FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1999
__________________________
Commission File Number 1-13936
__________________________
BOSTONFED BANCORP INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 52-1940834
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 New England Executive Park, Burlington, Massachusetts 01803
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(781) 273-0300
________________________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Number of shares of common stock, par value $.01 per share,
outstanding as of July 31, 1999: 5,025,871.
<PAGE>
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
______________________________ ____
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 2
Consolidated Statements of Operations for the Three
and Six Months ended June 30, 1999 and 1998 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended
June 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1999 and 1998 (unaudited) 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Average Balances and Yield / Costs 9 - 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18 - 19
PART II _ OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
1
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
---------------------------
(In Thousands
June 30, December 31,
1999 1998
----------- --------------
Assets (Unaudited)
- ------------
Cash and cash equivalents $ 53,255 $ 37,201
Investment securities available for sale
(amortized cost of $62,442 and $48,837 at
June 30, 1999 and December 31, 1998
respectively) 61,594 49,137
Investment securities held to maturity (fair
value of $ 2,299 and $7,371 at June 30,
1999 and December 31, 1998 2,304 7,302
Mortgage-backed securities available for sale
(amortized cost of $16,857 and $20,935 at
June 30, 1999 and December 31, 1998, 16,626 21,029
Mortgage-backed securities held to maturity (fair
value of $15,760 and $23,333 at June 30,
1999 and December 31, 1998 15,537 22,913
Mortgage loans held for sale 21,280 17,008
Loans, net of allowance for loan losses of $9,552
and $8,500 at June 30, 1999 and December 31, 1998 980,124 943,662
Accrued interest receivable 6,329 5,549
Stock in FHLB of Boston and Federal Reserve Bank 19,461 17,802
Premises and equipment 6,666 6,614
Real estate owned 0 47
Other assets 11,694 10,859
-------- --------
Total assets $1,194,870 $1,139,123
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------
Liabilities:
Deposit accounts $727,969 $707,144
Federal Home Loan Bank advances 373,500 337,500
Advance payments by borrowers for taxes
and insurance 2,854 3,405
Other liabilities 7,877 9,280
------- -------
Total liabilities 1,112,200 1,057,329
------- -------
Commitments and contingencies
Stockholders' equity;
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued -- -- -- --
Common stock, $0.01 par value, 17,000,000 shares
authorized; 6,589,617 shares issued (5,025,871 and
5,112,441 shares outstanding at June 30, 1999
and December 31, 1998, respectively 66 66
Additional paid-in capital 66,727 66,417
Retained earnings 47,171 44,256
Accumulated other comprehensive income (loss) (636) 312
Less Treasury Stock, (1,563,746 shares and
1,477,176 shares at June 30, 1999
and December 31, 1998, respectively), at cost (27,738) (26,128)
Less unallocated ESOP shares (2,418) (2,418)
Less unearned Stock-Based Incentive Plan (502) (711)
-------- --------
Total stockholders' equity 82,670 81,794
-------- --------
Total liabilities and stockholders' equity $1,194,870 $1,139,123
======== ========
See accompanying condensed notes to consolidated financial statements.
2
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars In Thousands, except per share amount)
Three Months Ended Six Months Ended
------------------ ------------------
6/30/99 6/30/98 6/30/99 6/30/98
------------------ ------------------
(Unaudited) (Unaudited)
Interest income:
Loans $ 17,951 $ 16,047 $ 35,609 $ 31,896
Mortgage-backed securities 567 856 1,183 1,797
Investment securities 1,314 1,390 2,571 2,801
------- ------- ------- -------
Total interest income 19,832 18,293 39,363 36,494
------- ------- ------- -------
Interest expense:
Deposit accounts 6,281 5,922 12,556 11,616
Borrowed funds 5,214 4,480 10,302 8,783
------- ------- ------- -------
Total interest expense 11,495 10,402 22,858 20,399
------- ------- ------- -------
Net interest income 8,337 7,891 16,505 16,095
Provision for loan losses 430 342 860 745
------- ------- ------- -------
Net interest
income after provision 7,907 7,549 15,645 15,350
Non-interest income:
Loan processing and servicing
fees 118 196 279 340
Gain on sale of loans 932 771 1,696 1,426
Deposit service fees 439 414 848 823
Other 241 205 454 401
------- ------- ------- -------
Total non-interest income 1,730 1,586 3,277 2,990
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 3,675 3,498 7,301 6,908
Occupancy and equipment 804 810 1,601 1,584
Federal deposit insurance
premiums 89 80 183 159
Other 1,727 1,705 3,253 3,422
------- ------- ------- -------
Total non-interest expense 6,295 6,093 12,338 12,073
------- ------- ------- -------
Income before income taxes 3,342 3,042 6,584 6,267
Income tax expense 1,315 1,239 2,553 2,575
------- ------- ------- -------
Net income $ 2,027 $ 1,803 $ 4,031 $ 3,692
======= ======= ======= =======
Basic earnings per share $0.42 $0.35 $0.83 $0.72
Diluted earnings
per share $0.40 $0.33 $0.80 $0.68
Basic weighted average shares
outstanding 4,809,697 5,106,663 4,831,764 5,136,368
Common stock equivalents
due to dilutive effect
of stock options 181,934 315,319 186,976 288,453
Diluted total weighted average
shares outstanding 4,991,631 5,421,982 5,018,740 5,424,821
See accompanying condensed notes to consolidated financial statements.
3
<PAGE>
<TABLE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1999
(In Thousands)
(Unaudited)
<CAPTION>
Accumulated Unearned
other Stock-
Additional Comprehensive Unallocated Based Total
Common paid-in Retained Treasury income ESOP Incentive stockholders'
stock capital earnings Stock (loss) shares Plan equity
------ -------- --------- -------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 66 66,417 44,256 (26,128) 312 (2,418) (711) 81,794
Net income - - - - 2,004 - - - - - - - - 2,004
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $235) - - - - - - - - (398) - - - - (398)
--------
Total comprehensive income - - - - - - - - - - - - - - 1,606
Cash dividends declared and
paid ($0.10 per share) - - - - (511) - - - - - - - - (511)
Common Stock repurchased
(63,570 shares at an average
price of $18.69 per share) - - - - - - (1,188) - - - - - - (1,188)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 121 121
Appreciation in fair value of
shares charged to expense for
compensation plans - - 158 - - - - - - - - - - 158
------- ------- -------- --------- --------- -------- --------- --------
Balance at March 31, 1999 $ 66 66,575 45,749 (27,316) (86) (2,418) (590) 81,980
------- ------- -------- --------- --------- -------- --------- --------
Net income - - - - 2,027 - - - - - - - - 2,027
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $382) - - - - - - - - (550) - - - - (550)
--------
Total comprehensive income - - - - - - - - - - - - - - 1,477
Cash dividends declared and
paid ($0.12 per share) - - - - (605) - - - - - - - - (605)
Common Stock repurchased
(23,000 shares at an average
price of $18.35 per share) - - - - - - (422) - - - - - - (422)
Allocation relating to earned
portion of Stock-Based
Incentive Plan - - - - - - - - - - - - 88 88
Appreciation in fair value of
shares charged to expense for
compensation plans - - 152 - - - - - - - - - - 152
------- ------- -------- --------- --------- -------- --------- --------
Balance at June 30, 1999 $ 66 66,727 47,171 (27,738) (636) (2,418) (502) 82,670
------- ------- -------- --------- --------- -------- --------- --------
</TABLE>See accompanying condensed notes to consolidated financial statements.
