000 2 -- 1,002
------- ---- ---- ------
18,920 45 (170) 18,795
------- ---- ---- ------
Certificates of deposit:
Maturing within 1 year 250 -- -- 250
------- ---- ---- ------
Total investment securities $19,170 45 (170) 19,045
======= ==== ==== ======
Mortgage-backed securities:
Maturing after1 year but
within 5 years $ 51 -- (2) 49
Maturing after 5 years but
within 10 years 5,485 86 (51) 5,520
Maturing after 10 years 37,483 113 (132) 37,464
------- ---- ---- ------
Total mortgage-backed securities $43,019 199 (185) 43,033
======= ==== ==== ======
</TABLE>
(Continued)
41
<PAGE> 36
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities of mortgage-backed securities are shown at final contractual
maturity but are expected to have shorter lives because borrowers have
the right to prepay obligations without prepayment penalties.
A U.S. agency note with amortized cost of $500 and fair value of $496 at
December 31, 1997 was pledged to secure certain of BFS's recourse
liabilities relating to loans sold as described in note 6.
Investment securities with an amortized cost of $1,500 and a fair value
of $1,494 at December 31, 1997 were pledged to provide collateral for
customer and BFS's employee tax withholdings that are to be remitted
to the federal government in excess of the $100 of withholdings
insured by the FDIC.
Included in U.S. government, federal agency and other obligations are
investments with callable features that can be called prior to final
maturity with an amortized cost of $15,084 and a fair value of $15,105
at December 31, 1997.
The composition by issuer of mortgage-backed securities held to maturity
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996
------------------- ------------------
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
FHLMC $ 1,100 1,108 1,356 1,330
FNMA 894 902 1,147 1,129
GNMA 22,425 22,858 26,611 26,696
Privately issued collateralized mortgage obligation 13,931 14,035 13,905 13,878
------- ------ ------ ------
$38,350 38,903 43,019 43,033
======= ====== ====== ======
</TABLE>
(6) LOANS (DOLLARS IN THOUSANDS)
The Company's lending activities are conducted principally in eastern
Massachusetts. The Company grants single-family and multifamily
residential loans, commercial real estate loans, commercial loans and a
variety of consumer loans. In addition, the Company grants loans for
the construction of residential homes, multifamily properties,
commercial real estate properties and for land development.
Approximately 99% of the loans granted by the Company are secured by
real estate collateral. The ability and willingness of the
single-family residential and consumer borrowers to honor their
repayment commitments is generally dependent, among other things, on
the level of overall economic activity within the borrowers' geographic
areas and real estate values. The ability and willingness of commercial
real estate, commercial and construction loan borrowers to honor their
repayment commitments is generally affected by the health of the real
estate economic sector in the borrowers' geographic areas and the
general economy.
(Continued)
42
<PAGE> 37
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's loan portfolio was comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage loans:
Residential 1-4 family $692,285 603,822
Multi-family 18,874 21,381
Construction and land 20,497 12,532
Commercial real estate 36,400 28,136
-------- -------
768,056 665,871
-------- -------
Consumer and other loans:
Home equity and improvement 28,119 17,417
Secured by deposits 2,710 979
Consumer 6,526 1,730
Business 110 724
-------- -------
37,465 20,850
-------- -------
Total loans 805,521 686,721
Less:
Allowance for loan losses (note 7) (6,600) (4,400)
Construction loans in process (8,527) (6,936)
Net unearned discount on loans
purchased (114) (163)
Deferred loan origination costs 1,448 1,448
-------- -------
Loans, net $791,728 676,670
======== =======
</TABLE>
The Company services mortgage loans for investors which are not included
in the accompanying consolidated balance sheets totaling approximately
$549,422 and $540,356 at December 31, 1997 and 1996, respectively. Of
these loans serviced for others, $827 and $1,010 at December 31, 1997
and 1996, respectively, had been sold with recourse by the Company. In
addition, at December 31, 1997 and 1996, respectively, the Company had
retained the secondary layer of recourse risk on $7,736 and $9,861 of
serviced loans, with such risk limited to $223 and $267 after the first
layer (25% of each such loss, not to exceed $2,200) is exhausted. The
losses incurred on loans subject to recourse amounted to $44 and $53
for the years ended December 31, 1997 and 1995, respectively. There
were no such losses on loans subject to recourse in 1996.
Proceeds from the sales of loans were $112,680 for 1997, $148,693 for 1996
and $69,640 for 1995. Gains recognized on the sales of loans amounted
to $1,114 in 1997, $668 in 1996, and $214 in 1995.
(Continued)
43
<PAGE> 38
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the activity of the mortgage servicing rights, which is
included as a component of other assets, for the year ended
December 31 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year $ 988 --
Capitalized mortgage servicing rights 836 1,005
Amortization (290) (107)
------ -----
Balance, end of year $1,534 988
====== =====
</TABLE>
The Company has determined that the fair value of mortgage servicing
rights at December 31, 1997 approximates their carrying amount.
Therefore, a valuation allowance for the mortgage servicing rights was
not established.
The regulations established by FIRREA implemented a "loan to one borrower
limit" equal to 15% of capital and general valuation reserves. The
regulatory limits for BFS and BNB are $8,300 and $1,900, respectively.
The Company did not have any borrower relationships which exceeded the
limit as of December 31, 1997 and 1996.
