<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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:
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Title of Class Name of Exchange on Which Registered
<S> <C>
COMMON STOCK PAR VALUE $0.01 PER SHARE THE AMERICAN STOCK EXCHANGE
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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.
(1) Yes X No (2) 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 $57.8 million and is based upon the last
sales price as quoted on the American Stock Exchange for March 3, 2000.
The number of shares of Common Stock outstanding as of March 3, 2000 is
4,907,481.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1999 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
<PAGE> 2
PORTIONS OF THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
INDEX
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PAGE
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PART I
Item 1. Business .......................................... 3
Item 2. Properties ........................................ 38
Item 3. Legal Proceedings ................................. 39
Item 4. Submission of Matters to a Vote of Security Holders 39
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters .............................. 39
Item 6. Selected Financial Data ........................... 39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 39
Item 7A. Quantitative and Qualitative Disclosure About
Market Risks ...................................... 39
Item 8. Financial Statements and Supplementary Data ....... 40
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ............... 40
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation ............................ 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management .................................... 40
Item 13. Certain Relationships and Related Transactions .... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 41
SIGNATURES
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2
<PAGE> 3
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. On August 4, 1999, the Company entered into a Purchase and Sale
Agreement by and among the Company, Diversified Ventures, Inc. d/b/a Forward
Financial Company ("Forward Financial"), Ellsmere Insurance Agency, Inc.
("Ellsmere") and Gene J. DeFeudis, pursuant to which BFS purchased all of the
outstanding capital stock of Forward Financial and BNB purchased all of the
outstanding capital stock of Ellsmere in a cash transaction for approximately
$38.3 million. The transaction was consummated at the close of business on
December 6, 1999.
The Company's business is conducted primarily through its ownership of
BFS and BNB (collectively, the "Banks"). BFS' administrative and banking office
is located in Burlington, Massachusetts and its seven other banking offices are
located in Arlington, Bedford, Billerica, Boston, Lexington, Peabody and
Wellesley, all of which are in the greater Boston metropolitan area. BFS'
subsidiary, Forward Financial, maintains its headquarters in Northboro,
Massachusetts and operates in approximately twenty states across the United
States. BNB has two banking offices located in Chelsea and Revere, also 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 Board ("FRB"). Prior to its
acquisition of BNB, the Company was a savings and loan holding company regulated
by the Office of Thrift Supervision ("OTS"). 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. See "Regulation and Supervision-Holding Company Regulation."
The Company's principal business has been and continues to be
attracting retail deposits from the general public in the areas surrounding its
banking offices and investing those deposits, together with funds generated from
operations, loan sales 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, business and consumer loans. The Company originates mortgage
loans for investment and for sale in the secondary market, generally retaining
the servicing rights for loans sold. Through Forward Financial, the Company also
originates consumer loans primarily with customers purchasing or refinancing
manufactured homes, recreational vehicles, marine and leased equipment and
subsequently sells substantially all of such loans. 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, gain on sale of 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, other borrowings and
proceeds from the sale of loans.
3
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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. Forward Financial provides its
consumer lending services in approximately twenty states throughout the United
States.
The Company faces significant competition both in generating loans and
in attracting deposits. The Boston metropolitan area is a highly competitive
market and the national market for consumer lending is also very competitive.
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, consumer finance and insurance companies. Its most direct
competition for deposits has historically come from savings and commercial banks
and in recent years from mutual funds and equity markets. 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, 1999, the Company had total loans outstanding, including mortgage
loans held for sale, of $1,087.6 million, of which $846.7 million were one- to
four-family, residential mortgage loans, or 77.9% of the Company's total loans.
At such date, the remainder of the loan portfolio consisted of: $22.0 million of
multi-family residential loans, or 2.0% of total loans; $76.0 million of
commercial real estate loans, or 7.0% of total loans; $77.1 million of
construction and land loans, or 7.1% of total loans; and other loans, primarily
home equity lines of credit and business loans, of $65.8 million or 6.1% of
total loans. The Company had $16.2 million of mortgage loans held for sale at
December 31, 1999 consisting of one- to four-family fixed and variable-rate
mortgage loans. At that same date, 66.0% of the Company's mortgage loans had
adjustable interest rates, most of which, at the first adjustment date, 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 FRB, and legislative
tax policies.
4
<PAGE> 5
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.
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AT DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family(1). $ 846,739 77.85% $ 829,572 84.27% $ 702,102 86.11%
Multi-family .......... 22,017 2.02 22,889 2.33 18,874 2.32
Commercial real estate .. 75,999 6.99 48,951 4.97 36,400 4.46
Construction and land ... 77,079 7.09 41,608 4.23 20,497 2.51
Other loans(2)............. 65,767 6.05 41,308 4.20 37,465 4.60
--------- ------ ------- ------ ------- ------
Total loans ......... 1,087,601 100.00% 984,328 100.00% 815,338 100.00%
====== ====== ======
Less:
Allowance for loan losses (10,654) (8,500) (6,600)
Construction loans in
process ............... (30,372) (17,133) (8,527)
Net unearned premium
(discount) on loans
purchased ........... (7) (5) (114)
Deferred loan origination
(fees) costs .......... 2,200 1,980 1,448
----------- ---------- ----------
Loans, net and mortgage
loans held for sale $ 1,048,768 $ 960,670 $ 801,545
=========== ========== ==========
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<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family(1). $ 607,792 88.00% $ 447,033 85.44%
Multi-family .......... 21,381 3.10 27,986 5.35
Commercial real estate .. 28,136 4.07 26,412 5.05
Construction and land ... 12,532 1.81 3,435 .66
Other loans(2)............. 20,850 3.02 18,343 3.50
------- ------ ------- ------
Total loans ......... 690,691 100.00% 523,209 100.00%
====== ======
Less:
Allowance for loan losses (4,400) (4,275)
Construction loans in
process ............... (6,936) (805)
Net unearned premium
(discount) on loans
purchased ........... (163) (262)
Deferred loan origination
(fees) costs .......... 1,448 560
---------- ----------
Loans, net and mortgage
loans held for sale $ 680,640 $ 518,427
========== ==========
</TABLE>
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(1) Includes mortgage loans held for sale of $16.2 million, $17.0 million, $9.8
million, $4.0 million and $8.9 million at December 31, 1999, 1998, 1997,
1996 and 1995, respectively.
(2) These loans primarily consist of one- to four-family lines of credit secured
by mostly second mortgages which amounted to $43.7 million, $32.1 million,
$28.1 million,$17.4 million and $14.9 million at December 31, 1999, 1998,
1997, 1996 and 1995, respectively and business loans which amounted to $17.8
million, $3.6 million, $3.5 million, $724,000 and $664,000 at December 31,
1999, 1998, 1997, 1996 and 1995, respectively.
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<PAGE> 6
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Company's loans at December 31, 1999. There were $16.2 million
of mortgage loans held for sale at December 31, 1999. The table does not include
the effect of future principal prepayments. Principal prepayments on total loans
were $203.3 million, $316.4 million and $167.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
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<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------------------------------
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 ........................ $ 1,212 $ 3 $ 2,090 $ 45,135 $ 9,041 $ 57,481
After one year:
More than one year to three years ....... 4,640 200 2,315 29,604 6,609 43,368
More than three years to five years .. 11,603 117 3,262 2,198 3,483 20,663
More than five years to 10 years ..... 103,295 3,477 7,105 47 44,754 158,678
More than 10 years to 20 years ....... 182,756 13,176 33,966 45 1,288 231,231
More than 20 years ................... 543,233 5,044 27,261 50 592 576,180
----------- --------- --------- --------- --------- -----------
Total due after one year ............. 845,527 22,014 73,909 31,944 56,726 1,030,120
----------- --------- --------- --------- --------- -----------
Total amount due ..................... $ 846,739 $ 22,017 $ 75,999 $ 77,079 $ 65,767 $ 1,087,601
=========== ========= ========= ========= =========
Less:
Allowance for loan losses ...... (10,654)
Construction loans in process .. (30,372)
Net unearned discount on
loans purchased ............. (7)
Deferred loan origination costs 2,200
-----------
Loans, net, and mortgage
loans held for sale ............... 1,048,768
Mortgage loans held for sale ......... (16,174)
-----------
Loans, net ........................... $ 1,032,594
===========
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The following table sets forth at December 31, 1999 the dollar amount
of loans contractually due after December 31, 2000, and whether such loans have
fixed interest rates or adjustable interest rates.
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<CAPTION>
DUE AFTER DECEMBER 31, 2000
----------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family $ 321,503 $ 524,024 $ 845,527
Multi-family ....... 6,332 15,682 22,014
Commercial real estate 22,948 50,961 73,909
Construction and land 70 31,874 31,944
Other loans ............. 9,272 47,454 56,726
---------- ---------- ----------
Total loans ...... $ 360,125 $ 669,995 $1,030,120
========== ========== ==========
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ORIGINATION, SALE, SERVICING AND PURCHASE OF LOANS. The Company's
mortgage and consumer finance lending activities are conducted primarily by its
commissioned loan personnel, through its 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 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, economic conditions, and competition. The general policy of the Company
is to sell a substantial majority of the one- to four-family fixed-rate mortgage
loans it originates with maturities of fifteen years or over and to retain
adjustable-rate and fixed-rate loans with maturities of under fifteen years
sufficient to meet portfolio needs and selling the balance. The Company retains
the servicing of mortgage loans sold in most cases. At December 31, 1999, the
Company serviced $784.6 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, adjusted for the value of originated mortgage servicing rights. See
"--Loan Servicing." The Company recognizes a gain on sale of consumer finance
loans at Forward Financial when it collects its fee upon the sale of the loan to
client lenders. At December 31, 1999, the Company had $16.2 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
$6.4 million of purchased loans at December 31, 1999. 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, and loans that qualify for Community
Reinvestment Act ("CRA") purposes, the Company generally 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 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 that can 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, 1999, the Company had $3.0 million in net gains attributable to the
sale of loans.
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<PAGE> 8
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,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loans:
Beginning balance ................................. $ 943,662 $ 791,728 $ 676,670
Loans originated:
One- to four-family ........................ 507,569 773,655 321,039
Multi-family ............................... 2,821 7,911 869
Commercial real estate ..................... 30,160 25,363 7,294
Construction and land ...................... 50,946 32,348 16,870
Other(1).................................... 70,198 37,055 34,055
----------- ----------- -----------
Total loans originated ..................... 661,694 876,332 380,127
Loans purchased(2)............................. 41,996 25,042 17,013
Loans from BNB acquisition .................... -- -- 66,093
Loans from Forward acquisition ................ 11,345 -- --
----------- ----------- -----------
Total .................................. 1,658,697 1,693,102 1,139,903
Less:
Principal repayments and other, net ........... (307,906) (382,475) (226,143)
Loan (charge-offs) recoveries, net ............ 358 258 (116)
Sale of mortgage loans ........................ (302,298) (350,215) (111,566)
Transfer of mortgage loans to real estate owned (83) -- (533)
----------- ----------- -----------
Loans, net and mortgage loans held for sale ... 1,048,768 960,670 801,545
Mortgage loans held for sale .................. (16,174) (17,008) (9,817)
----------- ----------- -----------
Loans, net ........................................ $ 1,032,594 $ 943,662 $ 791,728
=========== =========== ===========
</TABLE>
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(1) Other loans primarily consist of one- to four-family lines of credit
secured by mortgages and business loans. The amounts indicated primarily
include new amounts drawn on such home-equity lines of credit, business
loans and/or 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 or for CRA purposes.
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 Company's primary market area. Loan originations are obtained at the
Company's banking 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, 1999, the Company's total loans outstanding were
$1,087.6 million, of which $846.7 million, or 77.9%, 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, 38.0% were fixed-rate loans, and 62.0% were adjustable-rate mortgage
loans. The interest rates for the
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<PAGE> 9
majority of the Company's adjustable-rate mortgage loans are indexed to 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.
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 90% 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 and
maintaining quality 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 five 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
coverage 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 generally be made in an
amount up to 85% of the appraised value of the underlying property to a maximum
loan to one borrower amount of $7.5 million. However, most loans are granted at
or below 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, or may require limited recourse 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 and pro- forma cash-flow statement on the
property and the employment and credit history of the guarantor, as well as
other related documentation. The Company's multi-family loan portfolio at
December 31, 1999, totalled $22.0 million or 2.0% of total loans. The Company's
largest multi-family loan at December 31, 1999, was a $2.6 million performing
loan secured by a 118 unit apartment complex located in Malden, Massachusetts.
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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 the 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 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 to one borrower limit which
is $7.5 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 twenty-five 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, or may require limited
recourse 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, 1999 was $76.0 million, or 7.0% of total loans. The
largest commercial real estate loan in the Company's portfolio at December 31,
1999 was a $3.4 million performing loan secured by an office building located in
Cambridge, 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 the 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 majority of the Company's construction loans
have been made to finance the construction of one- to four-family, residential
properties. While the Company originates loans secured by land, the Company
generally does not originate such loans unless the borrower has also secured
sub-division approval and 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, or limited recourse may be
required on such loans depending on the creditworthiness of the borrower and
amount of the down payment. The Company's current loan to one borrower limit is
$7.5 million. The Company's largest construction and land loan at December 31,
1999 was a performing loan of $7.4 million with an outstanding loan-in-process
balance of $4.9 million and secured by an office/warehouse building located in
Marlboro and Southboro, Massachusetts. At December 31, 1999, the Company had
$77.1 million of construction and land loans which amounted to 7.1% of the
Company's total
10
<PAGE> 11
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, 1999, amounting to $65.8
million or 6.1% of the Company's total loan portfolio, consisted primarily of
home equity, business loans, and improvement loans, and, to a significantly
lesser extent, consumer 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, automobiles and
business assets such as accounts receivable, inventory and machinery. 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, 1999, these loans totalled
$43.7 million, or 4.0% of the Company's total loans and 66.4% 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 of credit 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 of credit is converted to an
adjustable-rate loan with terms of up to ten years for BFS and up to five years
for BNB. 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.
The Company began originating loans to businesses and corporations in
1998. These loans, amounting to $17.8 million at December 31, 1999, are
generally secured by the assets of the borrowing entity. The most typical type
of loans generated for the Company are term loans and lines of credit. These
loans generally require the personal guaranty of the principals of the Company.
However, in some circumstances where the borrower is extremely strong or the
loan to value ratio is low, the personal guaranty may be waived or be limited in
recourse. The Company has separate lending guidelines and underwriting standards
for this type of lending. These guidelines currently limit the loan to one
borrower to $7.5 million. The largest business loan in the Company's portfolio
as of December 31, 1999 was a $4.3 million performing loan secured by the
business assets of a company located in Attleboro, Massachusetts.
Loans secured by rapidly depreciable assets such as equipment,
machinery, automobiles, etc., 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 more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. The consumer finance loans originated
by Forward Financial are substantially all sold without recourse and servicing
released. Finally, the application of various federal and state laws, including
federal and state
11
<PAGE> 12
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 $2.5 million, on all commercial real estate,
multi-family and non-owner occupied construction loans in excess of $5.0
million, and on all business loans in excess of $4.5 million. At BNB, a similar
matrix has been established and Board of Directors' approval is required on all
loans in excess of $500,000.
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, 1999, the
loans to one borrower limit was $10.4 million and $1.4 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, 1999, the Company was servicing $784.6
million of loans for others. The gross servicing fee income from loans sold is
generally 0.25% to 0.38% of the total balance of the loan serviced. The Company
has not purchased 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,
1999, the Company had $5.1 million of capitalized mortgage servicing rights,
representing 65 basis points of loans serviced for others.
NONPERFORMING AND PROBLEM ASSETS
CLASSIFIED ASSETS. The Company's Asset Classification Policy and
federal regulations 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 collateral
pledged, if any, or the current net worth and paying capacity of the obligor.
"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' 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' 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, 1999,
the Company had, on a consolidated basis, $4.5 million of assets designated as
"Special Mention," $3.6 million of assets designated as "Substandard," $35,000
of assets designated as "Doubtful" and $679,000 of assets designated as "Loss."
All assets classified as "Loss" have been charged off for financial statement
purposes. Included in these amounts was $746,000 in non-performing loans at
December 31, 1999. In the opinion of management, the remaining "Special Mention"
and "Substandard" loans of $7.4 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, 1999 AT DECEMBER 31, 1998
---------------------------------------------- ----------------------------------------------
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 ..... 10 $1,568 6 $ 721 16 $1,625 12 $ 618
Multi-family ............ -- -- -- -- -- -- -- --
Commercial real estate ....... 2 287 -- -- -- -- -- --
Construction and land ........ -- -- -- -- -- -- -- --
Other loans .................. 2 245 -- -- 4 121 -- --
------ ------ ------ ------ ------ ------ ------ ------
Total ................. 14 $2,100 6 $ 721 20 $1,746 12 $ 618
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to loans, net
and mortgage loans
held for sale ........... 0.20% 0.07% 0.18% 0.06%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------
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 ..... 36 $3,313 14 $ 865
Multi-family ............ -- -- -- --
Commercial real estate ....... -- -- 3 21
Construction and land ........ -- -- -- --
Other loans .................. 6 139 3 6
------ ------ ------ ------
Total ................... 42 $3,452 20 $ 892
====== ====== ====== ======
Delinquent loans to loans, net
and mortgage loans
held for sale ........... 0.43% 0.11%
</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, 1999, restructured loans totalled
$210,000, consisting of one loan. REO, net, totalled $376,000, consisting of two
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, 1999, 1998, 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
$(2,000), $33,000, $149,000, $103,000 and $303,000, respectively. For the same
periods, the difference between the amount of interest income that would have
been recognized on impaired loans if such loans were performing in accordance
with their regular terms and amounts recognized was $2,000, $1,000, $1,000,
$73,000 and $77,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family .............. $ 721 $ 784 $ 941 $1,463 $1,195
Multi-family ..................... -- -- -- -- 745
Commercial real estate ............. 25 25 458 25 3,312
Other loans ........................ -- -- 6 14 --
------ ------ ------ ------ ------
Total(l)....................... 746 809 1,405 1,502 5,252
Real estate owned, net(1)............. 376 47 195 2,668 971
------ ------ ------ ------ ------
Total non-performing assets ... 1,122 856 1,600 4,170 6,223
Restructured loans ................... 210 213 369 2,489 2,941
------ ------ ------ ------ ------
Total risk elements .................. $1,332 $1,069 $1,969 $6,659 $9,164
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans(2)......................... 1.01% 0.88% 0.82% 0.64% 0.82%
Allowance for loan losses as a percent
of non-performing loans(3)........... 1,428.15 1,029.06 469.75 293.02 81.40
Non-performing loans as a percent
of loans(2), (3)..................... 0.07 0.09 0.17 0.22 1.00
Non-performing assets as a percent
of total assets(4)................... 0.09 0.08 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 REO.
15
<PAGE> 16
At December 31, 1999, loans which were characterized as impaired
pursuant to Statement of Accounting Standards ("SFAS") 114 and 118 totalled
$235,000. All of the impaired loans have been measured using the discounted cash
flow method or the fair value of the collateral method if the loan is collateral
dependent. During the year ended December 31, 1999, the average recorded value
of impaired loans was $335,000, interest income of $15,000 was recognized, all
of which was recorded on a cash basis, and $17,000 of interest income would have
been recognized under original terms.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Impaired loans:
Multi-family real estate $ -- $245 $281
Commercial real estate . 235 238 217
---- ---- ----
Total ............. $235 $483 $498
==== ==== ====
</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 1999, 1998, 1997, 1996 and 1995 were $1.6 million, $1.6 million, $1.7
million, $1.3 million and $3.6 million, respectively. During the year ended
December 31, 1999, there were recoveries of $414,000 and charge-offs of $56,000
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, 1999, the Company's allowance for loan losses was 1.01% of
total loans as compared to 0.88% as of December 31, 1998. Management believes
this increased 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, and business loans. These combined total balances
increased from $149.2 million at December 31, 1998 to $236.6 million at December
31, 1999, an increase of 58.6%. The Company had non-accrual loans of $746,000
and $809,000 at December 31, 1999 and December 31, 1998, 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 YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .......... $ 8,500 $ 6,600 $ 4,400 $ 4,275 $ 3,700
BNB allowance for loan losses
at acquisition date .................. -- -- 620 -- --
Forward Financial allowance for loan
losses at acquisition date ........... 170 -- -- -- --
Provision for loan losses ............... 1,626 1,642 1,696 1,294 3,614
Charge-offs:
Real estate loans:
Residential:
One- to four-family ................. 19 51 370 387 550
Multi-family ........................ 1 2 84 263 483
Commercial ............................ -- 75 45 664 2,297
Other ................................. 36 131 16 198 194
-------- -------- -------- -------- --------
Total .............................. 56 259 515 1,512 3,524
Recoveries .............................. 414 517 399 343 485
-------- -------- -------- -------- --------
Balance at end of period ................ $ 10,654 $ 8,500 $ 6,600 $ 4,400 $ 4,275
======== ======== ======== ======== ========
Ratio of net charge-offs (net recoveries)
during the period to average loans
outstanding during the period ........ (0.04)% (0.03)% 0.02% 0.19% 0.60%
======== ======== ======== ======== ========
</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,
------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ---------------------------------------
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 $ 2,872 26.96% 77.85% $ 2,186 25.72% 84.27%
Multi-family ....... 209 1.96 2.02 214 2.52 2.33
Commercial real estate 2,090 19.62 6.99 615 7.24 4.97
Construction and land 1,285 12.06 7.09 3 0.03 4.23
Other loans .......... 1,029 9.66 6.05 731 8.60 4.20
Unallocated .......... 3,169 29.74 -- 4,751 55.89 --
------- ------ ------ ------- ------ ------
Total allowance
for loan losses $10,654 100.00% 100.00% $ 8,500 100.00% 100.00%
======= ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
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 $1,997 30.26% 86.11% $1,899 43.16% 88.00% $1,974 46.18% 85.44%
Multi-family ...... 206 3.12 2.32 274 6.23 3.10 373 8.72 5.35
Commercial real
estate ........... 369 5.59 4.46 451 10.25 4.07 1,285 30.06 5.05
Construction
and land ......... 152 2.30 2.51 463 10.52 1.81 580 13.57 0.66
Other loans ......... 266 4.03 4.60 61 1.39 3.02 47 1.10 3.50
Unallocated ......... 3,610 54.70 -- 1,252 28.45 -- 16 0.37 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses $6,600 100.00% 100.00% $4,400 100.00% 100.00% $4,275 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
18
<PAGE> 19
REAL ESTATE OWNED
At December 31, 1999, the Company had $376,000 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, 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 Company's
investment and mortgage-backed securities purchased for the held to maturity
portfolio totalled $16.2 million, or 1.3% of assets. At December 31, 1999, the
available for sale portfolio totalled $68.7 million or 5.5% 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. The Company's Board, BFS' Investment Committee and BNB's Board are
provided with activity reports at their respective meetings and summaries of the
held to maturity and available for sale investment portfolios of the Company,
BFS and BNB, respectively, on a quarterly basis.
At December 31, 1999, the Company had invested $29.5 million in
mortgage-backed securities, or 2.4% of total assets, which were guaranteed by
Ginnie Mae ("GNMA"), insured by either FNMA or FHLMC or privately issued. Of the
$29.5 million, $13.2 million were GNMA securities, of which $11.3 million were
adjustable-rate with 1.5% maximum annual rate adjustments and lifetime maximum
interest rates of 12.5%. 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 or increasing 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, 1999, mortgage-backed securities available for sale and
held-to-maturity amounted to $15.5 million and $14.0 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,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
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) ............................ $13,201 44.78% $22,627 51.49% $33,106 57.60%
FHLMC(3), (4) ........................... 5,965 20.23 5,684 12.94 9,544 16.60
FNMA(5) ................................. 3,263 11.07 428 0.97 894 1.56
Privately issued collateralized
mortgage obligations(6), (7) .......... 7,052 23.92 15,203 34.60 13,931 24.24
------- ----- ------- ----- ------- -----
Total mortgage-backed securities ...... 29,481 100.00% 43,942 100.00% 57,475 100.00%
====== ====== ======
Less:
Mortgage-backed securities available for
sale - GNMA(2) ........................ -- 5,982 10,681
Mortgage-backed securities available
for sale - FHLMC(4) ................... 5,484 5,002 8,444
Mortgage-backed securities available for
sale - FNMA .......................... 3,004 -- --
Privately issued collateralized mortgage
obligations(7) ....................... 7,052 10,045 --
------- ------- -------
Mortgage-backed securities
held to maturity ...................... $13,941 $22,913 $38,350
======= ======= =======
</TABLE>
- -------------------
(1) Includes $78,000, $151,000 and $213,000 of unamortized premiums related to
GNMA securities as of December 31, 1999, 1998 and 1997, respectively.
(2) Is net of unrealized gain of $0, $65,000, and $128,000 at December 31,
1999, 1998 and 1997, respectively.
(3) Includes $66,000, $104,000 and $144,000 of unamortized premiums related to
FHLMC securities as of December 31, 1999, 1998 and 1997, respectively.
(4) Is net of unrealized loss of $75,000 at December 31, 1999, an unrealized
gain of $6,000 at December 31, 1998 and an unrealized loss of $10,000 at
December 31, 1997.
(5) Includes $4,000 of unamortized premiums related to FNMA.
(6) Includes $81,000 of unamortized discounts related to privately issued
collateralized mortgage obligations at December 31, 1999.
(7) Is net of unrealized loss of $266,000 at December 31, 1999 and unrealized
gain of $22,000 at December 31, 1998.
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,
------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance ........................ $ 43,942 $ 57,475 $ 66,612
Mortgage-backed securities purchased:
Available for sale .................. 5,005 10,856 --
Less:
Sale of mortgage-backed securities
available for sale ................ (4,062) -- (1,084)
Principal repayments ................ (14,892) (24,275) (8,448)
Change in unrealized gains (losses) . (435) (24) 440
Accretion of premium, net of discount (77) (90) (45)
-------- -------- --------
Ending balance ........................... $ 29,481 $ 43,942 $ 57,475
======== ======== ========
</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>
AT DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
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:
GNMA .......................... $13,201 $13,297 $16,645 $16,991 $22,425 $22,858
FNMA .......................... 259 252 428 438 894 902
FHLMC ......................... 481 481 682 695 1,100 1,108
Privately issued collateralized
mortgage obligations ....... -- -- 5,158 5,209 13,931 14,035
------- ------- ------- ------- ------- -------
Total held to maturity ........ 13,941 14,030 22,913 23,333 38,350 38,903
------- ------- ------- ------- ------- -------
Available for sale:
GNMA .......................... -- -- 5,982 5,982 10,681 10,681
FNMA .......................... 3,004 3,004 -- -- -- --
FHLMC ......................... 5,484 5,484 5,002 5,002 8,444 8,444
Privately issued collateralized
mortgage obligations ....... 7,052 7,052 10,045 10,045 -- --
------- ------- ------- ------- ------- -------
Total available for sale ... 15,540 15,540 21,029 21,029 19,125 19,125
------- ------- ------- ------- ------- -------
Total mortgage-backed
securities .............. $29,481 $29,570 $43,942 $44,362 $57,475 $58,028
======= ======= ======= ======= ======= =======
</TABLE>
21
<PAGE> 22
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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Daily federal funds sold and
short-term investments ................ $ 2,815 $ 2,815 $18,068 $18,068 $ 3,448 $ 3,448
Investment securities:
Held to maturity:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 2,304 2,275 7,302 7,371 20,630 20,630
------- ------- ------- ------- ------- -------
Total held to maturity ................... 2,304 2,275 7,302 7,371 20,630 20,630
------- ------- ------- ------- ------- -------
Available for sale:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 33,641 33,641 29,356 29,356 30,617 30,617
Mortgage-Related Mutual Funds ...... 16,193 16,193 16,031 16,031 -- --
Other Mutual funds(1) .............. 1,960 1,960 1,974 1,974 1,150 1,150
Marketable Equity Securities--
Common Stock ...................... 1,409 1,409 1,776 1,776 -- --
------- ------- ------- ------- ------- -------
Total available for sale ........ 53,203 53,203 49,137 49,137 31,767 31,767
------- ------- ------- ------- ------- -------
Total investment securities .............. $58,322 $58,293 $74,507 $74,576 $55,845 $55,845
======= ======= ======= ======= ======= =======
</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, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------------------
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>
Daily federal funds sold and short-term investments ...... $ 2,796 4.16% $ 19 4.88% $ -- --%
Investment Securities:
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations ............... 4 5.46 2,300 6.34 -- --
------- ------- -------
Total held to maturity .......................... 4 5.46 2,300 6.34 -- --
------- ------- -------
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations .............. 4,997 6.50 12,187 6.11 5,740 5.28
Mortgage-Related Mutual Funds ....................... 16,193 6.44 -- -- -- --
Other Mutual Funds .................................. 1,960 4.91 -- -- -- --
Equity Investments .................................. 1,409 N/A -- -- -- --
------- ------- -------
Total available for sale ........................ 24,559 6.32 12,187 6.11 5,740 5.28
------- ------- -------
Total investment securities .............................. $27,359 6.09 $14,506 6.14 $ 5,740 5.28
======= ======= =======
Mortgage-backed securities:
Held to maturity:
FNMA ................................................ $ -- -- $ 259 7.00 $ -- --
GNMA ................................................ -- -- 99 7.49 1,810 8.23
FHLMC ............................................... -- -- 481 7.00 -- --
------- ------- -------
Total held to maturity .......................... -- -- 839 7.06 1,810 8.23
Held for sale:
FHLMC ............................................... -- -- 3,185 6.42 1,981 7.01
FNMA ................................................ -- -- -- -- -- --
Privately issued collateralized mortgage obligation . -- -- -- -- -- --
------- ------- -------
Total held for sale ............................... -- -- 3,185 6.42 1,981 7.01
------- ------- -------
Total mortgage-backed securities ................ $ -- --% $ 4,024 6.55% $ 3,791 7.59%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------------------------------
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 ...... $ -- --% $ 2,815 4.16%
Investment Securities:
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations ............... -- -- 2,304 6.34
------- -------
Total held to maturity .......................... -- -- 2,304 6.34
------- -------
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations .............. 10,717 5.91 33,641 5.96
Mortgage-Related Mutual Funds ....................... -- -- 16,193 6.44
Other Mutual Funds .................................. -- -- 1,960 4.91
Equity Investments .................................. -- -- 1,409 N/A
------- -------
Total available for sale ........................ 10,717 5.91 53,203 6.07
------- -------
Total investment securities .............................. $10,717 5.91 $58,322 5.99
======= =======
Mortgage-backed securities:
Held to maturity:
FNMA ................................................ $ -- -- $ 259 7.00
GNMA ................................................ 11,292 7.02 13,201 7.19
FHLMC ............................................... -- -- 481 7.00
------- -------
Total held to maturity .......................... 11,292 7.02 13,941 7.18
------- ---- -------
Held for sale:
FHLMC ............................................... 318 6.00 5,484 6.61
FNMA ................................................ 3,004 8.04 3,004 8.04
Privately issued collateralized mortgage obligation . 7,052 6.32 7,052 6.32
------- -------
Total held for sale ............................... 10,374 6.81 15,540 6.75
------- -------
Total mortgage-backed securities ................ $21,666 6.92% $29,481 6.95%
======= =======
</TABLE>
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, 1999, core deposits represented 50.4% 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, mutual funds and equity markets 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 $53.7
million and $7.7 million of deposits during 1999 and 1998, respectively, for
terms of two to five years.
The following table presents the deposit activity of the Company for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)................................... $37,033 $63,456 $ 47,355
Interest credited on deposit accounts........................ 25,872 23,867 18,626
Deposits acquired from BNB acquisition....................... -- -- 125,022
------- ------- --------
Total increase (decrease) in deposit accounts................ $62,905 $87,323 $191,003
======= ======= ========
</TABLE>
At December 31, 1999, the Company had $38.6 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............................... $11,675 4.88%
Over 3 through 6 months............................ 5,416 4.87
Over 6 through 12 months........................... 8,866 5.06
Over 12 months..................................... 12,644 5.73
-------
Total.............................................. $38,601 5.20%
======= ====
</TABLE>
24
<PAGE> 25
The following table sets forth the distribution of the Company's
average deposit accounts for the periods indicated and the average cost on each
category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposit
accounts..................... $ 59,279 8.24% 2.86% $ 62,739 9.56% 2.93% $ 61,800 11.18% 2.95%
Savings accounts............. 142,399 19.81 2.48 121,092 18.45 2.48 116,247 21.03 2.43
NOW accounts................. 110,684 15.39 0.80 104,532 15.94 1.11 96,590 17.47 1.11
Non-interest-bearing accounts 49,944 6.95 -- 54,808 8.36 -- 41,017 7.42 --
-------- ------ -------- ------ -------- ------
Total................... 362,306 50.39 1.69 343,171 52.31 1.75 315,654 57.10 1.81
-------- ------ -------- ------ -------- ------
Certificate accounts:
Less than six months...... 25,657 3.57 4.17 29,423 4.49 4.99 33,573 6.07 5.16
Over six through 12 months 39,741 5.53 3.63 42,483 6.48 5.42 54,876 9.93 5.41
Over 12 through 36 months. 241,689 33.62 6.00 187,285 28.55 6.02 94,157 17.04 5.99
Over 36 months............ 4,236 0.59 5.82 5,442 0.83 5.67 6,859 1.24 5.43
IRA/KEOGH................. 45,345 6.31 5.49 48,177 7.34 5.73 47,650 8.62 5.78
-------- ------ -------- ------ -------- ------
Total certificate accounts 356,668 49.61 5.54 312,810 47.69 5.79 237,115 42.90 5.68
-------- ------ -------- ------ -------- ------
Total average deposits $718,974 100.00% 3.60% $655,981 100.00% 3.68% $552,769 100.00% 3.47%
======== ====== ======== ====== ======== ======
</TABLE>
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, 1999.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1999 AT DECEMBER 31,
------------------------------------------------------------ ---------------------------------
LESS
THAN TWO TO FOUR TO
ONE ONE TO THREE THREE TO FIVE
YEAR TWO YEARS YEARS FOUR YEARS YEARS 1999 1998 1997
-------- --------- --------- ---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00% .......... $ 2,636 $ -- $ -- $ -- $ -- $ 2,636 $ 1,447 $ 1,367
4.01 to 5.00% ....... 78,980 16,468 4,809 692 909 101,858 46,814 1,885
5.01 to 6.00% ....... 90,729 62,957 2,165 1,479 1,067 158,397 255,263 203,481
6.01 to 7.00% ....... 71,716 23,988 7,306 9,395 24,092 136,497 35,135 76,802
7.01 to 8.00% ....... -- -- -- -- -- -- -- 94
-------- -------- -------- -------- -------- -------- -------- --------
Total ............ $244,061 $103,413 $ 14,280 $ 11,566 $ 26,068 $399,388 $338,659 $283,629
======== ======== ======== ======== ======== ======== ======== ========
</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, fluctuates from time to time
in accordance with the policies of the OTS, OCC and the FHLB. During the year
ended December 31, 1999, the Company increased its net borrowings from the FHLB
by $47.0 million. At December 31, 1999, the Company had $384.5 million in
outstanding advances from the FHLB.
25
<PAGE> 26
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,
-------------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............................. $367,484 $306,575 $287,128
Maximum amount outstanding at
any month-end during the period...................... 390,500 337,500 310,792
Balance outstanding at end of period.................... 384,500 337,500 256,500
Weighted average interest rate
during the period.................................... 5.77% 5.94% 6.00%
Weighted average interest rate at end 5.80% 5.69% 5.96%
of period...........................................