4
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
1999 1998
------- -------
(Unaudited)
Net cash flows from operating activities:
Net income $ 4,031 $ 3,692
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 620 670
Earned SIP shares 209 345
Appreciation in fair value of shares
charged to expense for compensation plans 310 481
Provision for loan losses 860 745
Loans originated for sale (179,686) (182,855)
Proceeds from sale of loans 177,110 164,781
Gain on sale of real estate
acquired through foreclosure - (32)
Gain on sale of loans (1,696) (1,426)
Increase in accrued interest receivable (780) (309)
Increase in prepaid expenses
and other assets, net (941) (81)
Decrease in accrued expenses and
other liabilities, net (704) (34)
-------- -------
Net cash used in
operating activities (667) (14,023)
-------- -------
Cash flows from investing activities:
Proceeds from maturities of investment
securities held to maturity 5,000 8,650
Proceeds from maturities of investment
securities available for sale 10,268 3,000
Purchase of investment securities
available for sale (23,892) (23,489)
Purchase of investment securities
held to maturity - (1,000)
Purchase of mortgage-backed securities
held to maturity - (997)
Purchase of FHLB and Federal Reserve Stock (1,659) -
Principal payments on mortgage-backed
securities available for sale 3,877 4,190
Principal payments on mortgage-
backed securities held to maturity 7,404 6,532
Increase in loans, net (37,322) (64,511)
Purchases of premises and equipment (550) (472)
Proceeds from sale of real estate owned 47 128
------- -------
Net cash used in
investing activities (36,827) (67,969)
------- ---------
-Continued on next page-
5
<PAGE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended
June 30,
1999 1998
------- -------
(Unaudited)
Cash flows from financing activities:
Increase in deposit accounts 20,825 32,487
Repayments of securities sold under
agreement to repurchase - (7,140)
Repayments of Federal Home Loan
Bank advances (67,291) (224,518)
Proceeds from Federal Home Loan
Bank advances 103,291 282,079
Cash dividends paid (1,116) (929)
Common stock repurchased (1,610) (2,810)
Options exercised - 15
Decrease in advance payments by
borrowers for taxes and insurance (551) (263)
-------- -------
Net cash provided by
financing activities 53,548 78,921
------- -------
Net increase (decrease)
in cash and cash equivalents 16,054 (3,071)
Cash and cash equivalents at beginning of quarter 37,201 24,690
------- -------
Cash and cash equivalents at end of quarter $ 53,255 $ 21,619
======= =======
Supplemental disclosure of cash flow
information:
Payments during
the quarter for:
Interest $ 22,676 $ 20,062
======= =======
Taxes $ 3,536 $ 2,590
======= =======
See accompanying condensed notes to consolidated financial statements.
6
<PAGE>
BOSTONFED BANCORP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements as of June 30, 1999 and
December 31, 1998 and for the three- and six-month periods ended June 30, 1999
and 1998 of BostonFed Bancorp, Inc., ("BostonFed" or the "Company") and its
wholly-owned subsidiaries, Boston Federal Savings Bank ("BFS"), Broadway
National Bank ("BNB") and BF Funding Corporation, presented herein, should be
read in conjunction with the consolidated financial statements of the Company as
of and for the year ended December 31, 1998. I n the opinion of management, the
unaudited consolidated financial statements presented herein reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation. Interim results are not necessarily indicative of results to
be expected for the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring accruals necessary for a fair presentation,
have been included. The results of operations for the three- and six-month
periods ended June 30, 1999 and 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
"derivatives") and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133, which delays the effective date of SFAS No. 133 to fiscal quarters
beginning after June 15, 2000.The adoption of these statements is not expected
to have a material impact on the Company.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At June 30, 1999, the Company had commitments of $90.2 million to originate
mortgage loans and $13.1 million to purchase loans from correspondent lenders.
Of these $103.3 million commitments, $76.2 million were adjustable rate mortgage
loans with interest rates ranging from 5.00% to 9.75% and $13.1 million were
fixed rate mortgage loans with interest rates ranging from 6.00% to 8.88%. The
Company also had commitments to sell $52.5 million of mortgage loans.
At June 30, 1999, the Company was servicing first mortgage loans of
approximately $719.6 million, which are either partially or wholly-owned by
others.
NOTE 3: LEGISLATIVE MATTERS
Currently, legislation is pending that may change the activities in
which banks and bank holding companies may engage and could restructure the
regulation of financial service companies. The Company is unable to predict
whether legislation will be enacted or the extent to which the legislation would
impact competition or restrict or disrupt its own operations.
7
<PAGE>
NOTE 4: Business Segments
The Company's wholly-owned bank subsidiaries, BFS and BNB (collectively
"the Banks"), have been identified as reportable operating segments in
accordance with the provisions of SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." BF Funding Corp., a wholly-owned
subsidiary of the Company, and various subsidiaries of the Banks did not meet
the quantitative thresholds for determining reportable segments. The Banks
provide general banking services to their customers, including deposit
accounts, residential, commercial, consumer and business loans. Each Bank also
invests in mortgage-backed securities and other financial instruments. In
addition to its own operations, the Company provides managerial expertise and
other professional services. The results of the Company and BF Funding comprise
the "other" category.
The Company evaluates performance and allocates resources based on the
Banks' net income, net interest margin, return on average assets and return on
average equity. The Banks follow generally accepted accounting principles as
described in the summary of significant accounting policies. The Company and
Banks have inter-company expense and tax allocation agreements. These
inter-company expenditures are allocated at cost. Asset sales between the Banks
were accounted for at current market prices at the time of sale and
approximated cost.