In the ordinary course of business, the Company makes loans to its
directors and officers and their related interests at substantially the
same terms prevailing at the time of origination for comparable
transactions with borrowers. The following is a summary of related
party loan activity:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year $ 846 951
Originations 22 --
Broadway at acquisition 280 --
Payments (106) (86)
Other changes 10 (19)
------ ---
Balance, end of year $1,052 846
====== ===
</TABLE>
At December 31, 1997 and 1996, total impaired loans were $2,091 and
$4,392, respectively. In the opinion of management, no impaired loans
required a specific valuation allowance at December 31, 1997 and 1996.
All impaired loans have been measured using the fair value of the
collateral method. The average recorded value of impaired loans was
$3,829 during 1997 and $5,450 during 1996. The Company follows the same
policy for recognition of income on impaired loans as it does for all
other loans.
(Continued)
44
<PAGE> 39
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information regarding the reduction of
interest income on impaired loans at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original terms $286 497 943
Income recognized 139 321 563
---- --- ---
Foregone interest income during year $147 176 380
==== === ===
</TABLE>
All of the Company's non-accrual loans are considered to be impaired
loans. Non-accrual loans at December 31, 1997 and 1996 were $1,405 and
$1,502, respectively.
At December 31, 1997 and 1996, there were no commitments to lend
additional funds to those borrowers whose loans were classified as
impaired.
(7) ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)
The following is a summary of the activity in the allowance for loan
losses for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $4,400 4,275 3,700
BNB allowance for loan losses at acquisition date 620 -- --
Provision charged to income 1,696 1,294 3,614
Recoveries 399 343 485
Charge-offs (515) (1,512) (3,524)
------ ------ ------
Balance, end of year $6,600 4,400 4,275
====== ====== ======
</TABLE>
(8) ACCRUED INTEREST RECEIVABLE (IN THOUSANDS)
Accrued interest receivable as of December 31 is presented in the
following table:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Investment and mortgage-backed securities $ 871 13
Loans 4,292 4,054
------ -----
$5,163 4,067
====== =====
</TABLE>
(Continued)
45
<PAGE> 40
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) PREMISES AND EQUIPMENT (IN THOUSANDS)
A summary of the cost, accumulated depreciation and amortization of land,
buildings and equipment is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 2,083 519
Buildings 4,036 3,114
Furniture, fixtures and equipment 6,188 4,841
Leasehold improvements 1,291 1,296
------- ------
13,598 9,770
Less accumulated depreciation and amortization (6,756) (4,791)
------- ------
$ 6,842 4,979
======= ======
</TABLE>
The Company presently leases office space at three locations and is
committed to minimum annual rentals plus lease escalations. Such leases
expire at various dates with options to renew. Minimum future rentals
are as follows at December 31:
<TABLE>
<CAPTION>
Year ended:
<S> <C>
1998 $ 969
1999 240
2000 240
2001 240
Beyond 2001 400
------
$2,089
======
</TABLE>
Rent expense was $1,178 in 1997, $1,095 in 1996 and $1,059 in 1995.
The Company is exploring various alternatives with respect to the two
locations which include lease renewal options and options to purchase
upon lease expiration in 1998.
The Company leases, as lessor, office space at two of its branch
locations. The leases expire at various dates with options to renew.
Minimum future rental income is as follows at December 31:
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
1998 $157
1999 144
2000 106
2001 52
----
$459
====
</TABLE>
(Continued)
46
<PAGE> 41
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) REAL ESTATE HELD FOR SALE OR DEVELOPMENT (IN THOUSANDS)
The Company's investment in real estate held for sale or development
consists of the following:
<TABLE>
<CAPTION>
Type of Property 1997 1996
---------------- ---- ----
<S> <C> <C>
Land $ -- 2,459
Write-downs to net realizable value -- (1,585)
---- ------
Net investment in real estate $ -- 874
==== ======
</TABLE>
Net gains on sales of the Company's joint venture interests amounted to
$854 and $167 for the years ended December 31, 1997 and 1995,
respectively. There were no sales in the Company's joint venture
interests for the year ended December 31, 1996. Operating expenses on
real estate held for sale or development were $51 in 1996 and $309 in
1995.
(11) REAL ESTATE OWNED (IN THOUSANDS)
The table below presents the composition of real estate owned by property
type at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Single-family homes and condominiums $195 84
Multi-family and apartment buildings -- 887
Land subdivisions 86 86
Commercial property -- 2,047
---- -----
281 3,104
Valuation allowance to net fair value (86) (436)
---- -----
$195 2,668
==== =====
</TABLE>
The following is a summary of the activity in the valuation allowance for
real estate owned:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 436 243 168
(Recovery) provision charged to income (350) 335 246
Charge-offs -- (142) (171)
----- ---- ----
Balance, end of period $ 86 436 243
===== ==== ====
</TABLE>
The table below summarizes the operating results of real estate owned:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income from holding real estate $ 9 163 3
Expenses of holding real estate (172) (294) (63)
Gains (losses) from disposition of properties 189 (44) --
Recovery (provision) to the valuation allowance 350 (335) (246)
----- ---- -----
Net gain (loss) $ 376 (510) (306)
===== ==== =====
</TABLE>
(Continued)
47
<PAGE> 42
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS)
A summary of deposit balances by type is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
NOW $106,637 1.13% $ 78,517 1.21%
Regular and statement savings 116,858 2.50 88,100 2.49
Money market 61,546 2.92 45,788 3.01
Demand deposits and official checks 51,151 -- 16,289 --
-------- -------
Total noncertificate accounts 336,192 1.76 228,694 1.98
-------- -------
Certificate accounts:
3 to 6 months 33,471 5.14 29,257 5.03
1 to 3 year 196,892 5.93 115,946 5.57
Greater than 3 years 6,286 5.58 7,061 5.44
IRA/Keogh 46,980 5.85 47,860 5.77
-------- -------
Total certificate accounts 283,629 5.82 200,124 5.53
-------- -------
$619,821 3.62% $428,818 3.64%
======== ==== ======== =====
Contractual maturity of certificate accounts:
Within one year $137,520 135,026
One to two years 56,533 37,949
Two to three years 84,479 16,546
Over three years 5,097 10,603
-------- --------
$283,629 $200,124
======== ========
</TABLE>
Aggregate amount of certificate accounts of $100 or more were $18,960 and
$15,256 at December 31, 1997 and 1996, respectively. Deposit amounts in
excess of $100 are not federally insured.