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Other Borrowed Money:
Average balance outstanding............................. $ 365 $ 1,616 $ 11,948
Maximum amount outstanding at
any month-end during the period...................... 3,054 7,140 21,861
Balance outstanding at end of period.................... 3,054 0 7,140
Weighted average interest rate
during the period.................................... 9.21% 6.05% 5.62%
Weighted average interest rate at end
of period........................................... 9.25% N/A 5.98%
</TABLE>
SUBSIDIARY ACTIVITIES
Leader Corporation ("Leader Corp.") incorporated under Massachusetts
law, is a wholly owned subsidiary of BFS.
In 1994, BFS, through Leader Corp., permitted Liberty Financial, a
third party securities broker, to offer various uninsured investment products to
BFS' customers. Leader Corp. entered into a contract with such third party
brokerage concern to perform brokerage services in segregated areas of BFS'
branches. Under this contract, Liberty Financial leases space from BFS at BFS'
branch locations, pays rent and a percentage of sales to Leader Corp. Leader
Corp. had net income of $33,000 and $25,000, respectively, for the years ended
December 31, 1999 and 1998.
Forward Financial was acquired by BFS at the close of business December
6, 1999. Forward Financial is incorporated under Massachusetts law and operates
as a subsidiary of BFS. It originates loans, primarily direct with consumers
purchasing or refinancing manufactured housing, recreational vehicles, marine
and leased equipment. Forward Financial operates in approximately twenty states
from its headquarters in Northboro Massachusetts and five other offices. It
sells the vast majority of the loans it originates to third party client
lenders.
26
<PAGE> 27
Ellsmere Insurance Agency, Inc. was acquired by BNB at the close of
business December 6, 1999. It is incorporated under Massachusetts law and has
limited operations as a subsidiary of BNB. It earns finder fees for customer
referrals.
PERSONNEL
As of December 31, 1999, the Company had 320 authorized full-time
employee positions and 70 authorized part-time employee positions, for a total
of approximately 350 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
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 back-up
regulator. BFS' 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 the OCC,
as its primary federal regulator, and the FDIC, as the back-up regulator. BNB's
deposit accounts are insured up to applicable limits by the Bank Insurance Fund
("BIF"), which is also managed by the FDIC. The OTS and OCC conduct periodic
examinations to test BFS' and BNB's safety and soundness and compliance with
various regulatory requirements. Federal regulations establish a comprehensive
framework of activities in which an institution can engage and are 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 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.
FEDERAL HOME LOAN BANK SYSTEM
Both BFS and BNB are members of the Federal Home Loan Bank System,
which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan
Bank provides a central credit facility primarily for member institutions. The
Banks, as members of the Federal Home Loan Bank, are required to acquire and
hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the
27
<PAGE> 28
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the Federal Home Loan Bank, whichever is greater. BFS and BNB were in
compliance with this requirement with investments in Federal Home Loan Bank
stock at December 31, 1999 of $19.2 million and $1.1 million, respectively.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Banks' net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
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 banks 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,
28
<PAGE> 29
or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. There is 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.
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.
RECENT LEGISLATION. The Gramm-Leach-Bliley Act of 1999 authorizes a
bank holding company that meets specified conditions, including being "well
capitalized" and "well managed," to opt to become a "financial holding company"
and thereby engage in a broader array of financial activities than previously
permitted. Such activities can include insurance underwriting and investment
banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through
"financial subsidiaries" in certain of the activities permitted for financial
holding companies. Financial subsidiaries are generally treated as an affiliates
for purposes of restrictions on a bank's transactions with affiliates.
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 in Massachusetts 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
29
<PAGE> 30
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 Massachusetts 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 effectively require
savings institutions to meet four minimum capital standards: a 2% tangible
capital ratio, a 4% leverage (core) capital ratio (3% for the most highly rated
institutions), a 4% risk-based Tier I capital ratio and 8% risk-based total
capital ratio. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
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 at least 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 believed inherent in the type of asset. 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
components of supplementary capital include, among other items, 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 a leverage
(core) capital at least equal to 4% of assets, net of certain exclusions, (3%
for institutions receiving the highest examination rating), a risk- based Tier I
capital ratio of 4% and an 8% risk-based capital ratio. 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%.
As a condition for approving the acquisition of Forward Financial, the FRB
required the Company and BFS to remain "well capitalized" as defined in the
regulations, for a period of one year following the date of the acquisition. The
Company and BFS have to date complied with this requirement.
The following table presents BFS' and BNB's capital position at
December 31, 1999 relative to regulatory requirements.
30
<PAGE> 31
<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, 1999
Risk-based Total Capital:
BFS....................... $67,862 10.0% $54,064 8.0% $67,581 10.0%
BNB....................... 9,436 13.6 5,537 8.0 6,921 10.0
Core Capital:
BFS....................... 59,396 5.4 43,906 4.0 54,882 5.0
BNB....................... 8,694 6.3 5,521 4.0 6,901 5.0
Risk-based Tier I Capital:
BFS....................... 59,396 8.8 27,032 4.0 40,548 6.0
BNB....................... 8,694 12.6 2,769 4.0 4,153 6.0
Tangible Capital:
BFS ..................... 59,396 5.4 21,953 2.0 54,882 5.0
As of December 31, 1998:
Risk-based Total Capital:
BFS ...................... $57,944 10.2% $45,538 8.0% $56,923 10.0%
BNB ...................... 10,131 15.3 5,291 8.0 6,614 10.0
Core Capital:
BFS ...................... 50,820 5.1 39,533 4.0 49,417 5.0
BNB ...................... 9,492 7.4 5,167 4.0 6,459 5.0
Risk-based Tier I Capital:
BFS ...................... 50,820 8.9 22,769 4.0 34,154 6.0
BNB ...................... 9,492 14.4 2,645 4.0 3,968 6.0
Tangible Capital:
BFS ...................... 50,820 5.1 19,767 2.0 49,417 5.0
</TABLE>
The Company's regulatory capital ratios at December 31, 1999 were 5.5%,
8.9% and 10.2% for Tier 1 leverage ratio, Tier 1 capital ratios and total
capital ratios, respectively, and 7.1%, 12.6% and 13.8%, respectively, at
December 31, 1998.
PROMPT CORRECTIVE REGULATORY ACTION. The OTS and OCC are required to
take certain supervisory actions against undercapitalized institutions under
their jurisdiction, the severity of which depends upon the institution's degree
of undercapitalization. Generally, an institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (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 OTS and OCC are 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 the OTS or OCC within 45 days of
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<PAGE> 32
the date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be 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 OTS and OCC 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 and BNB are presently
insured by the FDIC through the SAIF and BIF, respectively. The FDIC maintains a
risk-based assessment system by which institutions are assigned to one of three
categories based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for SAIF member institutions are determined semiannually by the FDIC and
currently range from zero basis points for the healthiest institutions to 27
basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund members paid 1.2 basis points. By law, there is equal sharing of
FICO payments between SAIF and BIF members beginning on January 1, 2000.
BFS' assessment rate for fiscal 1999 was approximately 6 basis points
and the premium paid for this period was $355,000. BNB's assessment rate was 1.2
basis points and the premium paid was $14,000 for 1999. A significant increase
in FDIC insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Company.
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.
LOANS TO ONE BORROWER. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. 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, 1999, BFS' limit
on loans to one borrower was $10.4 million and BNB's limit was $1.4 million. At
December 31, 1999, BFS' largest aggregate outstanding balance of loans to one
borrower was $7.5 million and BNB's largest aggregate outstanding balance of
loans to one borrower was $731,000.
QTL TEST. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under 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
32
<PAGE> 33
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.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 1999, BFS maintained approximately 90% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
National banks such as BNB are not subject to the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. An institution that exceeded all capital
requirements before and after a proposed capital distribution ("Tier 1 Bank")
and had not been advised by the OTS that it was in need of more than normal
supervision, could, after prior notice but without obtaining approval of the
OTS, make capital distributions during the 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 the excess capital over its 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 required prior
regulatory approval. Effective April 1, 1999, the OTS's capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the OTS is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i.e., generally, examination ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with OTS. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank'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, 1999, 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. At December 31, 1999, BNB met all
applicable 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' liquidity
ratio for December 31, 1999 was 6.85%, 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.
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<PAGE> 34
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' latest quarterly thrift
financial report. The assessments paid by BFS for the fiscal year ended December
31, 1999 totalled $180,000.
National banks pay semi-annual assessments to the OCC to fund its
operations based on asset size. Such assessments for BNB amounted to $46,000 for
the year ended December 31, 1999.
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. 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. Massachusetts did not enact any 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.
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
depository institution. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the depository 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. There is 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. Both banks have complied with
Regulation O requirements.
34
<PAGE> 35
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. Neither the Company nor the Bank are under any enforcement action.
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 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 FRB regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: for accounts
aggregating $44.3 million or less (subject to adjustment by the FRB) the reserve
requirement is 3%; and for accounts aggregating greater than $44.3 million, the
reserve requirement is $1,329 million plus 10% (subject to adjustment by the FRB
between 8% and 14%) against that portion of total transaction accounts in excess
of $44.3 million. The first $5.0 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. BFS and BNB are also in compliance with these
requirements.
FEDERAL SECURITIES LAWS
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 of 1933, as amended (the "Securities Act"). If the
Company meets the
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<PAGE> 36
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. Provisions 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.
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' 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 1999 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. 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 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' 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' income. Non-dividend distributions include
distributions in excess of BFS' current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of BFS' current or accumulated earnings and profits will not be so included in
BFS' 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
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<PAGE> 37
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.
STATE AND LOCAL TAXATION
COMMONWEALTH OF MASSACHUSETTS. Financial institutions are subject to a
tax on their apportioned income to Massachusetts at the rate of 10.5% The
Company's two bank subsidiaries each own a security corporation and a real
estate investment trust ("REIT"). The security corporations, which don't qualify
as "bank holding company" are taxed at 1.32%. The REITs pay no tax, provided
they distribute 100% of their income to their respective stockholders.
Subsidiary corporations of BFS and BNB conducting business in Massachusetts must
file separate Massachusetts state tax returns and are taxed as financial
institutions.
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 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' Employee Stock Ownership Plan and the Company's other activities qualify
as activities permissible for a securities corporation. If it were determined
that the Company failed to so qualify, it would be taxed as a financial
institution at a rate of 10.50%.
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.
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<PAGE> 38
ITEM 2. PROPERTIES.
The Company conducts its business through an administrative and full
service office located in Burlington and several other 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
YEAR PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1999
- ---------- ---------- ---------- ---------------- ---------------------
(In thousands)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/BRANCH/HOME
OFFICE:
17 New England Executive Park Leased 1988 November, 2008 1,250
Burlington, MA 01803
BRANCH OFFICES:
980 Massachusetts Avenue Owned 1976 -- 463
Arlington, MA 02174
60 The Great Road Owned 1971 -- 395
Bedford, MA 01730
459 Boston Road Owned 1972 -- 338
Billerica, MA 01821
75 Federal Street Leased 1988 August, 2003 74
Boston, MA 02110
457 Broadway Owned 1969 -- 707
Chelsea, MA 02150
1840 Massachusetts Avenue Owned 1960 -- 1,136
Lexington, MA 02173
31 Cross Street Owned 1971 -- 485
Peabody, MA 01960
411 Broadway Owned 1977 -- 1,166
Revere, MA 02150
200 Linden Street Leased 1973 November, 2003 149
Wellesley, MA 02181
Construction in Progress - New Billerica Branch 909
Construction in Progress - New Woburn Branch 923
Forward Financial Co. Leased with various terms and locations.
360 Church Street
Northboro, MA 01532 217
------
Total $8,212
======
</TABLE>
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ITEM 3. 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. BNB, 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 BNB. Plaintiff alleges that BNB knew or should have known of the
alleged fraudulent actions of Plaintiff's officer, and that BNB 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. BNB 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. BNB 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information relating to the market for the Company's common equity and
related stockholder matters appears under "Shareholder Information" in the
Company's 1999 Annual Report to Stockholders on page 71 and is incorporated
herein by reference. Information relating to dividend restrictions for the
Company's common stock appears under "Regulation and Supervision."
ITEM 6. SELECTED FINANCIAL DATA.
The above-captioned information appears under "Selected Financial Data"
of the Company in the Company's 1999 Annual Report to Stockholders on pages 4
through 5 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 Company's 1999
Annual Report to Stockholders on pages 8 through 24 and is incorporated herein
by reference.
ITEMS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
The above-captioned information appears under the heading "Market Risk
and Management of Interest Rate Risk" in the Company's 1999 Annual Report to
Stockholders on pages 10 through 13 and is incorporated herein by reference.
39
<PAGE> 40
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 LLP appears in the
Company's 1999 Annual Report to Stockholders on pages 25 through 70 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
Company is incorporated herein by reference to the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held on April 26, 2000 at pages 3
through 6.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 26, 2000 at pages 8 through 17.
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 Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2000,
at pages 3 through 6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2000,
at page 17.
40
<PAGE> 41
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 1999 Annual Report to Stockholders:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report .......................................... 25
Consolidated Balance Sheets as of
December 31, 1999 and 1998 .......................................... 26
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 .................................... 27
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997 .................... 28-30
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 .............................. 31-32
Notes to Consolidated Financial Statements ............................ 33-70
</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.
(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.
41
<PAGE> 42
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Restated Certificate of Incorporation of BostonFed
Bancorp, Inc.(1)
3.2 BostonFed Bancorp, Inc. Amended and Restated Bylaws as
of February 23, 2000, (filed herewith)
4.0 Stock Certificate of BostonFed Bancorp, Inc.(1)
10.1 Employment Agreement between BFS and David F. Holland
and Employment Agreement between the Company and David
F. Holland (filed herewith)
10.2 Employment Agreement between BFS and David P. Conley
and Employment Agreement between the Company and David
P. Conley(2)
10.3 Employment Agreement between BSF and John A. Simas and
Employment Agreement between the Company and John A.
Simas(2)
10.4 Change of Control Agreement between BFS and Dennis J.
Furey and Change in Control Agreement Between the
Company and Dennis J. Furey (filed herewith)
10.5 Boston Federal Savings Bank Employee Severance
Compensation Plan(1)
10.6 Employee Stock Ownership Plan and Trust(1)
10.7 BostonFed Bancorp, Inc. 1996 Stock-Based Incentive
Plan(3)
10.8 BostonFed Bancorp, Inc. 1997 Stock Option Plan(4)
10.10 Boston Federal Savings Bank Defined Benefit Restoration
Plan (filed herewith)
10.11 Boston Federal Savings Bank Defined Contribution
Restoration Plan (filed herewith)
10.12 Change in Control Agreement Between BFS and Marylea R.
Oates and Change in Control Agreement Between the
Company and Marylea R. Oates(2)
11.0 Computation of earnings per share (see Consolidated
Statements of Income on page located on page 27 of the
1999 Annual Report)
13.0 1999 Annual Report to Stockholders (filed herewith)
21.0 Subsidiaries of the Registrant (filed herewith)
23.0 Consent of Independent Accountant (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99.0 Proxy Statement for 2000 Annual Meeting previously
filed on March 27, 2000 is herein incorporated by
reference
-----------------------------
(1) Incorporated herein by reference into this document
from the Exhibits 3.1, 4.0 and 10.5 to the 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. 333-94860.
(2) BFS and the Company have entered into employment or
change in control agreements with each of the Executive
Officers as well as certain other officers of BFS and
the Company. The employment agreements for Messrs.
Conley and Simas are not filed as part of this report.
Rather, the Exhibits for Messrs. Conley and Simas
incorporate by reference the agreements filed with this
report for Mr. Holland and describe the differences
between the agreements for the Named Executive
Officers. The change in control agreements for Ms.
Oates is also not filed as part of this report. Rather,
the Exhibit for Ms. Oates incorporates by reference the
agreements filed with this report for Mr. Furey and
describe any differences in the agreements for the
Named Executive Officers.
(3) Incorporated herein by reference into this document
from the Proxy Statement for the 1996 Annual Meeting of
Stockholders dated March 20, 1996.
42
<PAGE> 43
4. 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.
The Company filed a Report on Form 8-K on August 6, 1999, announcing
the fact that the Company entered into a Purchase and Sale Agreement by and
among the Company, Diversified Ventures, Inc., d/b/a Forward Financial Company,
Ellsmere Insurance Agency, Inc. and Gene J. DeFeudis. The 8-K also included the
Company's Press Release issued on August 4, 1999.
The Company filed a Report on Form 8-K on December 21, 1999, announcing
that the Company had on December 6, 1999, completed its acquisition of
Diversified Ventures, Inc., d/b/a Forward Financial Company and Ellsmere
Insurance Agency, Inc.
<PAGE> 44
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: March 30, 2000
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>
/s/ David F. Holland President and Chief Executive March 30, 2000
- --------------------------------------- Officer and Chairman of the Board
David F. Holland
/s/ David P. Conley Director, Executive Vice President, March 30, 2000
- --------------------------------------- Assistant Treasurer and Assistant Secretary
David P. Conley
/s/ John A. Simas Executive Vice President, March 30, 2000
- --------------------------------------- Corporate Secretary and Chief Financial
John A. Simas Officer (Principal financial and accounting officer)
/s/ Edward P. Callahan Director March 30, 2000
- ---------------------------------------
Edward P. Callahan
/s/ Gene J. DeFeudis Director March 30, 2000
- ---------------------------------------
Gene J. DeFeudis
/s/ Richard J. Dennis, Sr. Director March 30, 2000
- ---------------------------------------
Richard J. Dennis, Sr.
/s/ Richard J. Fahey Director March 30, 2000
- ---------------------------------------
Richard J. Fahey
/s/ Patricia M. Flynn Director March 30, 2000
- ---------------------------------------
Patricia M. Flynn
</TABLE>
<PAGE> 45
<TABLE>
<S> <C> <C>
/s/ Charles R. Kent Director March 30, 2000
- ---------------------------------------
Charles R. Kent
/s/ W. Robert Mill Director March 30, 2000
- ---------------------------------------
W. Robert Mill
/s/ Irwin W. Sizer Director March 30, 2000
- ---------------------------------------
Irwin W. Sizer
</TABLE>
<PAGE> 1
EXHIBIT 3.2
BOSTONFED BANCORP, INC.
AMENDED AND RESTATED BYLAWS
AS OF FEBRUARY 23, 2000
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of Directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of
the shares of the stock entitled to vote at the meeting, present in person or by
proxy (after giving effect to the provisions of Article FOURTH of the
Corporation's Certificate of Incorporation), shall constitute a quorum for
<PAGE> 2
all purposes, unless or except to the extent that the presence of a larger
number may be required by law. Where a separate vote by a class or classes is
required, a majority of the shares of such class or classes present in person or
represented by proxy (after giving effect to the provisions of Article FOURTH of
the Corporation's Certificate of Incorporation) shall constitute a quorum
entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present in person or by proxy constituting a quorum, then except as
otherwise required by law, those present in person or by proxy at such adjourned
meeting shall constitute a quorum, and all matters shall be determined by a
majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such regulation of the manner of voting and the conduct of discussion as seem to
him or her in order. The date and time of the opening and closing of the polls
for each matter upon which the stockholders will vote at the meeting shall be
announced at the meeting.
(b) At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting: (i)
by or at the direction of the Board of Directors or (ii) by any stockholder of
the Corporation who is entitled to vote with respect thereto and who complies
with the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive offices of the Corporation not less than
ninety (90) days prior to the date of the annual meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set
2
<PAGE> 3
forth as to each matter such stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation's capital stock that are beneficially owned by such
stockholder; and (iv) any material interest of such stockholder in such
business. Notwithstanding anything in these Bylaws to the contrary, no business
shall be brought before or conducted at an annual meeting except in accordance
with the provisions of this Section 6(b). The Officer of the Corporation or
other person presiding over the annual meeting shall, if the facts so warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 6(b) and,
if he should so determine, he shall so declare to the meeting and any such
business so determined to be not properly brought before the meeting shall not
be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are qualified under Article II, Section 1
of these Bylaws and nominated in accordance with the procedures set forth in
these Bylaws shall be eligible for election as Directors. Nominations of persons
for election to the Board of Directors of the Corporation may be made at a
meeting of stockholders at which directors are to be elected only: (i) by or at
the direction of the Board of Directors; or (ii) by any stockholder of the
Corporation entitled to vote for the election of Directors at the meeting who
complies with the notice procedures set forth in this Section 6(c). Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made by timely notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than ninety (90) days prior to the date of the meeting; provided, however, that
in the event that less than one hundred (100) days' notice or prior disclosure
of the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth: (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a Director, all information relating to
such person that would indicate such person's qualification under Article II,
Section 1, including an affidavit that such person would not be disqualified
under the provisions of Section 1(d)(2), and such information that is required
to be disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (ii) as to the stockholder giving the notice (x) the name and
address, as they appear on the Corporation's books, of such stockholder and (y)
the class and number of shares of the Corporation's capital stock that are
beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Corporation that information
required to establish his or her qualifications and to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a Director of the Corporation unless nominated
in accordance with the provisions of this Section 6(c) and Section 1 of Article
II. The Officer of the Corporation or other person presiding at the meeting
shall, if the facts so warrant, determine that a
3
<PAGE> 4
nomination was not made in accordance with such provisions and, if he or she
shall so determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be made by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or his or her proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballot, each of which shall state the name of
the stockholder or proxy voting and such other information as may be required
under the procedures established for the meeting. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make a written report thereof. The Corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of stockholders,
the person presiding at the meeting shall appoint one or more inspectors to act
at the meeting. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Certificate of Incorporation, all
other matters shall be determined by a majority of the votes cast.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the identity
of the stockholders entitled to vote at the meeting and the number of shares
held by each of them.
4
<PAGE> 5
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at an annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number, Term of Office and
Qualifications.
(a) General Powers. The business and affairs of the Corporation
shall be under the direction of its Board of Directors. The
Board of Directors shall annually elect a Chairman of the
Board from among its members who shall, when present, preside
at its meetings.
(b) Number. The number of Directors who shall constitute the Whole
Board shall be such number as the Board of Directors shall
from time to time have designated, except that in the absence
of such designation shall be seven.
(c) Terms of Office. The Directors, other than those who may be
elected by the holders of any class or series of Preferred
Stock, shall be divided, with respect to the time for which
they severally hold office, into three classes, with the term
of office of the first class to expire at the first annual
meeting of stockholders, the term of office of the second
class to expire at the annual meeting of stockholders one year
thereafter and the term of office of the third class to expire
at the annual meeting of stockholders two years thereafter,
with each Director to hold office until his or her successor
shall have been duly elected and qualified. At each annual
meeting of stockholders, Directors elected to succeed those
Directors whose terms then expire shall be elected for a term
of office to expire at the third succeeding annual meeting of
stockholders after their election, with each Director to hold
office until his or her successor shall have been duly elected
and qualified.
(d) Qualifications.
(1) Age Limitation. No person 72 years of age shall be
eligible for election, reelection, appointment, or
reappointment to the Board of the Corporation;
provided, however, that such age limitation shall not
apply to any Director serving in such capacity as of
August 1, 1995; provided further, however, that any
such Director to which such age limitation does not
apply may only serve as a Director until the later of
reaching age 72 or April 30, 2001 or until their
successor shall be elected and qualified. The age
limitation contained in this Section shall not apply
to an advisory Director.
5
<PAGE> 6
(2) Qualifications. No person shall be eligible for
election or appointment to the Board of Directors:
(i) if such person has, within the previous 10 years,
been the subject of supervisory action by a financial
regulatory agency that resulted in a cease and desist
order or an agreement or other written statement
subject to public disclosure under 12 U.S.C. 1818(u),
or any successor provision; (ii) if such person has
been convicted of a crime involving dishonesty or
breach of trust which is punishable by imprisonment
for a term exceeding one year under state or federal
law; (iii) if such person is currently charged in any
information, indictment, or other complaint with the
commission of or participation in such a crime; and
(iv) unless such person has been, for a period of at
least one year prior to his or her election,
nomination or appointment, a resident of a county in
which the Corporation or its subsidiaries maintains a
banking office or of a county contiguous to any such
county or had significant business ties to such
counties. No person may serve on the Board of
Directors and at the same time be a director or
officer of another co-operative bank, credit union,
savings bank, savings and loan association, trust
company, bank holding company or banking association
(in each case whether chartered by a state, the
federal government or any other jurisdiction) that
engages in business activities in the same market
area as the Corporation or any of its subsidiaries.
No person shall be eligible for election to the Board
of Directors if such person is the representative or
agent of a person or acting in concert (as that term
is used to describe relationships involved in either
presumptive or actual concerted action under 12
C.F.R. Section 574.4(d)) with respect to the
Corporation or its subsidiaries, with a person who is
ineligible for election to the Board of Directors
under this Subsection 1(d)(2). No nomination of any
individual who would not be qualified to be elected
or appointed to or serve as a member of the Board of
Directors under this Article II, Section 1(d) shall
be valid, accepted or voted upon. The Board of
Directors shall have the power to construe and apply
the provisions of this Section 1(d) and to make all
determinations necessary to implement such
provisions, including but not limited to
determinations as to whether any persons are a group
acting in concert, as defined by this Section 1(d).
The Board may request from a nominee information it
deems relevant to assessing a nominee's satisfaction
of the requirements of this Section 1(d).
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of
Preferred Stock, and unless the Board of Directors otherwise determines, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the Directors then in office, though
less than a quorum, and Directors so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires and until such Director's
successor shall have
6
<PAGE> 7
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board shall shorten the term of any incumbent
Director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the Directors then in office (rounded up to the nearest whole number),
by the Chairman of the Board or the President or, in the event that the Chairman
of the Board or President are incapacitated or otherwise unable to call such
meeting, by the Secretary, and shall be held at such place, on such date, and at
such time as they, or he or she, shall fix. Notice of the place, date, and time
of each such special meeting shall be given each Director by whom it is not
waived by mailing written notice not less than five (5) days before the meeting
or by telegraphing or telexing or by facsimile transmission of the same not less
than twenty-four (24) hours before the meeting. Unless otherwise indicated in
the notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting to another place,
date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
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Section 8. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind,
negotiable or non-negotiable, secured or unsecured, and to do all
things necessary in connection therewith;
(4) To remove any Officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any
Officer upon any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to
appoint, remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for Directors, Officers,
employees and agents of the Corporation and its subsidiaries as it may
determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for Directors, Officers, employees and agents of
the Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent
with these Bylaws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
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ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for these committees and any others provided
for herein, elect a Director or Directors to serve as the member or members,
designating, if it desires, other Directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings. The quorum requirements for each such
committee shall be a majority of the members of such committee unless otherwise
determined by the Board of Directors by a majority vote of the Board of
Directors which such quorum determined by a majority of the Board may be
one-third of such members and all matters considered by such committees shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the
Board, consisting of not less than three (3) members. The Nominating Committee
shall have authority (a) to review any nominations for election to the Board of
Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii)
of Article I of these Bylaws in order to determine compliance with such Bylaw;
and (b) to recommend to the Whole Board nominees for election to the Board of
Directors to replace those Directors whose terms expire at the annual meeting of
stockholders next ensuing.
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ARTICLE IV - OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a Chairman of the Board, Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary and a
Treasurer and from time to time may choose such other officers as it may deem
proper. The Chairman of the Board shall be chosen from among the Directors. Any
number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next
annual election of Officers and until their respective successors are chosen but
any Officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of Directors then constituting the Board of
Directors.
(c) All Officers chosen by the Board of Directors shall have
such powers and duties as generally pertain to their respective Offices, subject
to the specific provisions of this ARTICLE IV. Such officers shall also have
such powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
The Chairman of the Board shall, subject to the provisions of these
Bylaws and to the direction of the Board of Directors, serve in general
executive capacity and unless the Board has designated another person, when
present, shall preside at all meetings of the stockholders of the Corporation.
The Chairman of the Board shall perform all duties and have all powers which are
commonly incident to the office of Chairman of the Board or which are delegated
to him or her by the Board of Directors. He or she shall have power to sign all
stock certificates, contracts and other instruments of the Corporation which are
authorized.
Section 3. President and Chief Executive Officer.
The President and Chief Executive Officer (the "President") shall have
general responsibility for the management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the offices of President and Chief Executive
Officer or which are delegated to him or her by the Board of Directors. Subject
to the direction of the Board of Directors, the President shall have power to
sign all stock certificates, contracts and other instruments of the Corporation
which are authorized and shall have general supervision of all of the other
Officers (other than the Chairman of the Board), employees and agents of the
Corporation.
Section 4. Vice President.
The Vice President or Vice Presidents shall perform the duties of the
President in his absence or during his inability to act. In addition, the Vice
Presidents shall perform the duties and exercise the powers usually incident to
their respective offices and/or such other duties and powers as may
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be properly assigned to them by the Board of Directors, the Chairman of the
Board or the President. A Vice President or Vice Presidents may be designated as
Executive Vice President or Senior Vice President.
Section 5. Secretary.
The Secretary or Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such office and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President. Subject to the direction of the Board of Directors, the Secretary
shall have the power to sign all stock certificates.
Section 6. Treasurer.
The Treasurer shall be the Comptroller of the Corporation and shall
have the responsibility for maintaining the financial records of the
Corporation. He or she shall make such disbursements of the funds of the
Corporation as are authorized and shall render from time to time an account of
all such transactions and of the financial condition of the Corporation. The
Treasurer shall also perform such other duties as the Board of Directors may
from time to time prescribe. Subject to the direction of the Board of Directors,
the Treasurer shall have the power to sign all stock certificates.
Section 7. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more Assistant Secretaries
and such other Officers who shall have such powers and shall perform such duties
as are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other
Corporations.
Unless otherwise directed by the Board of Directors, the President or
any Officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the Chairman of the Board or the President, and
by the Secretary or an Assistant Secretary, or any Treasurer or Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all of
the signatures on the certificate may be by facsimile.
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Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than (60) days prior to the time for such other action as
hereinbefore described; provided, however, that if no record date is fixed by
the Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the next day preceding the day on
which the meeting is held, and, for determining stockholders entitled to receive
payment of any dividend or other distribution or allotment or rights or to
exercise any rights of change, conversion or exchange of stock or for any other
purpose, the record date shall be at the close of business on the day on which
the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
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ARTICLE VI - NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, Director, Officer, employee
or agent shall be in writing and may in every instance be effectively given by
hand delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier. Any such notice shall be addressed to such stockholder, Director,
Officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
A written wavier of any notice, signed by a stockholder, Director,
Officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, Director, Officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
an assistant to the Treasurer.
Section 3. Reliance Upon Books, Reports and Records.
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such Director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
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Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
ARTICLE VIII - AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change was given not less
than two (2) days prior to the meeting. The stockholders shall also have power
to amend, alter or repeal these Bylaws at any meeting of stockholders provided
notice of the proposed change was given in the notice of the meeting; provided,
however, that, notwithstanding any other provisions of the Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the voting stock required by law, the Certificate of Incorporation,
any Preferred Stock Designation or these Bylaws, the affirmative votes of the
holders of at least 80% of the voting power of all the then-outstanding shares
of the Voting Stock, voting together as a single class, shall be required to
alter, amend or repeal any provisions of these Bylaws.
The above Bylaws initially effective as of July 11, 1995, the date of
incorporation of BostonFed Bancorp, Inc., were amended and restated as of
January 19, 2000.
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Exhibit 10.1
BOSTON FEDERAL SAVINGS BANK
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement"), originally entered into on October 24,
1995, is amended and restated, effective as of December 31, 1999, by and between
Boston Federal Savings Bank (the "Bank"), a federally chartered savings
institution, with its principal administrative offices at 17 New England
Executive Park, Burlington, MA 01803, BostonFed Bancorp, Inc., a corporation
organized under the laws of the state of Delaware, the Holding Company of the
Bank (the "Holding Company") and David F. Holland ("Executive").
WHEREAS, the Bank wishes to continue to assure itself of the services
of Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to continue to serve in the employ of the
Bank and its subsidiaries on a full-time basis for the term of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees
to serve as Chief Executive Officer of the Bank. Executive shall render
administrative and management services to the Bank such as are customarily
performed by persons in a similar executive capacity. During the term of this
Agreement, Executive also agrees to serve as a director of the Bank.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first written above and shall continue
for a period of thirty-six (36) full calendar months from the effective date of
this Agreement, as amended and restated. Commencing on the first anniversary
date of this Agreement, and continuing on each anniversary thereafter, the
disinterested members of the board of directors of the Bank ("Board") may extend
the Agreement an additional year such that the remaining term of the Agreement
shall be three (3) years unless the Executive elects not to extend the term of
this Agreement by giving written notice in accordance with Section 8 of this
Agreement. The Board will review the Agreement and Executive's performance
annually for purposes of determining whether to extend the Agreement and the
rationale and results thereof shall be included in the minutes of the Board's
meeting. The Board shall give notice to the Executive as soon as possible after
such review as to whether the Agreement is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and other
reasonable leaves of absence,
<PAGE> 2
Executive shall devote substantially all of his business time, attention, skill,
and efforts to the faithful performance of his duties hereunder, including
activities and services related to the organization, operation and management of
the Bank and participation in industry, community and civic organizations;
provided, however, that, with the approval of the Board, as evidenced by a
resolution of the Board, from time to time, Executive may serve, or continue to
serve, on the boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in the Board's judgment, will not present
any conflict of interest with the Bank, or materially affect the performance of
Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, either
Executive or the Bank may terminate Executive's employment with the Bank at any
time during the term of this Agreement, subject to the terms and conditions of
this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute
consideration paid by the Bank in exchange for the duties described in Section 1
of this Agreement. The Bank shall pay Executive, as compensation, a salary of
not less than $360,000 ("Base Salary"). Base Salary shall include any amounts of
compensation deferred by Executive under any tax-qualified retirement or welfare
benefit plan or any other deferred compensation arrangement maintained by the
Bank. Base Salary shall be payable in accordance with the normal payroll
practices of the Bank. During the period of this Agreement, Executive's Base
Salary shall be reviewed at least annually; on or about the 15th day of December
each year. Such review shall be conducted by the Board or by a committee of the
Board delegated such responsibility by the Board. The committee or the Board may
increase Executive's Base Salary at any time. Any increase in Base Salary shall
thereafter become the new "Base Salary" for purposes of this Agreement.
(b) Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, as amended and restated, and the
Bank will not, without Executive's prior written consent, make any changes in
such plans, arrangements or perquisites (or any plans, arrangements or
perquisites with respect to which Executive begins to participate at any time
during the term of this Agreement, as amended and restated) which would
adversely affect Executive's rights or benefits thereunder, without separately
providing for an arrangement that ensures Executive receives or will receive the
economic value that Executive would otherwise lose as a result of such adverse
affect, unless such change is general in nature and applies in a
nondiscriminatory manner to all employees covered by the plan, arrangement or
perquisite. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive shall be entitled to participate in and receive
benefits under any employee benefit plans including, but not limited to,
retirement plans (such as pension, profit sharing and employee stock ownership
plans), supplemental retirement plans, incentive plans, health and welfare plans
and any other employee benefit plan or arrangement made available by the Bank
now or in the future to full-time employees of the Bank and/or senior executives
and key management employees of the Bank, subject to and on a basis consistent
with the terms, conditions and overall
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<PAGE> 3
administration of such plans and arrangements. Nothing paid to Executive under
any such plans or arrangements will be deemed to be in lieu of other
compensation and benefits to which Executive is entitled under this Agreement.