Each Bank is managed separately. BNB is managed by a President and CEO, who
reports directly to BNB's Board of Directors. BFS is managed by a CEO, who is
also the Company's CEO, and reports directly to BFS' Board of Directors.
The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable segments.
<TABLE>
<CAPTION> (Dollars In Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
-------- -------- ------------ ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
At or for the three-months
ended June 30, 1999:
Interest income $ 17,526 2,165 19,691 253 (112) 19,832
Interest expense 11,067 540 11,607 (112) 11,495
Provision for loan losses 400 30 430 430
Non-interest income 1,525 205 1,730 1,730
Non-interest expense 5,051 1,077 6,128 167 6,295
Income tax expense 1,008 272 1,280 35 1,315
Net income 1,524 452 1,976 51 2,027
Total assets 1,046,968 137,348 1,184,316 86,035 (75,481) 1,194,870
Net interest margin 2.61% 5.21% n.m. n.m. n.m. 2.97%
Return on average assets .59% 1.33% n.m. n.m. n.m. .69%
Return on average equity 10.90% 14.78% n.m. n.m. n.m. 9.55%
At or for the three-months
ended June 30, 1998:
Interest income $ 15,928 2,103 18,031 373 (111) 18,293
Interest expense 10,032 468 10,500 13 (111) 10,402
Provision for loan losses 317 25 342 342
Non-interest income 1,402 174 1,576 10 1,586
Non-interest expense 4,854 1,130 5,984 109 6,093
Income tax expense 880 270 1,150 89 1,239
Net income 1,247 383 1,630 173 1,803
Total assets 918,463 124,761 1,043,224 85,564 (70,581) 1,058,207
Net interest margin 2.73% 5.72% n.m. n.m. n.m. 3.18%
Return on average assets .56% 1.21% n.m. n.m. n.m. .70%
Return on average equity 9.72% 12.40% n.m. n.m. n.m. 8.65%
n.m. = not meaningful
</TABLE>
<TABLE>
<CAPTION> (Dollars in Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
-------- -------- ------------ ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
At or for the six-months
ended June 30, 1999:
Interest income $ 34,766 4,317 39,083 537 (257) 39,363
Interest expense 22,051 1,064 23,115 (257) 22,858
Provision for loan losses 800 60 860 860
Non-interest income 2,891 386 3,277 3,277
Non-interest expense 9,906 2,163 12,069 269 12,338
Income tax expense 1,901 545 2,446 107 2,553
Net income 2,998 872 3,870 161 4,031
Total assets 1,046,968 137,348 1,184,316 86,035 (75,481) 1,194,870
Net interest margin 2.60% 5.27% n.m. n.m. n.m. 2.96%
Return on average assets .59% 1.29% n.m. n.m. n.m. .69%
Return on average equity 10.88% 14.14% n.m. n.m. n.m. 9.51%
At or for the six-months
ended June 30, 1998:
Interest income $ 31,805 4,146 35,951 798 (255) 36,494
Interest expense 19,631 930 20,561 93 (255) 20,399
Provision for loan losses 695 50 745 745
Non-interest income 2,629 351 2,980 10 2,990
Non-interest expense 9,689 2,137 11,826 247 12,073
Income tax expense 1,830 570 2,400 175 2,575
Net income 2,588 810 3,398 294 3,692
Total assets 918,463 124,761 1,043,224 85,564 (70,581) 1,058,207
Net interest margin 2.86% 5.71% n.m. n.m. n.m. 3.28%
Return on average assets .59% 1.30% n.m. n.m. n.m. .72%
Return on average equity 10.08% 13.17% n.m. n.m. n.m. 8.83%
n.m. = not meaningful
</TABLE>
8
<PAGE>
<TABLE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
<CAPTION>
For the quarter ended June 30: 1999 1998
------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities (1) $ 91,191 $ 1,314 5.76% $ 88,588 $ 1,390 6.28%
Loan, net and mortgage loans held for sale (2) 998,231 17,951 7.19% 853,276 16,047 7.52%
Mortgage-backed securities (3) 34,511 567 6.57% 51,148 856 6.69%
---------- --------- --------- ----------
Total interest-earning assets 1,123,933 19,832 7.06% 993,012 18,293 7.37%
--------- --------- ---------- ---------
Non-interest-earning assets 46,573 41,963
---------- ---------
Total assets $ 1,170,506 $1,034,975
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 58,577 419 2.86% $ 63,220 467 2.95%
Savings accounts 141,185 882 2.50% 116,211 718 2.47%
NOW accounts 110,749 212 0.77% 105,331 300 1.14%
Certificate accounts 346,860 4,768 5.50% 304,069 4,437 5.84%
---------- --------- --------- ----------
Total 657,371 6,281 3.82% 588,831 5,922 4.02%
Borrowed Funds (4) 364,089 5,214 5.73% 300,064 4,480 5.97%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,021,460 11,495 4.50% 888,895 10,402 4.68%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 64,153 62,715
---------- ---------
Total liabilities 1,085,613 951,610
---------- ---------
Stockholders' equity 84,893 83,365
---------- ---------
Total liabilities and
stockholders' equity $1,170,506 $1,034,975
========== =========
Net interest rate spread (5) $ 8,337 2.56% $ 7,891 2.69%
========= ========= ========== =========
Net interest margin (6) 2.97% 3.18%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 110.03% 111.71%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 5.70% and 5.97% for the three months ended June 30, 1999 and
June 30, 1998, respectively.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
<CAPTION>
For the six months ended June 30: 1999 1998
------------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities (1) $ 89,135 $ 2,571 5.77% $ 90,293 $ 2,801 6.20%
Loan, net and mortgage loans held for sale (2) 988,033 35,609 7.21% 836,732 31,896 7.62%
Mortgage-backed securities (3) 37,675 1,183 6.28% 53,695 1,797 6.69%
---------- --------- --------- ----------
Total interest-earning assets 1,114,843 39,363 7.06% 980,720 36,494 7.44%
--------- --------- --------- ---------- ---------
Non-interest-earning assets 45,932 41,680
---------- ---------
Total assets $ 1,160,775 $1,022,400
========== =========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 59,205 845 2.85% $ 63,430 937 2.95%
Savings accounts 136,779 1,661 2.43% 116,881 1,448 2.48%
NOW accounts 109,659 473 0.86% 104,162 596 1.14%
Certificate accounts 344,129 9,577 5.57% 297,380 8,635 5.81%
---------- --------- --------- ----------
Total 649,772 12,556 3.86% 581,853 11,616 3.99%
Borrowed Funds (4) 360,827 10,302 5.71% 295,195 8,783 5.95%
---------- --------- --------- ----------
Total interest-bearing liabilities 1,010,599 22,858 4.52% 877,048 20,399 4.65%
--------- --------- ---------- ---------
Non-interest-bearing liabilities 65,444 61,689
---------- ---------
Total liabilities 1,076,043 938,737
---------- ---------
Stockholders' equity 84,732 83,663
---------- ---------
Total liabilities and
stockholders' equity $1,160,775 $1,022,400
========== =========
Net interest rate spread (5) $ 16,505 2.54% $16,095 2.79%
========= ========= ========== =========
Net interest margin (6) 2.96% 3.28%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 110.32% 111.82%
========= =========
<FN>
(1) Includes investment securities available for sale and held to maturity,
short-term investments, stock in FHLB-Boston and daily federal funds sold.