Interest expense on deposits consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NOW $ 1,071 890 931
Regular and statement savings 2,826 2,219 2,485
Money market 1,822 1,395 1,472
Certificate accounts 13,457 11,194 10,235
------- ------ ------
$19,176 15,698 15,123
======= ====== ======
</TABLE>
The Company has $75,000 of brokered deposits with a weighted average
rate of 5.98% at December 31, 1997. Brokered deposits of $10,000 and
$65,000 mature in 1999 and 2000, respectively. There were no brokered
deposits outstanding at December 31, 1996.
(Continued)
48
<PAGE> 43
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Securities sold under agreements to
repurchase, due on demand $7,140 5.98% $3,500 5.45%
====== ==== ====== ====
</TABLE>
Securities sold under agreements to repurchase are collateralized by
mortgage-backed securities with a book value of $7,414 and a fair
value of $7,534 at December 31, 1997. Securities sold under agreement
to repurchase averaged $7,261 during 1997, and $7,496 during 1996.
Maximum amounts outstanding at any month end were $21,861 during 1997
and $10,016 during 1996. The average cost of repurchase agreements
was 5.62% in 1997 and 5.86% in 1996. The $7,140 represents three
commitments all scheduled to mature in February, 1998. The securities
collateralizing the agreements are not under the Company's control.
Interest expense was $671 in 1997 and $439 in 1996.
(14) FEDERAL HOME LOAN BANK ("FHLB") OF BOSTON ADVANCES
(DOLLARS IN THOUSANDS)
FHLB of Boston advances by year of maturity at December 31 were:
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
1997 $ -- 165,000 5.81
1998 118,000 5.76 58,000 5.79
1999 56,000 6.05 56,000 6.05
2000 58,500 6.25 13,500 6.26
2001 13,000 6.14 3,000 6.43
2002 11,000 5.79 1,000 6.55
-------- --------
Total $256,500 5.96% $296,500 5.88%
======== ==== ======== ====
</TABLE>
The advances are secured by FHLB of Boston stock and a blanket lien on
certain qualified collateral, defined principally as 90% of the
market value of U.S. Government and federal agency obligations and
75% of the carrying value of first mortgage loans on owner-occupied
residential property. Applying these ratios, and other ratios on
other qualifying collateral, the Company's overall borrowing capacity
was approximately $438,187 and $430,095 at December 31, 1997 and
1996, respectively.
As a member of the FHLB of Boston, the Company is required to maintain a
minimum investment in the capital stock of the Federal Home Loan Bank
of Boston, at cost, in an amount not less than 1% of its outstanding
home loans or 1/20 of its outstanding notes payable to the Federal
Home Loan Bank of Boston, whichever is greater, as calculated at
December 31 of each year. The investment exceeds the required level
by $3,788 and $1,470 at December 31, 1997 and 1996, respectively. Any
excess may be redeemed by the Company or called by FHLB of Boston at
par.
(Continued)
49
<PAGE> 44
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest expense on FHLB advances was $17,226 in 1997, $12,682 in 1996
and $8,401 in 1995.
(15) INCOME TAXES (DOLLARS IN THOUSANDS)
An analysis of the current and deferred federal and state income tax
expense (benefit) follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Federal income tax $4,581 1,142 607
State income tax 1,407 366 159
------ ----- ----
Total current expense 5,988 1,508 766
------ ----- ----
Deferred income tax expense (benefit):
Federal deferred income tax (371) 442 82
State income tax (29) 127 72
Change in valuation allowance (83) 6 (105)
------ ----- ----
Total deferred expense (benefit) (483) 575 49
------ ----- ----
Total income tax expense $5,505 2,083 815
====== ===== ====
</TABLE>
The temporary differences (the difference between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases) that give rise to significant portions of the
deferred tax asset and liability are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $2,747 1,796
Deferred compensation 766 91
Real estate owned 157 687
State net operating loss carryforwards 86 135
Premises and equipment 80 87
Unrealized loss on securities available for sale -- 110
Other 127 52
------ -----
Gross deferred assets 3,963 2,958
Valuation allowance (210) (403)
------ -----
Net deferred tax assets before deferred tax liabilities 3,753 2,555
------ -----
Deferred liabilities:
Premium on loans sold 696 438
Deferred loan fees 580 576
Unrealized gain on securities available for sale 89 --
Premises and equipment 368 --
Other -- 4
------ -----
Gross deferred liabilities 1,733 1,018
------ -----
Net deferred tax asset $2,020 1,537
====== =====
</TABLE>
(Continued)
50
<PAGE> 45
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The valuation allowance of $210 at December 31, 1997 is attributable to
state net operating loss carryforwards. Management believes that
existing net deductible temporary differences which give rise to the
net deferred tax asset will reverse during periods in which the
Company generates net taxable income. For the year ending December
31, 1997, the Company generated approximately $14,600 of taxable
income. Factors beyond management's control, such as the general
state of the economy and real estate values, can affect future levels
of taxable income and no assurance can be given that sufficient
taxable income will be generated to fully absorb gross deductible
temporary differences. Management believes it is more likely than not
that the net deferred tax asset will be realized.