(c) The Bank shall pay or reimburse Executive for all reasonable
expenses incurred by Executive in performing his obligations under this
Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section 4 shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Bank or the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) of this
Agreement, or Termination for Cause, as defined in Section 7 of this Agreement,
or Retirement or Disability, as defined in paragraph (f) of this Section 4 or;
(ii) Executive's resignation from the Bank's employ, upon, any (A) notice to
Executive by the Bank of non-renewal of the term of this Agreement, (B) failure
to re-elect or re-appoint as Chief Executive Officer of the Bank or a failure to
nominate or re-elect Executive to the Board of Directors of the Bank, unless
consented to by the Executive, (C) material change in Executive's function,
duties, or responsibilities with the Bank, which change would cause Executive's
position to become one of lesser responsibility, importance, or scope from the
position and attributes thereof described in Section 1 of this Agreement (and
any such material change shall be deemed as continuing breach of this
Agreement), unless consented to by Executive, (D) relocation of Executive's
principal place of employment by more than 25 miles from its location at the
effective date of this Agreement, unless consented to by Executive, (E) material
reduction in the benefits, arrangements or perquisites to Executive which is not
general in nature and applicable on a nondiscriminatory basis to all employees
covered by such benefits, arrangements, or perquisites or, pursuant to Section
3(b) of this Agreement, to which Executive does not consent or for which
Executive is not or will not be provided the economic benefit, (F) liquidation
or dissolution of the Bank or the Holding Company, or (G) breach of this
Agreement by the Bank. Upon the occurrence of any event described in clauses
(A), (B), (C), (D), (E), (F) or (G), above, Executive shall have the right to
elect to terminate employment under this Agreement by resignation upon not less
than sixty (60) days prior written notice given within six full calendar months
after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8 of this Agreement, the Bank shall be
obligated to pay Executive, or, in the event of Executive's subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, the amount
of the remaining payments and benefits that Executive would have earned if he
had continued his employment with the Bank during the remaining unexpired term
of this Agreement, based on Executive's Base Salary and the benefits provided to
Executive as of the date of the Event of Termination, as set forth in Sections
3(a) and (b) of this Agreement, as the case may be, and the amount still due
Executive under any paragraph of Section 3 for service rendered through the Date
of Termination. Except as provided for in paragraphs (c) and (d) of Section 4,
the determination of
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Executive's benefits as of the date of the Event of Termination shall be made
based on (i) the value of the allocation attributable to employer contributions
for the most recent plan year under any defined contribution type plan; (ii) the
percentage of salary of any incentive or bonus payment for the most
recently-completed fiscal year; and (iii) the employer-provided cost of any
other benefit for the most recently-completed fiscal year. At the election of
Executive, which election is to be made within thirty (30) days of the Date of
Termination, such payments shall be made in a lump sum (without discount for
early payment) or paid monthly during the remaining term of the agreement
following Executive's termination. In the event that no election is made,
payment to Executive will be made in a lump sum. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment. Notwithstanding anything to the contrary elsewhere in this
Agreement, to the extent the Executive is entitled to continued coverage or
benefit accrual under any retirement or welfare benefit plan during the
remaining unexpired term of this Agreement, the amount payable under this
Section 4(b) should be adjusted to the extent necessary to avoid any duplication
of such benefits.
(c) Upon the occurrence of an Event of Termination, Executive will be
entitled to receive benefits due him under or contributed by the Bank on his
behalf pursuant to any retirement, incentive, profit sharing, employee stock
ownership, bonus, performance, disability or other employee benefit plan or
arrangement maintained by the Bank to the extent such benefits are not otherwise
paid to Executive under a separate provision of this Agreement. In addition, for
purposes of determining his vested accrued benefit, Executive shall be credited
either under the defined benefit pension plan maintained by the Bank or, if not
permitted under such plan, under a separate arrangement, with the additional
"years of service" that he would have earned for vesting and benefit accrual
purposes for the remaining term of the Agreement had his employment not
terminated.
(d) To the extent that the Bank continues to offer any life, medical,
health, disability or dental insurance plan or arrangement in which Executive
participates in on the last day of his employment (each being a "Welfare Plan"),
after an Event of Termination (as herein defined), Executive and his dependents
shall continue participating in such Welfare Plans, subject to the same premium
contributions on the part of Executive as were required immediately prior to the
Event of Termination until the earlier of (i) his death (ii) his employment by
another employer other than one of which he is the majority owner or (iii) the
end of the remaining term of this Agreement. If the Bank does not offer the
Welfare Plans (or if for any reason Executive's participation in said plans is
prohibited) after the Event of Termination, then the Bank shall provide
Executive with a payment equal to the actuarial value of the provision of such
benefit for the period which runs until the earlier of (i) his death; (ii) his
employment by another employer other than one of which he is the majority owner;
or (iii) the end of the remaining term of this Agreement.
(e) In the event that Executive is receiving monthly payments pursuant
to Section 4(b) of this Agreement, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement for that year shall be
paid in a lump sum or on a pro rata basis. Such election shall be irrevocable
for the year for which such election is made.
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(f) Termination of Executive based on "Retirement" shall mean
termination by written notice to the Bank from Executive specifying an exact
retirement date or termination in accordance with any retirement arrangement
established with Executive's written consent with respect to him. Termination of
Executive based on Disability shall mean written notice to the Bank by Executive
specifying an exact date as of which he is unable to perform all of the duties
and responsibilities of his position. Upon termination of Executive upon
Disability, Executive shall be entitled to all benefits under any disability
plan of the Bank or any other plans which Executive is a party or a participant
in accordance with the terms of the plan or arrangement. Executive shall be
entitled to all compensation and benefits provided for in Section 3 of this
Agreement through the date of his termination of employment as specified in the
notice provided by him.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank
or Holding Company shall mean an event of a nature that: (i) would be required
to be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act and
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control or presumptive change in
control or acting in concert or presumptive acting in concert as set forth under
the rules and regulations of the OTS, ownership by a person or a group,
including a presumptive group, of at least 15% of the voting stock of the Bank
or the Holding Company shall be required, and provided further that ownership of
stock by a tax-qualified employee benefit plan of the Bank or the Holding
Company shall not be subject to presumptions of control or acting in concert);
or (iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting
securities of the Bank or the Holding Company representing 25% or more of the
Bank's or the Holding Company's outstanding voting securities or right to
acquire such securities except for any voting securities of the Bank purchased
by the Holding Company and any voting securities purchased by any employee
benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the board of directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board (or members who were nominated by the Incumbent Board), or whose
nomination for election by the Holding Company's stockholders was approved by
the same Nominating Committee serving under an Incumbent Board (or members who
were nominated by the Incumbent Board), shall be, for purposes of this clause
(B), considered as though he were a member of the Incumbent Board, or (C) a plan
of reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity; provided, however, that
such an
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event listed above will be deemed to have occurred or to have been effectuated
upon the receipt of all required regulatory approvals not including the lapse of
any statutory waiting periods.
(b) If any of the events described in Section 5(a) of this Agreement
constituting a Change in Control have occurred, or the Board has determined that
a Change in Control has occurred, Executive shall be entitled to the benefits
provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his
termination of employment on or after the date the Change in Control occurs due
to (i) Executive's dismissal at any time during the term of this Agreement, (ii)
Executive's resignation for any reason within the thirty (30) day period
following the date that is one-year from the date the Change in Control occurred
or (iii) Executive's resignation following any demotion, loss of title, office
or significant authority or responsibility, reduction in the annual compensation
or benefits or relocation of Executive's principal place of employment by more
than 25 miles from its location immediately prior to the Change in Control,
unless such termination is because of Executive's Termination for Cause;
provided, however, Executive may consent in writing to any such demotion, loss,
reduction or relocation. The effect of any written consent of the Executive
under this Section 5(b) shall be strictly limited to the terms specified in such
written consent. Under no circumstances can a termination of employment during
the term of this Agreement on or after the date of a Change in Control occurs be
considered a termination on account of retirement or disability for purposes of
determining Executive's rights to the payment of benefits provided in paragraphs
(c), (d), (e), (f), and (g) of this Section 5.
(c) Upon Executive's entitlement to payment pursuant to Section 5(b) of
this Agreement, the Bank shall pay Executive, or in the event of Executive's
subsequent death, Executive's beneficiary or beneficiaries, or estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
three (3) times the greater of (i) Executive's average annual compensation
(including compensation attributable to the exercise of stock options) for the
five most recently completed taxable years of Executive or (ii) the highest
annual compensation (excluding compensation attributable to the exercise of
stock options) for any of the five most recently completed taxable years of
Executive; provided, however, that any payment under this provision shall not
exceed three (3) times Executive's average annual compensation during the five
(5) previous taxable years. In the event the Bank is not in compliance with its
minimum capital requirements or if such payments would cause the Bank's capital
to be reduced below its minimum regulatory capital requirements, such payments
shall be deferred until such time as the Bank or successor thereto is in capital
compliance. Except as provided for in the preceding sentence, for purposes of
this Section 5(c), annual compensation shall include Base Salary and any other
taxable income paid by the Bank or its Subsidiaries, including but not limited
to amounts related to the granting, vesting or exercise of restricted stock or
stock option awards, commissions, bonuses, severance payments, retirement
benefits, director or committee fees and fringe benefits paid or to be paid to
Executive or paid for Executive's benefit during any such year, as well as
pension, profit sharing, employee stock ownership plan and other retirement
contributions or benefits, including to any tax-qualified or non-tax-qualified
plan or arrangement (whether or not taxable) made or accrued on behalf of
Executive for such year. At the election of Executive, which election is to be
made prior to or within thirty (30) days of the Date of Termination on or
following a Change in Control, such payment may be made in a lump sum (without
discount for early payment) on or immediately
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<PAGE> 7
following the Date of Termination (which may be the date a Change in Control
occurs) or paid in equal monthly installments during the thirty-six (36) months
following Executive's termination. In the event that no election is made,
payment to Executive will be made in a lump sum. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment.
(d) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, Executive will be entitled to receive benefits due
him under or contributed by the Bank on his behalf pursuant to any retirement,
incentive, profit sharing, employee stock ownership, bonus, performance,
disability or other employee benefit plan or other arrangement maintained by the
Bank on Executive's behalf to the extent such benefits are not otherwise paid to
Executive under a separate provision of this Agreement. In addition, for
purposes of determining his vested accrued benefit, Executive shall be credited
either under the defined benefit pension plan maintained by the Bank or, if not
permitted under such plan, under a separate arrangement, with the additional
"years of service" that he would have earned for vesting and benefit accrual
purposes for the remaining term of the Agreement had his employment not
terminated.
(e) Upon the occurrence of a Change in Control and Executive's
termination of employment pursuant to the provisions of Section 5(b) of this
Agreement in connection therewith, the Bank will cause to be continued any
Welfare Plan Benefit (as described in Section 4(d) of this Agreement)
substantially identical to the benefit coverage maintained by the Bank for
Executive and any of his dependents covered under such plans prior to the Change
in Control. Such coverage shall cease upon the expiration of thirty-six (36)
full calendar months following the Date of Termination. In the event Executive's
or Executive's dependent's participation in any such plan or program is barred,
the Bank shall arrange to provide Executive and his dependents with benefits
coverage substantially similar to those which Executive and his dependents would
otherwise have been entitled to receive under such plans and programs by
operation of this provision or provide their economic equivalent to Executive
and his dependents.
(f) The use or provision of any membership, license, automobile use, or
other perquisites shall be continued during the remaining term of the Agreement
on the same financial terms and obligations as were in place immediately prior
to the Change in Control. To the extent that any item referred to in this
paragraph will at the end of the term of this Agreement no longer be available
to Executive, Executive will have the option to purchase all rights then held by
the Bank or its Subsidiaries to such item for a price equal to the then fair
market value of the item.
(g) In the event that Executive is receiving monthly payments pursuant
to Section 5(c) hereof, on an annual basis, thereafter, between the dates of
January 1 and January 31 of each year, Executive shall elect whether the balance
of the amount payable under the Agreement for that year shall be paid in a lump
sum pursuant to such section. Such election shall be irrevocable for the year
for which such election is made.
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<PAGE> 8
6. CHANGE OF CONTROL RELATED PROVISIONS.
Notwithstanding the provisions of Section 5 of this Agreement, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs or otherwise paid or provided by the Bank in
connection with a Change in Control (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result, the Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section 280G.
The allocation of any reduction required with respect to the Termination
Benefits provided by Section 5 shall be determined by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, regulation (other than traffic
violations or similar offenses), final cease and desist order or material breach
of any provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against the standards for professional competence
generally prevailing for executive officers having comparable positions in the
savings institution industry. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to Executive a Notice of Termination which shall include a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for Executive, together with counsel, to be heard before the Board and which
such meeting shall be held not more than 30 days from the date of notice during
which period Executive may be suspended with pay), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause except for compensation and benefits
already vested. Any stock options and related limited rights granted to
Executive under any stock option plan, or any unvested awards granted to
Executive under any restricted stock benefit plan of the Bank or its
Subsidiaries, shall become null and void effective upon Executive's receipt of
Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause except all benefits shall be deemed to have remained in
effect if Executive is reinstated.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
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<PAGE> 9
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) Except as otherwise provided for in this Agreement, "Date of
Termination" shall mean the date specified in the Notice of Termination (which,
in the case of a Termination for Cause, shall not be less than thirty (30) days
from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a reasonable dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive's Base Salary and continue to cover Executive under each Welfare
Benefit Plan in which Executive participated at the time of such notice in
effect when the notice giving rise to the dispute was given until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section 8(c) are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for two (2) full years
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank with regard to matters as to
which he has personal knowledge and as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party. The Bank shall reimburse Executive for
all out-of-pocket expenses incurred and at an hourly rate equivalent to the
hourly rate (based on an eight-hour work day) of his Base Salary in effect at
the time of his termination from employment for any time incurred in connection
with services rendered pursuant to this Section 9.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 of this Agreement, Executive agrees not to compete with the Bank
for a period of one (1) year following such termination in any city, town or
county in which the Executive's normal business office is located and the Bank
has an office or has filed an application for regulatory approval to establish
an office, determined as of the effective date of such termination, except as
agreed to pursuant to a resolution duly adopted by the Board. Executive agrees
that during such period and within said cities, towns and counties, Executive
shall not work for or advise, consult or otherwise
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<PAGE> 10
serve with, directly or indirectly, any entity whose business materially
competes with the depository, lending or other business activities of the Bank.
The parties hereto, recognizing that irreparable injury will result to the Bank,
its business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Bank will be
entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Executive, Executive's partners,
agents, servants, employees and all persons acting for or under the direction of
Executive. Executive represents and admits that in the event of the termination
of his employment pursuant to Section 4 hereof, Executive's experience and
capabilities are such that Executive can obtain employment in a business engaged
in other lines and/or of a different nature than the Bank, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the Bank
from pursuing any other remedies available to the Bank for such breach or
threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and its
affiliates as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of Executive's employment, disclose any knowledge of the past, present, planned
or considered business activities of the Bank and its affiliates thereof to any
person, firm, corporation, or other entity for any reason or purpose whatsoever
unless expressly authorized by the Board of Directors or required by law.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section 10, the Bank will be entitled to an injunction restraining
Executive from disclosing, in whole or in part, the knowledge of the past,
present, planned or considered business activities of the Bank or its affiliates
or from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash, check or other mutually agreed upon method from the general funds of the
Bank subject to Section 11(b) of this Agreement. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the Bank are
not timely paid or provided by the Bank, such amounts and benefits shall be paid
or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement in effect between Executive
and the Holding Company, such payments and benefits paid by the Bank will be
subtracted from any amount due simultaneously to Executive under similar
10
<PAGE> 11
provisions of this Agreement. Payments pursuant to this Agreement and the
Holding Company Agreement shall be allocated in proportion to the level of
activity and the time expended on such activities by Executive as determined by
the Holding Company and the Bank on a quarterly basis; provided, however, that
except for the reduction provided by the first sentence of this Section 11(b),
the Bank will be obligated to pay 100% of the amounts due Executive hereunder.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
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<PAGE> 12
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section1818(e)(3) or (g)(1); the Bank 's obligations under this contract shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion: (i) pay Executive all or part of the compensation withheld while
their contract obligations were suspended; and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section1818(e)(4) or (g)(1), all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. Section1813(x)(1) all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution: (i) by the Director of
the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at the
time the FDIC enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the Federal Deposit
Insurance Act, 12 U.S.C. Section1823(c); or (ii) by the Director of the OTS (or
his designee) at the time the Director (or his designee) approves a supervisory
merger to resolve problems related to the operations of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section1828(k) and 12 C.F.R. Section545.121 and any rules and regulations
promulgated thereunder.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
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17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of Executive's right to
be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, if Executive is successful pursuant to a legal
judgment, arbitration or settlement.
21. INDEMNIFICATION.
The Bank shall provide Executive (including Executive's heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and Executive's heirs, executors and administrators) to the fullest
extent permitted under Delaware law against all expenses and liabilities
reasonably incurred by Executive in connection with or arising out of any
action, suit or proceeding in which Executive may be involved by reason of
Executive having been a director or officer of the Bank or its Subsidiaries
(whether or not Executive continues to be a director or officer at the time of
incurring such expenses
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or liabilities), such expenses and liabilities to include, but not be limited
to, judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
22. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally, to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Boston Federal Savings Bank and BostonFed Bancorp,
Inc. have caused this Agreement, as amended and restated to be executed and
their seals to be affixed hereunto by their duly authorized officers and
Executive has signed this Agreement, as amended and restated on March 28, 2000.
ATTEST: BOSTON FEDERAL SAVINGS BANK
By: /s/ Richard J. Dennis, Sr.
- -------------------------- --------------------------------------
Secretary For the Entire Board of Directors
[SEAL]
WITNESS:
By: /s/ David F. Holland
- -------------------------- --------------------------------------
Executive
ATTEST: BOSTONFED BANCORP, INC.
(Guarantor)
By: /s/ Richard J. Dennis, Sr.
- -------------------------- --------------------------------------
Secretary For the Entire Board of Directors
[SEAL]
WITNESS: EXECUTIVE
/s/ David F. Holland
- -------------------------- ------------------------------------------
David F. Holland
15
<PAGE> 16
BOSTONFED BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement"), originally entered into on October 24,
1995, is amended and restated, effective as of December 31, 1999, by and between
BostonFed Bancorp, Inc. (the "Holding Company"), a corporation organized under
the laws of Delaware, with its principal administrative offices at 17 New
England Executive Park, Burlington, MA 01803, and David F. Holland
("Executive"). Any reference to the "Institution" in this Agreement shall mean
Boston Federal Savings Bank or any successor to Boston Federal Savings Bank.
WHEREAS, the Holding Company wishes to continue to assure itself of the
services of Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to continue to serve in the employ of the
Holding Company and its subsidiaries on a full-time basis for the term of this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees
to serve as President and Chief Executive Officer of the Holding Company.
Executive shall render administrative and management services to the Holding
Company such as are customarily performed by persons in a similar executive
capacity. During the term of this Agreement, Executive also agrees to serve as a
director and officer of the Institution, as well as a director of the Holding
Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first written above and shall continue
for a period of thirty-six (36) full calendar months from the effective date of
this Agreement, as amended and restated. Commencing on the date of execution of
this Agreement, the term of this Agreement shall be extended for one day each
day, so that a constant thirty-six (36) calendar month term shall remain in
effect, until such time as the Board of Directors of the Holding Company (the
"Board") or Executive elects not to extend the term of the Agreement by giving
written notice to the other party in accordance with Section 8 of this
Agreement, in which case the term of this Agreement shall be fixed and shall end
on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and other
reasonable leaves of absence, Executive shall devote substantially all of his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder, including activities and services related to the organization,
<PAGE> 17
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in industry, community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of the Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in the Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, either
Executive or the Holding Company may terminate Executive's employment with the
Holding Company at any time during the term of this Agreement, subject to the
terms and conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute
consideration paid by the Holding Company in exchange for the duties described
in Section 1 of this Agreement. The Holding Company shall pay Executive, as
compensation, a salary of not less than $360,000 ("Base Salary"). Base Salary
shall include any amounts of compensation deferred by Executive under any
tax-qualified retirement or welfare benefit plan or any other deferred
compensation arrangement maintained by the Holding Company or its Subsidiaries.
Base Salary shall be payable in accordance with the normal payroll practices of
the Holding Company. During the period of this Agreement, Executive's Base
Salary shall be reviewed at least annually; on or about the 15th day of December
each year. Such review shall be conducted by the Board or by a committee of the
Board delegated such responsibility by the Board. The committee or the Board may
increase Executive's Base Salary at any time. Any increase in Base Salary shall
thereafter become the new "Base Salary" for purposes of this Agreement.
(b) Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, as amended and restated, and the
Holding Company and its Subsidiaries will not, without Executive's prior written
consent, make any changes in such plans, arrangements or perquisites (or any
plans, arrangements or perquisites with respect to which Executive begins to
participate at any time during the term of this Agreement, as amended and
restated) which would adversely affect Executive's rights or benefits
thereunder, without separately providing for an arrangement that ensures
Executive receives or will receive the economic value that Executive would
otherwise lose as a result of such adverse affect, unless such change is general
in nature and applies in a nondiscriminatory manner to all employees covered by
the plan, arrangement or perquisite. Without limiting the generality of the
foregoing provisions of this Subsection (b), Executive shall be entitled to
participate in and receive benefits under any employee benefit plans including,
but not limited to, retirement plans (such as pension, profit sharing and
employee stock ownership plans), supplemental retirement plans, incentive plans,
health and welfare plans and any other employee benefit plan or arrangement made
available by the Holding Company or its Subsidiaries now or in the future to
full-time employees of the Holding Company and/or senior executives and key
management employees of
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the Holding Company or its Subsidiaries, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements. Nothing paid to Executive under any such plans or arrangements
will be deemed to be in lieu of other compensation and benefits to which
Executive is entitled under this Agreement.
(c) The Holding Company shall pay or reimburse Executive for all
reasonable expenses incurred by Executive in performing his obligations under
this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section 4 shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Holding Company of Executive's full-time employment hereunder for any reason
other than termination governed by Section 5(a) of this Agreement, or
Termination for Cause, as defined in Section 7 of this Agreement, or Retirement
or Disability, as defined in paragraph (f) of this Section 4 or; (ii)
Executive's resignation from the Holding Company's employ, upon, any (A) notice
to Executive by the Holding Company of non-renewal of the term of this
Agreement, (B) failure to re-elect or re-appoint Executive as President and
Chief Executive Officer of the Holding Company or a failure to nominate or
re-elect Executive to the Board of Directors of the Holding Company or of the
Institution, unless consented to by the Executive, (C) material change in
Executive's function, duties, or responsibilities with the Holding Company or
its Subsidiaries, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1 of this Agreement (and any such material change
shall be deemed as continuing breach of this Agreement), unless consented to by
Executive, (D) relocation of Executive's principal place of employment by more
than 25 miles from its location at the effective date of this Agreement, unless
consented to by Executive, (E) material reduction in the benefits, arrangements
or perquisites to Executive which is not general in nature and applicable on a
nondiscriminatory basis to all employees covered by such benefits, arrangements,
or perquisites or, pursuant to Section 3(b) of this Agreement, to which
Executive does not consent or for which Executive is not or will not be provided
the economic benefit, (F) liquidation or dissolution of the Holding Company or
the Institution, or (G) breach of this Agreement by the Holding Company. Upon
the occurrence of any event described in clauses (A), (B), (C), (D), (E), (F) or
(G), above, Executive shall have the right to elect to terminate employment
under this Agreement by resignation upon not less than sixty (60) days prior
written notice given within six full calendar months after the event giving rise
to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8 of this Agreement, the Holding Company
shall be obligated to pay Executive, or, in the event of Executive's subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, the
amount of the remaining payments and benefits that Executive would have earned
if he had continued his employment with the Holding Company during the remaining
unexpired term of this Agreement, based on Executive's Base Salary and the
benefits provided to Executive as of the date of the Event of Termination, as
set forth in Sections 3(a) and (b) of this Agreement, as the
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<PAGE> 19
case may be, and the amount still due Executive under any paragraph of Section 3
for service rendered through the Date of Termination. Except as provided for in
paragraphs (c) and (d) of Section 4, the determination of Executive's benefits
as of the date of the Event of Termination shall be made based on (i) the value
of the allocation attributable to employer contributions for the most recent
plan year under any defined contribution type plan; (ii) the percentage of
salary of any incentive or bonus payment for the most recently-completed fiscal
year; and (iii) the employer- provided cost of any other benefit for the most
recently-completed fiscal year. At the election of Executive, which election is
to be made within thirty (30) days of the Date of Termination, such payments
shall be made in a lump sum (without discount for early payment) or paid monthly
during the remaining term of the agreement following Executive's termination. In
the event that no election is made, payment to Executive will be made in a lump
sum. Such payments shall not be reduced in the event Executive obtains other
employment following termination of employment. Notwithstanding anything to the
contrary elsewhere in this Agreement, to the extent Executive is entitled to
continued coverage or benefit accrual under any retirement or welfare benefit
plan during the remaining unexpired term of this Agreement, as amended and
restated, the amount payable under this Section 4(b) should be adjusted to the
extent necessary to avoid any duplication of such benefits.
(c) Upon the occurrence of an Event of Termination, Executive will be
entitled to receive benefits due him under or contributed by the Holding Company
or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit
sharing, employee stock ownership, bonus, performance, disability or other
employee benefit plan or arrangement maintained by the Holding Company or its
Subsidiaries to the extent such benefits are not otherwise paid to Executive
under a separate provision of this Agreement. In addition, for purposes of
determining his vested accrued benefit, Executive shall be credited either under
any defined benefit pension plan maintained by the Institution or, if not
permitted under such plan, under a separate arrangement, with the additional
"years of service" that he would have earned for vesting and benefit accrual
purposes for the remaining term of the Agreement had his employment not
terminated.
(d) To the extent that the Holding Company or its Subsidiaries continue
to offer any life, medical, health, disability or dental insurance plan or
arrangement in which Executive participates in on the last day of his employment
(each being a "Welfare Plan"), after an Event of Termination (as herein
defined), Executive and his dependents shall continue participating in such
Welfare Plans, subject to the same premium contributions on the part of
Executive as were required immediately prior to the Event of Termination until
the earlier of (i) his death (ii) his employment by another employer other than
one of which he is the majority owner or (iii) the end of the remaining term of
this Agreement. If the Holding Company or its Subsidiaries does not offer the
Welfare Plans (or if for any reason Executive's participation in said plans is
prohibited) after the Event of Termination, then the Holding Company shall
provide Executive with a payment equal to the actuarial value of the provision
of such benefit for the period which runs until the earlier of (i) his death;
(ii) his employment by another employer other than one of which he is the
majority owner; or (iii) the end of the remaining term of this Agreement.
(e) In the event that Executive is receiving monthly payments pursuant
to Section 4(b) of this Agreement, on an annual basis, thereafter, between the
dates of January 1 and January 31 of
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<PAGE> 20
each year, Executive shall elect whether the balance of the amount payable under
the Agreement for that year shall be paid in a lump sum or on a pro rata basis.
Such election shall be irrevocable for the year for which such election is made.
(f) Termination of Executive based on "Retirement" shall mean
termination by written notice to the Holding Company or its Subsidiaries from
Executive specifying an exact retirement date or termination in accordance with
any retirement arrangement established with Executive's written consent with
respect to him. Termination of Executive based on Disability shall mean written
notice to the Holding Company or its Subsidiaries by Executive specifying an
exact date as of which he is unable to perform all of the duties and
responsibilities of his position. Upon termination of Executive upon Disability,
Executive shall be entitled to all benefits under any disability plan of the
Holding Company or its Subsidiaries or any other plans which Executive is a
party or a participant in accordance with the terms of the plan or arrangement.
Executive shall be entitled to all compensation and benefits provided for in
Section 3 of this Agreement through the date of his termination of employment as
specified in the notice provided by him.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Holding Company or the Institution shall mean an event of a nature that; (i)
would be required to be reported in response to Item 1(a) of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries; or (B) individuals who constitute the board of directors on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board (or members who
were nominated by the Incumbent Board), or whose nomination for election by the
Company's stockholders was approved by a Nominating Committee solely composed of
members which are Incumbent Board members (or members who were nominated by the
Incumbent Board), shall be, for purposes of this clause (B), considered as
though he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the
Institution or the Holding Company or similar transaction occurs or is
effectuated in which the
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<PAGE> 21
Institution or Holding Company is not the resulting entity; provided, however,
that such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required federal regulatory approvals not
including the lapse of any statutory waiting periods; or (D) a proxy statement
has been distributed soliciting proxies from stockholders of the Holding
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Institution with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Institution or
the Holding Company shall be distributed; or (E) a tender offer is made for 20%
or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If any of the events described in Section 5(a) of this Agreement
constituting a Change in Control have occurred, or the Board has determined that
a Change in Control has occurred, Executive shall be entitled to the benefits
provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his
termination of employment on or after the date the Change in Control occurs due
to (i) Executive's dismissal at any time during the term of this Agreement, (ii)
Executive's resignation for any reason within the thirty (30) day period
following the date that is one-year from the date the Change in Control occurred
or (iii) Executive's resignation following any demotion, loss of title, office
or significant authority or responsibility, reduction in the annual compensation
or benefits or relocation of Executive's principal place of employment by more
than 25 miles from its location immediately prior to the Change in Control,
unless such termination is because of Executive's Termination for Cause;
provided, however, Executive may consent in writing to any such demotion, loss,
reduction or relocation. The effect of any written consent of the Executive
under this Section 5(b) shall be strictly limited to the terms specified in such
written consent. Under no circumstances can a termination of employment during
the term of this Agreement on or after the date of a Change in Control occurs be
considered a termination on account of retirement or disability for purposes of
determining Executive's rights to the payment of benefits provided in paragraphs
(c), (d), (e), (f), and (g) of this Section 5.
(c) Upon Executive's entitlement to payment pursuant to Section 5(b) of
this Agreement, the Holding Company shall pay Executive, or in the event of
Executive's subsequent death, Executive's beneficiary or beneficiaries, or
estate, as the case may be, as severance pay or liquidated damages, or both, a
sum equal to the greater of: (1) the payments that would have been due pursuant
to Section 3 of this Agreement for the remaining term of the Agreement; or (2)
three (3) times the greater of (i) Executive's average annual compensation
(including compensation attributable to the exercise of stock options) for the
five most recently completed taxable years of Executive or (ii) the highest
annual compensation (excluding compensation attributable to the exercise of
stock options) for any of the five most recently completed taxable years of
Executive. Except as provided for in the preceding sentence, for purposes of
this Section 5(c), annual compensation shall include Base Salary and any other
taxable income paid by the Holding Company or its Subsidiaries, including but
not limited to amounts related to the granting, vesting or exercise of
restricted stock or stock option awards, commissions, bonuses, severance
payments, retirement benefits, director or committee fees and fringe benefits
paid or to be paid to Executive or paid for Executive's benefit during any such
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<PAGE> 22
year, as well as pension, profit sharing, employee stock ownership plan and
other retirement contributions or benefits, including to any tax-qualified or
non-tax-qualified plan or arrangement (whether or not taxable) made or accrued
on behalf of Executive for such year. At the election of Executive, which
election is to be made prior to or within thirty (30) days of the Date of
Termination on or following a Change in Control, such payment may be made in a
lump sum (without discount for early payment) on or immediately following the
Date of Termination (which may be the date a Change in Control occurs) or paid
in equal monthly installments during the thirty-six (36) months following
Executive's termination. In the event that no election is made, payment to
Executive will be made in a lump sum. Such payments shall not be reduced in the
event Executive obtains other employment following termination of employment.
(d) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, Executive will be entitled to receive benefits due
him under or contributed by the Holding Company or its Subsidiaries on his
behalf pursuant to any retirement, incentive, profit sharing, employee stock
ownership, bonus, performance, disability or other employee benefit plan or
other arrangement maintained by the Institution or the Holding Company on
Executive's behalf to the extent such benefits are not otherwise paid to
Executive under a separate provision of this Agreement. In addition, for
purposes of determining his vested accrued benefit, Executive shall be credited
either under any defined benefit pension plan maintained by the Institution or,
if not permitted under such plan, under a separate arrangement, with the
additional "years of service" that he would have earned for vesting and benefit
accrual purposes for the remaining term of the Agreement had his employment not
terminated.
(e) Upon the occurrence of a Change in Control and Executive's
termination of employment pursuant to the provisions of Section 5(b) of this
Agreement in connection therewith, the Holding Company will cause to be
continued any welfare Plan benefit (as described in Section 4(d) of this
Agreement) substantially identical to the benefit coverage maintained by the
Holding Company or its Subsidiaries for Executive and any of his dependents
covered under such plans prior to the Change in Control. Such coverage shall
cease upon the expiration of thirty-six (36) full calendar months following the
Date of Termination. In the event Executive's or Executive's dependent's
participation in any such plan or program is barred, the Holding Company shall
arrange to provide Executive and his dependents with benefits coverage
substantially similar to those which Executive and his dependents would
otherwise have been entitled to receive under such plans and programs by
operation of this provision or provide their economic equivalent to executive
and his dependents.
(f) The use or provision of any membership, license, automobile use, or
other perquisites shall be continued during the remaining term of the Agreement
on the same financial terms and obligations as were in place immediately prior
to the Change in Control. To the extent that any item referred to in this
paragraph will at the end of the term of this Agreement no longer be available
to Executive, Executive will have the option to purchase all rights then held by
the Holding Company or its Subsidiaries to such item for a price equal to the
then fair market value of the item.
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(g) In the event that Executive is receiving monthly payments pursuant
to Section 5(c) hereof, on an annual basis, thereafter, between the dates of
January 1 and January 31 of each year, Executive shall elect whether the balance
of the amount payable under the Agreement for that year shall be paid in a lump
sum pursuant to such section. Such election shall be irrevocable for the year
for which such election is made.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the preceding provisions of Section 5 of this
Agreement, for any taxable year in which Executive shall be liable for the
payment of an excise tax under Section 4999 of the Internal Revenue Code (or any
successor provision thereto), with respect to any payment in the nature of the
compensation made by the Holding Company or its Subsidiaries to (or for the
benefit of) Executive pursuant to this Agreement or otherwise, the Holding
Company (or any successor thereto) shall pay to Executive an amount determined
under the following formula:
An amount equal to: (E x P) + X
WHERE:
X = E x P
--------------------------------------------------------------
1 - [(FI x (1 - SLI)) + SLI + E + M]
and
E = the rate at which the excise tax is assessed under
Section 4999 of the Code;
P = the amount with respect to which such excise tax is
assessed, determined without regard to this Section
6;
FI = the highest marginal rate of federal income,
employment, and other taxes (other than taxes imposed
under Section 4999 of the Code) applicable to
Executive for the taxable year in question with
respect to such payment (including any effective
increase in Executive's tax rate attributable to the
resultant disallowance of any deduction or the
phase-out of any personal exemption or similar
items);
SLI = the sum of the highest marginal rates of income and
payroll tax applicable to Executive under applicable
state and local laws for the taxable year in question
(including any effective increase in Executive's tax
rate attributable to the resultant disallowance of
any deduction or the phase-out of any personal
exemption or similar items);
M = highest marginal rate of Medicare tax; and
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<PAGE> 24
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Section 6 or otherwise and
on which an excise tax under Section 4999 of the Code may or will be assessed,
the payment determined under this Section 6 shall be made to Executive on the
earliest of (i) the date the Holding Company is required to withhold such tax,
(ii) the date the tax is required to be paid by Executive, or (iii) at the time
of termination resulting from the Change in Control. It is the intention of the
parties that the Holding Company provide Executive with a full tax gross-up
under the provisions of this Section 6, so that on a net after-tax basis, the
result to Executive shall be the same as if the excise tax under Section 4999
(or any successor provisions) of the Code had not been imposed. The tax gross-up
may be adjusted, as appropriate, if alternative minimum tax rules are applicable
to Executive.