(2) Amount is net of deferred loan origination costs, construction loans in
process, net unearned discount on loans purchased and allowance for loan
losses and includes non-performing loans.
(3) Includes mortgage-backed securities available for sale and held to maturity.
(4) Interest paid on borrowed funds for the periods presented includes
interest expense on FNMA deposits held in escrow accounts with the
Company related to the Company's FNMA servicing, which, if such interest
expense was excluded, would result in an average cost of borrowed funds
of 5.67% and 5.94% for the six months ended June 30, 1999 and
June 30, 1998, respectively.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
</TABLE>
10
<PAGE>
A. GENERAL
The Company is the holding company for two banking subsidiaries, Boston
Federal Savings Bank, a federally chartered community savings bank, and Broadway
National Bank, a nationally chartered commercial bank. On February 7, 1997, the
Company acquired BNB and as a result of the acquisition, the Company became a
bank holding company subject to regulation by the Federal Reserve Bank ("FRB").
Boston Federal Savings Bank is regulated by the Office of Thrift Supervision and
Broadway National Bank is regulated by the Office of the Comptroller of the
Currency. Substantially all of the Company's business is coordinated through its
subsidiary banks and references herein to "Company" include the banks as
appropriate. The Company's principal business has been and continues to be
attracting retail deposits from the general public in the areas surrounding its
branch offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family residential mortgage
loans. To a lesser extent, the Company invests in multi-family mortgages,
commercial real estate, construction and land, consumer loans, business loans,
and investment securities. The Company originates loans for investment and loans
for sale in the secondary market, generally retaining the servicing rights for
loans sold. Loan sales are made from loans held in the Company's portfolio
designated as being held for sale or originated for sale during the period. The
Company's revenues are derived principally from interest on its mortgage loans,
and to a lesser extent, interest and dividends on its investments and
mortgage-backed securities, fees, gains on sale of loans and loan servicing
income. The Company's primary sources of funds are retail deposits, wholesale
brokered deposits, principal and interest payments on loans and mortgage-backed
securities, FHLB advances, and proceeds from the sale of loans.
B. YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act. The following "Year 2000" discussion contains forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believes,"
"expects," "estimates," and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the phases of
the Plan, its estimated costs, and its belief that its statements involve a
number of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources, the ability to identify and remediate
all date sensitive lines of computer code, and the actions of governmental
agencies or other third parties with respect to Year 2000 problems.
Included in other non-interest expenses for the three-month periods ended
June 30, 1999 and 1998 are charges incurred in connection with the modification
or replacement of software or hardware in order for the Company's computer and
related systems to properly recognize dates beyond December 31, 1999.
The impact of computer systems ability to process dates beyond 1999, the
Year 2000 issue, creates a significant business challenge for the Company. The
Company is addressing this issue as it affects all of its software, hardware and
other systems to insure the Company is Year 2000 compliant. The Company has
developed a plan that is based upon the Federal Financial Institutions
Examination Council ("FFIEC") recommended phases and time frames for insuring
Year 2000 compliance. These phases include awareness, assessment, renovation,
validation and implementation.
The Company has completed the awareness phase through development of a Year
2000 committee and reporting structure including quarterly project status
reports to the Company's Board. The assessment phase has been completed with a
review of all software, hardware and business systems including an evaluation of
the critical nature and year 2000 business risk that each application presents.
The Company primarily utilizes third-party vendors for the processing of its
critical data processing applications. The Company is working closely with these
critical vendors to monitor renovation and validation efforts to insure that the
time frames set out in the Company's plan are met. Based upon review of
vendor-provided Year 2000 disclosure statements, review of the applicable
testing process and verification of test results, the Company believes that all
critical applications were renovated at June 30, 1999. The Company will continue
to work with critical application vendors to monitor ongoing status in
maintaining Year 2000 compliance.. The Company has created an internal Year 2000
testing environment and has developed test scripts incorporating typical
transactions in order to validate the modified systems. Testing with critical
application vendors was substantially completed in the fourth quarter of 1998.
Additional testing including follow-up and interface testing was completed by
June 30, 1999, prior to any anticipated impact on operating systems. The
implementation phase is ongoing and incorporates review of replaced or modified
and tested systems, as well as, contingency planning and customer awareness
programs.
11
<PAGE>
In the event that the Company's third-party vendors are unable to provide
services due to Year 2000 issues, the Company's operations could be adversely
effected. The Company has developed contingency plans in the event that one or
all of these significant vendors fails to meet Year 2000 operating requirements.
Plans for various failure scenarios are developed on an ongoing basis as such
risks are identified and incorporate the Company's business resumption plan.
Contingency plans for unexpected Year 2000 related business interruption were
substantially complete by June 30, 1999. Further, the Company will seek
alternative vendors should one of the critical vendors fail to maintain
satisfactory Year 2000 compliance. In the event the Company's current third
party data processing vendors were not Year 2000 compliant and the Company could
not engage alternative vendors in a timely manner, the Company's operations
would be adversely impacted.
The total cost of the Year 2000 project is estimated at $400,000 to
$500,000 which includes estimated costs and time associated with third-party
Year 2000 issues, and an allocation of payroll costs for personnel assigned to
the Year 2000 project. Through June 30, 1999 the Company has expensed
approximately $100,000 year to date and $350,000 total toward the Year 2000
remediation effort. 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.
Based on the remediation, testing and monitoring efforts to date, the
Company expects that most of its critical systems will operate successfully
through the century date change. Therefore, the Company believes that internal
system failures are not likely to adversely affect the Company's operations or
financial condition. The Company has successfully tested with its critical
application vendors and will continue to monitor and validate the efforts of
other service providers, including the Company's electrical power and
telecommunications providers in 1999. At this time the Company believes the most
likely "worst case" Year 2000 scenarios are temporary and localized disruptions
in infrastructure services which could disrupt the ability of the Company to
provide services to its customers and/or the ability of external service
providers to provide services to the Company.