Of the change in the valuation allowance of $193, approximately $110 was
attributable to the unrealized losses on securities available for
sale and consequently is not recorded in the statement of income.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the
base year reserve of approximately $13.3 million, on which no
deferred taxes have been provided, remains subject to recapture in
the event that the Bank pays dividends in excess of its earnings and
profits or redeems its stock.
A reconciliation between the amount of total tax expense and expected
tax expense, computed by applying the federal statutory rate to
income before taxes, follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed expected expense at statutory rate $4,396 1,707 663
Items affecting federal income tax rate:
State income tax, net of federal income tax
benefit and before valuation allowance 896 325 152
Change in valuation allowance (83) 6 (105)
Allocated ESOP share appreciation 212 98 45
Other 84 (53) 60
------ ----- ----
Effective income tax expense $5,505 2,083 815
====== ===== ====
Effective income tax rate 43.8% 41.5% 41.8%
====== ===== ====
</TABLE>
(16) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Employee Stock Ownership Plan
Effective January 1, 1995, the Company adopted an Employee Stock
Ownership Plan ("ESOP"). The Plan is designed to provide retirement
benefits for eligible employees of BFS. Because the Plan invests
primarily in the stock of the Company, it will also give eligible
employees an opportunity to acquire an ownership interest in the
Company. Employees are eligible to participate in the Plan after
reaching age twenty-one, completing one year of service and working
at least one thousand hours of consecutive service during the
previous year. Contributions are allocated to eligible participants
on the basis of compensation.
(Continued)
51
<PAGE> 46
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During October 1995, the Company issued a total of 529,000 shares to the
ESOP at a total purchase price of $5,290. The purchase was made from
the proceeds of a $5,290 loan from B.F. Funding Corporation, a
wholly-owned subsidiary of the Company, bearing interest at the prime
rate. Repayment of the loan is secured by contributions BFS is
obliged to make under a contribution agreement with the ESOP. BFS
made contributions to the ESOP totaling $755 in 1997 and $606 in 1996
to enable the ESOP to make principal payments on the loan. The amount
contributed was charged to compensation and benefits expense. The
Company recognized $604 in 1997 and $287 in 1996 in compensation and
benefit expense and an increase in additional paid-in capital related
to the appreciation in the fair value of allocated ESOP shares. The
balance of the loan will be repaid over a period of approximately
five years, principally with funds from BFS's future contributions to
ESOP, subject to IRS limitations.
Shares used as collateral to secure the loan are released and available
for allocation to eligible employees as the principal balance of the
loan is repaid. Employees vest in their ESOP account at a rate of
33-1/3% annually commencing after the completion of one year of
credited service or immediately if service was terminated due to
death, retirement, disability, or change in control. Dividends on
released shares are credited to the participants' ESOP accounts.
At December 31, 1997 and 1996, shares held in suspense to be released
annually as the loan is paid down amounted to 317,379 and 392,929,
respectively. The fair value of unallocated ESOP shares was $6,944
and $5,796 at December 31, 1997 and 1996, respectively. Dividends on
ESOP shares are charged to retained earnings and ESOP shares
committed-to-be released are considered outstanding in determining
earnings per share.
1996 Stock-Based Incentive Plan
On April 30, 1996, the Company's stockholders approved the 1996
Stock-Based Incentive Plan ("SIP"). The objective of the SIP is to
enable the Company to provide officers and directors with a
proprietary interest in the Company as an incentive to encourage such
persons to remain with the Company. The SIP acquired 263,584 shares
in the open market at an average price of $12.255 per share. This
acquisition represents deferred compensation which is initially
recorded as a reduction in stockholders' equity and charged to
compensation expense over the vesting period of each annual stock
award.
Awards are granted in the form of common stock held by the SIP. A total
of 242,500 shares were awarded on April 30, 1996 and 8,584 shares
were awarded on October 15, 1996. During 1997, 50,217 shares were
distributed. Awards outstanding vest in five annual installments
generally commencing one year from the date of the award. As of
December 31, 1997, 12,500 shares remain unallocated under the SIP.
Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service
period for the portion of each award that vests equally over a
five-year period. The Company recognized $1,226 and $1,104 related to
the earned shares in compensation and benefit expense in 1997 and
1996, respectively.
A recipient will be entitled to all voting and other stockholder
rights. The unallocated SIP shares, with the exception of the
unawarded SIP shares, are considered outstanding in the calculation
of earnings per share.
(Continued)
52
<PAGE> 47
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Option Plan
The Company adopted a stock option plan in 1996 ("1996 Plan") for
officers, key employees and directors. Pursuant to the terms of the
1996 plan, the number of common shares reserved for issuance is
658,961 of which 43,100 options remain unawarded. All options have
been issued at not less than fair market value at the date of the
grant and expire in 10 years from the date of the grant. All stock
options granted vest over a five year period from the date of grant.