(b) Notwithstanding the foregoing, if its is (i) initially determined
by the Holding Company's tax advisors that no excise tax under Section 4999 of
the Code is due with respect to any payment or benefit described in the first
paragraph of Section 6(a) and thereafter it is determined in a final judicial
determination or administrative settlement that the Section 4999 excise tax is
due with respect to such payments or benefits or subsequently determined in a
final judicial determination or a final administrative settlement to which
Executive is a party that the excise tax under Section 4999 of the Code is due
or that the excess parachute payment as defined in Section 4999 of the Code is
more than the amount determined as "P", above (such revised determination under
(i) or (ii) above thereafter being referred to as the "Determinative Excess
Parachute Payment"), then the tax advisors of the Holding Company (or any
successor thereto) shall determine the amount (the "Adjustment Amount"), the
Holding Company (or any successor thereto) must pay to Executive, in order to
put Executive in the same position as Executive would have been if the amount
determined as "P" above had been equal to the Determinative Excess Parachute
Payment. In determining the Adjustment Amount, the tax advisors shall take into
account any and all taxes (including any penalties and interest) paid or payable
by Executive in connection with such final judicial determination or final
administrative settlement As soon as practicable after the Adjustment Amount has
been so determined, the Holding Company shall pay the Adjustment Amount to
Executive.
(c) The Holding Company (or its successor) shall indemnify and hold
Executive harmless from any and all losses, costs and expenses (including
without limitation, reasonable attorney's fees, reasonable accountant's fees,
interest, fines and penalties of any kind) which Executive incurs as a result of
any administrative or judicial review of Executive's liability under Section
4999 of the Code by the Internal Revenue Service or any comparable state agency
through and including a final judicial determination or final administrative
settlement of any dispute arising out of Executive's liability for the Section
4999 excise tax or otherwise relating to the classification for purposes of
Section 280G of the Code of any payment or benefit in the nature of compensation
made or provided to Executive by the Holding Company or any successor thereto.
Executive shall promptly notify the Holding Company in writing whenever
Executive receives notice of the commencement of any judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under Section
4999 of the Code of any amount paid or payable under this Supplemental Agreement
is being reviewed or is in dispute (including a notice of audit or other inquiry
concerning the reporting of Executive's liability under Section 4999). The
Holding Company (or its successor) may assume
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<PAGE> 25
control at its expense over all legal and accounting matters pertaining to such
federal or state tax treatment (except to the extent necessary or appropriate
for Executive to resolve any such proceeding with respect to any matter
unrelated to amounts paid or payable pursuant to this contract) and Executive
shall cooperate fully with the Holding Company in any such proceeding. Executive
shall not enter into any compromise or settlement or otherwise prejudice any
rights the Holding Company (or its successor) may have in connection therewith
without prior consent to the Holding Company (or its successor). In the event
that the Holding Company (or any successor thereto) elects not to assume control
over such matters, the Holding Company (or any successor thereto) shall promptly
reimburse Executive for all expenses related thereto as and when incurred upon
presentation of appropriate documentation relating thereto.
(d) The preceding provisions of this Section 6 shall apply only in the
event Executive's "parachute payments" (as such term is used for purposes of
Section 280G of the Code) exceed the amount equal to three times Executive's
"base amount" (as such term is used for purposes of Section 280G of the Code) by
more than five percent. If the preceding provisions of this Section 6 shall not
apply by operation of the preceding sentence and if
(i) the aggregate payments or benefits to be made or
afforded to Executive, which are deemed to be
parachute payments (the "Termination Benefits") would
be deemed to include an "excess parachute payment"
under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to three (3) times Executive's "base amount," as
determined in accordance with said Section 280G of
the Code and the Non-Triggering Amount less the
product of the marginal rate of any applicable state
and federal income tax (P, FI, SLI, and M, as defined
in paragraph (a) of this Section 6) and the
Non-Triggering Amount would be greater than the
aggregate value of the Termination Benefits (without
such reduction) minus (i) the amount of tax required
to be paid by the Executive thereon by Section 4999
of the Code and further minus (ii) the product of the
Termination Benefits and the marginal rate of any
applicable state and federal income tax (as
determined above including E, as defined in paragraph
(a) of this Section 6),
then the Termination Benefits shall be reduced to the Non-Triggering Amount and
the allocation of the reduction required hereby among the Termination Benefits
shall be determined by Executive.
7. TERMINATION FOR CAUSE.
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<PAGE> 26
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, regulation (other than traffic
violations or similar offenses), final cease and desist order or material breach
of any provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against the standards for professional competence
generally prevailing for executive officers having comparable positions in the
savings institution industry. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to Executive a Notice of Termination which shall include a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for Executive, together with counsel, to be heard before the Board and which
such meeting shall be held not more than 30 days from the date of notice during
which period Executive may be suspended with pay), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause except for compensation and benefits
already vested. Any stock options and related limited rights granted to
Executive under any stock option plan, or any unvested awards granted to
Executive under any restricted stock benefit plan of the Holding Company or its
Subsidiaries, shall become null and void effective upon Executive's receipt of
Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause except all benefits shall be deemed to have remained in
effect if Executive is reinstated.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) Except as otherwise provided for in this Agreement, "Date of
Termination" shall mean the date specified in the Notice of Termination (which,
in the case of a Termination for Cause, shall not be less than thirty (30) days
from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a reasonable dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
11
<PAGE> 27
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive's Base Salary and continue to cover Executive under
each Welfare Benefit Plan in which Executive participated at the time of such
notice in effect when the notice giving rise to the dispute was given until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section 8(c) are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for two (2) full years
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company with regard to matters as to which he has personal knowledge and as may
reasonably be required by the Holding Company in connection with any litigation
in which it or any of its subsidiaries or affiliates is, or may become, a party.
The Holding Company shall reimburse Executive for all out-of-pocket expenses
incurred and at an hourly rate equivalent to the hourly rate (based on an
eight-hour work day) of his Base Salary in effect at the time of his termination
from employment for any time incurred in connection with services rendered
pursuant to this Section 9.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 of this Agreement, Executive agrees not to compete with the Holding
Company or its Subsidiaries for a period of one (1) year following such
termination in any city, town or county in which the Executive's normal business
office is located and the Holding Company or any of its Subsidiaries has an
office or has filed an application for regulatory approval to establish an
office, determined as of the effective date of such termination, except as
agreed to pursuant to a resolution duly adopted by the Board. Executive agrees
that during such period and within said cities, towns and counties, Executive
shall not work for or advise, consult or otherwise serve with, directly or
indirectly, any entity whose business materially competes with the depository,
lending or other business activities of the Holding Company or its Subsidiaries.
The parties hereto, recognizing that irreparable injury will result to the
Holding Company or its Subsidiaries, its business and property in the event of
Executive's breach of this Subsection 10(a) agree that in the event of any such
breach by Executive, the Holding Company or its Subsidiaries, will be entitled,
in addition to any other remedies and damages available, to an injunction to
restrain the violation hereof by Executive, Executive's partners, agents,
servants, employees and all persons acting for or under the direction of
Executive. Executive represents and admits that in the event of the termination
of his employment pursuant to Section 4 hereof, Executive's experience and
capabilities are such that Executive can obtain employment in a business engaged
in other lines and/or of a different nature than the Holding Company or its
Subsidiaries, and that the enforcement of a remedy by way of injunction will not
prevent Executive from earning a livelihood. Nothing herein will be construed as
prohibiting the Holding Company or its Subsidiaries from pursuing any other
remedies available to the Holding
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<PAGE> 28
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of Executive's employment, disclose
any knowledge of the past, present, planned or considered business activities of
the Holding Company and its Subsidiaries thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever unless
expressly authorized by the Board of Directors or required by law.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Holding
Company. In the event of a breach or threatened breach by the Executive of the
provisions of this Section 10, the Holding Company will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Holding Company or its Subsidiaries or from rendering any services to any
person, firm, corporation, other entity to whom such knowledge, in whole or in
part, has been disclosed or is threatened to be disclosed. Nothing herein will
be construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash, check or other mutually agreed upon method from the general funds of the
Holding Company subject to Section 11(b) of this Agreement.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement in effect between Executive
and the Institution, such payments and benefits paid by the Institution will be
subtracted from any amount due simultaneously to Executive under similar
provisions of this Agreement. Payments pursuant to this Agreement and the
Institution Agreement shall be allocated in proportion to the level of activity
and the time expended on such activities by Executive as determined by the
Holding Company and the Institution on a quarterly basis; provided, however,
that except for the reduction provided by the first sentence of this Section
11(b), the Holding Company will be obligated to pay 100% of the amounts due
Executive hereunder.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided. No provision of this
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<PAGE> 29
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
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17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Association, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of Executive's right to
be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
The Holding Company shall provide Executive (including Executive's
heirs, executors and administrators) with coverage under a standard directors'
and officers' liability insurance policy at its expense and shall indemnify
Executive (and Executive's heirs, executors and administrators) to the fullest
extent permitted under Delaware law against all expenses and liabilities
reasonably incurred by Executive in connection with or arising out of any
action, suit or proceeding in which Executive may be involved by reason of
Executive having been a director or officer of the Holding Company or its
Subsidiaries (whether or not Executive continues to be a director or officer at
the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
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<PAGE> 31
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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<PAGE> 32
SIGNATURES
IN WITNESS WHEREOF, BostonFed Bancorp, Inc. has caused this Agreement,
as amended and restated to be executed and its seal to be affixed hereunto by
its duly authorized officer and its directors, and Executive has signed this
Agreement, on March 28, 2000.
ATTEST: BOSTONFED BANCORP, INC.
By: /s/ Richard J. Dennis, Sr.
- -------------------------- --------------------------------------
Secretary For the Entire Board of Directors
[SEAL]
WITNESS: EXECUTIVE
By: /s/ David F. Holland
- -------------------------- --------------------------------------
Executive David F. Holland
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<PAGE> 1
Exhibit 10.2
Mr. Conley's Employment Agreement with the Company is substantially the same as
the Employment Agreement with Company in Exhibit 10.1, which is incorporated
herein by reference except as to: (i) the name of the signatory, which is David
P. Conley; (ii) the signatory for Company, which is David F. Holland; (iii) the
position in Section 1, which is Executive Vice President, Assistant Treasurer
and Assistant Secretary; and (iv) the amount of the base salary in Section 3(a),
which is $210,000.
Mr. Conley's Employment Agreement with BFS is substantially the same as the
Employment Agreement with BFS in Exhibit 10.1, which is incorporated herein by
reference except as to: (i) the name of the signatory, which is David P. Conley;
(ii) the signatory for BFS, which is David F. Holland; (iii) the position in
Section 1, which is President; and (iv) the amount of the base salary in Section
3(a), which is $210,000.
<PAGE> 1
Exhibit 10.3
Mr. Simas' Employment Agreement with the Company is substantially the same as
the Employment Agreement with the Company in Exhibit 10.1, which is incorporated
herein by reference except as to: (i) the name of the signatory, which is John
A. Simas; (ii) the signatory for the Company, which is David F. Holland; (iii)
the position in Section 1, which is Executive Vice President and Chief Financial
Officer, but not as a director of the Company or BFS; and (iv) the amount of the
base salary in Section 3(a), which is $165,000.
Mr. Simas' Employment Agreement with BFS is substantially the same as the
Employment Agreement with BFS in Exhibit 10.1, which is incorporated herein by
reference except as to: (i) the name of the signatory, which is John A. Simas;
(ii) the signatory for BFS, which is David F. Holland; (iii) the position in
Section 1, which is Executive Vice President and Chief Financial Officer, but
not as a director of BFS; and (iv) the amount of the base salary in Section
3(a), which is $165,000.
<PAGE> 1
EXHIBIT 10.4
BOSTON FEDERAL SAVINGS BANK
CHANGE IN CONTROL AGREEMENT
This AGREEMENT originally entered into on March 28, 2000, is amended
and restated, effective as of December 31, 1999, by and between Boston Federal
Savings Bank (the "Bank"), a federally chartered savings institution, with its
principal administrative offices at 17 New England Executive Park, Burlington,
MA 01803, and BostonFed Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of the State of Delaware and the holding company of the
Bank and Dennis J. Furey ("Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to continue to protect Executive's position with the
Bank for the period provided in this Agreement in the event of a Change in
Control (as defined in this Agreement); and
WHEREAS, Executive has agreed to continue serve in the employ of the
Bank.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The period of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of thirty (30) full
calendar months from the date of this Agreement, as amended and restated.
Commencing on the date of execution of this Agreement and at each anniversary
date thereafter, the Board of Directors of the Bank (the "Board") may extend the
term of this Agreement for an additional year so that the remaining term is a
full thirty (30) calendar months, unless Executive elects not to extend the term
of the Agreement by providing written notice to the Board in accordance with
Section 5 of the Agreement. The Board will review the Agreement and Executive's
performance annually for purposes of determining whether to extend the term of
the Agreement, and the results of such review shall be included in the minutes
of the Board's meeting.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as defined in paragraph
(b) of this Section 2), Executive shall be entitled to the payments and benefits
provided for in Section 3 of this Agreement upon Executive's termination of
employment on or after the date the Change in Control occurs due to: (i)
Executive's dismissal at any time during the term of this Agreement; (ii)
Executive's voluntary resignation for any reason within the thirty (30) day
period following the date that is one-year from the date the Change in Control
occurred, or (iii) Executive's resignation at any time during the term of this
Agreement following any demotion, or loss of title, office or significant
authority, or reduction in Executive's annual compensation or benefits, or
relocation of Executive's principal place of employment by more than 25 miles
from its location immediately prior to the
<PAGE> 2
Change in Control; provided, however, Executive may consent in writing to any
such demotion, loss, reduction or relocation. The effect of any written consent
of Executive under this Section 2(a) shall be strictly limited to the terms
specified in such written consent.
(b) For purposes of this Agreement, a "Change in Control" of the Bank
or Holding Company shall mean an event of a nature that: (i) would be required
to be reported in response to Item 1 of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Holding Company within the meaning of the Home
Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office
of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the
date hereof (provided, that in applying the definition of change in control or
presumptive change in control or acting in concert or presumptive acting in
concert as set forth under the Rules and Regulations of the OTS, ownership by a
person or group, including a presumptive group, of at least 15% of the voting
stock of the Bank or the Holding Company shall be required, and provided further
that ownership of stock by a tax qualified employee benefit plan of the Bank or
the Holding Company shall not be subject to presumptions of control or acting in
concert); or (iii) without limitation such a Change in Control shall be deemed
to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 25% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
employee benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the board of directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board (or members who were nominated by the Incumbent Board), or whose
nomination for election by the Holding Company's stockholders was approved by
the same Nominating Committee serving under an Incumbent Board (or members who
were nominated by the Incumbent Board), shall be, for purposes of this clause
(B), considered as though he were a member of the Incumbent Board, or (C) a plan
of reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity.
(c) Notwithstanding any other provision of this Agreement, Executive
shall not have the right to receive termination benefits under this Agreement
upon Executive's Termination for Cause. The term "Termination for Cause" shall
mean termination because of Executive's personal dishonesty, incompetence,
willful misconduct, any breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, regulation (other than traffic violations or similar offenses) or final
cease and desist order, or any material breach of this Agreement. In determining
incompetence, the acts or omissions shall be measured against standards of
professional competence generally prevailing for officers having comparable
positions in the savings institutions industry. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to Executive a
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<PAGE> 3
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for Executive, together with counsel, to be heard before the Board and which
such meeting shall be held not more than 30 days from the date of notice during
which period Executive may be suspended with pay), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause except for compensation or benefits
already vested. Any stock options and related limited rights granted to
Executive under any stock option plan, or any unvested awards granted to
Executive under any restricted stock benefit plan of the Holding Company or its
subsidiaries, shall become null and void effective upon Executive's receipt of
Notice of Termination For Cause pursuant to Section 5 of this Agreement except
all benefits shall be deemed to have remained in effect if Executive is
reinstated, and shall not be exercisable by or delivered to Executive at any
time subsequent to such Termination For Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time by
the termination of Executive's employment in accordance with the provisions of
Section 2 of this Agreement, the Bank shall be obligated to pay Executive, or in
the event of Executive's subsequent death, Executive's beneficiary or
beneficiaries, or Executive's estate, as the case may be, a sum equal to two and
one-half (2-1/2) times the greater of (i) Executive's average annual
compensation (including compensation attributable to the exercise of stock
options) for the five most recently completed taxable years of Executive or (ii)
the highest annual compensation (excluding compensation attributable to the
exercise of stock options) for any of the five most recently completed taxable
years of Executive. Except as provided for in the preceding sentence, for
purposes of this Section 3(a), annual compensation shall include base salary and
any other taxable income, including but not limited to amounts related to the
granting, vesting or exercise of restricted stock or stock option awards,
commissions, bonuses, severance payments, retirement benefits, director or
committee fees and fringe benefits paid or to be paid to Executive or paid for
Executive's benefit during any such year, as well as pension, profit sharing,
employee stock ownership plan and other retirement contributions or benefits,
including to any tax-qualified or non-tax-qualified plan or agreement (whether
or not taxable) made or accrued on behalf of Executive for such year. In
addition, for purposes of determining his vested accrued benefit, Executive
shall be credited either under the defined benefit pension plan maintained by
the Bank or, if not permitted under such plan, under a separate arrangement,
with the additional "years of service" that he would have earned for vesting and
benefit accrual purposes for the remaining term of the Agreement had his
employment not terminated. At the election of Executive, which election is to be
made prior to or within thirty (30) days of the Date of Termination on or
following a Change in Control, such payment may be made in a lump sum (without
discount for early payment) on or immediately following the Date of Termination
(which may be the date a Change in Control occurs) or paid in equal monthly
installments during the thirty (30) months following Executive's termination. In
the event that no election is made, payment to Executive will be made on a
monthly basis during the remaining thirty (30) month term of the Agreement. Such
payments shall not be reduced in the event Executive
3
<PAGE> 4
obtains other employment following termination of employment. However, in the
event the Bank is not in compliance with its minimum capital requirements or if
such payments pursuant to this Section 3 would cause the Bank's capital to be
reduced below its minimum regulatory capital requirements, such payments shall
be deferred until such time as the Bank or successor thereto is in capital
compliance.
(b) Upon the occurrence of a Change in Control and Executive's
termination of employment in accordance with the provisions of Section 2 of this
Agreement, the Bank will cause to be continued any life, medical, health and
disability or dental insurance plan or arrangement in which Executive
participates (each being a "Welfare Benefit Plan") substantially identical to
the benefit coverage maintained by the Bank for Executive and any of his
dependents covered under such plans prior to the Change in Control. Such
coverage shall cease upon the expiration of thirty-six (36) full calendar months
following the Date of Termination. In the event Executive's or Executive's
covered dependent's participation in any such plan or program is barred, the
Holding Company shall arrange to provide Executive and his dependents with
benefits coverage substantially similar to those which Executive and his
dependents would otherwise have been entitled to receive under such plans and
programs by operation of this provision or provide their economic equivalent to
Executive and Executive's dependents.
4. CHANGE IN CONTROL RELATED PROVISIONS.
Notwithstanding the preceding paragraphs of Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under this Agreement (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result the Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G. The allocation of
any reduction required with respect to the Termination Benefits shall be
determined by Executive.
5. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank, or by Executive, shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a reasonable dispute exists concerning the
4
<PAGE> 5
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Bank will continue to pay Executive's base salary and continue to cover
Executive under each Welfare Benefit Plan in which Executive participated when
the notice giving rise to the dispute was given until the dispute is finally
resolved in accordance with this Agreement. Amounts paid under this Section 5(c)
are in addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
6. SOURCE OF PAYMENTS.
The parties to this Agreement intend that all payments provided for in
this Agreement shall be paid in cash, check or other mutually agreed upon method
from the general funds of the Bank. Further, the Holding Company guarantees such
payment and provision of all amounts and benefits due hereunder to Executive
and, if such amounts and benefits due from the Bank are not timely paid or
provided by the Bank, such amounts and benefits shall be paid or provided by the
Holding Company.
7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to Executive without reference to
this Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of the Bank or shall impose on the Bank or its
subsidiaries any obligation to employ or retain Executive in its employ for any
period.
8. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
5
<PAGE> 6
9. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
10. REQUIRED REGULATORY PROVISIONS.
(a) The Board may terminate Executive's employment at any time, but any
termination by the board of directors, other than Termination for Cause, shall
not prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 2 of
this Agreement.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1818(e)(3) or (g)(1)), the Bank's obligations under this contract shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the benefit obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1818(c)(4) or (g)(1)), all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, all obligations of the Bank under this contract
shall terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
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<PAGE> 7
(e) All obligations under this contract shall be terminated, except to
the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director of the Office of Thrift Supervision (or his or her designee) at the
time the Director (or his or her designee) approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any rules and regulations promulgated thereunder.
11. REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 10(b) of this Agreement (the "Notice") during the term of this Agreement
and a Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice of Termination.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references herein to the
masculine shall apply to both the masculine and the feminine.
14. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware.
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<PAGE> 8
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of Executive's right to
be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful pursuant to a legal
judgment, arbitration or settlement.
17. INDEMNIFICATION.
The Bank shall provide Executive (including his or her legal
representatives, successors and assigns) with coverage under a standard
directors' and officers' liability insurance policy at its expense and shall
indemnify Executive (including his or her legal representatives, successors and
assigns) for reasonable costs and expenses incurred by Executive in defending or
settling any judicial or administrative proceeding, or threatened proceeding,
whether civil, criminal or otherwise, including any appeal or other proceeding
for review.
Indemnification by the Bank shall be made only upon the final judgment
on the merits in the favor of Executive, in case of settlement, in case of final
judgment against Executive or in the case of final judgment in favor of
Executive other than on the merits, if a majority of the disinterested directors
of the Bank determine Executive was acting in good faith within the scope of
Executive's employment or authority in accordance with 12 C.F.R. section
545.121(c)(iii).
Any such indemnification of Executive must conform with the notice
provisions of 12 C.F.R. Section 545.121(c)(iii) to indemnify Executive to the
fullest for such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements, such settlements to be approved by the Board, if such action is
brought against Executive in his or her capacity as a officer or director of the
Bank, however, shall not extend to matters as to which Executive is finally
adjudged to be liable for willful misconduct in the performance of his or her
duties.
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<PAGE> 9
18. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
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<PAGE> 10
SIGNATURES
IN WITNESS WHEREOF, Boston Federal Savings Bank and BostonFed Bancorp,
Inc. have caused this Agreement, as amended and restated to be executed by their
duly authorized officers, and Executive has signed this Agreement, as amended
and restated on March 28, 2000.
ATTEST: BOSTON FEDERAL SAVINGS BANK
By: /s/ David F. Holland
- -------------------------- -------------------------------
Secretary For the Entire Board of Directors
SEAL
ATTEST: BOSTONFED BANCORP, INC.
(Guarantor)
By: /s/ David F. Holland
- -------------------------- ------------------------------
Secretary For the Entire Board of Directors
SEAL
WITNESS: EXECUTIVE
/s/ Dennis J. Furey
- -------------------------- ---------------------------------
Dennis J. Furey
10
<PAGE> 11
BOSTONFED BANCORP, INC.
CHANGE IN CONTROL AGREEMENT
This AGREEMENT originally entered into on March 28, 2000, is amended
and restated, effective as of December 31, 1999, by and between BostonFed
Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of
the State of Delaware, with its office at 17 New England Executive Park,
Burlington, MA 01803, and Dennis J. Furey ("Executive"). Any reference to the
term "Bank" in this Agreement shall mean Boston Federal Savings Bank, a
wholly-owned subsidiary of the Holding Company, or any successor to Boston
Federal Savings Bank.
WHEREAS, the Holding Company recognizes the substantial contribution
Executive has made to the Holding Company and wishes to continue to protect
Executive's position with the Holding Company for the period provided in this
Agreement in the event of a Change in Control (as defined in this Agreement);
and
WHEREAS, Executive has agreed to continue serve in the employ of the
Holding Company.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The period of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of thirty (30) full
calendar months from the date of this Agreement, as amended and restated.
Commencing on the date of execution of this Agreement, the term of this
Agreement shall be extended for one day each day until such time as the Board of
Directors of the Holding Company (the "Board") or Executive elects not to extend
the term of the Agreement by giving written notice to the other party in
accordance with Section 5 of this Agreement, in which case the term of this
Agreement shall be fixed and shall end on the thirtieth- month anniversary of
the date of such written notice.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as defined in paragraph
(b) of this Section 2), Executive shall be entitled to the payments and benefits
provided for in Section 3 of this Agreement upon Executive's termination of
employment on or after the date the Change in Control occurs due to: (i)
Executive's dismissal at any time during the term of this Agreement; (ii)
Executive's voluntary resignation for any reason within the thirty (30) day
period following the date that is one-year from the date the Change in Control
occurred, or (iii) Executive's resignation at any time during the term of this
Agreement following any demotion, or loss of title, office or significant
authority, or reduction in Executive's annual compensation or benefits, or
relocation of Executive's principal place of employment by more than 25 miles
from its location immediately prior to the Change in Control; provided, however,
Executive may consent in writing to any such demotion, loss,
<PAGE> 12
reduction or relocation. The effect of any written consent of Executive under
this Section 2(a) shall be strictly limited to the terms specified in such
written consent.
(b) For purposes of this Agreement, a "Change in Control" of the
Holding Company or the Bank shall mean an event of a nature that; (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act,
and the Rules and Regulations promulgated by the Office of Thrift Supervision
(or its predecessor agency), as in effect on the date hereof (provided, that in
applying the definition of change in control as set forth under the rules and
regulations of the OTS, the Board shall substitute its judgment for that of the
OTS); or (iii) without limitation such a Change in Control shall be deemed to
have occurred at such time as (A) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding voting securities or right to
acquire such securities except for any voting securities of the Bank purchased
by the Holding Company and any voting securities purchased by any employee
benefit plan of the Holding Company or its Subsidiaries; or (B) individuals who
constitute the board of directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board (or members who were nominated by the Incumbent Board), or whose
nomination for election by the Company's stockholders was approved by a
Nominating Committee solely composed of members which are Incumbent Board
members (or members who were nominated by the Incumbent Board), shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Holding Company or
similar transaction occurs or is effectuated in which the Bank or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have occurred or to have been effectuated upon
the receipt of all required federal regulatory approvals not including the lapse
of any statutory waiting periods; or (D) a proxy statement has been distributed
soliciting proxies from stockholders of the Holding Company, by someone other
than the current management of the Holding Company, seeking stockholder approval
of a plan of reorganization, merger or consolidation of the Holding Company or
Bank with one or more corporations as a result of which the outstanding shares
of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Bank or the Holding Company shall be distributed; or (E) a tender offer is made
for 20% or more of the voting securities of the Bank or Holding Company then
outstanding.
(c) Notwithstanding any other provision of this Agreement, Executive
shall not have the right to receive termination benefits under this Agreement
upon Executive's Termination for Cause. The term "Termination for Cause" shall
mean termination because of Executive's personal dishonesty, incompetence,
willful misconduct, any breach of fiduciary duty involving personal
2
<PAGE> 13
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards of professional competence generally prevailing for officers having
comparable positions in the savings institutions industry. Notwithstanding the
foregoing, Executive shall not be deemed to have been Terminated for Cause
unless and until there shall have been delivered to Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for Executive,
together with counsel, to be heard before the Board and which such meeting shall
be held not more than 30 days from the date of notice during which period
Executive may be suspended with pay), finding that in the good faith opinion of
the Board, Executive was guilty of conduct justifying Termination for Cause and
specifying the particulars thereof in detail. Executive shall not have the right
to receive compensation or other benefits for any period after Termination for
Cause except for compensation or benefits already vested. Any stock options and
related limited rights granted to Executive under any stock option plan, or any
unvested awards granted to Executive under any restricted stock benefit plan of
the Holding Company or its subsidiaries, shall become null and void effective
upon Executive's receipt of Notice of Termination For Cause pursuant to Section
5 of this Agreement except all benefits shall be deemed to have remained in
effect if Executive is reinstated, and shall not be exercisable by or delivered
to Executive at any time subsequent to such Termination For Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time by
the termination of Executive's employment in accordance with the provisions of
Section 2 of this Agreement, the Holding Company shall be obligated to pay
Executive, or in the event of Executive's subsequent death, Executive's
beneficiary or beneficiaries, or Executive's estate, as the case may be, a sum
equal to two and one-half (2-1/2) times the greater of (i) Executive's average
annual compensation (including compensation attributable to the exercise of
stock options) for the five most recently completed taxable years of Executive
or (ii) the highest annual compensation (excluding compensation attributable to
the exercise of stock options) for any of the five most recently completed
taxable years of Executive. Except as provided for in the preceding sentence,
for purposes of this Section 3(a), annual compensation shall include base salary
and any other taxable income, including but not limited to amounts related to
the granting, vesting or exercise of restricted stock or stock option awards,
commissions, bonuses, severance payments, retirement benefits, director or
committee fees and fringe benefits paid or to be paid to Executive or paid for
Executive's benefit during any such year, as well as pension, profit sharing,
employee stock ownership plan and other retirement contributions or benefits,
including to any tax-qualified or non-tax-qualified plan or agreement (whether
or not taxable) made or accrued on behalf of Executive for such year. In
addition, for purposes of determining his vested accrued benefit, Executive
shall be credited either under the defined benefit pension plan maintained by
the Bank or, if not permitted under such plan, under a separate arrangement,
with the additional "years of service" that he would have earned for vesting and
benefit accrual purposes for the remaining term of the Agreement had his
employment not terminated. At the election of Executive, which election is to be
made prior to or within thirty
3
<PAGE> 14
(30) days of the Date of Termination on or following a Change in Control, such
payment may be made in a lump sum (without discount for early payment) on or
immediately following the Date of Termination (which may be the date a Change in
Control occurs) or paid in equal monthly installments during the thirty (30)
months following Executive's termination. In the event that no election is made,
payment to Executive will be made on a monthly basis during the remaining thirty
(30) month term of the Agreement. Such payments shall not be reduced in the
event Executive obtains other employment following termination of employment.
(b) Upon the occurrence of a Change in Control and Executive's
termination of employment in accordance with the provisions of Section 2 of this
Agreement, the Holding Company will cause to be continued any life, medical,
health and disability or dental insurance plan or arrangement in which Executive
participates (each being a "Welfare Benefit Plan") substantially identical to
the benefit coverage maintained by the Holding Company or its subsidiaries for
Executive and any of his dependents covered under such plans prior to the Change
in Control. Such coverage shall cease upon the expiration of thirty-six (36)
full calendar months following the Date of Termination. In the event Executive's
or Executive's covered dependent's participation in any such plan or program is
barred, the Holding Company shall arrange to provide Executive and his
dependents with benefits coverage substantially similar to those which Executive
and his dependents would otherwise have been entitled to receive under such
plans and programs by operation of this provision or provide their economic
equivalent to Executive and Executive's dependents.
4. CHANGE IN CONTROL RELATED PROVISIONS.
(a) Notwithstanding the preceding provisions of Section 3 of this
Agreement, for any taxable year in which Executive shall be liable, for the
payment of an excise tax under Section 4999 of the Internal Revenue Code (or any
successor provision thereto), with respect to any payment in the nature of the
compensation made by the Holding Company or its Subsidiaries to (or for the
benefit of) Executive pursuant to this Agreement or otherwise, the Holding
Company (or any successor thereto) shall pay to Executive an amount determined
under the following formula:
An amount equal to: (E x P) + X
WHERE:
X = E x P
---------------------------------------
1 - [(FI x (1 - SLI)) + SLI + E + M]
and
E = the rate at which the excise tax is assessed under
Section 4999 of the Code;
P = the amount with respect to which such excise tax is
assessed, determined without regard to this Section 4;
4
<PAGE> 15
FI = the highest marginal rate of federal income, employment,
and other taxes (other than taxes imposed under Section
4999 of the Code) applicable to Executive for the taxable
year in question with respect to such payment (including
any effective increase in Executive's tax rate attributable
to the resultant disallowance of any deduction or the
phase-out of any personal exemption or similar items);
SLI = the sum of the highest marginal rates of income and payroll
tax applicable to Executive under applicable state and
local laws for the taxable year in question (including any
effective increase in Executive's tax rate attributable to
the resultant disallowance of any deduction or the
phase-out of any personal exemption or similar items); and
M = highest marginal rate of Medicare tax.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Section 4 or otherwise and
on which an excise tax under Section 4999 of the Code may or will be assessed,
the payment determined under this Section 4 shall be made to Executive on the
earliest of (i) the date the Holding Company is required to withhold such tax,
(ii) the date the tax is required to be paid by Executive, or (iii) at the time
of termination resulting from the Change in Control. It is the intention of the
parties that the Holding Company provide Executive with a full tax gross-up
under the provisions of this Section 4, so that on a net after-tax basis, the
result to Executive shall be the same as if the excise tax under Section 4999
(or any successor provisions) of the Code had not been imposed. The tax gross-up
may be adjusted, as appropriate, if alternative minimum tax rules are applicable
to Executive.
(b) Notwithstanding the foregoing, if its is (i) initially determined
by the Holding Company's tax advisors that no excise tax under Section 4999 of
the Code is due with respect to any payment or benefit described in the first
paragraph of Section 4(a) and thereafter it is determined in a final judicial
determination or administrative settlement that the Section 4999 excise tax is
due with respect to such payments or benefits or subsequently determined in a
final judicial determination or a final administrative settlement to which
Executive is a party that the excise tax under Section 4999 of the Code is due
or that the excess parachute payment as defined in Section 4999 of the Code, is
more than the amount determined as "P", above (such revised determination under
(i) or (ii) above thereafter being referred to as the "Determinative Excess
Parachute Payment"), then the tax advisors of the Holding Company (or any
successor thereto) shall determine the amount (the "Adjustment Amount"), the
Holding Company (or any successor thereto) must pay to Executive, in order to
put Executive in the same position as Executive would have been if the amount
determined as "P" above had been equal to the Determinative Excess Parachute
Payment. In determining the Adjustment Amount, the tax advisors shall take into
account any and all taxes (including any penalties and interest) paid or payable
by Executive in connection with such final judicial determination or final
administrative settlement. As soon as practicable after the Adjustment Amount
has been so determined, the Holding Company shall pay the Adjustment Amount to
Executive.
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<PAGE> 16
(c) The Holding Company (or its successor) shall indemnify and hold
Executive harmless from any and all losses, costs and expenses (including
without limitation, reasonable attorney's fees, reasonable accountant's fees,
interest, fines and penalties of any kind) which Executive incurs as a result of
any administrative or judicial review of Executive's liability under Section
4999 of the Code by the Internal Revenue Service or any comparable state agency
through and including a final judicial determination or final administrative
settlement of any dispute arising out of Executive's liability for the Section
4999 excise tax or otherwise relating to the classification for purposes of
Section 280G of the Code of any payment or benefit in the nature of compensation
made or provided to Executive by the Holding Company or any successor thereto.