The Company's evaluation of the Year 2000 readiness is based upon
management's best estimates and projections 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.
C. FINANCIAL CONDITION
Total assets at June 30, 1999 were $1.195 billion, compared to $1.139
billion at December 31, 1998, an increase of $56 million or 4.9%. The major
components of asset growth included cash and cash equivalents, investment
securities available for sale, mortgage loans held for sale and loans, net of
allowance for loan losses. Cash and cash equivalents increased from a balance of
$37.2 million at December 31, 1998 to $53.3 million at June 30, 1999. This
increase in liquidity was in anticipation for the funding of a bank owned life
insurance policy ("BOLI") early in the third quarter of 1999. The BOLI purchase
is expected to partially offset employee benefit costs and provide the Company
with increased earnings resulting from the tax advantaged status of BOLI income.
Investment securities available for sale increased to $61.6 million at June 30,
1999 from $49.1 million at December 31, 1998 as securities purchases exceeded
maturities. Mortgage loans held for sale increased from $17.0 million at
December 31, 1998 to $21.3 million at June 30, 1999 as large sales near the end
of last year reduced the available for sale inventory. Loans, net of allowance
for loan losses, increased by $36.5 million, or 3.9%, from a balance of $943.7
million at December 31, 1998 to $980.1 million at June 30, 1999 as origination
of loans for portfolio exceeded amortization and prepayments. These increases
were partially offset by decreases in investment securities held to maturity,
mortgage-backed securities available for sale and mortgage-backed securities
held to maturity amounting to $5.0 million, $4.4 million and $7.4 million,
respectively, compared to the balances at December 31, 1998. Deposit accounts
increased by $20.8 million from a balance of $707.1 million at December 31, 1998
to a balance of $728.0 million at June 30, 1999. Approximately one-half of the
deposit account balance increase was due to the Company's acquisition of $10
million of wholesale brokered certificates of deposit. Federal Home Loan Bank
advances increased by $36.0 million, to a balance of $373.5 million at June 30,
1999 from a balance of $337.5 million at December 31, 1998. These advances were
used primarily to fund the increase in loans, net.
12
<PAGE>
D. LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, investments,
mortgage-backed and related securities and loan sales, FHLB advances and
repurchase agreements. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company has maintained in excess of the required minimum levels of liquid assets
at BFS as defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of the BFS's deposits and short-term borrowings.
BFS's current required liquidity ratio is 4%. At June 30, 1999 and December 31,
1998 BFS's liquidity ratio was 8.4% and 6.9% respectively. Management has
maintained liquidity as close as possible to the minimum requirement so that it
may invest any excess liquidity in higher yielding interest-earning assets or
use such funds to repay higher cost FHLB advances. The liquidity ratio is higher
than usual at June 30, 1999 due to the anticipated purchase of BOLI as explained
in the above paragraph. 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,
and loans and investments available for sale. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period. At June 30, 1999, BFS' cash, loans and
investments available for sale totaled $79.1 million or 7.6% of BFS's total
assets. While not all of these liquid assets qualify for BFS's regulatory
liquidity requirements, other assets in the held to maturity category qualify
for regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1999, the Company had $373.5
million in advances outstanding from the FHLB. The Company generally does not
pay the highest deposit rates in its market and accordingly utilizes alternative
sources of funds such as FHLB advances, wholesale brokered deposits and
repurchase agreements to supplement cash flow needs.
At June 30, 1999, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $171.97 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from June 30, 1999, totaled $188.2 million.
At June 30, 1999, the consolidated stockholders' equity to total assets
ratio was 6.9%. As of June 30, 1999, the Company, BFS and BNB exceeded all of
their regulatory capital requirements. The Company's consolidated tier 1
capital, total capital and Tier 1 leverage ratios were 11.7%, 13.0% and 6.8%,
respectively. BFS's tier 1, total risk-based, tier 1 risk-based and tangible
equity capital ratios were 5.3%, 10.4%, 9.1% and 5.3%, respectively. BNB's total
risk-based, tier 1 risk-based and tier 1 leverage capital ratios were 15.1%,
14.1%, and 7.1%, respectively.
13
<PAGE>
E. COMPARISON OF THREE- AND SIX-MONTHS ENDED JUNE 30, 1999 AND 1998
General
Earnings for the quarter ended June 30, 1999 were $2.0 million, or $.42
basic earnings per share, $.40 per share on a diluted basis, compared to
earnings of $1.8 million, or $.35 basic and $.33 diluted earnings per share for
the second quarter of 1998. The current quarter's earnings amount to an 20%
increase in basic earnings per share and a 21% increase in diluted earnings per
share compared to last year's second quarter. Earnings for the six-months ended
June 30, 1999 amounted to $4.0 million, or $83 basic and $.80 diluted earnings
per share, compared to $3.7 million, or $.72 basic and $.68 diluted earnings per
share for the comparable 1998 period. The Company's annualized return on average
assets was .69% and the annualized return on average stockholders' equity was
9.51% during the six-months ended June 30, 1999, compared to .72% and 8.83%,
respectively, for the six-months ended June 30, 1998 (annualized). Comments
regarding the components of net income are detailed in the following paragraphs.
Interest Income
Total interest income on interest-earning assets for the quarter ended June
30, 1999 increased by $1.5 million, or 8.4%, to $19.8 million, compared to the
quarter ended June 30, 1998. The increase in interest income was primarily
attributable to a $130.9 million increase in average interest-earning assets,
offset by a 31 basis point decrease in the average yield. The average yield on
interest-earning assets decreased to 7.06% for the three months ended June 30,
1999 from 7.37% for the three months ended June 30, 1998. For the first half of
1999, total interest income was $39.4 million, compared to $36.5 million for the
comparable period in 1998. The major reason for the increase was also the
increased average balances of interest-earning assets, which were $1.115 billion
during the six-months ended June 30, 1999, compared to $980.7 million during the
comparable period in 1998. Partially offsetting the benefits of higher average
balances in interest-earning assets was a decline in average yields, which
declined from an average of 7.44% during the six-months ended June 30, 1998 to
an average of 7.06% during the six-months ended June 30, 1999.