During 1997, the Company adopted the 1997 stock option plan ("1997
Plan"). Pursuant to the terms of the 1997 plan, 250,000 common shares
are reserved for issuance of which 120,000 options have been granted.
During 1997, the Company granted employees options to purchase 135,461
shares of common stock at between $18.82 and $19.75 per share.
A summary of option activity follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -----------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Balance, beginning of year 604,500 $12.51 -- $ --
Granted 135,461 18.89 604,500 12.51
Forfeited (6,600) 18.82 -- --
------- ------ ------- ------
Balance, end of year 733,361 $13.63 604,500 $12.51
======= ====== ======= ======
Options exercisable 120,900 $12.51 -- --
======= ====== ======= ======
</TABLE>
A summary of options outstanding and exercisable by price range as of
December 31, follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
as of Remaining Average as of Average
December 31, 1997 Contractual Life Exercise Price December 31, 1997 Exercise Price
----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
570,000 8.3 $12.44 114,000 $12.44
25,400 8.8 13.44 5,400 13.44
7,500 8.9 14.82 1,500 14.82
120,461 9.5 18.82 -- --
10,000 9.9 19.75 -- --
------- -------
733,361 8.5 $13.63 120,900 $12.51
======= === ====== ======= ======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation expense has been recognized in the
financial statements. Had the Company determined compensation expense
based on the fair value at the grant date for its stock options under
SFAS 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
(Continued)
53
<PAGE> 48
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income as reported $7,055 2,937
Pro forma net income 6,383 2,533
Basic earnings per share as reported 1.28 .48
Diluted earnings per share as reported 1.24 .48
Pro forma basic earnings per share 1.16 .41
Pro forma diluted earnings per share 1.12 .41
</TABLE>
The per share weighted average fair value of stock options granted
during 1997 was $5.21 determined using the Flexible Binomial option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected dividend yield 1.54% 1.63%
Risk-free interest rate 5.99% 6.47%
Expected volatility 29.12% 32.75%
Expected life (years) 4.0 7.8
</TABLE>
Pension Plan
All eligible officers and employees are included in a noncontributory
defined benefit pension plan provided by BFS as a participating
employer with Pentegra, formerly known as the Financial Institutions
Retirement Fund. Salaried employees are eligible to participate in
the plan after reaching age twenty-one and completing one year of
service. Pentegra does not segregate the assets or liabilities by
participating employer and, accordingly, disclosure of accumulated
vested and nonvested benefits and net assets available for benefits
required by SFAS No. 87 is not possible. Contributions are based on
individual employer experience. According to Pentegra's
Administrators, as of June 30, 1997, the date of the latest actuarial
valuation, the market value of Pentegra's net assets exceeded the
actuarial present value of vested benefits in the aggregate. There
was no pension expense recorded for 1997, 1996 and 1995, except for
an administration fee of approximately $5 per year.
Deferred Thrift Incentive Plan
BFS and BNB have employee tax deferred thrift incentive plans (the "401K
plans") under which employee contributions to the plans are matched
pursuant to the provisions of the respective plans. All employees who
meet specified age and length of service requirements are eligible to
participate in the 401K plans. The amounts matched by BFS and BNB are
included in compensation and employee benefits expense. The amounts
matched were $119 for 1997 and $88 for 1996.
Short Term Incentive Plan
The Company established a short-term incentive plan during 1997.
Generally, all BFS employees are eligible to participate in the
incentive plan, and awards are granted based on the achievement of
certain performance measures. Compensation expense related to this
award amounted to $450,000 during 1997.
(Continued)
54
<PAGE> 49
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Executive Officer Employment Agreements
The Company and BFS entered into employment agreements with its President
and Chief Executive Officer, Executive Vice President, and Chief
Financial Officer. The employment agreements generally provide for
the continued payment of specified compensation and benefits for
three years and provide payments for the remaining term of the
agreement after the officers are terminated, unless the termination
is for "cause" as defined in the employment agreements. The
agreements also provide for payments to the officer upon voluntary or
involuntary termination of the officer following a change in control,
as defined in the agreements. In addition, BFS and BNB entered into
change in control agreements with certain other executives which
provide for the payment, under certain circumstances, to the officer
upon the officer's termination after a change of control, as defined
in their change of control agreements.
Employee Severance Compensation Plan
The Company established an Employee Severance Compensation Plan. The Plan
provides eligible employees with severance pay benefits in the event
of a change in control of BFS or Company. Generally, employees are
eligible to participate in the Plan if they have completed at least
one year of service with the Company and are not eligible to receive
benefits under the executive officer employment agreements. The Plan
provides for the payment, under certain circumstances, of lump-sum
amounts upon termination following a change of control, as defined in
the Plan.
The Company does not provide any postretirement benefits other than
pensions.
(17) LITIGATION
Various legal proceedings are pending against the Company which have
arisen in the normal course of business. In the opinion of
management, the ultimate disposition of these matters is not expected
to have a material adverse effect on the consolidated financial
position, the annual results of operations, or liquidity of the
Company.
(18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (IN THOUSANDS)
In the normal course of business, the Company is party to financial
instruments with off-balance-sheet risk, including commitments to
originate or purchase loans, unadvanced amounts of construction
loans, unused credit lines, standby letters of credit and forward
commitments to sell loans and recourse agreements on assets sold.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Company has
in these particular classes of financial instruments. The Company's
exposure to credit loss in the event of nonperformance by the other
party with respect to loan commitments, unused credit lines and
standby letters of credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments. For forward commitments, the contract
or notional amounts exceed the Company's exposure to credit loss.