Executive shall promptly notify the Holding Company in writing whenever
Executive receives notice of the commencement of any judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under Section
4999 of the Code of any amount paid or payable under this Supplemental Agreement
is being reviewed or is in dispute (including a notice of audit or other inquiry
concerning the reporting of Executive's liability under Section 4999). The
Holding Company (or its successor) may assume control at its expense over all
legal and accounting matters pertaining to such federal or state tax treatment
(except to the extent necessary or appropriate for Executive to resolve any such
proceeding with respect to any matter unrelated to amounts paid or payable
pursuant to this contract) and Executive shall cooperate fully with the Holding
Company in any such proceeding. Executive shall not enter into any compromise or
settlement or otherwise prejudice any rights the Holding Company (or its
successor) may have in connection therewith without prior consent to the Holding
Company (or its successor). In the event that the Holding Company (or any
successor thereto) elects not to assume control over such matters, the Holding
Company (or any successor thereto) shall promptly reimburse Executive for all
expenses related thereto as and when incurred upon presentation of appropriate
documentation relating thereto.
(d) The preceding provisions of this Section 4 shall apply only in the
event Executive's "parachute payments" (as such term is used for purposes of
Section 280G of the Code) exceed the amount equal to three times Executive's
"base amount" (as such term is used for purposes of Section 280G of the Code) by
more than five percent. If the preceding provisions of this Section 4 shall not
apply by operation of the preceding sentence and if
(i) the aggregate payments or benefits to be made or
afforded to Executive, which are deemed to be
parachute payments (the "Termination Benefits") would
be deemed to include an "excess parachute payment"
under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to three (3) times Executive's "base amount," as
determined in accordance with said Section 280G of
the Code and the Non-Triggering Amount less the
product of the marginal rate of any applicable state
and federal income tax (P, FI, SLI, and M, as defined
in paragraph (a) of this Section 4) and the
Non-Triggering Amount would be greater than the
aggregate value of the Termination Benefits (without
such reduction) minus
6
<PAGE> 17
(i) the amount of tax required to be paid by the
Executive thereon by Section 4999 of the Code and
further minus (ii) the product of the Termination
Benefits and the marginal rate of any applicable
state and federal income tax (as determined above
including E, as defined in paragraph (a) of this
Section 4),
then the Termination Benefits shall be reduced to the Non-Triggering Amount and
the allocation of the reduction required hereby among the Termination Benefits
shall be determined by Executive.
5. NOTICE OF TERMINATION.
(a) Any purported termination by the Holding Company, or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a reasonable dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive's base salary and continue to cover Executive under
each Welfare Benefit Plan in which Executive participated when the notice giving
rise to the dispute was given until the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section 5(c) are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
6. SOURCE OF PAYMENTS.
(a) It is intended by the parties hereto that all payments provided in
this Agreement shall be paid in cash, check or other mutually agreed upon method
from the general funds of the Holding Company subject to Section 6(b) of this
Agreement.
7
<PAGE> 18
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under a Change in Control Agreement in effect between
Executive and the Bank (the "Bank Agreement"), such payments and benefits paid
by the Bank under the Bank Agreement will be subtracted from any amount due
simultaneously to Executive under similar provisions of this Agreement.
7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Holding Company and
Executive, except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to Executive without
reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of the Holding Company or shall impose on the Holding
Company or its subsidiaries any obligation to employ or retain Executive in its
employ for any period.
8. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Holding Company and their respective successors and assigns.
9. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
8
<PAGE> 19
10. REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in the
Bank Agreement during the term of this Agreement and a Change in Control, as
defined herein, occurs, the Holding Company will assume its obligation to pay
and Executive will be entitled to receive all of the termination benefits
provided for under Section 3 of the Bank Agreement upon the notification of the
Holding Company of the Bank's receipt of a dismissal of charges in the Notice.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references herein to the
masculine shall apply to both the masculine and the feminine.
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Holding Company, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of
Executive's right to be paid until the Date of Termination during the pendency
of any dispute or controversy arising under or in connection with this
Agreement.
9
<PAGE> 20
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
The Holding Company shall provide Executive (including Executive's
heirs, executors and administrators) with coverage under a standard directors'
and officers' liability insurance policy at its expense, and shall indemnify
Executive (and Executive's heirs, executors and administrators) to the fullest
extent permitted under Delaware law and as provided in the Holding Company's
certificate of incorporation against all expenses and liabilities reasonably
incurred by Executive in connection with or arising out of any action, suit or
proceeding in which Executive may be involved by reason of Executive having been
a director or officer of the Holding Company or its subsidiaries (whether or not
Executive continues to be a director or officer at the time of incurring such
expenses or liabilities), such expenses and liabilities to include, but not be
limited to, judgments, court costs and attorneys' fees and the cost of
reasonable settlements.
17. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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<PAGE> 21
SIGNATURES
IN WITNESS WHEREOF, BostonFed Bancorp, Inc. has caused this Agreement,
as amended and restated to be executed by its duly authorized officer, and
Executive has signed this Agreement, as amended and restated on March 28, 2000.
ATTEST: BOSTONFED BANCORP, INC.
By: /s/ David F. Holland
- -------------------------- --------------------------------
Secretary For the Entire Board of Directors
WITNESS: EXECUTIVE
/s/ Dennis J. Furey
--------------------------------
Dennis J. Furey
- --------------------------
Seal
11
<PAGE> 1
Exhibit 10.10
BOSTON FEDERAL SAVINGS BANK
DEFINED BENEFIT RESTORATION PLAN
(EFFECTIVE AS OF SEPTEMBER 21, 1999)
1. PURPOSE. The purpose of the Plan is to (a) attract and retain
certain key executive employees of Boston Federal Savings Bank and certain of
its subsidiaries and affiliates by providing them with supplemental retirement
income (determined by reference to the FIRF Plan (as defined below)) to augment
their qualified plan retirement benefits by, for purposes of the Plan only, (a)
eliminating the effect of the limitations contained in Sections 401(a)(17) and
415 of the Internal Revenue Code of 1986, as amended and in effect from time to
time (the "Code"), on the benefits provided under the FIRF Plan, and (b)
eliminating the effect of the early retirement factors applicable to benefits
payable under the FIRF Plan. The Plan shall be construed consistent with the
purposes described herein.
2. DEFINITIONS. The following terms shall have the following
meanings for purposes of the Plan:
2.1 "ACCELERATION PAYMENT" means a lump sum acceleration
payment, as defined in Section 7 hereof.
2.2 "ACCRUED BENEFIT" means, as of any date, (i) in the
case of a Participant who has not yet retired, become disabled or otherwise
terminated employment with the Employer, the Benefit which would be payable to
such Participant under the Plan had he retired, become disabled or otherwise
terminated employment with the Employer on such date, and (ii) in the case of a
Participant who has retired, become disabled or otherwise terminated employment
with the Employer, the Benefit.
2.3 "BENEFIT" means the supplemental benefit provided by
the Plan, as defined in Section 5 hereof.
2.4 "BFSB" means Boston Federal Savings Bank, a
federally chartered stock savings bank, and any successor entity(ies) thereto.
2.5 "BFSB BOARD" means the board of directors of BFSB or
a committee of the board of directors of BFSB authorized to act on behalf of the
board of directors of BFSB under this Plan.
2.6 "CHANGE IN CONTROL" means, with respect to a
Participant who has an Employment Agreement, a "Change in Control" as defined in
such Participant's Employment Agreement.
<PAGE> 2
2.7 "CODE" means the Internal Revenue Code, as defined in
Section 1 hereof.
2.8 "DEATH BENEFIT" means the death benefit provided by
the Plan, as defined in Section 8 hereof.
2.9 "EARLY TAX OBLIGATION" means the early tax
obligation, as described in Section 15 hereof.
2.10 "ELECTION DATE" means the date on which a Participant
submits an election to receive an Acceleration Payment.
2.11 "EMPLOYER" means BFSB and any subsidiary or affiliate
of BFSB which participates in the FIRF Plan and which adopts this Plan with the
permission of the BFSB Board. References to the Employer or the Employer Board
in the context of a particular Participant shall refer to that Participant's
Employer and its board of directors (or authorized committee thereof).
2.12 "EMPLOYER BOARD" means, with respect to an Employer,
the board of directors of such Employer or a committee of the board of directors
of such Employer authorized to act on behalf of such board of directors under
this Plan.
2.13 "EMPLOYMENT AGREEMENT" means, with respect to a
Participant, any employment, change in control or similar agreement between such
Participant and his Employer.
2.14 "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended and in effect from time to time.
2.15 "EVENT OF TERMINATION" means, with respect to a
Participant who has an Employment Agreement which defines such term, an "Event
of Termination" as defined in such Participant's Employment Agreement.
2.16 "FIRF PLAN" means the Financial Institutions
Retirement Fund, as amended from time to time, and as adopted by the Employer.
2.17 "INSURANCE PROCEEDS" means that portion of the
proceeds of any split-dollar life insurance policy collaterally assigned to the
Participant but only to the extent such proceeds are designated in advance by
the Employer as Insurance Proceeds hereunder. The Employer shall at all times
maintain a record identifying all such policies and the extent to which proceeds
thereunder will constitute Insurance Proceeds. Such records shall be binding and
conclusive for all purposes of the Plan and upon all Participants and any
person(s) claiming under, through or in respect of any Participant.
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<PAGE> 3
2.18 "INTEREST RATE" means, for any calendar year,
interest compounded annually at the rate of 120 percent of the applicable
Federal mid-term rate as in effect under Section 1274 of the Code for the first
month of such year.
2.19 "PARTICIPANT" means David F. Holland, David P.
Conley, John A. Simas, and such other senior executives of the Employer as are
selected for participation in the Plan from time to time by the Employer Board.
Notwithstanding the foregoing, no person shall be a Participant until such
person executes and delivers to the Employer Board a Participation Agreement.
2.20 "PARTICIPATION AGREEMENT" means a participation
agreement in the form attached hereto as Exhibit A.
2.21 "PLAN" means the Boston Federal Savings Bank Defined
Benefit Restoration Plan, as set forth herein and as amended from time to time.
2.22 "PRESENT VALUE" means the present value of a future
(or past) lump sum payment or a series of future (or past) installment payments
determined by discounting (or accreting) such future (or past) payment(s) to the
determination date at an annually compounded rate equal to the Interest Rate.
3. ADMINISTRATION.
3.1 Subject to Sections 2.16, 3.2, 13(b) and 15 hereof,
the Plan shall be administered by the BFSB Board. Except as otherwise provided
in the Plan or by applicable law, the BFSB Board shall have full authority and
discretion to determine the rights and benefits of Participants under the Plan,
to establish from time to time regulations for the administration of the Plan,
to interpret and construe the Plan, and to make all determinations deemed
necessary or advisable for the administration of the Plan.
3.2 The BFSB Board may designate persons other than
members of the BFSB Board to carry out the day-to-day ministerial administration
of the Plan under such conditions and limitations as it may prescribe. The BFSB
Board's determinations under the Plan shall be reasonable and shall be
consistent with the provisions and purposes of the Plan; PROVIDED, HOWEVER,
that, subject to the foregoing, such determinations need not be uniform and may
be made selectively among Participants, whether or not such Participants are
similarly situated. Except as otherwise provided in the Plan or by applicable
law, any such determination, decision or action of the BFSB Board in connection
with the construction, interpretation, administration, implementation or
maintenance of the Plan shall be final, conclusive and binding upon all
Participants and any person(s) claiming under, through or in respect of any
Participant.
3.3 The BFSB Board and any Employer Board, and/or any
member of the BFSB Board and any Employer Board, shall not be liable to or in
respect of any Participant
3
<PAGE> 4
or to any other person for or in respect of any act, omission, interpretation,
construction or determination made in good faith in connection with or under the
Plan.
4. PARTICIPATION. Participation in the Plan shall be limited to
the Participants. This Plan is intended to constitute a non-qualified, unfunded
deferred compensation plan for a select group of management or highly
compensated employees under Title I of ERISA.
5. SUPPLEMENTAL RETIREMENT BENEFIT. In accordance with Section 6
hereof, the Employer shall pay in respect of each Participant a supplemental
benefit under the Plan (the "Benefit") in the form of two hundred forty (240)
equal monthly payments. The monthly amount of the Benefit shall be determined as
of the date such Benefit is to be paid or is to be commenced being paid, and
shall not be subject to further adjustment (e.g., the Benefit shall not be
adjusted to reflect any future cost of living adjustment under the FIRF Plan).
Each monthly payment shall be determined by the following formula:
X = A - B - C, where:
X = the amount of the monthly payment;
A = the accrued and vested monthly retirement benefit that would be
payable under the FIRF Plan, in the regular form of payment (i.e., assuming the
Participant was not married and made no election of any optional form of
payment), commencing at the later of age 65 or the Participant's date of
retirement or other termination of employment with the Employer, assuming, for
purposes of the Plan only, that the provisions of the FIRF Plan designed solely
to satisfy the requirements of Section 401(a)(17) and Section 415 of the Code
were deleted and of no effect;
B = such Participant's accrued and vested monthly retirement benefit
actually payable under the FIRF Plan, in the regular form of payment (i.e.,
assuming the Participant was not married and made no election of any optional
form of payment), commencing at the earlier of the date the Participant
commences receipt of his monthly Benefit under this Plan or the date the
Participant commences receipt of his benefit under the FIRF Plan; and
C = the monthly installment equivalent with respect to any Acceleration
Payment paid in respect of such Participant prior to his retirement or other
termination of employment with the Employer. The monthly installment equivalent
with respect to an Acceleration Payment shall be equal to 100% of the monthly
Benefit amount used in calculating the lump sum amount of such Acceleration
Payment.
In no event shall the Benefit be less than zero.
Notwithstanding anything to the contrary elsewhere herein, if a
Participant becomes entitled to benefits under his Employment Agreement on
account of either an Event of Termination or the termination of his employment
with the Employer after a Change in
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<PAGE> 5
Control, then solely for purposes of determining A above, such Participant shall
be deemed to have three (3) additional years of Service (as defined in the FIRF
Plan).
6. PAYMENT OF BENEFIT. Upon thirty (30) days' prior written
notice to the Employer Board, the Participant may commence receipt of his
monthly Benefit payments on the first day of any month following the later of
the following:
6.1 such Participant's attainment of age 55; or
6.2 such Participant's retirement or other termination of
employment with the Employer.
Notwithstanding the foregoing:
6.3 in a situation where a Participant's employment with
the Employer terminates and such Participant is eligible for disability benefits
under the FIRF Plan, then the Benefit payable hereunder shall be determined in
accordance with Section 5 hereof taking into account the disability provisions
of the FIRF Plan. Such a disabled Participant may commence receipt of his
monthly Benefit payments on the first day of any month following the date such
Participant becomes disabled, as defined in the FIRF Plan, regardless of his age
at that time; and
6.4 in the event any payment to be made to a Participant
(or his designated beneficiary, as the case may be) under this Section 6 (or
Sections 7 or 8, as the case may be) has not been paid within 30 days after the
date such payment was to be made, the Employer shall (in addition to such
payment) pay to such Participant (or his designated beneficiary, as the case may
be) interest on the amount of such delinquent payment, from the date such
payment was to be paid through the date such payment was actually paid, at a
rate equal to the Interest Rate.
7. ACCELERATION PAYMENT. At any time, upon sixty (60) days' prior
written notice to the Employer Board, a Participant may elect to receive an
Acceleration Payment, PROVIDED, HOWEVER, that no more than one (1) such
Acceleration Payment may be paid with respect to a Participant before such
Participant retires, becomes disabled or otherwise terminates employment with
the Employer. Such Acceleration Payment shall be paid promptly by the Employer
to such Participant in a single lump sum. The amount of such Acceleration
Payment shall be determined in accordance with this Section 7.
7.1 If a Participant requests an Acceleration Payment
prior to the date he retires, becomes disabled or otherwise terminates
employment with the Employer, the amount of such Acceleration Payment shall
equal ninety percent (90%) of the Present Value of such Participant's Accrued
Benefit as of the Election Date. In all cases, the Present Value of such Accrued
Benefit shall be determined on the assumption that the Participant has
terminated his
5
<PAGE> 6
employment with the Employer on such date and elected to commence receipt of
such Accrued Benefit on the earliest date permitted by the Plan.
7.2 If a Participant requests an Acceleration Payment
after the date he retires, becomes disabled or otherwise terminates employment
with the Employer (including after commencing receipt of the Benefit), the
amount of such Acceleration Payment shall equal ninety percent (90%) of the
Present Value of the then unpaid monthly Benefit payments.
8. DEATH BENEFIT. Upon a Participant's death prior to the receipt
of his entire Accrued Benefit under the Plan, in lieu of any further Benefit
under the Plan and in lieu of any death benefit under any other non-qualified
plan of the Employer which pre-dates the effectiveness of the Plan, the Employer
shall make a single lump sum payment to such Participant's designated
beneficiary, or, if none, to such Participant's estate, equal to the Death
Benefit determined pursuant to this Section 8.
8.1 If a Participant dies prior to commencing receipt of
either or both of his monthly Benefit under the Plan and/or his benefit under
the FIRF Plan, the amount of such Death Benefit shall be determined by the
following formula:
Y = D - E - F - G, where:
Y = the amount of the Death Benefit;
D = the Present Value of any death benefit payable on account of such
Participant's death under the FIRF Plan, assuming, for purposes of the Plan
only, that the provisions of the FIRF Plan designed solely to satisfy the
requirements of Section 401(a)(17) and Section 415 of the Code were deleted and
of no effect;
E = the Present Value of the death benefit actually payable in respect
of such Participant's death under the FIRF Plan;
F = the Present Value of one hundred percent (100%) of the Accrued
Benefit amount used to calculate any Acceleration Payment received by the
Participant; and
G = the amount of any Insurance Proceeds payable in respect of such
Participant.
In no event shall the Death Benefit be less than zero.
8.2 If a Participant dies after commencing receipt of
either or both of his monthly Benefit under the Plan and/or his benefit under
the FIRF Plan, the amount of the Death Benefit shall equal the Present Value of
the remaining unpaid monthly Benefit payments reduced, but not below zero, by
the amount of any Insurance Proceeds payable in respect of such Participant.
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<PAGE> 7
9. ASSIGNMENTS AND TRANSFERS. No right or benefit of a
Participant, a surviving contingent annuitant or a surviving spouse under the
Plan may be assigned, alienated, encumbered, or otherwise hypothecated or
transferred in any manner. No such right or benefit hereunder shall be subject
to legal process or attachment for the payment of any claims of a creditor of or
through a Participant or a beneficiary of a deceased Participant.
10. EMPLOYEE RIGHTS UNDER THE PLAN. Neither the Plan nor any
action taken thereunder shall be construed as giving any Participant any right
to be retained in the employment of the Employer, nor shall it be construed as
limiting in any way the right of the Employer to discharge any Participant or to
treat him without regard to the effect any such treatment would or might have
upon him as a Participant in the Plan.
11. UNFUNDED PLAN. The Plan shall be unfunded and no Participant
in the Plan shall have any right to any specific assets of the Employer by
reason of the Plan, and the rights of each Participant hereunder shall be solely
those of an unsecured creditor of the Employer. Any liability of the Employer to
any Participant under the Plan shall be based solely upon the contractual
obligations that may be created as a result of the Plan and such Participant's
Participation Agreement. No such obligation of the Employer shall be deemed to
be secured by any pledge of, encumbrance on, or other interest in, any property
or asset of the Employer or any affiliate of the Employer. Nothing contained in
the Plan shall be construed as creating in respect of any Participant (or
beneficiary thereof or any other person) any equity or other interest of any
kind in any assets of the Employer or any affiliate of the Employer, or creating
a trust of any kind or a fiduciary relationship of any kind between the
Employer, any affiliate of the Employer, and/or any such Participant, any
beneficiary or any other person. Except as specifically provided herein,
participation in the Plan shall not in any way affect any rights which a
Participant may have under any other employee benefit plan of the Employer or
under any individual contractual agreement between such Participant and the
Employer. Notwithstanding the foregoing, timely payment of all Benefits and
Death Benefits payable under the Plan (including without limitation Acceleration
Payments and Early Tax Obligations) shall be fully guaranteed by BostonFed
Bancorp, Inc.
12. SOURCE OF PAYMENT. Subject to Section 11 hereof, the Employer,
in its sole discretion, may establish (a) a grantor or other trust of which the
Employer is treated as the owner under the Code and the assets of which are
subject to the claims of the Employer's general creditors in the event of its
insolvency, (b) an insurance arrangement, or (c) any other arrangement or
arrangements designed to provide for the payment of benefits hereunder. Any such
arrangement shall be subject to such other terms and conditions as the Employer
may deem necessary or advisable to ensure that benefits are not includible, by
reason of the establishment of any such arrangement or the funding of any such
trust, in the income of the beneficiaries of such trust or other arrangement
prior to actual distribution or other payment and that the existence of such
trust or other arrangement does not cause the Plan to be considered to be funded
for purposes of Title I of ERISA.
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<PAGE> 8
13. AMENDMENT OR TERMINATION. The BFSB Board may amend, suspend,
or terminate the Plan or any portion thereof at any time. Notwithstanding the
foregoing, (a) without the consent of the Participant, no such amendment,
suspension, or termination shall cause such Participant's (or his designated
beneficiary's, as the case may be) benefits hereunder to be less than the lesser
of (i) such Participant's Accrued Benefit as of the effective date of such
amendment, suspension, or termination, or (ii) such Participant's Benefit
payable under Section 5 (or Section 8) at the times specified in Section 6 (or
Section 8) determined as if such amendment, suspension or termination had not
been effected, and (b) any other Employer Board may terminate its Employer's
continued participation in the Plan which shall constitute a termination of the
Plan as to that Employer.
14. GOVERNING LAW; CONSTRUCTION. The Plan shall be governed by and
construed, interpreted and administered in accordance with the laws of the
Commonwealth of Massachusetts, except to the extent such laws are preempted by
ERISA. The titles and headings of sections of the Plan are for convenience of
reference only and shall have no substantive meaning in and of themselves.
15. WITHHOLDING. All payments under the Plan shall be made in cash
and shall be reduced by such amounts as are required to be withheld with respect
thereto under applicable federal, state and local tax laws and regulations in
effect as of the date of any such payments. In the event any federal, state or
local taxes are imposed with respect to any benefits under the Plan before such
benefits become payable to the Participant or his beneficiary (an "Early Tax
Obligation"), then the Employer shall pay such Early Tax Obligation and, in the
Employer Board's sole discretion, either (a) withhold an equivalent amount of
funds from any current or future compensation payable by the Employer to the
Participant, or (b) require the Participant to promptly provide an equivalent
amount of funds to the Employer. To the extent the Employer does not collect an
equivalent amount from the Participant in accordance with the preceding
sentence, then the Employer may reduce any Benefit payment hereunder by the then
Present Value of such Early Tax Obligations paid by the Employer.
16. OTHER BENEFITS PLANS OR PROGRAMS. Payments and benefits
received under the Plan shall not be deemed a part of any Participant's
compensation for purposes of determining any benefits under any other welfare,
pension or incentive benefit plans or programs, if any, maintained by the
Employer or any of its affiliates or predecessors from time to time.
17. EFFECTIVE DATE. The Plan shall be effective as of September
21, 1999.
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<PAGE> 9
IN WITNESS WHEREOF, the Plan is executed by Boston Federal Savings Bank
on this ____ day of March, 2000.
BOSTON FEDERAL SAVINGS BANK
By:
-------------------------------
Title:
9
<PAGE> 1
Exhibit 10.11
BOSTON FEDERAL SAVINGS BANK
DEFINED CONTRIBUTION RESTORATION PLAN
(EFFECTIVE AS OF SEPTEMBER 21, 1999)
1. PURPOSE. The purpose of the Plan is to (a) attract and retain
certain key executive employees of Boston Federal Savings Bank and certain of
its subsidiaries and affiliates by providing them with supplemental retirement
income (determined by reference to the Savings Plan and ESOP (each as defined
below)) to augment their qualified plan retirement benefits by, for purposes of
the Plan only, eliminating the effect of the limitations contained in Sections
401(a)(17), 401(k)(3), 401(m)(2), 402(g) and 415 of the Internal Revenue Code of
1986, as amended and in effect from time to time (the "Code"), on the benefits
provided under the Savings Plan and the ESOP. The Plan shall be construed
consistent with the purposes described herein, including without limitation, the
anti-conditioning rules of Section 401(k)(4) of the Code.
2. DEFINITIONS. The following terms shall have the following
meanings for purposes of the Plan:
2.1 "ACCELERATION PAYMENT" means a lump sum acceleration
payment, as defined in Section 8 hereof.
2.2 "ACCOUNT" means the bookkeeping account maintained
for each Participant to which amounts credited on behalf of the Participant
under Section 5 hereof shall be recorded. Notwithstanding any other provision of
the Plan that may be interpreted to the contrary, the amounts credited to a
Participant's Account under the Plan are for measurement purposes only and shall
not be considered or construed in any manner as an actual contribution or
investment.
2.3 "ACCOUNT BALANCE" means as of any date with respect
to a Participant the number of BFBI Share equivalents credited to such
Participant's Account.
2.4 "BFBI" means BostonFed Bancorp, Inc., a corporation
organized under the laws of Delaware, or any successor entity(ies) thereto.
2.5 "BFBI SHARE" means a share of the voting common
stock, par value $0.01, issued by BFBI, subject to adjustments pursuant to
Section 6.3.
2.6 "BFSB" means Boston Federal Savings Bank, a federally
chartered stock savings bank, and any successor entity(ies) thereto.
<PAGE> 2
2.7 "BFSB BOARD" means the board of directors of BFSB or
a committee of the board of directors of BFSB authorized to act on behalf of the
board of directors of BFSB under this Plan.
2.8 "CLOSING PRICE" means for any day the closing price
for one BFBI Share as reported for such day in The Wall Street Journal or in any
successor to The Wall Street Journal or, if there is no such successor, in any
trade publication selected by the BFSB Board or, if no closing price is so
reported for such day, the fair market value of a BFBI Share as determined by
the BFSB Board.
2.9 "CODE" means the Internal Revenue Code, as defined in
Section 1 hereof.
2.10 "DIVIDEND PAYMENT DATE" means a date after the
Effective Date on which a dividend (other than a dividend consisting solely of
additional BFBI Shares) is paid with respect to the BFBI Shares.
2.11 "EARLY TAX OBLIGATION" means an early tax obligation,
as described in Section 15 hereof.
2.12 "EFFECTIVE DATE" means September 21, 1999.
2.13 "ELECTION DATE" means the date on which a Participant
submits an election to receive an Acceleration Payment.
2.14 "EMPLOYER" means BFSB and any subsidiary or affiliate
of BFSB which participates in the ESOP and/or the Savings Plan and which adopts
this Plan with the permission of BFSB Board. Reference to the Employer or the
Employer Board in the context of a particular Participant shall refer to that
Participant's Employer and its board of directors (or authorized committee
thereof).
2.15 "EMPLOYER BOARD" means, with respect to an Employer,
the board of directors of such Employer or a committee of the board of directors
of such Employer authorized to act on behalf of such board of directors under
this Plan.
2.16 "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended and in effect from time to time.
2.17 "ESOP" means the Boston Federal Savings Bank Employee
Stock Ownership Plan, as amended from time to time.
2.18 "INTEREST RATE" means, for any calendar year,
interest compounded annually at the rate of 120 percent of the applicable
Federal mid-term interest rate as in effect under Section 1274 of the Code for
the first month of such year.
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<PAGE> 3
2.19 "LIMITATIONS" means the limitations imposed under
Sections 401(a)(17), 401(k)(3), 401(m)(2), 402(g) and 415 of the Code, or any
successor provisions to such sections of the Code.
2.20 "PARTICIPANT" means David F. Holland, David P.
Conley, John A. Simas, and such other senior executives of the Employer as are
selected for participation in the Plan from time to time by the Employer Board.
Notwithstanding the foregoing, no person shall be a Participant until such
person executes and delivers to the Employer Board a Participation Agreement.
2.21 "PARTICIPATION AGREEMENT" means a participation
agreement in the form attached hereto as Exhibit A.
2.22 "PLAN" means the Boston Federal Savings Bank Defined
Contribution Restoration Plan, as set forth herein and as amended from time to
time.
2.23 "SAVINGS PLAN" means the Boston Federal Savings Bank
Employees Savings & Profit Sharing Plan, as amended from time to time, and as
adopted by the Employer.
2.24 "YEAR OF SERVICE" means "Year of Service," as defined
in the Savings Plan.
3. ADMINISTRATION.
3.1 Subject to Sections 2.19, 3.2, 13(b) and 15 hereof,
the Plan shall be administered by the BFSB Board. Except as otherwise provided
in the Plan or by applicable law, the BFSB Board shall have full authority and
discretion to determine the rights and benefits of Participants under the Plan,
to establish from time to time regulations for the administration of the Plan,
to interpret and construe the Plan, and to make all determinations deemed
necessary or advisable for the administration of the Plan.
3.2 The BFSB Board may designate persons other than
members of the BFSB Board to carry out the day-to-day ministerial administration
of the Plan under such conditions and limitations as it may prescribe. The BFSB
Board's determinations under the Plan shall be reasonable and shall be
consistent with the provisions and purposes of the Plan; PROVIDED, HOWEVER,
that, subject to the foregoing, such determinations need not be uniform and may
be made selectively among Participants, whether or not such Participants are
similarly situated. Except as otherwise provided in the Plan or by applicable
law, any such determination, decision or action of the BFSB Board in connection
with the construction, interpretation, administration, implementation or
maintenance of the Plan shall be final, conclusive and binding upon all
Participants and any person(s) claiming under, through or in respect of any
Participant.
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<PAGE> 4
3.3 The BFSB Board and any Employer Board, and/or any
member of the BFSB Board and any Employer Board, shall not be liable to or in
respect of any Participant or to any other person for or in respect of any act,
omission, interpretation, construction or determination made in good faith in
connection with or under the Plan.
4. PARTICIPATION. Participation in the Plan shall be limited to
the Participants. This Plan is intended to constitute a non-qualified, unfunded
deferred compensation plan for a select group of management or highly
compensated employees under Title I of ERISA.
5. SUPPLEMENTAL BENEFIT. Effective as of the last day of each
calendar year during the effectiveness of the Plan, the Employer shall credit to
each Participant's Account:
5.1 An amount equal to two percent (2%) of the amount by
which the Participant's Salary (as defined in the Savings Plan without regard to
the 401(a)(17) language of the Plan incorporating the 401(a)(17) limits) exceeds
the compensation limit set forth in Section 401(a)(17) of the Code for such
calendar year; plus
5.2 An amount equal to the maximum employer contributions
and forfeitures which would have been credited to the account of the Participant
under the ESOP pursuant to the plan contribution and allocation provisions
contained therein if such provisions had been applied without regard to the
Limitations, less the actual employer contributions and forfeitures credited to
such Participant's account under the ESOP with respect to such calendar year.
Notwithstanding the foregoing, to the extent such employer contributions are
applied to the repayment of a Stock Obligation (as defined in the ESOP) and
result in the release of BFBI Shares from the Unallocated Stock Fund (as defined
in the ESOP), the preceding sentence shall be applied by substituting for
employer contributions the number of released BFBI Shares which would have been
credited to such Participant's account under the ESOP but for the Limitations,
less the number of released BFBI Shares actually credited to such Participant's
account under the ESOP.
6. MAINTENANCE OF ACCOUNTS.
6.1 FORM OF ACCOUNT BALANCE. All Account Balances under
the Plan shall be recorded and maintained as a number of BFBI Share equivalents.
Any dollar amount credited under Section 5 to a Participant's Account with
respect to a calendar year shall be converted into, and thereafter accounted for
as, a number of BFBI Share equivalents determined by the following formula:
W = A divided by B, where:
W = the number of BFBI Share equivalents to be credited to such
Participant's Account;
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<PAGE> 5
A = the amount credited to such Participant's Account under Section 5
with respect to such calendar year; and
B = the Closing Price on the last business day of such calendar year.
Any amount of shares credited under Section 5 to a Participant's
Account with respect to a calendar year shall be converted to, and thereafter
accounted for, as a number of BFBI Share equivalents equal to the number of BFBI
Shares so credited.
In addition to the foregoing, as of the Effective Date, the Employer
shall credit to the Account of each Participant listed on Appendix A hereto, the
number of BFBI Share equivalents equal to the number of BFBI Share equivalents
listed next to such Participant's name on said Appendix A.
6.2 DIVIDENDS. There shall be credited to each
Participant's Account as of each Dividend Payment Date an additional number of
BFBI Share equivalents determined by the following formula:
X = (C x D) divided by E, where:
X = the number of BFBI Share equivalents to be credited to such
Participant's Account on such Dividend Payment Date;
C = the number of BFBI Share equivalents credited to such Participant's
Account as of the record date applicable to the dividend being paid on such
Dividend Payment Date;
D = the dividend amount (excluding any portion of the dividend
consisting of additional BFBI Shares) per BFBI Share paid on such Dividend
Payment Date; and
E = the Closing Price on such Dividend Payment Date.
6.3 OTHER ADJUSTMENTS. If, as a result of any
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar change in BFBI Shares, the outstanding BFBI
Shares are increased or decreased or are exchanged for a different number or
kind of shares or other securities of BFBI, or additional shares or new or
different shares or other securities of BFBI or any successor entity (or a
parent or subsidiary thereof) are distributed with respect to such BFBI Shares
or other securities, or, if, as a result of any merger, consolidation, sale of
all or substantially all of the assets of BFBI or similar transaction, the
outstanding BFBI Shares are converted into or exchanged for a different number
or kind of securities of BFBI or any successor entity (or a parent or subsidiary
thereof), the BFSB Board shall make an appropriate or proportionate adjustment
in each Participant's Account Balance and, if appropriate, in the definition of
BFBI Shares. Any such adjustment by the BFSB Board shall be final, binding and
conclusive.
5
<PAGE> 6
If, as a result of any reorganization, liquidation, merger,
consolidation, sale of all or substantially all of the assets of BFBI or similar
transaction, there are no outstanding BFBI Shares and the BFSB Board determines
that it is not feasible to adjust the definition of BFBI Shares pursuant to the
preceding paragraph, then, notwithstanding any provision elsewhere herein to the
contrary, the number of BFBI Share equivalents then credited to each
Participant's Account shall be converted to a dollar amount determined by the
following formula:
Y = F x G, where:
Y = the dollar amount to be credited;
F = the number of BFBI Share equivalents then credited to such
Participant's Account; and
G = the most recent Closing Price.
In such event, each such Account shall thereafter be credited with, and
increased by, an additional dollar amount each December 31 equal to interest on
such Account Balance for the year ending on such date at an annual rate equal to
the Interest Rate. Thereafter, any payments made pursuant to Section 7 or
Section 8 shall be made in cash rather than BFBI Shares, but otherwise applying
the provisions of Section 7 or Section 8, whichever is applicable.
7. PAYMENT OF BENEFIT. Provided the Participant has completed at
least five Years of Service, the Participant shall commence receipt of his
Account Balance (as set forth below) on the fifteenth (15th) day of January of
the year following the later of the following:
7.1 such Participant's attainment of age 55; or
7.2 such Participant's retirement, disability or other
termination of employment with the Employer.
Notwithstanding the foregoing, the Participant may irrevocably elect to
commence receipt of his Account Balance (as set forth below) on the fifteenth
(15th) day of January of any year following the year after the later of the
dates set forth in Sections 7.1 and 7.2, provided that such Participant provides
notice to the Employer Board, on or before the last day of the calendar year
immediately preceding the calendar year containing the later of the dates set
forth in Sections 7.1 and 7.2, which notice shall set forth the calendar year in
which such Participant shall commence receipt of his Account Balance; PROVIDED,
HOWEVER, that the making of such an election shall not preclude the Participant
from subsequently electing an Acceleration Payment pursuant to Section 8.
Notwithstanding the foregoing, in a situation where a Participant's
employment with the Employer terminates and such Participant is eligible for
disability benefits under the
6
<PAGE> 7
Savings Plan, then such a disabled Participant may commence receipt of his
Account Balance (as set forth below) on the fifteenth (15th) day of January of
any year following the date such Participant becomes disabled, as defined in the
Savings Plan, regardless of his age or Years of Service at that time.