Interest income on loans, net, for the quarter ended June 30, 1999
increased by $1.9 million, or 11.9%, to $17.9 million compared to $16.0 million
for the same quarter in 1998. On a year to date basis, interest income on loans,
net, increased $3.7 million to $35.6 million from the $31.9 million earned
during the first half of 1998. The increase in interest income from loans, net,
for the three- and six-months ended June 30, 1999, compared to the same periods
last year, was primarily attributable to increases in average balances of $145.0
million and $151.3 million, respectively. The earnings impact of higher balances
of loans, net was partially offset by a decline in the average yield on loans,
net, which decreased by 33 basis points to 7.19% during the quarter ended June
30, 1999, compared to 7.52% during the quarter ended June 30, 1998. On a year to
date basis, the yield on loans, net, decreased from 7.62% for the six-months
ended June 30, 1998 to 7.21% during the current year period.
Interest on mortgage-backed securities for the quarter ended June 30, 1999
decreased by $289,000 to $567,000, compared to $856,000 for the same quarter in
1998. This decrease in income was due primarily to the $16.6 million lower
average balance during the quarter ended June 30, 1999, compared to the quarter
ended June 30, 1998. Additionally, the average yield declined by 12 basis points
to an average of 6.57% during the June 30, 1999 quarter, compared to the same
quarter last year. On a year to date basis, interest on mortgage-backed
securities was $1.2 million, compared to last year's comparable period total of
$1.8 million, also due to declines in average balances and yields. The average
balance of mortgage-backed securities declined by $16.0 million to an average
balance of $37.8 million for the six-months ended June 30, 1999 compared to the
prior year period average balance of $53.7 million. Average yields declined by
41 basis points during the current period.
Income from investment securities was $1.3 million for the quarter ended
June 30, 1999 compared to $1.4 million for the prior year quarter. On a year to
date basis, income from investment securities was $2.6 million and $2.8 million,
respectively, for the six-months ended June 30, 1999 and 1998. The average yield
on investment securities decreased by 52 basis points and 43 basis points,
respectively, in the current three- and six-month periods, compared to last
year's periods due to overall declines in market interest rates. The average
balance increased by $2.6 million to an average of $91.2 million during the
quarter ended June 30, 1999, compared to an average balance of $88.6 million for
the quarter ended June 30, 1998. On a year to date basis, the average balance of
investment securities declined by $1.2 million to an average balance of $89.1
million during the six-months ended June 30, 1999, compared to an average
balance of $90.3 million for the comparable prior year period.
14
<PAGE>
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended June 30, 1999 increased by $1.1 million or 10.5%, to $11.5 million
compared to the quarter ended June 30, 1998. The increase in interest expense
for the quarter ended June 30, 1999 was due primarily to an increase of $132.6
million in the average balance of interest-bearing liabilities, which averaged
$1.021 billion during the current quarter, compared to an average balance of
$888.9 million during the quarter ended June 30, 1998. The increase in interest
expense was partially offset by a decrease of 18 basis points in the average
cost of interest-bearing liabilities during the quarter ended June 30, 1999. The
average cost of interest-bearing liabilities decreased to 4.50% during the
quarter ended June 30, 1999, compared to 4.68% for last year's comparable
quarter. The decrease was due to generally lower market rates. On a year to date
basis, interest expense on interest-bearing liabilities totaled $22.9 million,
compared to last year's to date total of $20.4 million, an increase of 12.1%.
The increase is attributable to the higher average balance of interest-bearing
liabilities, which averaged $1.011 billion during the six-months ended June 30,
1999, compared to an average balance of $877.0 million during the six-months
ended June 30, 1998. Partially offsetting the impact of higher average balances,
was a 13 basis point decline in the cost of interest-bearing liabilities during
the six-months ended June 30, 1999.
Interest expense on deposit accounts was $6.3 million for the quarter ended
June 30, 1999, an increase of $359,000 from the $5.9 million for the quarter
ended June 30, 1998. The increase in the expense was due to higher average
deposit account balances of $68.5 million, partially offset by a 20 basis point
decrease in the average cost of funds during the quarter ended June 30, 1999,
compared to the quarter ended June 30, 1998. The cost of funds declined due to
lower rates paid on all types of deposit accounts. The average balance of
deposit accounts increased from $588.8 million for the quarter ending June 30,
1998, to an average balance of $657.4 million for the current quarter. Most of
the increase is attributable to the odd-month retail certificate of deposit
acquisition program and a special "money market" savings account initiated by
BFS during 1998. For the six-months ended June 30, 1999, interest expense on
deposit accounts was $12.6 million, compared to $11.6 million for the prior year
period, an increase of $1.0 million, or 8.1%. The increase was due to the
effects of higher average deposit account balances, which averaged $649.8
million during the six-months ended June 30, 1999, compared to $581.9 million in
the prior year period, partially offset by the effects of a decrease of nine
basis points in the total cost of deposit accounts during the current period.
Interest expense on borrowed funds increased from $4.5 million for the
quarter ended June 30, 1998 to $5.2 million for the current quarter. The average
cost of borrowed funds decreased from 5.97% during the quarter ended June 30,
1998 to an average of 5.73% during the current quarter. The average balance
increased from $300.1 million during the second quarter of 1998 to an average
balance of $364.1 million during the second quarter of 1999. For the six-months
ended June 30, 1999 interest expense on borrowed funds was $10.3 million,
compared to $8.8 million for the six-months ended June 30, 1998. The increase in
interest expense on borrowed funds was caused by a $65.6 million increase in the
average balances from $295.2 million for the six-months ended June 30, 1998 to
$360.8 million during the current period. The increase was partially offset by a
reduction of 24 basis points in the cost of borrowed money during the six-months
ended June 30, 1999.
Net Interest Income
Net interest income during the second quarters of 1999 and 1998 was $8.3
million and $7.9 million, respectively, as industry-wide margin shrinkage was
offset by net interest income earned from asset growth. The net interest margin,
at 2.97% for the quarter ended June 30, 1999 was 21 basis points lower than last
year's comparable quarter. On a year to date basis, net interest income was
$16.5 million, compared to $16.1 million for the prior year to date. The net
interest margin was 2.96% for the six-months ended June 30, 1999, compared to
3.28% for the prior year comparable period. The net interest margin was
compressed due to the continuing effects of a relatively flat interest rate
yield curve.