(Continued)
55
<PAGE> 50
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Commitments to originate loans and unused credit lines are agreements to
lend to a customer, provided the customer meets all conditions
established in the contract. Commitments have fixed expiration dates
and may require payment of a fee. The total commitment amounts do not
necessarily represent total future cash requirements since many
commitments are not expected to be drawn upon. The amount of
collateral obtained, if necessary for the extension of credit, is
based on the credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance by a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers.
Forward commitments to sell loans are contracts which the Company enters
into for the purpose of reducing the market risk associated with
originating loans for sale. In order to fulfill a forward commitment,
the Company typically exchanges through FNMA or FHLMC its current
production of loans for mortgage-backed securities which are then
delivered to a securities firm at a future date at prices or yields
specified by the contracts. Risks may arise from the possible
inability of the Company to originate loans to fulfill the contracts,
in which case the Company may purchase securities in the open market
to deliver against the contracts.
In addition to construction loans in process, the Company had the
following outstanding commitments at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to originate mortgage loans:
Fixed $16,341 7,540
Variable 20,882 23,116
Unused lines of credit:
Home equity 42,601 30,080
Commercial loans 1,185 209
Standby letters of credit 372 34
Commitments to sell loans or swap loans for
mortgage-backed securities 21,872 8,723
Loans sold with recourse (note 6) 827 1,010
</TABLE>
(19) FAIR VALUES OF FINANCIAL INSTRUMENTS (IN THOUSANDS)
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include real estate acquired by foreclosure, the deferred
income tax asset, office properties and equipment, and core deposit
and other intangibles. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in any of the estimates. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Company.
(Continued)
56
<PAGE> 51
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for some of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions and changes in the loan, debt and interest rate markets
could significantly affect the estimates.
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximate the carrying
amounts as reported in the balance sheet.
Investment and Mortgage-backed Securities
Fair values for investment securities and mortgage-backed securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
Mortgage Loans Held for Sale
Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to
sell loans have been considered in the determination of the fair
value of mortgage loans held for sale.
Loans
The fair values of loans are estimated using discounted cash flows
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The incremental
credit risk for nonperforming loans has been considered in the
determination of the fair value of loans.
Accrued Interest Receivable
The fair value of accrued interest receivable approximates the carrying
amount as reported in the balance sheet because of its short-term
nature.
Stock in FHLB of Boston
The fair value of Federal Home Loan Bank of Boston ("FHLB") stock
approximates its carrying amount as reported in the balance sheet. If
redeemed, the Company will receive an amount equal to the par value
of the stock.
Deposit Accounts and Advance Payments by Borrowers for Taxes and
Insurance
The fair values of demand deposits (e.g., NOW, regular and statement
savings and money market accounts and advance payments by borrowers
for taxes and insurance) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow technique that applies
interest rates currently being offered on certificates with similar
remaining maturities to a schedule of aggregated expected monthly
maturities on such time deposits.
(Continued)
57
<PAGE> 52
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Federal Home Loan Bank Advances
Fair values for FHLB advances are estimated using a discounted cash flow
technique that applies interest rates currently being offered on
advances to a schedule of aggregated expected monthly maturities of
FHLB advances.
Securities Sold Under Agreements to Repurchase
Fair values of securities sold under agreements to repurchase are
estimated using a discounted cash flow technique that applies
interest rates currently being offered on securities sold under
agreements to repurchase to a schedule of expected maturities of
securities sold under agreements to repurchase.
Off-balance-sheet Instruments
The Company's commitments for unused lines and outstanding standby
letters of credit and unadvanced portions of loans and loans sold
with recourse are considered in estimating the fair value of loans.
The carrying amounts and fair values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $24,690 24,690 18,278 18,278
Investment securities available for sale 31,767 31,767 1,085 1,085
Investment securities held to maturity 20,630 20,630 19,170 19,045
Mortgage-backed securities available for sale 19,125 19,125 23,593 23,593
Mortgage-backed securities held to maturity 38,350 38,903 43,019 43,033
Loans, net and mortgage loans held for sale 801,545 815,740 680,640 678,602
Accrued interest receivable 5,163 5,163 4,067 4,067
Stock in FHLB of Boston 16,613 16,613 16,295 16,295
Financial liabilities:
Deposit accounts $619,821 625,117 428,818 429,060
Securities sold under agreements to repurchase 7,140 7,534 3,500 3,487
FHLB advances 256,500 258,934 296,500 297,873
Advance payments by borrowers for taxes and insurance 3,133 3,133 2,100 2,100
</TABLE>
(Continued)
58
<PAGE> 53
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) ACQUISITION
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 327 day period
beginning February 8, 1997. In connection with the acquisition, the
fair value of assets acquired and liabilities assumed were as
follows:
<TABLE>
<CAPTION>
February 7, 1997
----------------
(in thousands)
<S> <C>
Assets acquired:
Cash and due from banks $ 5,758
Federal funds sold 28,150
Investment securities available for sale 35,352
Investment securities held to maturity 4,646
Loans, net 66,093
Accrued interest receivable 856
Stock in FRB of Boston 69
Premises and equipment 1,972
Prepaid expenses and other assets 3,267
--------
Total assets acquired 146,163
Liabilities assumed:
Deposit accounts 125,022
Advance payments by borrowers for taxes and insurance 349
Accrued expenses and other liabilities 1,969
--------
Total liabilities assumed 127,340
--------
Assets in excess of liabilities 18,823
Cash paid to BNB shareholders 22,000
--------
Goodwill $ 3,177
========
</TABLE>
Goodwill is included as a component of prepaid expenses and other
assets.