Notwithstanding the foregoing, when a Participant dies, such
Participant's beneficiary shall commence (or continue if such Participant had
already commenced) receipt of such Participant's Account Balance (as set forth
below) on the fifteenth (15th) day of January of the year following such
Participant's death.
A Participant who commences receipt of his Account Balance shall
receive annual payments in the form of BFBI Shares on or before the fifteenth
(15th) day of January of each year until his Account Balance is reduced to zero.
The number of BFBI Shares to be included in each such payment shall be
determined by the following formula:
Z = F divided by (20 - G), where:
Z = the number of BFBI Shares to be included in that payment, PROVIDED,
HOWEVER, that Y shall be rounded to the nearest whole share;
F = the number of BFBI Share equivalents credited to such Participant's
Account on the date such payment is to be made; and
G = the total number of annual payments previously received by (or in
respect of) such Participant.
Immediately following any such payment of benefits, the number of BFBI Share
equivalents credited to the Participant's Account shall be reduced by a number
equal to the number of BFBI Shares actually distributed. Any fractional BFBI
Share equivalents remaining in a Participant's Account after the final payment
of benefits shall be forfeited.
Further notwithstanding the foregoing, in the event any payment to be
made to a Participant (or his designated beneficiary, as the case may be) under
this Section 7 (or under Section 8) has not been paid within 30 days after the
date such payment was to be made hereunder, the Employer shall, in addition to
such payment, pay to such Participant (or his designated beneficiary, as the
case may be) interest on the amount of such delinquent payment (determined as of
the date on which such payment was to be paid), from the date such payment was
to be paid hereunder through the date such payment was actually paid, at a rate
equal to the Interest Rate.
8. ACCELERATION PAYMENT. At any time after a Participant
completes five Years of Service or otherwise becomes eligible to receive
payments under Section 7, upon sixty (60) days' prior written notice to the
Employer Board, a Participant (or a Participant's beneficiary following such
Participant's death) may elect to receive his current Account Balance in the
7
<PAGE> 8
form of an Acceleration Payment; PROVIDED, HOWEVER, that no more than one (1)
such Acceleration Payment may be paid with respect to a Participant before such
Participant retires, becomes disabled or otherwise terminates employment with
the Employer. Such Acceleration Payment shall be paid promptly by the Employer
to such Participant in a single lump sum of BFBI Shares. The number of BFBI
Shares to be included in such Acceleration Payment shall equal ninety percent
(90%) of the number of BFBI Share equivalents credited to his Account as of the
Election Date, rounded to the nearest whole share. Immediately after such
Acceleration Payment, such Participant's Account Balance shall be reduced to
zero.
9. ASSIGNMENTS AND TRANSFERS. No right or benefit of a
Participant, a surviving contingent annuitant or a surviving spouse under the
Plan may be assigned, alienated, encumbered, or otherwise hypothecated or
transferred in any manner. No such right or benefit hereunder shall be subject
to legal process or attachment for the payment of any claims of a creditor of or
through a Participant or a beneficiary of a deceased Participant.
10. EMPLOYEE RIGHTS UNDER THE PLAN. Neither the Plan nor any
action taken thereunder shall be construed as giving any Participant any right
to be retained in the employment of the Employer, nor shall it be construed as
limiting in any way the right of the Employer to discharge any Participant or to
treat him without regard to the effect any such treatment would or might have
upon him as a Participant in the Plan.
11. UNFUNDED PLAN. The Plan shall be unfunded and no Participant
in the Plan shall have any right to any specific assets of the Employer by
reason of the Plan, and the rights of each Participant hereunder shall be solely
those of an unsecured creditor of the Employer. Any liability of the Employer to
any Participant under the Plan shall be based solely upon the contractual
obligations that may be created as a result of the Plan and such Participant's
Participation Agreement. No such obligation of the Employer shall be deemed to
be secured by any pledge of, encumbrance on, or other interest in, any property
or asset of the Employer or any affiliate of the Employer. Nothing contained in
the Plan shall be construed as creating in respect of any Participant (or
beneficiary thereof or any other person) any equity or other interest of any
kind in any assets of the Employer or any affiliate of the Employer, or creating
a trust of any kind or a fiduciary relationship of any kind between the
Employer, any affiliate of the Employer, and/or any such Participant, any
beneficiary or any other person. Except as specifically provided herein,
participation in the Plan shall not in any way affect any rights which a
Participant may have under any other employee benefit plan of the Employer or
under any individual contractual agreement between such Participant and the
Employer. Notwithstanding the foregoing, timely payment of all Account Balances
payable under the Plan (including, without limitation, Acceleration Payments and
Early Tax Obligations) shall be fully guaranteed by BFBI.
12. SOURCE OF PAYMENT. Subject to Section 11 hereof, the Employer,
in its sole discretion, may establish (a) a grantor or other trust of which the
Employer is treated as the owner under the Code and the assets of which are
subject to the claims of the Employers general creditors in the event of its
insolvency, (b) an insurance arrangement, or (c) any other
8
<PAGE> 9
arrangement or arrangements designed to provide for the payment of benefits
hereunder. Any such arrangement shall be subject to such other terms and
conditions as the Employer may deem necessary or advisable to ensure that
benefits are not includible, by reason of the establishment of any such
arrangement or the funding of any such trust, in the income of the beneficiaries
of such trust or other arrangement prior to actual distribution or other payment
and that the existence of such trust or other arrangement does not cause the
Plan to be considered to be funded for purposes of Title I of ERISA.
13. AMENDMENT OR TERMINATION. The BFSB Board may amend, suspend,
or terminate the Plan or any portion thereof at any time. Notwithstanding the
foregoing, (a) without the consent of the Participant, no such amendment,
suspension, or termination shall cause such Participant's (or his designated
beneficiary's, as the case may be) Account Balance to be less than such
Participant's Account Balance immediately prior to such amendment, suspension,
or termination, and (b) any other Employer Board may terminate its Employers
continued participation in the Plan which shall constitute a termination of the
Plan as to that Employer.
14. GOVERNING LAW; CONSTRUCTION. The Plan shall be governed by and
construed, interpreted and administered in accordance with the laws of the
Commonwealth of Massachusetts, except to the extent such laws are preempted by
ERISA. The titles and headings of sections of the Plan are for convenience of
reference only and shall have no substantive meaning in and of themselves.
15. WITHHOLDING. All payments under the Plan shall be made in BFBI
Shares and shall be reduced by such amounts (by an appropriate reduction in the
number of BFBI Shares to be distributed, based on the Closing Price on the
business day next prior to the date of such payment, with any such reduction
increased to the next whole share) as are required to be withheld with respect
thereto under applicable federal, state and local tax laws and regulations in
effect as of the date of any such payments. In the event any federal, state or
local taxes are imposed with respect to any benefits under the Plan before such
benefits become payable to the Participant or his beneficiary (an "Early Tax
Obligation"), then the Employer shall pay such Early Tax Obligation on behalf of
such Participant or beneficiary and, in the Employer Boards sole discretion,
either (a) withhold an equivalent amount of funds from any current or future
compensation payable by the Employer to the Participant, (b) require the
Participant (or beneficiary) to promptly pay an equivalent amount of funds to
the Employer, or (c) reduce such Participant's Account Balance by the number of
BFBI Share equivalents having a value (based on the Closing Price on the
business day next prior to the date the Employer makes such payment) equal to
the amount of such Early Tax Obligation.
16. OTHER BENEFITS PLANS OR PROGRAMS. Payments and benefits
received under the Plan shall not be deemed a part of any Participant's
compensation for purposes of determining any benefits under any other welfare,
pension or incentive benefit plans or programs, if any, maintained by the
Employer or any of its affiliates or predecessors from time to time.
9
<PAGE> 10
17. EFFECTIVE DATE. The Plan shall be effective as of September
21, 1999.
IN WITNESS WHEREOF, the Plan is executed by Boston Federal Savings Bank
on this ___________ day of March, 2000.
BOSTON FEDERAL SAVINGS BANK
By:
----------------------------------
Title:
10
<PAGE> 1
Exhibit 10.12
Ms. Oates' Change in Control Agreement with the Company is substantially the
same as the Change in Control Agreement with Company in Exhibit 10.4, which is
incorporated herein by reference except as to the name of the signatory, which
is Marylea R. Oates.
Ms. Oates' Change in Control Agreement with BFS is substantially the same as the
Change in Control Agreement with BFS in Exhibit 10.4, which is incorporated
herein by reference except as to the names of the signatory, which is Marylea R.
Oates.
<PAGE> 1
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
BFS.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets ........................................ $1,253,653 $1,139,123 $974,680 $820,567 $640,752
Investment securities available for sale(1) ......... 53,203 49,137 31,767 1,085 1,022
Investment securities held to maturity(1) ........... 2,304 7,302 20,630 19,170 16,906
Mortgage-backed securities available for sale(1) .... 15,540 21,029 19,125 23,593 23,873
Mortgage-backed securities held to maturity(1) ...... 13,941 22,913 38,350 43,019 35,116
Mortgage loans held for sale ........................ 16,174 17,008 9,817 3,970 8,931
Loans, net .......................................... 1,032,594 943,662 791,728 676,670 509,496
Allowance for loan losses ........................... 10,654 8,500 6,600 4,400 4,275
Deposit accounts .................................... 770,049 707,144 619,821 428,818 419,104
Borrowed funds ...................................... 387,555 337,500 263,640 300,000 126,909
Stockholders' equity ................................ 85,704 81,794 81,611 86,355 90,701
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income ..................................... $ 80,736 $ 74,775 $ 68,037 $ 52,678 $ 42,454
Interest expense .................................... 47,208 42,557 37,129 28,891 23,552
Net interest income ................................. 33,528 32,218 30,908 23,787 18,902
Provision for loan losses ........................... 1,626 1,642 1,696 1,294 3,614
Net interest income after provision for loan losses . 31,902 30,576 29,212 22,493 15,288
Total non-interest income ........................... 6,911 6,128 4,806 3,567 2,672
Total non-interest expense .......................... 25,300 23,932 21,458 21,040 16,009
Income before income taxes .......................... 13,513 12,772 12,560 5,020 1,951
Income tax expense (benefit) ........................ 4,945 5,151 5,505 2,083 815
Net income .......................................... $ 8,568 $ 7,621 $ 7,055 $ 2,937 $ 1,136
</TABLE>
4
<PAGE> 2
SELECTED FINANCIAL
RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:(2)
Return on average assets ................................. 0.72% 0.72% 0.75% 0.40% 0.19%
Return on average stockholders' equity ................... 10.00 9.02 8.21 3.21 2.57
Dividend payout ratio .................................... 27.10 24.70 20.31 31.25 NM
Average stockholders' equity to average assets ........... 7.21 7.99 9.11 12.35 7.36
Stockholders' equity to total assets at end of period .... 6.84 7.18 8.37 10.52 14.16
Average interest rate spread(3) .......................... 2.59 2.69 2.94 2.79 2.98
Net interest margin(4) ................................... 2.97 3.17 3.42 3.34 3.28
Average interest-earning assets to average
interest-bearing liabilities .......................... 109.0 111.60 111.53 113.40 107.40
ASSET QUALITY RATIOS:(2)
Non-performing loans as a percent of loans(5)(6) ......... 0.07 0.09 0.17 0.22 1.00
Non-performing assets as a percent of total assets(6) .... 0.09 0.08 0.16 0.51 0.97
Allowance for loan losses as a percent of loans(5) ....... 1.01 0.88 0.82 0.64 0.82
Allowance for loan losses as a percent of
non-performing loans(6) ............................... 1,428.15 1,029.06 469.75 293.02 81.40
NUMBER OF FULL-SERVICE BANKING FACILITIES ................ 10 10 10 8 8
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD
(IN THOUSANDS) ........................................ 4,973 5,112 5,520 6,260 6,590
PER SHARE DATA:
Basic earnings per common share .......................... $ 1.78 $ 1.50 $ 1.28 $ 0.48 $ NM
Diluted earnings per common share ........................ 1.71 1.43 1.24 0.48 NM
Dividends per common share ............................... 0.46 0.37 0.26 0.15 NM
Book value per common share at end of period ............. 17.88 16.84 15.72 14.75 14.78
Market value per common share at end of period ........... 15.88 17.63 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.
(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 collectability 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.
5
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The 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, accounting estimates and other estimates used
throughout this discussion.
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. On December 6, 1999, the Company acquired Diversified
Ventures, Inc., d/b/a Forward Financial Company ("Forward Financial") and
Ellsmere Insurance Agency, Inc. ("Ellsmere") using the purchase method of
accounting at a cost of approximately $38 million. Forward Financial operates as
a subsidiary of BFS while Ellsmere has limited operations as a subsidiary of
BNB.
The Company's business has been conducted primarily through its ownership
of BFS and BNB (collectively, the "Banks"). BFS operates its administrative/bank
branch office located in Burlington, Massachusetts and its seven other bank
branch offices located in Arlington, Bedford, Billerica, Boston, Lexington,
Peabody and Wellesley, all of which are located in the greater Boston
metropolitan area. BFS' subsidiary, Forward Financial, maintains its
headquarters in Northboro, Massachusetts and operates in approximately twenty
states across the United States. BNB operates two banking offices in Chelsea and
Revere, both of 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 mortgage loans for its investment portfolio and for sale,
generally retaining the servicing rights of loans sold. Additionally, the
Company originates chattel mortgage loans, substantially all of which are sold
in the secondary market, servicing released. 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, gains on sale of loans, 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 was also subject to the
regulations of the Office of Thrift Supervision ("OTS"). BFS is regulated by the
OTS and BNB is regulated by the Office of the Comptroller of the Currency
("OCC"). Since the acquisition of BNB was
8
- --------------------------------------------------------------------------------
<PAGE> 4
consummated at the close of business on February 7, 1997 and the acquisitions of
Forward Financial and Ellsmere were consummated at the close of business on
December 6, 1999, 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, 1999, 1998 and 1997, include information
and data related to BNB only from February 8, 1997 to December 31, 1999 and
information and data related to Forward Financial and Ellsmere only from
December 7, 1999 to December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, loan sales, 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 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 required liquidity
ratio is 4%. At both December 31, 1999 and 1998, BFS's liquidity ratio was 6.9%.
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, 1999, cash,
short-term investments and investment securities available for sale totaled
$87.9 million or 7.0% 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, 1999, the Company had
$384.5 million in advances outstanding from the FHLB and had, with existing
collateral, an additional $39.1 million in overall borrowing capacity from the
FHLB. Borrowing capacity can be increased upon the delivery of mortgage notes on
non owner-occupied 1-4 family loans, multi-family and commercial loans.
Additional collateral was available at BNB. 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, 1999, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $159.4 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, 1999, totaled $244.1 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, 1999 was
approximately $8.1 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, 1999, the
consolidated capital to assets ratio of the Company was 6.8%, which exceeded the
minimum regulatory capital requirements for the Company. As of December 31,
1999, BFS exceeded all of its regulatory capital requirements with tangible,
core, risk-based tier 1, and risk-based total capital ratios of 5.4%, 5.4%, 8.8%
and 10.0%, respectively, compared to the minimum regulatory requirements of
2.0%, 4.0%, 4.0% 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 6.3%, 12.6% and 13.6%, respectively,
compared to the minimum regulatory requirements of 4.0%, 4.0% and 8.0%,
respectively.
9
- --------------------------------------------------------------------------------
<PAGE> 5
As a condition for approving the acquisition of Forward Financial, the
Federal Reserve Bank required the Company and BFS to remain "well-capitalized"
as defined in the regulations, for the period of one year following the date of
the acquisition. The Company and BFS have to date complied with this
requirement.
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 throughout 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.
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 mortgage loans; (2) generally selling in the secondary market
substantially all fixed-rate mortgage loans originated with terms of 15 years or
greater 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 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, 1999, 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, 1999, 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 14.5% and 9.9%, respectively.
Annual prepayment rates for adjustable-rate and fixed-rate mortgage-backed
securities are assumed
10
- --------------------------------------------------------------------------------
<PAGE> 6
to be 19.2% and 13.8%, 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 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,
1999 and 1998:
<TABLE>
<CAPTION>
3 MORE THAN MORE THAN MORE THAN MORE THAN MORE
MONTHS 3 MONTHS 7 MONTHS 1 YEAR TO 3 YEARS TO THAN TOTAL
OR LESS TO 6 MONTHS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS AMOUNT
------- ----------- --------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS (DOLLARS IN THOUSANDS)
Short-term investments ......................... $ 2,641 $ 0 $ 174 $ 0 $ 0 $ 0 $ 2,815
Investment securities .......................... 37,988 2,000 2,926 2,488 6,767 3,338 55,507
Fixed Rate Loans(1) ............................ 14,351 13,884 27,029 97,688 80,106 119,880 352,938
Adjustable Rate Loans(1) ....................... 177,055 42,795 97,715 247,163 134,346 6,664 705,738
Mortgage-backed securities ..................... 10,663 2,272 2,186 7,222 4,103 3,035 29,481
Stock in FHLB-Boston ........................... 20,311 0 0 0 0 0 20,311
-------- --------- --------- -------- -------- -------- ----------
Total Interest-earning assets ............... 263,009 60,951 130,030 354,561 225,322 132,917 1,166,790
-------- --------- --------- -------- -------- -------- ----------
INTEREST-BEARING LIABILITIES
Money market deposit accounts .................. 56,970 0 0 0 0 0 56,970
Savings accounts ............................... 4,371 4,371 8,741 34,965 34,965 58,275 145,688
NOW accounts ................................... 3,436 3,436 6,873 27,492 27,492 45,416 114,145
Certificate accounts ........................... 70,535 75,386 105,404 110,574 37,489 0 399,388
FHLB Advances and other borrowings ............. 64,055 80,000 77,500 89,000 57,000 20,000 387,555
-------- --------- --------- -------- -------- -------- ----------
Total interest-bearing liabilities ....... 199,367 163,193 198,518 262,031 156,946 123,691 1,103,746
-------- --------- --------- -------- -------- -------- ----------
Interest-earning assets less interest-bearing
liabilities .............................. $ 63,642 $(102,242) $ (68,488) $ 92,530 $ 68,376 $ 9,226 $ 63,044
-------- --------- --------- -------- -------- -------- ----------
Cumulative interest rate sensitivity gap
December 31, 1999 ........................ $ 63,642 $ (38,600) $(107,088) $(14,558) $ 53,818 $ 63,044 $ 63,044
======== ========= ========= ======== ======== ======== ==========
Cumulative interest rate gap as a percentage
of total assets at December 31, 1999 ..... 5.08% (3.08)% (8.54)% (1.16)% 4.29% 5.03%
Cumulative interest rate gap as a percentage
of total interest-earning assets
at December 31, 1999 ..................... 5.45% (3.31)% (9.18)% (1.25)% 4.61% 5.40%
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities at December 31, 1999 ......... 131.92% 89.35% 80.91% 98.23% 105.49% 105.71%
Cumulative interest rate sensitivity gap
December 31, 1998 ........................ $ 90,195 $ 96,735 $ 74,980 $ 75,113 $139,219 $120,920 $ 120,920
======== ========= ========= ======== ======== ======== ==========
Cumulative interest rate gap as a percentage
of total assets at December 31, 1998 ..... 7.92% 8.49% 6.58% 6.59% 12.22% 10.62%
Cumulative interest rate gap as a percentage
of total interest-earning assets
at December 31, 1998 ..................... 8.17% 8.76% 6.79% 6.80% 12.60% 10.95%
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities at December 31, 1998 ......... 168.85% 145.57% 119.06% 109.93% 116.09% 112.29%
</TABLE>
- ---------------
(1) Includes total loans net of non-performing loans.
11
- --------------------------------------------------------------------------------
<PAGE> 7
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 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, 1999 and 1998, as calculated by the Company.
<TABLE>
<CAPTION>
Net Portfolio Value as of December 31, 1999
----------------------------------------------------------
Interest Rates In Basis Points $ $ % Board NPV
(Rate Shock) Amount Change Change Limits % Ratio
- ------------------------------------------------- ------ ------ ------ -------- -----
(Dollar in Thousands)
<S> <C> <C> <C> <C> <C>
300 .......................... 97,090 (26,932) (21.7) (30.0) 7.7
200 .......................... 107,541 (16,481) (13.3) (20.0) 8.6
100 .......................... 116,545 (7,477) (6.0) (10.0) 9.3
Static ....................... 124,022 9.9
(100) ........................ 128,917 4,895 3.9 (10.0) 10.3
(200) ........................ 132,560 8,538 6.9 (20.0) 10.6
(300) ........................ 132,848 8,826 7.1 (30.0) 10.6
</TABLE>
<TABLE>
<CAPTION>
Net Portfolio Value as of December 31, 1998
----------------------------------------------------------
Rates In Basis Points $ $ % Board NPV
(Rate Shock) Amount Change Change Limits % Ratio
- ------------------------------------------------- ------ ------ ------ -------- -----
(Dollar in Thousands)
<S> <C> <C> <C> <C> <C>
300 .......................... 103,788 (20,956) (16.8) (25.0) 9.1
200 .......................... 113,611 (11,133) (8.9) (20.0) 10.0
100 .......................... 120,618 (4,126) (3.3) (10.0) 10.6
Static ....................... 124,744 11.0
(100) ........................ 126,627 1,883 1.5 (10.0) 11.1
(200) ........................ 126,108 1,364 1.1 (20.0) 11.1
(300) ........................ 123,260 (1,484) (1.2) (25.0) 10.8
</TABLE>
12
- --------------------------------------------------------------------------------
<PAGE> 8
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 1999, 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. Forward
Financial originates and sells, servicing released, substantially all of its
consumer loans to various client lenders. The client lenders impose their
underwriting standards and if they consider an application satisfactory and
accept it, the loan is approved for closing. In this manner, Forward Financial
eliminates its exposure to interest rate risk.
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, 1999, 1998 and 1997. 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. The average balance data is derived from daily balances. The
yields and costs include fees, premiums and discounts which are considered
adjustments to yields.
13
- --------------------------------------------------------------------------------
<PAGE> 9
<TABLE>
<CAPTION>
AT FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
DECEMBER 31, 1999 1999 1998 1997
----------------- -------------------------- -------------------------- -----------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ------ ------- -------- ------ ------- -------- ------- ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Investment securities(1)...... $ 78,633 6.41% $ 92,956 $ 5,486 5.90% $ 88,166 $ 5,400 6.12% $ 82,701 $ 5,003 6.05%
Loans, net and mortgage loans
held for sale(2)............ 1,048,768 7.32% 1,002,847 73,096 7.29% 876,344 66,040 7.54% 759,312 58,805 7.74%
Mortgage-backed securities(3). 29,481 6.65% 34,241 2,154 6.29% 50,375 3,335 6.62% 62,265 4,229 6.79%
---------- ---------- ------- ---------- ------- -------- -------
Total interest-earning
assets..................... 1,156,882 7.24% 1,130,044 80,736 7.14% 1,014,885 74,775 7.37% 904,278 68,037 7.52%
---- ------ ---- ------ ---- ------ ----
Non-interest-earning assets..... 96,771 58,279 42,683 39,770
---------- ---------- ---------- --------
Total assets................ $1,253,653 $1,188,323 $1,057,568 $944,048
========== ========== ========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing Liabilities:
Money market deposit accounts. $ 56,970 2.82% $ 59,279 1,693 2.86% $ 62,739 1,838 2.93% $ 61,800 1,822 2.95%
Savings accounts.............. 145,688 2.54% 142,399 3,534 2.48% 121,092 2,999 2.48% 116,247 2,826 2.43%
NOW accounts.................. 114,145 0.75% 110,684 884 0.80% 104,532 1,158 1.11% 96,590 1,071 1.11%
Certificate accounts.......... 399,388 5.53% 356,668 19,761 5.54% 312,810 18,101 5.79% 237,115 13,457 5.68%
---------- ---------- ------- ---------- ------- -------- -------
Total....................... 716,191 3.94% 669,030 25,872 3.87% 601,173 24,096 4.01% 511,752 19,176 3.75%
Borrowed Funds(4)............. 387,555 5.87% 367,849 21,336 5.80% 308,191 18,461 5.99% 299,076 17,953 6.00%
---------- ---------- ------- ---------- ------- -------- -------
Total interest-bearing
liabilities................ 1,103,746 4.62% 1,036,879 47,208 4.55% 909,364 42,557 4.68% 810,828 37,129 4.58%
---- ------ ---- ------ ---- ------ ----
Non-interest-bearing
liabilities................ 64,203 65,762 63,729 47,264
---------- ---------- ---------- --------
Total liabilities........... 1,167,949 1,102,641 973,093 858,092
---------- ---------- ---------- --------
Stockholders' equity.......... 85,704 85,682 84,475 85,956
---------- ---------- ---------- --------
Total liabilities and
stockholders' equity....... $1,253,653 $1,188,323 $1,057,568 $944,048
========== ========== ========== ========
Net interest income........... NA $33,528 $32,218 $30,908
==== ======= ======= =======
Net interest rate spread(5)... 2.62% 2.59% 2.69% 2.94%
==== ==== ==== ====
Net interest margin(6)........ NA 2.97% 3.17% 3.42%
==== ==== ==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities................. 104.81% 108.99% 111.60% 111.53%
========== ========== ========== ========
</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 5.78%,
5.94%, and 5.98% for the years ended December 31, 1999, 1998 and 1997,
respectively.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
14
- --------------------------------------------------------------------------------
<PAGE> 10
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 DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (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 ..................... $ 293 $ (207) $ 86 $ 331 $ 66 $ 397
Loans, net and mortgage loans held for sale 9,538 (2,482) 7,056 9,058 (1,823) 7,235
Mortgage-backed securities ................ (1,068) (113) (1,181) (807) (87) (894)
-------- ------- ------- ------- ------- -------
Total interest-earning assets .......... 8,763 (2,802) 5,961 8,582 (1,844) 6,738
-------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Money market deposit accounts ............. (101) (44) (145) 28 (12) 16
Savings accounts .......................... 528 7 535 118 55 173
NOW accounts .............................. 68 (342) (274) 88 (1) 87
Certificate accounts ...................... 2,539 (879) 1,660 4,299 345 4,644
-------- ------- ------- ------- ------- -------
Total .................................. 3,034 (1,258) 1,776 4,533 387 4,920
Borrowed funds ............................ 3,574 (699) 2,875 547 (39) 508
-------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ..... 6,608 (1,957) 4,651 5,080 348 5,428
-------- ------- ------- ------- ------- -------
Net change in net interest income ............ $ 2,155 $ (845) $ 1,310 $ 3,502 $(2,192) $ 1,310
======== ======= ======= ======= ======= =======
</TABLE>
15
- --------------------------------------------------------------------------------
<PAGE> 11
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. Accordingly, loans categorized as
impaired include commercial real estate, multi-family, business loans and
restructured loans which are non-performing loans as well as other identified
loans. At December 31, 1999, non-performing loans totaled $746,000, impaired
loans totaled $235,000, consisting of two loans, and REO totaled $376,000,
consisting of two 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, 1999, 1998, and 1997, the amount of
additional interest income that would have been recognized on non-performing
loans if such loans had continued to perform in accordance with their
contractual terms was ($2,000), $33,000, and $149,000, respectively. For the
same periods, the difference between the amount of interest income which would
have been recognized on impaired loans if such loans were performing in
accordance with their regular terms and actual amounts recognized was $2,000,
$1,000, and $1,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NON-PERFORMING LOANS:
Residential real estate:
One- to four-family ....................................... $ 721 $ 784 $ 941
Commercial real estate ....................................... 25 25 458
Other Loans .................................................. -- -- 6
--------- --------- -------
Total ........................................................ 746 809 1,405
Real estate owned, net(3) ....................................... 376 47 195
--------- --------- -------
Total non-performing assets .................................. 1,122 856 1,600
Restructured loans .............................................. 210 213 369
--------- --------- -------
Total risk elements ............................................. $ 1,332 $ 1,069 $ 1,969
========= ========= =======
Allowance for loan losses as a percent of loans(1) .............. 1.01% 0.88% 0.82%
========= ========= =======
Allowance for loan losses as a percent of non-performing loans(2) 1,428.15 1,029.06 469.75
Non-performing loans as a percent of loans(1)(2) ................ .07 0.09 0.17
Non-performing assets as a percent of total assets(4) ........... .09 0.08 0.16
</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).
16
- --------------------------------------------------------------------------------
<PAGE> 12
At December 31, 1999, loans that were characterized as impaired totaled
$235,000. All of the impaired loans have been measured using the discounted cash
flow method or the fair value of the collateral method if the loan is collateral
dependent. During the year ended December 31, 1999, the average recorded value
of impaired loans was $335,000, $15,000 of interest income was recognized and
$17,000 of interest income would have been recognized under original terms. The
composition of impaired loans by type is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
IMPAIRED LOANS:
MULTI-FAMILY REAL ESTATE -- 245
COMMERCIAL REAL ESTATE 235 238
---- ----
TOTAL IMPAIRED LOANS $235 $483
==== ====
</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 1999, 1998 and 1997 were $1.6 million, $1.6 million and $1.7 million,
respectively. During the year ended December 31, 1999, there were recoveries of
$414,000 credited to, and charge-offs of $56,000 taken against this allowance.
As of December 31, 1999, the Company's allowance for loan losses was 1.01% of
total loans compared to 0.88% as of December 31, 1998. 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, multi-family and business loans. These combined total balances
increased from $149.2 million at December 31, 1998 to $236.6 million at December
31, 1999, an increase of 59%. These loans aggregated to 22.1% and 15.4% of the
total loans at December 31, 1999 and 1998, respectively. The Company had
non-performing loans of $746,000 and $809,000 at December 31, 1999 and December
31, 1998, 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.
17
- --------------------------------------------------------------------------------
<PAGE> 13
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,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ........................ $ 8,500 $ 6,600 $4,400 $4,275 $3,700
Allowance for loan losses at acquisition date
(BNB in 1997 and Forward Financial in 1999) ..... 170 -- 620 -- --
Provision for loan losses ............................. 1,626 1,642 1,696 1,294 3,614
Charge-offs:
One-to four-family ................................. 19 51 370 387 550
Multi-family ....................................... 1 2 84 263 483
Commercial ......................................... 0 75 45 664 2,297
Other ................................................. 36 131 16 198 194
-------- ------- ------ ------ ------
Total .............................................. 56 259 515 1,512 3,524
Recoveries ............................................ 414 517 399 343 485
-------- ------- ------ ------ ------
Balance at end of
period .......................................... $ 10,654 $ 8,500 $6,600 $4,400 $4,275
======== ======= ====== ====== ======
Ratio of net charge-offs/(net recoveries) during
the period to average loans outstanding
during the period ............................... (0.04)% (0.03)% 0.02% 0.19% 0.60%
======== ======= ====== ====== ======
</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, 1999, 1998 and 1997, the Company classified (excluding REO) $3.6 million,
$4.2 million and $5.8 million of sub-standard assets, respectively. Included in
these amounts were $746,000, $809,000, and $1.4 million in non-performing
assets, respectively. In the opinion of management, the performing sub-standard
loans 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.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS AS OF AND FOR THE YEARS
ENDED DECEMBER 31, 1999 AND 1998.
CHANGES IN FINANCIAL CONDITION
The Company's assets increased $114.5 million to a balance of $1.254
billion at December 31, 1999, compared to $1.139 billion at December 31, 1998,
an increase of 10.1%. Asset growth was primarily in loans, net, of $88.9
million, bank-owned life insurance of $20.6 million and goodwill of $16.7
million, partially offset by decreases in investment securities held to maturity
of $5.0 million, mortgage-backed securities available for sale of $5.5 million
and mortgage-backed securities held to maturity of $9.0 million. The growth in
loans, net was primarily due to increased originations of adjustable-rate and
ten to fifteen year fixed-rate one- to four-family mortgage loans combined with
increased lending for construction and land, commercial real estate, equity, and
business loans. Loans, net, increased from a balance of $943.7 million at
December 31, 1998 to a balance of $1,032.6 million at December 31, 1999.
Volatility in market interest rates and a generally rising interest rate
environment throughout 1999 increased customer demand for adjustable-rate loans
and decreased demand for longer term, fixed-rate loan products most of which the
Company sells in the secondary market. Shorter-term loans, generally under 15
years, were originated for portfolio. The Company also sold certain
adjustable-rate loans. Mortgage-backed securities decreased by $14.5 million, or
32.9%, from a balance of $43.9 million at December 31, 1998 to a balance of
$29.5 million at December 31, 1999. Mortgage loans held for sale totaled $16.2
million at December 31, 1999, compared to $17.0 million at December 31, 1998.
Deposit accounts increased by $62.9 million from a balance of $707.1 million at
December 31, 1998 to a balance of $770.0 million at December 31, 1999.
18
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<PAGE> 14
This increase is mainly attributable to growth in a premium-rate statement
savings account, BFS' rollout of a new 9-month retail certificate of deposit
acquisition program and growth in longer-term certificates of deposit, including
wholesale brokered certificates of deposit. FHLB advances and other borrowings
increased $50.1 million to a balance of $387.6 million at December 31, 1999,
compared to $337.5 million at December 31, 1998 as additional funds were needed
to support balance sheet growth. Total stockholders' equity was $85.7 million at
December 31, 1999 or $17.88 per share, compared to $81.8 million or $16.84 per
share at December 31, 1998. Stockholders' equity increased during the year ended
December 31, 1999 due to the combined effects of net income and the amortization
of the Stock-based Incentive Plans and Employee Stock Ownership Plan ("ESOP"),
offset by the completion of the fifth and commencement of the sixth 5% stock
repurchase programs, dividends paid, and the change in market valuation, net of
taxes, of the available-for sale securities portfolio. The stockholders' equity
to total assets ratio of the Company was 6.8% at December 31, 1999 and 7.2% at
December 31, 1998.
RESULTS OF OPERATIONS
General
Net income for the year ended December 31, 1999 was $8.6 million, or $1.78
basic earnings per share and $1.71 diluted earnings per share, compared to $7.6
million, or $1.50 basic earnings per share and $1.43 diluted earnings per share
for the comparable period in 1998. The return on average stockholder's equity
improved to 10.00% during the year ended December 31, 1999, compared to 9.02%
for the year ended December 31, 1998. Return on average assets remained at 0.72%
for the years ended December 31, 1999 and 1998. Increased earnings were
primarily attributable to higher net interest income, due to increased balances
of interest earning assets, and earnings from bank-owned life insurance,
partially offset by lower interest margins. The net interest margin in 1999
decreased to 2.97% from 3.17% during 1998. Federal Reserve induced increases in
short-term interest rates during 1999 created a flat yield curve that caused
industry-wide margin compression. The Company's margin declined as substantial
volumes of adjustable-rate loans either refinanced into lower interest
adjustable-rate mortgages or refinanced to fixed-rate loans, the vast majority
of which were sold in the secondary market. Management is attempting to mitigate
the margin compression by continuing to expand the portfolio of commercial real
estate, construction and land, equity, consumer and business loans.
Interest Income
Total interest income for the year ended December 31, 1999 increased by
$6.0 million to $80.7 million compared to $74.8 million for the year ended
December 31, 1998. Interest on loans increased by $7.0 million, or 9.6%, to
$73.1 million, during 1999 compared to $66.0 million during 1998. The increase
in interest income in 1999 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $876.3 million for 1998 to $1,002.8 million for 1999. The increased
average loan, net, balances generated an additional $9.5 million of interest
earned while lower yields decreased interest earned on loans, net, by $2.5
million. The lower yields were generally the result of falling interest rates
during 1998 and early 1999 that created an opportunity for borrowers to
refinance their mortgages at lower rates. The loan portfolio average loan yield
decreased to 7.29% for 1999 compared to an average yield of 7.54% for 1998.