15
<PAGE>
Provision for Loan Losses
The Company's provision for loan losses amounted to $430,000 for the
quarter ended June 30, 1999, compared to the $342,000 loan loss provision for
the comparable quarter last year. For the six-months ended June 30, 1999 and
1998, the provision was $860,000 and $745,000, respectively. The allowance for
loan losses increased from $8.5 million at December 31, 1998 to $9.6 million at
June 30, 1999 due to the year to date provision and net recoveries.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon size and type of loans and management's
assessment of the risk inherent in its loan portfolio in light of current
economic conditions, actual loss experience, industry trends and other factors
which may affect the real estate values in the Company's market area. In
addition various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses. Such
agencies may require the Company to make additional provisions for estimated
loan losses based upon judgements different from those of management. While
management believes the current allowance for loan losses is adequate, actual
losses are dependent upon future events, and as such, future provisions for loan
losses may be necessary. As part of the Company's determination of the adequacy
of the allowance for loan losses, the Company monitors its loan portfolio
through its Asset Classification Committee. The Committee classifies loans
depending on risk of loss characteristics. The most severe classification before
a charge-off is required is "sub-standard." At June 30, 1999, the Company
classified $3.6 million of loans ($3.2 million at BFS and $403,000 at BNB) as
sub-standard compared to $4.2 million ($3.4 million of BFS and $770,000 of BNB)
at December 31, 1998. The Asset Classification Committee, which meets quarterly,
determines the adequacy of the allowance for loan losses through ongoing
analysis of historical loss experience, the composition of the loan portfolios,
delinquency levels, underlying collateral values, cash flow values and state of
the real estate economy. Utilizing these procedures, management believes that
the allowance for loan losses at June 30, 1999 was sufficient to provide for
anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at June 30, 1999 was $9.6 million,
which represented 744.5% of non-performing loans or .94% of total loans,
compared to $8.5 million at December 31, 1998, or 1,029.1% of non-performing
loans and .88% of total loans. Management believes this coverage ratio is
prudent due to the balance increase in the combined total of construction and
land, commercial real estate, multi-family, home equity and improvement,
consumer and business loans. These combined total balances increased from $153.8
at December 31, 1998 to $172.5 million at June 30, 1999.
Non-performing loans at June 30, 1999 amounted to $1.3 million or .11% of
total loans, compared to $0.8 million, or .09% of total loans, at December 31,
1998.
The amount of interest income on non-performing loans that would have been
recorded had these loans been current in accordance with their original terms,
was $55,000 and $78,000 for the six-month periods ended June 30, 1999 and 1998,
respectively. The amount of interest income that was recorded on these loans was
$21,000 and $30,000 for the six-month periods ended June 30, 1999 and 1998,
respectively.
At June 30, 1999, loans characterized as impaired, pursuant to 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", totaled $269,000. All of the impaired loans have
been measured using the fair value of the collateral method. During the
six-months ended June 30, 1999, the average recorded value of impaired loans was
$405,000, $9,000 interest income was recognized and $11,000 of interest income
would have been recognized under the loans' original terms.
At June 30, 1999 and at December 31, 1998, the Company had $0 and $47,000
in real estate owned, respectively. Further, at June 30, 1999, the Company also
had restructured real estate loans amounting to $213,000 for which interest is
being recorded in accordance with the loans' restructured terms. The amount of
the interest income lost on these restructured loans is not material to the
Company's financial statements.
16
<PAGE>
Non-Interest Income
Total non-interest income in the second quarter of 1999 increased by
$144,000, or 9.1%, to $1.7 million from $1.6 million for the three months ended
June 30, 1998. The largest component of non-interest income was gain on sale of
loans, which increased to $932,000 during the quarter ended June 30, 1999,
compared to $771,000 for the comparable quarter last year. The gain on sale of
loans improved due to an increase in the volume of loans sold. The Company sold
$100.2 million of loans during the quarter ended June 30, 1999 compared to $83.3
million during last year's comparable quarter. On a year to date basis, gain on
sale of loans amounted to $1.7 million, compared to $1.4 million for the first
six months of 1998, also due to increased volume of loans sold. Generally lower
market interest rates and the position of the interest rate yield curve have
provided many borrowers an opportunity to re-finance their mortgages to lower,
and generally fixed interest rates. The Company sells the vast majority of
fixed-rate loans it originates. The continuation of a strong housing market and
economy also contributed to increased volume for financing of home purchases.
Non-Interest Expense
Total non-interest expense was $6.3 million and $6.1 million, respectively,
for the quarters ended June 30, 1999 and 1998. On a year to date basis, total
non-interest expense increased from $12.1 million for the six-months ended June
30, 1999 to $12.3 million for the six-months ended June 30, 1998. Compensation
and benefits increased by $177,000 and $393,000 for the three- and six-months
ended June 30, 1999 compared to the comparable prior year totals. The increases
were due to additional staff hired to expand the Company's corporate lending
department and normal year over year salary increases. On a year to date basis,
other non-interest expense declined to $3.3 million for the six-months June 30,
1999 compared to $3.5 million for the six-months ended June 30, 1998 as the
prior year's period included consulting and legal costs incurred to assist in
establishing the Company's tax saving strategies. These strategies included the
formation of real estate investment trusts and securities subsidiaries in early
1998.
Income Tax Expense
Income tax expense for the quarter ended June 30, 1999 was $1.3 million,
compared to $1.2 million for the quarter ended June 30, 1998. The effective
income tax rate was 39.4% during the current quarter, compared to 40.7% for the
quarter ended June 30, 1998. On a year to date basis, the current period income
tax expense was $2.6 million, for an effective rate of 38.8%, compared to $2.6
million, for an effective rate of 41.1% for the six-months ended June 30, 1998.
The lower effective rate during the current periods is due to the full
implementation of the tax saving strategies.
17
<PAGE>
Item 3. MARKET RISK AND MANAGEMENT OF INTEREST RATE RISK
The principal market risk affecting the Company is interest rate risk. The
objective of the Company's interest rate risk management function is to evaluate
the interest rate risk included in certain balance sheet accounts, determine the
level of risk appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with Board of Directors' approved guidelines. Through
such management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates. The Company monitors its interest rate risk as
such risk relates to its operating strategies. The Company's Board of Directors
has established a management Asset/Liability Committee that is responsible for
reviewing the Company's asset/ liability policies and interest rate risk
position. The Committee reports trends and interest rate risk position to the
Board of Directors on a quarterly basis. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Company.
In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate, one- to four-family mortgage loans; (2) generally selling in
the secondary market substantially all fixed-rate mortgage loans originated with
terms greater than 15 years while generally retaining the servicing rights
thereof; (3) primarily investing in investment securities or mortgage- backed
securities with adjustable interest rates; and (4) attempting to reduce the
overall interest rate sensitivity of liabilities by emphasizing longer-term
deposits and utilizing FHLB advances to replace rate sensitive deposits.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. These differences are
a primary component of the risk to net interest income. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a positive gap position would be in a better position to invest
in higher yielding assets which, consequently, may result in the yield on its
assets increasing at a pace more closely matching the increase in the cost of
its interest-bearing liabilities than if it had a negative gap. During a period
of falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap which,
consequently, may tend to restrain the growth of its net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
adjustable-rate loans may decrease in the event of an interest rate increase.