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.
<TABLE>
<CAPTION>
Year Ended
-------------------------------
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Total interest and dividend income and
total non-interest income $73,784 $65,329
Net income 7,206 4,263
Basic earnings per share 1.31 .70
Diluted earnings per share 1.27 .70
</TABLE>
(Continued)
59
<PAGE> 54
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
The following are the condensed financial statements for BostonFed
Bancorp, Inc. (the "Parent Company") only:
<TABLE>
<CAPTION>
BALANCE SHEETS
ASSETS 1997 1996
---- ----
<S> <C> <C> <C>
Cash and interest bearing deposit in subsidiary bank $ 6,812 10,854
Short-term investments 18 13
------- ------
Total cash and cash equivalents 6,830 10,867
------- ------
Mortgage-backed securities available for sale (amortized cost
of $19,007 at 1997 and $23,915 at 1996) 19,125 23,593
Investment in subsidiaries, at equity 61,518 55,143
Accrued interest receivable 104 125
Other assets 1,298 200
------- ------
Total assets $88,875 89,928
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreement to repurchase $ 7,140 3,500
Accrued expenses and other liabilities 124 73
------- ------
Total liabilities 7,264 3,573
------- ------
Total stockholders' equity 81,611 86,355
------- ------
Total liabilities and stockholders' equity $88,875 89,928
======= ======
<CAPTION>
STATEMENTS OF INCOME 1997 1996 1995
---- ---- ----
Interest income $1,684 2,164 316
Interest expense 671 439 5
------ ----- -----
Net interest income 1,013 1,725 311
Non-interest income 45 -- --
Non-interest expense 428 307 10
------ ----- -----
Income before income taxes 630 1,418 271
Income tax expense 226 536 93
------ ----- -----
Income before equity in net income of subsidiaries 404 882 178
Equity in net income of subsidiaries 6,651 2,055 958
------ ----- -----
Net income $7,055 2,937 1,136
====== ===== =====
</TABLE>
(Continued)
60
<PAGE> 55
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 7,055 2,937 1,136
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (6,651) (2,055) (908)
Amortization and accretion, net 17 (1) --
Appreciation in fair value of shares charged to
expense for compensation plans 821 474 132
Earned SIP shares 1,009 917 --
Reduction in unallocated ESOP shares 755 606 755
Loss on sale of investment securities -- 11 --
(Increase) decrease in accrued interest receivable 21 14 (139)
(Increase) in other assets (1,098) (200) --
Increase (decrease) in accrued expenses and other liabilities 175 (59) 132
-------- ------- -------
Net cash provided by operating activities 2,104 2,644 1,108
-------- ------- -------
Cash flow from investing activities:
Purchase of BNB (22,000) -- --
Proceeds from sale of mortgage-backed securities for sale 1,084 10,614 --
Principal repayments on mortgage-backed securities available
for sale 3,807 -- --
Purchase of mortgage-backed securities available for sale -- (10,666) (23,873)
Change in investment in subsidiaries 22,276 9,048 (31,181)
-------- ------- -------
Net cash used in (provided by) investing activities 5,167 8,996 (55,054)
-------- ------- -------
Cash flow from financing activities:
Proceeds from securities sold under agreement to repurchase 7,140 2,973 7,000
Repayments of securities sold under agreement to repurchase (3,500) (6,473) --
Net proceeds from common stock issued pursuant to initial
public offering -- -- 63,921
Payments to acquire common stock for ESOP -- -- 5,290
Common stock repurchases (13,407) (4,739) --
Purchase of common stock by SIP - (3,230) --
Cash dividends paid (1,541) (989) --
-------- ------- -------
Net cash provided (used) from financing activities (11,308) (12,458) 65,631
-------- ------- -------
Net increase (decrease) in cash and cash equivalents (4,037) (818) 11,685
Cash and cash equivalents at beginning of year 10,867 11,685 --
-------- ------- -------
Cash and cash equivalents at end of year $ 6,830 10,867 11,685
======== ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 662 442 --
Income taxes 268 584 --
</TABLE>
(Continued)
61
<PAGE> 56
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(22) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis for the
year ended December 31 follows:
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
------------------------------------------ -------------------------------------------
(In Thousands, Except Per Share Amounts) (In Thousands, Except Per Share Amounts)
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $17,428 $17,542 $17,070 $15,997 $14,583 $14,083 $12,627 $11,385
Interest expense 9,490 9,600 9,182 8,857 8,333 7,937 6,754 5,867
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 7,938 7,942 7,888 7,140 6,250 6,146 5,873 5,518
------- ------- ------- ------- ------- ------- ------- -------
Provision for loan losses 421 395 455 425 168 390 298 438
Non-interest income 1,327 1,303 1,181 995 914 839 856 969
SAIF special assessment -- -- -- -- -- 2,670 -- --
Non-interest expense 5,860 5,637 5,496 4,465 4,852 4,680 4,533 4,316
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 2,984 3,213 3,118 3,245 2,144 (755) 1,898 1,733
Income tax expense (benefit) 1,249 1,512 1,413 1,331 933 (334) 774 710
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,735 $ 1,701 $ 1,705 $ 1,914 $ 1,211 $ (421) $ 1,124 $ 1,023
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share $ 0.33 $ 0.30 $ 0.30 $ 0.33 $ 0.20 $ (0.07) $ 0.18 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per share $ 0.31 $ 0.30 $ 0.30 $ 0.33 $ 0.20 $ (0.07) $ 0.18 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
62
<PAGE> 57
ANNUAL MEETING
The annual meeting of stockholder will be held on Thursday, April 29, 1998,
at 2:00 p.m. The meeting will take place at the Burlington Marriott, 1 Mall
Road, at the intersection of Routes 128 & 3A, Burlington, MA.