Interest income on investment securities and overnight federal funds sold
increased by $86,000 to $5.5 million for the year ended December 31, 1999,
compared to $5.4 million for the year ended December 31, 1998. The primary
reason for the increase is due to higher average balances of investment
securities averaging $93.0 million during the year ended December 31, 1999,
compared to average balances of $88.2 million for the prior year, offset by the
effects of an average of 22 basis point decrease in yields. Interest income on
mortgage-backed securities decreased by $1.2 million for the year ended December
31, 1999 due primarily to a decrease in average balances compared to the prior
year. Average mortgage-backed securities balances decreased by $16.1 million
from an average of $50.4 million during 1998 to an average of $34.2 million
during 1999. The majority of the mortgage-backed securities held in 1999 were
adjustable GNMA securities. The yields on mortgage-backed securities decreased
from an average yield of 6.62% in 1998 to 6.29% in 1999, resulting in a decrease
in interest earned on such securities in 1999 of $113,000, compared to 1998.
19
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<PAGE> 15
Interest Expense
Interest expense increased by $4.7 million, or 11.0%, for the year ended
December 31, 1999 to $47.2 million compared to $42.6 million for the year ended
December 31, 1998. The increase in interest expense for the year ended December
31, 1999 was due primarily to higher interest expense on borrowed funds and
certificate accounts. Borrowed funds consisted primarily of FHLB advances that
were used generally to fund loan portfolio growth. Higher average balances of
$367.8 million of borrowed funds for the year ended December 31, 1999, compared
to average balances of $308.2 million for the prior year, resulted in a $2.9
million increase in interest expense. The average cost of borrowed funds
declined by 19 basis points, from 5.99% for the year ended December 31, 1998 to
an average of 5.80% for the current year. Interest expense on deposit accounts
increased by $1.8 million for the year ended December 31, 1999 due primarily to
the effects of higher average balances of $669.0 million for the year ended
December 31, 1999 compared to average deposit balances of $601.2 million for the
prior year. The increased average balances were primarily attributable to the
net acquisition of $53.7 million of wholesale brokered certificate of deposit
accounts, which contributed to the increased average balance of $356.7 million
for the year ended December 31, 1999, compared to an average balance of $312.8
million for the prior year. The higher average balances in certificate accounts
resulted in an increase in interest expense of $2.5 million for the year ended
December 31, 1999 compared to the prior year. The average cost of deposit
accounts decreased from 4.01% for the year ended December 31, 1998 to an average
cost of 3.87% for the current year.
Provision for Loan Losses
The provision for loan losses amounted to $1.6 million for the years ended
December 31, 1999 and 1998. The 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 $746,000, or 0.07% of loans at
December 31, 1999 from $809,000, or 0.08% at December 31, 1998. The Company
recorded net recoveries of $358,000 during the year ended December 31, 1999,
compared to net recoveries of $258,000 during 1998. The allowance for loan
losses as a percentage of total loans was 1.01% at December 31, 1999 compared to
0.88% at December 31, 1998. As a percentage of total non-performing loans, the
allowance for loan losses was 1,428% at December 31, 1999, compared to 1,029% a
year earlier. See also "Asset Quality" included elsewhere herein.
Non-Interest income
Total non-interest income increased to $6.9 million for the year ended
December 31, 1999 from $6.1 million for the year ended December 31, 1998. The
primary contributing factor was income from bank owned life insurance ("BOLI").
The policy generated $556,000 of income through an increase in the cash
surrender value. Gain on sale of loans was $3.0 million for the year ended
December 31, 1999 compared to $3.2 million for the prior year. The decrease
would have been greater had it not been for the approximately $572,000 of gains
on sale of loans recorded by Forward Financial. Gain on sale of loans is the
primary source of revenue of Forward Financial. The continuation of a strong
housing market and economy contributed to the strong volume for financing of
home purchases during 1999. There were no OMSR (originated mortgage servicing
rights) adjustments necessary during 1999 as normal amortization was sufficient
to account for loan servicing balance run-off. During 1998, the high volume of
refinancing of mortgages, however, necessitated an adjustment of $481,000 to
reflect the impairment to the OMSR. At December 31, 1999, the OMSR balance was
$5.1 million compared to $3.8 million at December 31, 1998. Loans serviced for
others increased to $784.6 million at December 31, 1999 from a balance of $648.3
million at December 31, 1998. Deposit service fees were $1.7 million for the two
years ended December 31, 1999 and 1998.
20
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<PAGE> 16
Non-Interest Expense
Total non-interest expense for the year ended December 31, 1999 was $25.3
million, compared to $23.9 million for 1998. The primary reason for the increase
was due to higher compensation and benefits expense, which increased to $15.0
million for the year ended December 31, 1999 from $13.7 million for the prior
year. Compensation and benefits expenses were higher primarily due to increased
staff levels for the establishment of the Company's corporate and business
lending department, the inclusion of Forward Financial's compensation and
benefits from the acquisition date to year-end, and normal year-over-year salary
increases. Data processing expense was $1.6 million for the year ended December
31, 1999, compared to $1.3 million for the prior year. The increase was
primarily attributable to the service bureau computer conversion costs at BNB
and expenses related to the Year 2000 issue. Other non-interest expense declined
to $4.5 million for the year ended December 31, 1999 from $5.0 million for the
prior year. The year ended December 31, 1998 included consulting and legal costs
incurred to assist in establishing the Company's tax saving strategies that
included the formation of real estate investment trusts and securities
subsidiaries.
Income Taxes
Income tax expense was $4.9 million for the year ended December 31, 1999
(resulting in an effective tax rate of 36.6%), compared to a tax expense of $5.2
million for the year ended December 31, 1998 (resulting in an effective tax rate
of 40.3%). The decrease in income tax expense and rate was due to the effects of
BOLI and a lower non-deductible Employee Stock Ownership Plan ("ESOP") expense.
Year 2000
Year 2000 computer software compliance issues affected the Company and many
other financial institutions and companies throughout the world. The primary
concern was that computer programs would not recognize the proper date which
could then generate erroneous data or cause systems to fail, thereby creating an
adverse impact on the Company's business and possibly its operating results.
The Company started its Year 2000 initiative in early 1997. It adhered to
the suggested procedures established by the Federal Financial Institutions
Examination Council (the "FFIEC") guidelines of awareness, assessment,
renovation, validation and implementation. Software systems and hardware
components were tested and contingency plans were developed. Human and financial
resources were made available to complete the remediation efforts.
Due to the extensive planning and testing during the past three years, the
Company was able to begin the Year 2000 without any interruption in its
operations, whatsoever.
Included in other non-interest expenses during 1999 were charges incurred
in connection with the modification or replacement of software and hardware in
order for the company's computer systems to properly recognize the Year 2000.
The expenses incurred totaled approximately $175,000 for the year ended December
31, 1999 and $425,000 over the course of the project.
21
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<PAGE> 17
COMPARISON OF OPERATING RESULTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997.
General
Net income for the year ended December 31, 1998 was $7.6 million, or $1.50
basic earnings per share and $1.43 diluted earnings per share, compared to $7.1
million, or $1.28 basic earnings per share and $1.24 diluted earnings per share
for the comparable period in 1997. The return on average stockholder's equity
improved to 9.02% during the year ended December 31, 1998, compared to 8.21% for
the year ended December 31, 1997. Return on average assets declined by three
basis points, from 0.75% for the year ended December 31, 1997 to 0.72% for the
current year. Increased earnings were primarily attributable to higher net
interest income, due to increased balances of interest earning assets, although
with lower interest margins, improved gains on the sale of loans, offset by a
reduction in real estate operations income. The net interest margin in 1998
decreased to 3.17% from 3.42% during 1997. Generally falling longer term
interest rates during 1998 created a flat yield curve that caused industry-wide
margin compression. The Company's margin suffered as substantial volumes of
adjustable-rate loans either refinanced into lower interest adjustable-rate
mortgages or refinanced to fixed-rate loans, the vast majority of which were
sold in the secondary market. Management is attempting to mitigate the margin
compression by de-emphasizing one- to four-family residential lending and
expanding the portfolio of commercial real estate, construction and land,
consumer and business loans.
Interest Income
Total interest income for the year ended December 31, 1998 increased by
$6.7 million to $74.8 million compared to $68.0 million for the year ended
December 31, 1997. Interest on loans increased by $7.2 million, or 12.2%, to
$66.0 million, during 1998 compared to $58.8 million during 1997. The increase
in interest income in 1998 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $759.3 million for 1997 to $876.3 million for 1998. The increased
average loan, net, balances generated an additional $9.1 million of interest
earned while lower yields decreased interest earned on loans, net, by $1.8
million. The lower yields were generally the result of falling interest rates
during 1998 that created an opportunity for borrowers to refinance their
mortgages at lower rates. The loan portfolio average loan yield decreased to
7.54% for 1998 compared to an average yield of 7.74% for 1997. Interest income
on investment securities and overnight federal funds sold increased by $397,000
to $5.4 million for the year ended December 31, 1998, compared to $5.0 million
for the year ended December 31, 1997. The primary reason for the increase is due
to higher average balances of investment securities averaging $88.2 million
during the year ended December 31, 1998, compared to average balances of $82.7
million for the prior year. Interest income on mortgage-backed securities
decreased by $894,000 for the year ended December 31, 1998 due primarily to a
decrease in average balances compared to the prior year. Average balances
decreased by $11.9 million from an average of $62.3 million during 1997 to an
average of $50.4 million during 1998. The majority of the mortgage-backed
securities held in 1998 were adjustable GNMA securities. The yields on
mortgage-backed securities decreased from an average yield of 6.79% in 1997 to
6.62% in 1998, resulting in a decrease in interest earned on such securities in
1998 of $87,000, compared to 1997.
Interest Expense
Interest expense increased by $5.4 million, or 14.6%, for the year ended
December 31, 1998 to $42.6 million compared to $37.1 million for the year ended
December 31, 1997. The increase in interest expense for the year ended December
31, 1998 was due primarily to higher interest expense on deposits. Interest
expense on deposit accounts increased by $4.9 million for the year ended
December 31, 1998 due primarily to the effects of higher average balances of
$601.2 million for the year ended December 31, 1998 compared to average deposit
balances of $511.8 million for the prior year. The increased average balances
were primarily attributable to the acquisition of certificate accounts, which
increased from an average balance of $237.1 for the year ended December 31,
1997, to an average balance of $312.8 million for the current year. The higher
average balances in certificate accounts resulted in an increase in interest
expense of $4.3 million for the year ended December 31, 1998 compared to the
prior year. The average cost of
22
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<PAGE> 18
deposit accounts increased from 3.75% for the year ended December 31, 1997 to an
average cost of 4.01% for the current year. The acquisition of $90.8 million in
the 15-month certificate of deposit program was the major contributing factor in
increasing the cost of savings. Borrowed funds consisted primarily of FHLB
advances that were used primarily to fund loan portfolio growth. Higher average
balances of $308.2 million of borrowed funds for the year ended December 31,
1998, compared to average balances of $299.1 million for the prior year,
resulted in a $547,000 increase in interest expense. The average cost of
borrowed funds declined by one basis point, from 6.00% for the year ended
December 31, 1997 to an average of 5.99% for the current year.
Provision for Loan Losses
The provision for loan losses amounted to $1.6 million for the year ended
December 31, 1998 compared to $1.7 million for the prior year. The 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
$809,000, or 0.08% of loans at December 31, 1998 from $1.4 million, or 0.16% at
December 31, 1997. The Company recorded net recoveries of $258,000 during the
year ended December 31, 1998, compared to net charge-offs of $116,000, or 0.02%
of average loans outstanding during 1997. The allowance for loan losses as a
percentage of total loans was 0.88% at December 31, 1998 compared to 0.82% at
December 31, 1997. As a percentage of total non-performing loans, the allowance
for loan losses was 1,029% at December 31, 1998, compared to 469.8% a year
earlier.
Non-Interest income
Total non-interest income increased to $6.1 million for the year ended
December 31, 1998 from $4.8 million for the year ended December 31, 1997. The
primary contributing factor was increased gains on the sale of loans. The $3.2
million gain on sale of loans during 1998 exceeded the $1.1 million for the
prior year, primarily due to the increased volume of loans sold resulting from
the high volumes of refinancing to long-term fixed rate mortgages, which the
Company generally sells in the secondary market. The continuation of a strong
housing market and economy also contributed to increased volume for financing of
home purchases during 1998. The high volume of refinancing of mortgages,
however, necessitated an adjustment of $481,000 to reflect the impairment to the
originated mortgage servicing rights, ("OMSR") during the year ended December
31, 1998. The adjustment for the impairment of the OMSR, combined with a
decrease in the balance of loans serviced that were sold before OMSR was
recorded, contributed to the decrease in loan processing and servicing fees
which totaled $477,000 for the year ended December 31, 1998, compared to $1.2
million for the prior year. Deposit service fees were $1.7 million for the two
years ended December 31, 1998 and 1997.
Non-Interest Expense
Total non-interest expense for the year ended December 31, 1998 was $23.9
million, compared to $21.5 million for 1997. The primary components of this
increase were higher data processing expenses, lower real estate operations
income and higher other non-interest expenses. Data processing expense was $1.3
million for the year ended December 31, 1998, compared to $968,000 for the prior
year. The prior year total was lower than normal due to the receipt from the
Company's data processor, of approximately $200,000 as reimbursement of expenses
the Company had incurred in assisting the data processor in developing a new
software program. Additionally, the Company incurred approximately $100,000 of
costs related to the Year 2000 issue. For the year ended December 31, 1998, real
estate operations earned $71,000, compared to earnings of $1.2 million for the
prior year. The prior year total included approximately $891,000 from the sale
of a land sub-division, sold by a subsidiary of BFS, during the first quarter of
1997. Other non-interest expense increased to $5.0 million for the year ended
December 31, 1998 from $4.1 million for the prior year due to the inclusion of
BNB's miscellaneous expenses for the full year and consulting and legal costs
incurred to assist in establishing the Company's tax saving strategies that
included the formation of real estate investment trusts and securities
subsidiaries.
23
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<PAGE> 19
Income Taxes
Income tax expense was $5.2 million for the year ended December 31, 1998
(resulting in an effective tax rate of 40.3%), compared to a tax expense of $5.5
million for the year ended December 31, 1997 (resulting in an effective tax rate
of 43.8%). The decrease in income tax expense and rate was due to the
implementation of the tax saving strategies.
Impact of New Accounting Standards
In June 1998, FASB issued 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 FASB
Statement No. 133, which defers the effective date of SFAS No. 133. SFAS No. 133
is now effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The adoption of this settlement is not expected to have a material
impact on the Company's financial position.
24
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<PAGE> 20
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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Boston, Massachusetts
January 20, 2000
25
<PAGE> 21
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- ----------
<S> <C> <C>
Cash and due from banks (note 1) $ 31,881 19,133
Overnight federal funds sold 2,541 17,795
Certificates of deposit 274 273
----------- ----------
Total cash and cash equivalents 34,696 37,201
Investment securities available for sale (amortized cost of $55,051 at 1999 and
$48,837 at 1998) (note 3) 53,203 49,137
Investment securities held to maturity (fair value of $2,275 at 1999 and $7,371 at 1998)
(notes 4 and 10) 2,304 7,302
Mortgage-backed securities available for sale (amortized cost of $15,881 at 1999 and
$20,935 at 1998) (notes 3 and 10) 15,540 21,029
Mortgage-backed securities held to maturity (fair value of $14,030 at 1999 and
$23,333 at 1998) (notes 4 and 10) 13,941 22,913
Mortgage loans held for sale 16,174 17,008
Loans, net of allowance for loan losses of $10,654 at 1999 and $8,500 at 1998 1,032,594 943,662
(notes 5 and 6)
Accrued interest receivable (note 7) 6,267 5,549
Stock in FHLB of Boston, at cost (note 10) 20,311 17,802
Premises and equipment, net (note 8) 8,212 6,614
Bank owned life insurance 20,556 --
Goodwill, net of amortization 19,519 2,772
Deferred income tax asset, net (note 11) 2,411 1,812
Prepaid expenses and other assets 7,925 6,322
----------- ----------
Total assets $ 1,253,653 1,139,123
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts (note 9) $ 770,049 707,144
Federal Home Loan Bank advances and other borrowings (note 10) 387,555 337,500
Advance payments by borrowers for taxes and insurance 3,298 3,405
Accrued expenses and other liabilities 7,047 9,280
----------- ----------
Total liabilities 1,167,949 1,057,329
----------- ----------
Commitments and contingencies (notes 3, 4, 5, 8, 13 and 14)
Stockholders' equity (notes 2 and 13):
Preferred stock, $.01 per value; 1,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value; 17,000,000 shares authorized; 6,589,617 shares
issued at 1999 and 1998. 66 66
Additional paid-in capital 67,198 66,417
Retained earnings 50,481 44,256
Accumulated other comprehensive (loss) income (1,485) 312
Treasury stock, at cost (1,616,536 and 1,477,176 shares at 1999 and 1998, respectively) (28,532) (26,128)
Unallocated ESOP shares (1,663) (2,418)
Unearned 1996 stock-based incentive plan (361) (711)
----------- ----------
Total stockholders' equity 85,704 81,794
----------- ----------
Total liabilities and stockholders' equity $ 1,253,653 1,139,123
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 22
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans (note 5) $ 73,096 66,040 58,805
Mortgage-backed securities 2,154 3,335 4,229
Investment securities 5,312 5,258 4,736
Federal funds sold 174 142 267
-------- ------- -------
Total interest income 80,736 74,775 68,037
-------- ------- -------
Interest expense:
Deposit accounts (note 9) 25,872 24,096 19,176
Borrowed funds (note 10) 21,336 18,461 17,953
-------- ------- -------
Total interest expense 47,208 42,557 37,129
-------- ------- -------
Net interest income 33,528 32,218 30,908
Provision for loan losses (note 6) 1,626 1,642 1,696
-------- ------- -------
Net interest income after provision for loan losses 31,902 30,576 29,212
-------- ------- -------
Non-interest income:
Deposit service fees 1,742 1,658 1,710
Loan processing and servicing fees (note 5) 583 477 1,241
Gain on sale of loans 3,017 3,173 1,114
Income from bank owned life insurance (note 12) 556 -- --
Gain (loss) on sale of investments (note 3) (28) 19 (18)
Other 1,041 801 759
-------- ------- -------
Total non-interest income 6,911 6,128 4,806
-------- ------- -------
Non-interest expense:
Compensation and benefits (note 12) 14,955 13,728 13,543
Occupancy and equipment 3,284 3,187 3,087
Data processing 1,589 1,286 968
Advertising expense 691 523 682
Deposit insurance premiums 368 327 293
Real estate operations (71) (71) (1,230)
Other 4,484 4,952 4,115
-------- ------- -------
Total non-interest expense 25,300 23,932 21,458
-------- ------- -------
Income before income taxes 13,513 12,772 12,560
Income tax expense (note 11) 4,945 5,151 5,505
-------- ------- -------
Net income $ 8,568 7,621 7,055
======== ======= =======
Basic earnings per share $ 1.78 1.50 1.28
======== ======= =======
Diluted earnings per share $ 1.71 1.43 1.24
======== ======= =======
Weighted average shares outstanding - basic 4,825 5,078 5,505
======== ======= =======
Weighted average shares outstanding - diluted 4,997 5,328 5,690
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 23
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except per share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED
COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP
STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES
----- ------ ---------- -------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,590 $66 64,461 33,131 (322) (4,739) (3,929)
Common stock repurchased
(740 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
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 821 -- -- -- --
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- --
Comprehensive income:
Changes in net unrealized gain
(loss) in investments -- -- -- -- 564 -- --
available for sale, net
Net income -- -- -- 7,055 -- -- --
Comprehensive income
----- --- ------ ------- ---- ------- ------
Balance at December 31, 1997 6,590 $66 65,282 38,645 242 (18,146) (3,174)
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
STOCK-
BASED
INCENTIVE TOTAL
PLAN STOCKHOLDERS'
("SIP") EQUITY
--------- -------------
<S> <C> <C>
Balance at December 31, 1996 (2,313) 86,355
Common stock repurchased
(740 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
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
Comprehensive income:
Changes in net unrealized gain
(loss) in investments -- 564
available for sale, net
Net income -- 7,055
-------
Comprehensive income 7,619
------ -------
Balance at December 31, 1997 (1,304) 81,611
</TABLE>
(CONTINUED)
28
<PAGE> 24
\ BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity, Continued
(In thousands, except per share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED
COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP
STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES
----- ------ ---------- -------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock repurchased
(409 shares at an average
price of $19.56 per share) -- $-- -- -- -- (7,998) --
Stock options exercised
(.9 shares at an average
price of $16.67 per share,
net of tax benefit) -- -- -- -- -- 16 --
Cash dividends declared and
paid ($.37 per share) -- -- -- (2,010) -- -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- 756
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 1,135 -- -- -- --
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- --
Comprehensive income:
Changes in net unrealized
gain (loss) in investments
available for sale, net -- -- -- -- 70 -- --
Net income -- -- -- 7,621 -- -- --
Comprehensive income
----- --- ------ ------- ------ ------- ------
Balance at December 31, 1998 6,590 $66 66,417 44,256 312 (26,128) (2,418)
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
STOCK-
BASED
INCENTIVE TOTAL
PLAN STOCKHOLDERS'
("SIP") EQUITY
--------- -------------
<S> <C> <C>
Common stock repurchased
(409 shares at an average
price of $19.56 per share) -- (7,998)
Stock options exercised
(.9 shares at an average
price of $16.67 per share,
net of tax benefit) -- 16
Cash dividends declared and
paid ($.37 per share) -- (2,010)
Reduction in unallocated ESOP
shares charged to expense -- 756
Appreciation in fair value of
shares charged to expense
for compensation plans -- 1,135
Earned portion of SIP shares
charged to expense 593 593
Comprehensive income:
Changes in net unrealized
gain (loss) in investments
available for sale, net -- 70
Net income -- 7,621
-------
Comprehensive income 7,691
------ -------
Balance at December 31, 1998 (711) 81,794
</TABLE>
(Continued)
29
<PAGE> 25
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity, Continued
(In thousands, except per share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED
COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP
STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES
----- ------ ---------- -------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock repurchased
(144 shares at an average
price of $17.31 per share) -- $-- -- -- (2,492) --
Stock options exercised
(5 shares at an average
price of $12.44 per share,
net of tax benefit) -- -- (19) -- -- 88 --
Cash dividends declared and
paid ($.46 per share) -- -- -- (2,343) -- -- --
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- 755
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 800 -- -- -- --
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- --
Comprehensive income:
Changes in net unrealized
gain (loss) in investments
available for sale, net -- -- -- -- (1,797) -- --
Net income -- -- -- 8,568 -- -- --
Comprehensive income
----- --- ------- ------- ------ ------- ------
Balance at December 31, 1999 6,590 $66 67,198 50,481 (1,485) (28,532) (1,663)
===== === ======= ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
STOCK-
BASED
INCENTIVE TOTAL
PLAN STOCKHOLDERS'
("SIP") EQUITY
--------- -------------
<S> <C> <C>
Common stock repurchased
(144 shares at an average
price of $17.31 per share) -- (2,492)
Stock options exercised
(5 shares at an average
price of $12.44 per share,
net of tax benefit) -- 69
Cash dividends declared and
paid ($.46 per share) -- (2,343)
Reduction in unallocated ESOP
shares charged to expense -- 755
Appreciation in fair value of
shares charged to expense
for compensation plans -- 800
Earned portion of SIP shares
charged to expense 350 350
Comprehensive income:
Changes in net unrealized
gain (loss) in investments
available for sale, net -- (1,797)
Net income -- 8,568
-------
Comprehensive income 6,771
------ -------
Balance at December 31, 1999 (361) 85,704
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 26
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 8,568 7,621 7,055
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 1,465 1,343 963
Earned SIP shares 350 593 1,009
Reduction in unallocated ESOP shares 755 756 755
Appreciation in fair value of shares charged to expense for
compensation plans 800 1,135 821
Income from bank-owned life insurance (556) -- --
Provision for loan losses 1,626 1,642 1,696
Recovery (provision) for valuation allowance for real estate
owned -- 17 (350)
Loans originated for sale (301,464) (357,405) (117,413)
Proceeds from sale of loans 305,315 353,387 112,680
Net loss (gain) on sale of investment securities 28 (19) 18
Gain on sale of real estate held for sale or development, net -- -- (854)
Deferred income tax expense (benefit) 185 208 (483)
(Gain) loss on sale of real estate acquired through foreclosure (15) (60) 189
Gain on sale of loans (3,017) (3,173) (1,114)
Increase in accrued interest receivable (718) (386) (240)
(Increase) decrease in prepaid expenses and other assets (92) (1,520) 3,066
(Decrease) increase in accrued expenses and other liabilities (3,190) 2,818 795
--------- -------- --------
Net cash provided by operating activities 10,040 6,957 8,593
--------- -------- --------
Cash flows from investing activities:
Net cash (paid for) received from acquired institution (28,609) -- 11,908
Proceeds from sales of investment securities available for sale -- 5,000 14,008
Proceeds from sale of mortgage-backed securities available for sale 4,034 -- 1,084
Proceeds from maturities of investment securities available for sale 20,375 -- 4,000
Proceeds from maturities of investment securities held to maturity 5,500 14,850 9,100
Purchase of investment securities available for sale (27,329) (32,217) (13,013)
Purchase of investment securities held to maturity (500) (1,500) (5,900)
Purchase of mortgage-backed securities available for sale (5,005) (10,856) --
Principal repayments of investments securities available-for-sale 657 10,000 --
Principal repayments on mortgage-backed securities held to maturity 8,993 15,432 4,641
Principal repayments on mortgage-backed securities available for sale 5,899 8,843 3,807
Increase in portfolio loans, net (79,700) (153,576) (51,194)
Purchase of FHLB stock (2,509) (1,189) (249)
Purchases of premises and equipment (2,314) (887) (956)
Proceeds from sale of real estate held for sale or development -- -- 2,058
Proceeds from sale of real estate owned 61 191 3,167
Additional investment in real estate owned (98) -- --
Purchase of bank owned life insurance (20,000) -- --
--------- -------- --------
Net cash used in investing activities (120,545) (145,909) (17,539)
--------- -------- --------
</TABLE>
(Continued)
31
<PAGE> 27
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposits accounts $ 62,905 87,323 65,981
Proceeds from securities sold under agreement to repurchase -- -- 7,140
Repayments of securities sold under agreement to repurchase -- (7,140) (3,500)
Proceeds from Federal Home Loan Bank advances 356,581 546,073 276,200
Repayments of Federal Home Loan Bank advances (309,581) (465,073) (316,200)
Proceeds from other borrowings 3,055 -- --
(Decrease) increase in advanced payments by borrowers for
taxes and insurance (194) 272 685
Cash dividends paid (2,343) (2,010) (1,541)
Common stock repurchased (2,492) (7,998) (13,407)
Stock options exercised 69 16 --
--------- -------- --------
Net cash provided by financing activities 108,000 151,463 15,358
--------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,505) 12,511 6,412
Cash and cash equivalents at beginning of year 37,201 24,690 18,278
--------- -------- --------
Cash and cash equivalents at end of year $ 34,696 37,201 24,690
========= ======== ========
Supplemental disclosure of cash flow information: Payments during the year for:
Interest $ 46,460 42,017 36,746
========= ======== ========
Taxes $ 7,283 3,306 4,688
========= ======== ========
Supplemental schedule of noncash investing activities:
Transfers of mortgage loans to real estate owned $ 83 -- 533
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 28
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
BostonFed Bancorp Inc. (the "Company") is a Bank holding company which is
headquartered in Burlington, Massachusetts and provides a variety of loan
and deposit services to its customers through a network of banking and
finance locations. The Company's deposit gathering is concentrated in the
communities surrounding its banking and consumer finance 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, and periodic examination by the Federal
Reserve Bank ("FRB"). Boston Federal Savings Bank ("BFS") is subject to
the regulations of, and periodic examination by, the Office of Thrift
Supervision ("OTS"). Broadway National Bank ("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").
The Company acquired BNB effective the close of business February 7,
1997, which was accounted for using the purchase method of accounting.
The Company acquired Diversified Ventures, Inc. d/b/a Forward Financial
Company ("Forward Financial") and Ellsmere Insurance Agency, Inc.
("Ellsmere") effective December 7, 1999, for $38.3 million in cash. The
acquisition was accounted for using the purchase method. Forward
originates loans primarily direct with customers purchasing or
refinancing manufactured homes, recreational vehicles, boats and leased
equipment and subsequently sells substantially all such loans. Forward is
a subsidiary of BFS and Ellsmere is a subsidiary of BNB.
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.
(a) 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").
33
<PAGE> 29
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Boston Federal Savings Bank includes its wholly-owned
subsidiaries, including Forward Financial Company. Broadway
National Bank includes its wholly-owned subsidiaries, including
Ellsmere Insurance Agency, Inc. 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.
(b) 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 $5,979 and $1,631 at BFS and
BNB, respectively, at December 31, 1999.
(c) 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.
(d) 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
one to four 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.
34
<PAGE> 30
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
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.
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.
(e) ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for 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.
35
<PAGE> 31
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Impaired loans are multi-family, commercial real estate,
construction and business loans, 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
collateral dependent 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.
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.
(f) 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.
(g) 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.
36
<PAGE> 32
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(h) 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 the Company'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. The Company'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.
(i) PENSION
Pension cost is recognized over the employees' approximate service
period.
(j) EMPLOYEE BENEFITS
The Company continues to follow APB Opinion No. 25, Accounting for
Stock Issued to Employees. See footnote 12 for the expanded
disclosures required by SFAS 123 regarding pro forma net income
and earnings per share.
(k) EARNINGS PER SHARE
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 on 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 years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Basic shares 4,825 5,078 5,505
Dilutive impact of stock options 172 250 185
------- ------- -------
Diluted shares 4,997 5,328 5,690
======= ======= =======
</TABLE>
37
<PAGE> 33
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(l) COMPREHENSIVE INCOME
Comprehensive income 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. The
following table shows the components of other comprehensive income
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 8,568 7,621 7,055
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding (losses) gains arising during
the period, net of tax of ($692) for 1999 (1,815) 73 557
Reclassification adjustment for losses (gains)
included in net income, net of tax
of $10 for 1999 18 (3) 7
------- ------- -------
(1,797) 70 564
------- ------- -------
Comprehensive income $ 6,771 7,691 7,619
======= ======= =======
</TABLE>
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued 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 FASB Statement No. 133, which defers the
effective date of SFAS No. 133. SFAS No. 133 will be effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
The adoption of this statement is not expected to have a material
impact on the Company's financial position.
38
<PAGE> 34
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(2) STOCKHOLDERS' EQUITY
Prior to the Company's initial public 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 $8.1 million (unaudited) at December 31,
1999.
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 has 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, 1999, there were no shares of preferred stock
issued.
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, 1999, that BFS and
BNB meets all capital adequacy requirements to which it is subject.
As of December 2, 1999, the most recent notification from the OTS
categorized BFS as "well capitalized" by regulatory definition. As of
December 4, 1998, 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, 1999, 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
(Continued)
39
<PAGE> 35
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
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 below. As a condition for approving the acquisition of Forward
Financial, the Federal Reserve Board required the Company and BFS to
remain "well capitalized" as defined in the regulations for a period of
one year following the date of the acquisition. To date, the Company and
BFS have complied with this requirement.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY REGULATORY
ACTUAL PURPOSES DEFINITIONS
----------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Risk-based Total Capital:
BFS $ 67,862 10.0% $ 54,064 8.0% $ 67,581 10.0%
BNB 9,436 13.6 5,537 8.0 6,921 10.0
Core Capital:
BFS 59,396 5.4 43,906 4.0 54,882 5.0
Risk-based Tier I Capital:
BFS 59,396 8.8 27,032 4.0 40,548 6.0
BNB 8,694 12.6 2,769 4.0 4,153 6.0
Tangible Capital:
BFS 59,396 5.4 21,953 2.0 54,882 5.0
Leverage Capital:
BNB 8,694 6.3 5,521 4.0 6,901 5.0
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY REGULATORY
ACTUAL PURPOSES DEFINITIONS
----------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Risk-based Total Capital:
BFS 57,944 10.2 45,538 8.0 56,923 10.0
BNB 10,131 15.3 5,291 8.0 6,614 10.0
Core Capital:
BFS 50,820 5.1 39,533 4.0 49,417 5.0
Risk-based Tier I Capital:
BFS 50,820 8.9 22,769 4.0 34,154 6.0
BNB 9,492 14.4 2,645 4.0 3,968 6.0
Tangible Capital:
BFS 50,820 5.1 19,767 2.0 49,417 5.0
Leverage Capital:
BNB 9,492 7.4 5,167 4.0 6,459 5.0
</TABLE>
(Continued)
40
<PAGE> 36
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
At December 31, 1999 and 1998, the consolidated capital to assets ratio
was 6.8% and 7.2%, respectively, which exceeded the minimum capital
requirements for the Company. During 1999, the Company's Board of
Directors approved a program to repurchase up to 254,996, or
approximately 5%, 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, 1999, 131,843 shares
were repurchased under this program.
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE (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, 1999
---------------------------------------------
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 1 year $ 4,993 5 (1) 4,997
Maturing after 1 year but within
5 years 12,434 5 (252) 12,187
Maturing after 5 years but within
10 years 5,914 -- (174) 5,740
Maturing after 10 years 10,836 29 (148) 10,717
--------- ----- ------ --------
34,177 39 (575) 33,641
--------- ----- ------ --------
Mutual funds 19,089 -- (936) 18,153
Marketable equity securities 1,785 -- (376) 1,409
--------- ----- ------ --------
20,874 -- (1,312) 19,562
--------- ----- ------ --------
Total investment securities $ 55,051 39 (1,887) 53,203
========= ===== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Maturing after 1 year but within
5 years $ 3,250 -- (65) 3,185
Maturing after 5 years but
within 10 years 1,985 -- (4) 1,981
Maturing after 10 years 10,646 -- (272) 10,374
--------- ----- ------ --------
Total mortgage-backed
securities $ 15,881 (341) 15,540
========= ===== ====== ========
</TABLE>
(Continued)
41
<PAGE> 37
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------
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 1 year $ 13,013 51 -- 13,064
Maturing after 1 year but within
5 years 15,975 329 (12) 16,292
--------- ----- ------ --------
28,988 380 (12) 29,356
--------- ----- ------- --------
Mutual funds 18,064 6 (65) 18,005
Marketable equity securities 1,785 42 (51) 1,776
--------- ----- ------ --------
19,849 48 (116) 19,781
--------- ----- ------ --------
Total investment securities $ 48,837 428 (128) 49,137
========= ===== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Maturing after 5 years but
within 10 years $ 4,996 6 -- 5,002
Maturing after 10 years 15,939 255 (167) 16,027
--------- ----- ------ --------
Total mortgage-backed
securities $ 20,935 261 (167) 21,029
========= ===== ====== ========
</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.
U.S. agency notes with an amortized cost and a fair value of $1,000 at
December 31, 1999 were pledged to provide collateral for customers 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.
Included in U.S. government, federal agency and other obligations are
investments that can be called prior to final maturity with an amortized
cost of $11,445 and a fair value of $11,064 at December 31, 1999.