At June 30, 1999, the Company's one year gap was a negative .66% of
total assets, compared to a positive 6.6% of total assets at December 31, 1998.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
net portfolio value (NPV") over a range of interest rate change scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario.
18
<PAGE>
As in the case with the gap analysis, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model used assumes that the composition
of the Company's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and also
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements and net
interest income models provide an indication of the Company's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income and will differ from actual
results. See the Company's Form 10-K for the year ended December 31, 1998 for a
detail of the GAP and NPV tables. There have been no material changes in the net
portfolio value since December 31, 1998.
In addition to historical information, this 10-Q includes certain
forward-looking statements based on current management expectations. Generally,
verbs in the future tense and the words, "believe", "expect", "anticipate",
"intends", "opinion", "potential", and similar expressions identify
forward-looking statements. Examples of this forward-looking information can be
found in, but are not limited to, the allowance for losses discussion, Year 2000
issues, subsequent events and any quantitative and qualitative disclosure about
market risk. The Company's actual results could differ materially from those
management expectations. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company' loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors (including Year 2000 problems) affecting the Company's
operations, markets, products, services and prices. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions, which may be made to any
forward-looking statements, to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
SUBSEQUENT EVENTS
On August 4, 1999, the Company entered into an agreement to purchase a
privately-held mortgage company, Diversified Ventures, Inc., d/b/a Forward
Financial Company and Ellsmere Insurance Agency, Inc., both headquartered in
Northborough, Massachusetts. The tax deductible transaction premium will result
in approximately $20 million of goodwill to be amortized over 15 years. See Note
5 "Other Information" for further details.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, 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. Broadway National Bank, a national bank subsidiary of
the Company, was named a defendant in the Superior Court for Suffolk County,
Massachusetts, civil action No. SUCV 99-018F served on April 12, 1999 in a
matter captioned "Glyptal, Inc. v. John Hetherton, Jr., Fleet Bank, NA and
Broadway National Bank of Chelsea." The suit alleges that an officer of the
Plaintiff, Glyptal, embezzled funds from Plaintiff, by making unauthorized
transfers from Plaintiff's corporate accounts and subsequently deposited checks
drawn on such account into an account at Broadway National Bank. Plaintiff
alleges that Broadway National Bank knew or should have known of the alleged
fraudulent actions of Plaintiff's Officer, and that Broadway National Bank owed
a duty to Plaintiff to investigate the transactions and protect Plaintiff from
the alleged fraudulent actions. The Plaintiff is seeking damages for the alleged
breach of duty by the defendants. Broadway National Bank intends to deny the
allegations that it owed or breached any duty to Plaintiff or that it is liable
for any losses incurred by Plaintiff. Broadway National Bank intends to
vigorously defend the action and believes the action is not likely to result in
any material loss or adverse effect on the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(A) The Annual Meeting of Stockholders of the Corporation
was held on April 28, 1999.
(B) Directors elected at Annual Meeting:
(1) Election of Directors to a three-year term
Nominee Total Votes For Total Votes Withheld
David P. Conley 4,455,539 184,207
W. Robert Mill 4,455,539 184,207
(2) Continuing Directors Year Term Expires
Edward P. Callahan 2000
Richard J. Dennis, Sr. 2000
David F. Holland 2001
Charles R. Kent 2000
Irwin W. Sizer 2001
(C) Other Matters submitted to a vote of the Stockholders of the Corporation:
Selection of Independent Auditors
Votes For Votes Against Abstentions Broker Non-Votes
4,628,523 5,748 5,475 None
Item 5. Other Information
On August 4, 1999, the Company entered into a definitive purchase and Sale
Agreement ("Purchase Agreement") with Diversified Ventures, Inc., d/b/a/ Forward
Financial Company ("Forward Financial"), Ellsmere Insurance Agency, Inc.
("Ellsmere"), and Gene J. DeFeudis. Pursuant to the Purchase Agreement, the
Company will purchase all of the outstanding capital stock of Forward Financial
and Ellsmere in a cash transaction. Consummation of the sale is subject to
various conditions, including regulatory a pproval, and the Company anticipates
the transaction will close in the fourth quarter of 1999. In connection with the
transaction, the Company filed a Current Report of Form 8-K on August 6, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation*
3.2 Bylaws*
27 Financial Data Schedule
* Incorporated herein to the Company's Registration Statement on Form S-1,
as amended, (SEC No. 33-94860) originally filed on July 21, 1995
(b) No reports on Form 8-K
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTONFED BANCORP, INC.
(Registrant)
Date: August 13, 1999 By: /s/ David F. Holland
__________________________________
David F. Holland
President and
Chief Executive Officer
Date: August 13, 1999 By: /s/ John A. Simas
__________________________________
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety by reference to such financial statements.)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 24,719
<INT-BEARING-DEPOSITS> 28,536
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,220
<INVESTMENTS-CARRYING> 17,841
<INVESTMENTS-MARKET> 18,059
<LOANS> 1,001,404
<ALLOWANCE> 9,552
<TOTAL-ASSETS> 1,194,870
<DEPOSITS> 727,969
<SHORT-TERM> 180,000
<LIABILITIES-OTHER> 10,731
<LONG-TERM> 193,500
0
0
<COMMON> 66
<OTHER-SE> 82,604
<TOTAL-LIABILITIES-AND-EQUITY> 1,194,870
<INTEREST-LOAN> 35,609
<INTEREST-INVEST> 3,754
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 39,363
<INTEREST-DEPOSIT> 12,556
<INTEREST-EXPENSE> 22,858
<INTEREST-INCOME-NET> 16,505
<LOAN-LOSSES> 860
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,338
<INCOME-PRETAX> 6,584
<INCOME-PRE-EXTRAORDINARY> 6,584
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,031
<EPS-BASIC> .83
<EPS-DILUTED> .80
<YIELD-ACTUAL> 2.96
<LOANS-NON> 1,165
<LOANS-PAST> 0
<LOANS-TROUBLED> 213
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,500
<CHARGE-OFFS> 46
<RECOVERIES> 238
<ALLOWANCE-CLOSE> 9,552
<ALLOWANCE-DOMESTIC> 9,552
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