STOCK LISTING
BostonFed Bancorp, Inc. became a public company on October 24, 1995.
BostonFed Bancorp, Inc. Common Stock is traded on the American Stock Exchange
with the symbol "BFD." The stock is listed as "Bostnfd" in the Boston Globe and
as "BstnfdBcp" in the Wall Street Journal.
COMMON STOCK INFORMATION
Initial Public Offering Price: $10.00 per share.
COMMON STOCK PRICE AND DIVIDENDS PAID (UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---------------------------------- ----------------------------------
BY QUARTER 1 2 3 4 1 2 3 4
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Price
High......................... $12 3/8 $12 5/8 $13 1/2 $15 1/4 $17 1/8 $18 $22 1/8 $22 1/2
Low.......................... 11 3/8 11 1/2 11 1/4 13 14 1/4 14 1/4 17 3/4 19 5/8
Dividend Paid..................... .05 .05 .05 .05 .07 .07 .07
</TABLE>
As of December 31, 1997, the Company had 5,520,437 shares outstanding and
approximately 650 stockholders of record, not including persons of entities
holding stock in nominee or street name through brokers or banks.
10-K REPORT
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge upon written request to
BostonFed Bancorp, Inc., Investor Relations, 17 New England Executive Park,
Burlington, MA 01803.
63
<PAGE> 58
TRANSFER AGENT
Boston EquiServe Boston EquiServe
Mail Stop: 45-02-62 Mail Stop: 45-02-62
P.O. Box 1865 150 Royall Street
Boston, MA 02105-1865 Canton, MA 02021
Shareholder Inquiries: (781) 575-3170
INDEPENDENT AUDITOR
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
REGULATORY COUNSEL LOCAL COUNSEL
Muldoon, Murphy & Faucette Goodwin, Procter, & Hoar LLP
5101 Wisconsin Avenue NW Exchange Place
Washington, DC 20016 Boston, MA 02109
OFFICES
BOSTON FEDERAL SAVINGS BANK
ARLINGTON BURLINGTON
980 Massachusetts Avenue 17 New England Executive Park
Arlington, MA 02174 Burlington, MA 01803
BEDFORD LEXINGTON
60 The Great Road 1840 Massachusetts Avenue
Bedford, MA 01730 Lexington, MA 02173
BILLERICA PEABODY
459 Boston Road 31 Cross Street
Billerica, MA 01821 Peabody, MA 01960
BOSTON WELLESLEY
75 Federal Street 200 Linden Street
Boston, MA 02110 Wellesley, MA 02181
BROADWAY NATIONAL BANK
CHELSEA REVERE
457 Broadway 411 Broadway
Chelsea, MA 02150 Revere, MA 02151
BOSTONFED BANCORP, INC.
CORPORATE HEADQUARTERS INVESTOR RELATIONS
17 New England Executive Park Amy L. Timmerman
Burlington, MA 01803 (781) 221-6396
(781) 273-0300 (800) 688-2372
64
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-23995 and 333-34521) on Form S-8 of BostonFed Bancorp, Inc. (the
"Company") of our report, dated January 20, 1998, related to the consolidated
balance sheets of the Company as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report is incorporated by reference in the Annual Report on Form 10-K of
the Company for the year ended December 31, 1997. Our report refers to a change
in the method of accounting for mortgage servicing rights.
/s/ KPMG Peat Marwick LLP
---------------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(This schedule contains summary financial information extracted from Form 10-K
and is qualified in its entirety by reference to such financial statements.)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,242
<INT-BEARING-DEPOSITS> 118
<FED-FUNDS-SOLD> 3,330
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,892
<INVESTMENTS-CARRYING> 58,980
<INVESTMENTS-MARKET> 59,533
<LOANS> 801,545
<ALLOWANCE> 6,600<F1>
<TOTAL-ASSETS> 974,680
<DEPOSITS> 619,821
<SHORT-TERM> 125,140
<LIABILITIES-OTHER> 9,608
<LONG-TERM> 138,500
0
0
<COMMON> 66
<OTHER-SE> 8,545
<TOTAL-LIABILITIES-AND-EQUITY> 974,680
<INTEREST-LOAN> 58,805
<INTEREST-INVEST> 9,232
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 68,037
<INTEREST-DEPOSIT> 19,176
<INTEREST-EXPENSE> 37,129
<INTEREST-INCOME-NET> 30,908
<LOAN-LOSSES> 1,696
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,458
<INCOME-PRETAX> 12,560
<INCOME-PRE-EXTRAORDINARY> 12,560
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,055
<EPS-PRIMARY> 0
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 3.42
<LOANS-NON> 1,405
<LOANS-PAST> 0
<LOANS-TROUBLED> 369
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,020
<CHARGE-OFFS> 515
<RECOVERIES> 399
<ALLOWANCE-CLOSE> 6,600
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,600
<FN>
F1 Allowance-open includes 620 from BNB acquisition.
</TABLE>