42
<PAGE> 38
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The composition by issuer of mortgage-backed securities available for
sale follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1999 1998
-------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ----- --------- -----
<S> <C> <C> <C> <C>
FHLMC $ 5,559 5,484 4,996 5,002
GNMA -- -- 5,916 5,982
FNMA 3,004 3,004 -- --
Privately issued collateralized
mortgage obligations 7,318 7,052 10,023 10,045
--------- --------- -------- --------
$ 15,881 15,540 20,935 21,029
========= ========= ======== ========
</TABLE>
Proceeds from the sale of investment securities and mortgage-backed
securities available for sale amounted to $4,034, $5,000 and $15,092 in
1999, 1998 and 1997, respectively. Realized losses on investment
securities and mortgage-backed securities available for sale were $33 and
$18 in 1999 and 1997, respectively. Realized gains amounted to $5 and $19
in 1999 and 1998, respectively.
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY (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, 1999
----------------------------------------------
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 $ 4 21 -- 25
Maturing after 1 year but
within 5 years 2,300 -- (50) 2,250
-------- ---- ------ -------
Total investment securities $ 2,304 21 (50) 2,275
======== ==== ===== =======
Mortgage-backed securities:
Maturing after 1 year but within 5 years $ 839 1 (7) 833
Maturing after 5 years but within 10 years 1,810 47 (1) 1,856
Maturing after 10 years 11,292 54 (5) 11,341
-------- ---- ----- --------
Total mortgage-backed
securities $ 13,941 102 (13) 14,030
======== ==== ===== ========
</TABLE>
(Continued)
43
<PAGE> 39
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------
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 $ 1,250 1 -- 1,251
Maturing after 1 year but
within 5 years 5,027 63 -- 5,090
Maturing after 5 years but
within 10 years 1,025 5 -- 1,030
--------- ----- ----- ------
Total investment securities $ 7,302 69 -- 7,371
========= ===== ===== ======
Mortgage-backed securities:
Maturing after 1 year but within 5 years 1,205 23 -- 1,228
Maturing after 5 years but within 10 years 2,309 118 -- 2,427
Maturing after 10 years 19,399 279 -- 19,678
--------- ----- ----- ------
Total mortgage-backed
securities $ 22,913 420 -- 23,333
========= ===== ===== ======
</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.
At December 31, 1999, a U.S. agency note with an amortized cost of $500
and a fair value of $476 was pledged to secure certain of BFS's recourse
liabilities relating to loans sold as described in note 5.
At December 31, 1999, investment securities with an amortized cost of
$500 and a fair value of $481 were pledged to provide collateral for
customers 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.
Included in U.S. government, federal agency and other obligations are
investments that can be called prior to final maturity with an amortized
cost of $2,000 and a fair value of $1,950 at December 31, 1999.
44
<PAGE> 40
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The composition by issuer of mortgage-backed securities held to maturity
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1999 1998
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- --------
<S> <C> <C> <C> <C>
FHLMC, FNMA and GNMA $13,941 14,030 17,755 18,124
Privately issued collateralized
mortgage obligation -- -- 5,158 5,209
------ --------- --------- --------
$13,941 14,030 22,913 23,333
====== ========= ========= ========
</TABLE>
(5) LOANS (IN THOUSANDS)
The Company's primary banking activities are conducted principally in
eastern Massachusetts. The Company grants single-family and multi-family
residential loans, commercial real estate loans, business loans and a
variety of consumer loans. In addition, the Company grants loans for the
construction of residential homes, multi-family properties, commercial
real estate properties and for land development. Except for loans
processed by Forward Financial, the vast majority of the loans granted by
the Company are secured by real estate collateral. Through BFS'
subsidiary, Forward Financial, the Company originates loans, primarily
direct with the consumer, on manufactured housing, recreational vehicles,
boats and leased equipment in approximately 20 states across the United
States. Forward Financial sells substantially all of the loans it
originates. The ability and willingness of the one to four 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)
45
<PAGE> 41
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The Company's loan portfolio was comprised of the following at December
31:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Mortgage loans:
Residential 1-4 family $ 830,565 812,564
Multi-family 22,017 22,889
Construction and land 77,079 41,608
Commercial real estate 75,999 48,951
----------- --------
1,005,660 926,012
----------- --------
Consumer and other loans:
Home equity and improvement 43,721 32,119
Secured by deposits 682 934
Consumer 3,549 4,637
Business 17,815 3,618
----------- --------
65,767 41,308
----------- --------
Total loans, gross 1,071,427 967,320
----------- --------
Less:
Allowance for loan losses (note 6) (10,654) (8,500)
Construction loans in process (30,372) (17,133)
Net unearned discount on loans purchased (7) (5)
Deferred loan origination costs 2,200 1,980
----------- --------
Loans, net $ 1,032,594 943,662
=========== ========
</TABLE>
The Company services mortgage loans for investors which are not included
in the accompanying consolidated balance sheets totaling approximately
$784,597 and $648,279 at December 31, 1999 and 1998, respectively. Of
these loans serviced for others, $383 and $473 at December 31, 1999 and
1998, respectively, had been sold with recourse by the Company. In
addition, at December 31, 1999 and 1998, respectively, the Company had
retained the secondary layer of recourse risk on $3,190 and $4,737 of
serviced loans, with such risk limited to $221 and $221 after the first
layer is exhausted. There were no losses incurred on loans subject to
recourse during 1999 and 1998. The loss incurred on loans subject to
recourse amounted to $44 for the year ended December 31, 1997.
(Continued)
46
<PAGE> 42
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
A summary of the activity of the mortgage servicing rights, which is
included as a component of other assets, for the years ended December 31
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Balance, beginning of year $ 3,571 1,534 988
Capitalized mortgage servicing rights 2,813 3,149 836
Amortization (1,304) (1,112) (290)
------- ------ ------
Balance, end of year $ 5,080 3,571 1,534
======= ====== ======
</TABLE>
The Company has determined that the fair value of mortgage servicing
rights at December 31, 1999 approximates their carrying amount. There was
an adjustment of $481 recorded to reflect impairment value of mortgage
servicing rights during 1998. A valuation allowance for the mortgage
servicing rights was not established, as the mortgage servicing rights
were adjusted through additional amortization.
Regulatory limits for loans to one borrower are limited to 15% of capital
and general valuation reserves. These regulatory limits for BFS and BNB,
at December 31, 1999, are $10.4 million and $1.4 million, respectively.
BFS and BNB did not have any borrower relationships which exceeded the
limit at December 31, 1999.
In the ordinary course of business, the Company makes loans to its
directors and senior 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>
1999 1998
----- ------
<S> <C> <C>
Balance, beginning of year $ 785 1,209
Originations 145 145
Payments (152) (581)
Other changes 7 12
----- ------
Balance, end of year $ 785 785
===== ======
</TABLE>
At December 31, 1999 and 1998, total impaired loans were $235 and $483,
respectively. In the opinion of management, no impaired loans required a
specific valuation allowance at December 31, 1999 and 1998. The average
recorded value of impaired loans was $335 during 1999 and $488 during
1998. The Company follows the same policy for recognition of income on
impaired loans as it does for nonaccrual loans. At December 31, 1999 and
1998, there were no commitments to lend additional funds to those
borrowers whose loans were classified as impaired.
(Continued)
47
<PAGE> 43
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The following table summarizes information regarding the reduction of
interest income on impaired loans at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original terms $17 47 52
Income recognized 15 46 51
--- --- ---
Foregone interest income during year $ 2 1 1
=== === ===
</TABLE>
Non-accrual loans at December 31, 1999 and 1998 were $746 and $809,
respectively.
The following table summarizes information regarding the reduction or
(increase) in interest income on non-accrual loans as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original terms $ 62 68 208
Income recognized 64 35 59
---- ---- ----
Foregone (net earned) interest income during year $ (2) 33 149
==== ==== ====
</TABLE>
(6) 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 8,500 6,600 4,400
Allowance for loan losses from acquired companies 170 -- 620
Provision charged to income 1,626 1,642 1,696
Recoveries 414 517 399
Charge-offs (56) (259) (515)
-------- -------- --------
Balance, end of year $ 10,654 8,500 6,600
======== ======== ========
</TABLE>
(Continued)
48
<PAGE> 44
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(7) ACCRUED INTEREST RECEIVABLE (IN THOUSANDS)
Accrued interest receivable as of December 31 is presented in the
following table:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Investment and mortgage-backed securities $ 739 886
Loans 5,528 4,663
------ ------
$6,267 5,549
====== ======
</TABLE>
(8) 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>
1999 1998
---- ----
<S> <C> <C>
Land $ 2,503 2,083
Buildings 5,464 4,074
Furniture, fixtures and equipment 8,337 6,876
Leasehold improvements 1,395 1,402
-------- --------
17,699 14,435
Less accumulated depreciation and amortization (9,487) (7,821)
-------- --------
$ 8,212 6,614
======== ========
</TABLE>
The Company presently leases office space at four locations to which it
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------
<S> <C>
2000 $ 1,458
2001 1,458
2002 1,458
2003 1,342
2004 and thereafter 5,825
------------
$ 11,541
============
</TABLE>
Rent expense was $1,418 in 1999, $1,257 in 1998 and $1,178 in 1997.
(Continued)
49
<PAGE> 45
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------
<S> <C>
2000 $ 182
2001 124
2002 73
2003 66
2004 and thereafter 44
------------
$ 489
============
</TABLE>
Rental income was $172, $165 and $160 in 1999, 1998 and 1997,
respectively.
(9) DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS)
A summary of deposit balances by type is as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NOW $114,145 114,934
Regular and statement savings 145,688 130,843
Money market 56,970 61,756
Demand deposits and official checks 53,858 60,952
-------- --------
Total non-certificate accounts 370,661 368,485
-------- --------
Certificate accounts:
3 to 6 months 22,975 26,066
9 months 16,800 --
1 to 3 year 278,393 262,103
Greater than 3 years 37,551 4,442
IRA/Keogh 43,669 46,048
-------- --------
Total certificate accounts 399,388 338,659
-------- --------
$770,049 707,144
======== ========
Expected maturity of certificate accounts:
Within one year $244,061 198,124
One to two years 103,413 125,285
Two to three years 14,280 9,415
Over three years 37,634 5,835
-------- --------
$399,388 338,659
======== ========
</TABLE>
(Continued)
50
<PAGE> 46
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Aggregate amount of certificate accounts of $100 or more were $38,601 and
$29,006 at December 31, 1999 and 1998, 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NOW $ 884 1,158 1,071
Regular and statement savings 3,534 2,999 2,826
Money market 1,693 1,838 1,822
Certificate accounts 19,761 18,101 13,457
------- ------- -------
$25,872 24,096 19,176
======= ======= =======
</TABLE>
The Company has $136,394 of brokered deposits with a weighted average
rate of 6.58% at December 31, 1999. Brokered deposits of $67,644,
$27,957, $7,306, $9,395 and $24,092 mature in 2000, 2001, 2002, 2003 and
thereafter, respectively. There were $82,722 of brokered deposits
outstanding at December 31, 1998.
(10) FEDERAL HOME LOAN BANK ("FHLB") OF BOSTON ADVANCES AND OTHER BORROWINGS
(DOLLARS IN THOUSANDS)
FHLB of Boston advances by year of maturity at December 31 were:
<TABLE>
<CAPTION>
1999 1998
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
1999 $ -- -- % $114,000 5.56%
2000 218,500 5.74 113,500 5.85
2001 46,000 5.63 49,000 5.59
2002 43,000 6.02 1,000 6.55
2003 40,000 5.57 40,000 5.57
2004 17,000 6.59 -- --
Beyond 2004 20,000 5.99 20,000 5.99
-------- ---- -------- ----
$384,500 5.80% $337,500 5.69%
======== ==== ======== ====
</TABLE>
(Continued)
51
<PAGE> 47
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The advances are secured by FHLB of Boston stock and a blanket lien on
certain qualified collateral. The amount of advances is principally
limited to 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 $423,620 and $474,168 at December 31, 1999 and
1998, respectively.
Other borrowings total $3,055 and consist of a line of credit from a
financial institution which is utilized for general corporate purposes.
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 $436 and $927 at
December 31, 1999 and 1998, respectively. Any excess may be redeemed by
the Company or called by FHLB of Boston at par.
Interest expense on FHLB advances was $21,207 in 1999, $18,219 in 1998
and $17,226 in 1997.
(11) INCOME TAXES (DOLLARS IN THOUSANDS)
An analysis of the current and deferred federal and state income tax
expense (benefit) follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Federal income tax $4,620 4,654 4,581
State income tax 140 287 1,407
------ ------ ------
Total current expense 4,760 4,941 5,988
------ ------ ------
Deferred income tax expense (benefit):
Federal deferred income tax 137 313 (371)
State income tax 48 107 (29)
Change in valuation allowance -- (210) (83)
------ ------ ------
Total deferred expense (benefit) 185 210 (483)
------ ------ ------
Total income tax expense $4,945 5,151 5,505
====== ====== ======
</TABLE>
(Continued)
52
<PAGE> 48
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
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>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $4,575 3,676
Deferred compensation 596 856
Unrealized loss on securities available for sale 702 --
Other 78 90
------ ------
Gross deferred assets 5,951 4,622
------ ------
Deferred liabilities:
Premium on loans sold 2,138 1,527
Deferred loan fees 879 806
Unrealized gain on securities available for sale -- 82
Premises and equipment 523 358
Other -- 37
------ ------
Gross deferred liabilities 3,540 2,810
------ ------
Net deferred tax asset $2,411 1,812
====== ======
</TABLE>
At December 31, 1999, the net deferred tax asset is supported by
recoverable income taxes. For the year ended December 31, 1999, the
Company generated approximately $13,000 of taxable income In addition,
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. 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.
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 $13,300 remains subject to recapture
in the event that the Company pays dividends in excess of its earnings
and profits or redeems its stock.
(Continued)
53
<PAGE> 49
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed expected expense at statutory rate $ 4,615 4,343 4,396
Items affecting federal income tax rate:
State income tax, net of federal income tax
benefit 124 261 896
Change in valuation allowance -- (210) (83)
Allocated ESOP share appreciation 185 273 212
Bank-owned life insurance (189) -- --
Other 210 484 84
------- ------- -------
Effective income tax expense $ 4,945 5,151 5,505
======= ======= =======
Effective income tax rate 36.6% 40.3% 43.8%
======= ======= =======
</TABLE>
(12) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(a) 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.
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 1999, 1998 and 1997 to enable the ESOP to make
principal payments on the loan. The amount contributed was charged
to compensation and benefits expense. The Company recognized $550
in 1999, $803 in 1998 and $604 in 1997 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
three years, principally with funds from BFS's future
contributions to ESOP, subject to IRS limitations.
(Continued)
54
<PAGE> 50
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
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, 1999 and 1998, shares held in suspense to be
released annually as the loan is paid down amounted to 166,279 and
241,829, respectively. The fair value of unallocated ESOP shares
was $2,640 and $4,263 at December 31, 1999 and 1998, 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.
(b) 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 the
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 1999, 52,381
shares were distributed. Awards outstanding vest in five annual
installments generally commencing one year from the date of the
award. As of December 31, 1999, 12,500 shares remain unawarded
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 $350, $593 and
$1,009 related to the earned shares in compensation and benefit
expense in 1999, 1998 and 1997, 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)
55
<PAGE> 51
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(c) STOCK OPTION PLANS
The Company adopted a stock option plan in 1996 (the "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 25,000 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 (the "1997 Plan"). Pursuant to the terms of the 1997
plan, 250,000 common shares are reserved for issuance of which
68,600 remain unawarded. During 1999, the Company granted
employees options to purchase 61,000 shares of common stock
between $14.56 and $18.50 per share. During 1998, the Company
granted employees options to purchase 40,500 shares of common
stock at between $18.13 and $24.81 per share.
A summary of option activity follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance, beginning
of year 772,961 $14.12 733,361 $13.63
Granted 61,000 15.53 40,500 22.77
Forfeited (19,500) 18.82 -- --
Exercised (5,000) 12.44 (900) 16.43
-------- --------
Balance, end of year 809,461 $14.12 772,961 $14.12
======== ====== ======== ======
Options exercisable 418,784 $13.61 273,992 $13.40
======== ====== ======== ======
</TABLE>
(Continued)
56
<PAGE> 52
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
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, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
1999 LIFE PRICE 1999 PRICE
---- ---- ----- ---- -----
<S> <C> <C> <C> <C>
565,000 6.3 $ 12.44 337,000 $ 12.44
25,000 6.8 13.44 15,000 13.44
7,500 6.9 14.82 4,500 14.82
100,461 7.5 18.82 40,184 18.82
10,000 7.9 19.75 4,000 19.75
15,000 8.2 22.22 6,000 22.22
15,000 8.3 24.81 6,000 24.81
5,000 8.4 23.38 2,000 23.38
5,500 9.0 18.13 1,100 18.13
15,000 9.2 18.50 3,000 18.50
46,000 10.0 14.56 -- --
------- -------
809,461 6.9 $ 14.12 418,784 $ 13.61
======= ==== ========= ======= =========
</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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income as reported $ 8,568 7,621
Pro forma net income 7,766 6,847
Basic earnings per share as reported 1.78 1.50
Diluted earnings per share as reported 1.71 1.43
Pro forma basic earnings per share 1.61 1.35
Pro forma diluted earnings per share 1.55 1.29
</TABLE>
The per share weighted average fair value of stock options granted during
1999 was $3.76 per share determined using the Flexible Binomial option
pricing model with the following weighted average assumptions: 1999 1998
<TABLE>
<S> <C> <C>
Expected dividend yield 3.00% 2.50%
Risk-free interest rate 5.66% 5.23%
Expected volatility 28.99% 24.88%
Expected life (years) 4.0 4.6
</TABLE>
(Continued)
57
<PAGE> 53
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(d) PENSION PLAN
All eligible officers and employees are included in a
noncontributory defined benefit pension plan provided by BFS and
BNB as participating employers with Pentegra. 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, 1999, 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 1999, 1998 and 1997, except for an
administration fee of approximately $5 per year.
(e) 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 $153 in 1999
and $143 for 1998.
(f) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company established a supplemental executive retirement plan
(the "SERP") in October 1999 for certain of its senior executives
under which participants are entitled to an annual retirement
benefit. Expenses associated with SERP totaled $194 in 1999.
(g) SHORT TERM INCENTIVE PLAN
The Company established a short-term incentive plan during 1997.
Generally, all BFS (effective in 1997) and BNB (effective in 1998)
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
$1,151 and $721 during 1999 and 1998, respectively.
(h) BANK-OWNED LIFE INSURANCE
Bank owned life insurance represents life insurance on the lives
of certain employees. The Company is the beneficiary of the
insurance policies. Increases in the cash value of the policies,
as well as insurance proceeds received, are recorded in
non-interest income, and are not subject to income taxes.
(Continued)
58
<PAGE> 54
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(i) EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The Company and BFS entered into employment agreements with its
President and Chief Executive Officer, and two Executive Vice
Presidents. 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.
(j) 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 the Company or its two
banks. 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.
(13) LITIGATION
Broadway National Bank 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.
Various other 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.
(Continued)
59
<PAGE> 55
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(14) 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.
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.
The Company sells the vast majority of its loans held for sale to various
private institutional investors on a best efforts basis. In addition,
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.
(Continued)
60
<PAGE> 56
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
In addition to construction loans in process, the Company had the
following outstanding commitments at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commitments to originate mortgage loans $74,668 97,658
Commitments to originate business loans 6,319 --
Unused lines of credit:
Home equity 68,019 56,166
Business loans 8,840 3,454
Credit card 1,507 1,453
Standby letters of credit 1,112 765
Optional commitments to sell loans and commitments to sell loans
or swap loans for mortgage-backed securities 23,478 44,942
</TABLE>
(15) 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. 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.
(a) CASH AND CASH EQUIVALENTS
The fair values of cash and cash equivalents approximate the
carrying amounts as reported in the balance sheet.
(Continued)
61
<PAGE> 57
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Fair values for FHLB advances and other borrowings 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.
(Continued)
62
<PAGE> 58
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(i) 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.
(j) 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>
1999 1998
------------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 34,696 34,696 37,201 37,201
Investment securities available for sale 53,203 53,203 49,137 49,137
Investment securities held to maturity 2,304 2,275 7,302 7,371
Mortgage-backed securities available for sale 15,540 15,540 21,029 21,029
Mortgage-backed securities held to maturity 13,941 14,030 22,913 23,333
Loans, net and mortgage loans held for sale 1,048,768 1,035,526 960,670 968,762
Accrued interest receivable 6,267 6,267 5,549 5,549
Stock in FHLB of Boston 20,311 20,311 17,802 17,802
Financial liabilities:
Deposit accounts 770,049 770,686 707,144 711,063
FHLB advances and other borrowings 387,555 384,631 337,500 341,415
Advance payments by borrowers for taxes
and insurance 3,298 3,298 3,405 3,405
</TABLE>
(Continued)
63
<PAGE> 59
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(16) BUSINESS SEGMENTS (DOLLARS IN THOUSANDS)
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 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 intercompany 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 with its own president, who reports
directly to the respective Boards of Directors of each Bank and the Chief
Executive Officer of the Company and its Board of Directors.
The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable
segments. The table includes information of BNB from the close of
business of February 7, 1997, the date of its acquisition by the Company,
through December 31, 1999.
<TABLE>
<CAPTION>
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
--- --- -------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
At or for the year ended December 31, 1999:
Interest income $ 71,583 8,679 80,262 971 (497) 80,736
Interest expense 45,478 2,192 47,670 35 (497) 47,208
Provision for loan losses 1,506 120 1,626 -- -- 1,626
Non-interest income 6,183 923 7,106 (23) (172) 6,911
Non-interest expense 20,505 4,442 24,947 525 (172) 25,300
Income tax expense 3,729 1,046 4,775 170 -- 4,945
----------- ------- --------- ------ ------- ---------
Net income $ 6,548 1,802 8,350 218 -- 8,568
=========== ======= ========= ====== ======= =========
Total assets $ 1,112,607 139,287 1,251,894 90,574 (88,815) 1,253,653
=========== ======= ========= ====== ======= =========
Net interest margin 2.62% 5.30% n.m n.m n.m 2.97%
Return on average assets .63% 1.32% n.m n.m n.m .72%
Return on average equity 11.27% 14.72% n.m n.m n.m 10.00%
</TABLE>
(Continued)
64
<PAGE> 60
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
At or for the year ended December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 65,411 8,429 73,840 1,452 (517) 74,775
Interest expense 41,069 1,912 42,981 93 (517) 42,557
Provision for loan losses 1,542 100 1,642 -- -- 1,642
Non-interest income 5,579 704 6,283 10 (165) 6,128
Non-interest expense 19,393 4,234 23,627 470 (165) 23,932
Income tax expense 3,611 1,169 4,780 371 -- 5,151
--------- --------- --------- --------- --------- ---------
Net income $ 5,375 1,718 7,093 528 -- 7,621
========= ========= ========= ========= ========= =========
Total assets $ 988,747 137,209 1,125,956 87,464 (74,297) 1,139,123
========= ========= ========= ========= ========= =========
Net interest margin 2.66% 5.14% n.m n.m n.m 3.17%
Return on average assets 0.59% 1.36% n.m n.m n.m 0.72%
Return on average equity 10.30% 13.90 n.m n.m n.m 9.02%
At or for the year ended December 31, 1997:
Interest income $ 59,282 7,436 66,718 2,017 (696) 68,037
Interest expense 35,531 1,623 37,154 671 (696) 37,129
Provision for loan losses 1,651 45 1,696 -- -- 1,696
Non-interest income 4,296 645 4,941 45 (180) 4,806
Non-interest expense 17,662 3,546 21,208 430 (180) 21,458
Income tax expense 4,104 1,049 5,153 352 --
--------- --------- --------- --------- --------- ---------
5,505
Net income $ 4,630 1,818 6,448 607 --
========= ========= ========= ========= ========= =========
7,055
Total assets $ 832,133 123,165 955,298 92,559 (73,177) 974,680
========= ========= ========= ========= ========= =========
Net interest margin 2.92% 5.12% n.m. n.m. n.m. 3.42%
Return on average assets 0.65% 1.06% n.m. n.m. n.m. 0.75%
Return on average equity 10.00% 7.43% n.m. n.m. n.m. 8.21%
</TABLE>
n.m. = not meaningful
(Continued)
65
<PAGE> 61
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(17) ACQUISITION
On December 7, 1999 the Company acquired Diversified Ventures, Inc,
d/b/a/ Forward Financial ("Forward") in a 100% cash transaction. Forward
is located in Northborough, MA. As part of the transaction, the Company
acquired Ellsmere Insurance Agency, Inc., a Massachusetts licensed
insurance agency with limited operations. The purchase price was $38.3
million and was accounted for using the purchase method of accounting.
The results of operations include the effect of the purchase from the
date of acquisition to year-end. In connection with the acquisition the
value of the assets acquired and liabilities assumed were as follows:
<TABLE>
<CAPTION>
DECEMBER 7, 1999
----------------
(in thousands)
<S> <C>
Assets acquired:
Cash $ 9,687
Loans 11,345
Accounts receivable 1,100
Premises and equipment 309
Other real estate owned 194
Other assets 256
-------
Total assets acquired 22,891
-------
Liabilities assumed:
Accrued expenses and other liabilities 1,627
-------
Total liabilities assumed 1,627
-------
Assets in excess of liabilities 21,264
Cash paid to Forward owner 38,296
-------
Goodwill $17,032
=======
</TABLE>
The following condensed consolidated pro-forma results of the Company
were prepared as if the acquisition had taken place on January 1, 1998.
The pro-forma results are not necessarily indicative of the actual
results of operations had the Company's acquisition of Forward actually
occurred on January 1 of the respective year.
<TABLE>
<CAPTION>
(unaudited)
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Net interest and dividend income $ 95,318 $ 88,865
Net income 6,988 6,030
Basic earnings per share 1.45 1.19
Diluted earnings per share 1.40 1.13
</TABLE>
(Continued)
66
<PAGE> 62
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(18) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS)
The following are the condensed financial statements for BostonFed
Bancorp, Inc. (the "Parent Company") only:
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Cash and interest bearing deposit in subsidiary bank $ 27 6,716
Certificates of deposit 71 74
------- -------
Total cash and cash equivalents 98 6,790
------- -------
Mortgage-backed securities available for sale (amortized cost
of $10,913 at 1998) -- 10,983
Investment securities available for sale (amortized cost of
$2,035 at 1999 and 1998) 1,649 2,032
Investment in subsidiaries, at equity 87,090 64,423
Accrued interest receivable -- 63
Other assets 13 15
------- -------
Total assets $88,850 84,306
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $ 3,055 --
Accrued expenses and other liabilities 91 2,512
------- -------
Total liabilities 3,146 2,512
------- -------
Total stockholders' equity 85,704 81,794
------- -------
Total liabilities and stockholders' equity $88,850 84,306
======= =======
</TABLE>
(Continued)
67
<PAGE> 63
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
STATEMENTS OF INCOME 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income $ 750 1,186 1,684
Interest expense 34 93 671
------ ------ ------
Net interest income 716 1,093 1,013
Non-interest income 43 13 45
Non-interest expense 561 469 428
------ ------ ------
Income before income taxes 198 637 630
Income tax expense 90 261 226
------ ------ ------
Income before equity in net income
of subsidiaries 108 376 404
Equity in net income of subsidiaries 8,460 7,245 6,651
------ ------ ------
Net income $8,568 7,621 7,055
====== ====== ======
</TABLE>
The Parent Company's statement of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders'
equity and therefore are not presented here.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 8,568 7,621 7,055
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in undistributed earnings of
subsidiaries (8,460) (7,245) (6,651)
Amortization and accretion, net 88 81 17
Appreciation in fair value of shares charged
to expense for compensation plans 800 1,135 821
Earned SIP shares 350 593 1,009
Reduction in unallocated ESOP shares 755 756 755
Loss on sale of investment securities 28 -- --
Decrease in accrued interest receivable 63 41 21
Decrease (increase) in other assets 2 1,283 (1,098)
(Decrease) increase in accrued expenses
and other liabilities (2,421) 2,505 175
------- ------- -------
Net cash (used in) provided by
operating activities (227) 6,770 2,104
------- ------- -------
</TABLE>
(Continued)
68
<PAGE> 64
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS, CONTINUED 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flow from investing activities:
Purchase of BNB $ -- -- (22,000)
Proceeds from sale of mortgage-backed
securities available for sale 7,354 -- 1,084
Principal repayments on mortgage-backed
securities available for sale 3,444 8,012 3,807
Purchase of investment securities available
for sale -- (2,035) --
Change in investment in subsidiaries (15,552) 4,340 22,276
-------- -------- --------
Net cash used in investing
activities (4,754) 10,317 5,167
-------- -------- --------
Cash flow from financing activities:
Proceeds from securities sold under
agreement to purchase -- -- 7,140
Repayments of securities sold under
agreement to purchase -- (7,140) (3,500)
Proceeds from other borrowed money 3,055 -- --
Common stock repurchases (2,492) (7,998) (13,407)
Cash dividends paid (2,343) (2,005) (1,541)
Stock options exercised 69 16
-------- -------- --------
Net cash provided (used) from
financing activities (1,711) (17,127) (11,308)
-------- -------- --------
Net decrease in cash and cash
equivalents (6,692) (40) (4,037)
Cash and cash equivalents at beginning of year 6,790 6,830 10,867
-------- -------- --------
Cash and cash equivalents at end of year $ 98 6,790 6,830
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 23 93 662
Income taxes 2,444 296 268
</TABLE>
(Continued)
69
<PAGE> 65
BOSTONFED BANCORP. INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Summaries of consolidated operating results on a quarterly basis for the
years ended December 31 follow:
<TABLE>
<CAPTION>
1999 QUARTERS 1998 QUARTERS
------------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $20,938 20,435 19,832 19,531 19,227 19,054 18,293 18,201
Interest expense 12,386 11,964 11,495 11,363 11,101 11,057 10,402 9,997
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 8,552 8,471 8,337 8,168 8,126 7,997 7,891 8,204
------- ------- ------- ------- ------- ------- ------- -------
Provision for loan losses 376 390 430 430 455 442 342 403
Non-interest income 1,975 1,692 1,730 1,547 1,632 1,506 1,586 1,404
Non-interest expense 6,738 6,257 6,295 6,043 5,997 5,862 6,093 5,980
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 3,413 3,516 3,342 3,242 3,306 3,199 3,042 3,225
Income tax expense 1,138 1,254 1,315 1,238 1,295 1,281 1,239 1,336
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 2,275 2,262 2,027 2,004 2,011 1,918 1,803 1,889
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share $ 0.47 0.47 0.42 0.41 0.41 0.38 0.35 0.37
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share $ 0.46 0.45 0.40 0.40 0.39 0.36 0.33 0.35
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
70
<PAGE> 66
ANNUAL MEETING
The annual meeting of stockholders will be held on Wednesday, April 26,
2000, at 2:00 p.m. The meeting will take place at the Renaissance Bedford
Hotel, 44 Middlesex Turnpike, Bedford, 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>
1998 1999
By Quarter 1 2 3 4 1 2 3 4
Stock Price ------------------------------- -------------------------------------
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High............. 23% $25 1/8 $24 $18 7/8 $19 $18 3/4 $18 1/2 $17 5/8
Low.............. 20 22 3/8 15 3/4 13 1/2 17 5/16 16 1/6 15 13 13/15
Dividend Paid...... 07 10 10 10 10 12 12 12
</TABLE>
As of December 31, 1999, the Company had 4,973,081 shares outstanding and
approximately 600 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.
TRANSFER AGENT
EquiServe EquiServe
Mail Stop: 45-02-62 Mail Stop: 45-02-62
P.O. Box 8040 150 Royall Street
Boston, MA 02266-8040 Canton, MA 02266-8040
Shareholder Inquiries: (781) 575-3170
INDEPENDENT AUDITOR
KPMG 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
71
<PAGE> 1
Exhibit 21.0
SUBSIDIARIES OF THE REGISTRANT
The following are descriptions of subsidiaries which are directly or indirectly
owned by the Company.
BFS Preferred Capital Corp. BFS Preferred Capital Corp. is a subsidiary of BFS
and was organized under Massachusetts law in 1998 as a real estate investment
trust, in satisfaction of Section 858 of the Internal Revenue Code of 1986, as
amended.
BNB Preferred Capital Corp. BNB Preferred Capital Corp. is a subsidiary of BNB
and was organized under Massachusetts law in 1998 as a real estate investment
trust, in satisfaction of Section 858 of the Internal Revenue Code of 1986, as
amended.
BFS Security Corp. BFS Security Corp. is a subsidiary of BFS and was organized
under Massachusetts law in 1998 as an investment subsidiary.
BNB Security Corp. BNB Security Corp. is a subsidiary of BNB and was organized
under Massachusetts law in 1998 as an investment subsidiary.
BF Funding Corporation. BF Funding Corporation is a subsidiary of the Company
and was organized under Massachusetts law in 1995 for purposes of funding the
BFS' ESOP plan.
Diversified Ventures, Inc. d/b/a Forward Financial Company. Forward Financial
Company was acquired by BFS in December 1999. It is incorporated under
Massachusetts law and operates as a subsidiary of BFS.
Ellsmere Insurance Agency, Inc. Ellsmere Insurance Agency, Inc. was acquired by
BNB in December 1999. It is incorporated under Massachusetts law and operates as
a subsidiary of BNB.
Leader Corporation. Leader Corporation is incorporated under Massachusetts law
and is a subsidiary of BFS.
BFS Service Corp. BFS Service Corp. was a subsidiary of BFS organized under
Massachusetts law. In November 1999, BFS Service Corp. was dissolved.
Agyro Corp. Agyro Corp. was a subsidiary of BNB organized under Massachusetts
law. In November 1999, Agyro Corp. was dissolved.
<PAGE> 1
Exhibit 23
[LETTERHEAD OF KPMG LLP]
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, 2000, related to the consolidated
balance sheets of the Company as of December 31, 1999 and 1998 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, 1999,
which report is incorporated by reference in the Annual Report on Form 10-K of
the Company for the year ended December 31, 1999.
/s/ KPMG LLP
Boston, Massachusetts
March 28, 2000
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 31,881
<INT-BEARING-DEPOSITS> 274
<FED-FUNDS-SOLD> 2,541
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,743
<INVESTMENTS-CARRYING> 16,245
<INVESTMENTS-MARKET> 16,305
<LOANS> 1,048,768
<ALLOWANCE> 10,654
<TOTAL-ASSETS> 1,253,653
<DEPOSITS> 770,049
<SHORT-TERM> 218,500
<LIABILITIES-OTHER> 10,345
<LONG-TERM> 169,055
0
0
<COMMON> 68
<OTHER-SE> 85,638
<TOTAL-LIABILITIES-AND-EQUITY> 1,253,653
<INTEREST-LOAN> 73,096
<INTEREST-INVEST> 7,640
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 80,736
<INTEREST-DEPOSIT> 25,872
<INTEREST-EXPENSE> 47,208
<INTEREST-INCOME-NET> 33,528
<LOAN-LOSSES> 1,626
<SECURITIES-GAINS> (28)
<EXPENSE-OTHER> 25,300
<INCOME-PRETAX> 13,513
<INCOME-PRE-EXTRAORDINARY> 13,513
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,568
<EPS-BASIC> 1.78
<EPS-DILUTED> 1.71
<YIELD-ACTUAL> 2.97
<LOANS-NON> 746
<LOANS-PAST> 0
<LOANS-TROUBLED> 210
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,670
<CHARGE-OFFS> 56
<RECOVERIES> 414
<ALLOWANCE-CLOSE> 10,654
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10,654
</TABLE>
