<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 2000
--------------------------
Commission File Number 1-13936
--------------------------
BOSTONFED BANCORP INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1940834
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 New England Executive Park, Burlington, Massachusetts 01803
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 273-0300
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock, par value $.01 per share,
outstanding as of October 31, 2000: 4,718,681.
<PAGE> 2
BOSTONFED BANCORP INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and December 31, 1999 2
Consolidated Statements of Operations for the Three
and Nine Months ended September 30, 2000 and 1999 (unaudited) 3
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended
September 30, 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2000 and 1999 (unaudited) 5 - 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Average Balances and Yield / Costs 9 - 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
1
<PAGE> 3
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 50,173 $ 34,696
Investment securities available for sale
(amortized cost of $64,382 and $55,051 at
Sept. 30, 2000 and December 31, 1999
respectively) 63,459 53,203
Investment securities held to maturity (fair
value of $2,297 and $2,275 at Sept. 30,
2000 and December 31, 1999) 2,304 2,304
Mortgage-backed securities available for sale
(amortized cost of $16,049 and $15,881 at
Sept. 30, 2000 and December 31, 1999) 15,740 15,540
Mortgage-backed securities held to maturity (fair
value of $56,790 and $14,030 at Sept. 30,
2000 and December 31, 1999) 58,003 13,941
Mortgage loans held for sale 17,831 16,174
Loans, net of allowance for loan losses of $11,096
and $10,654 at Sept. 30, 2000 and December 31, 1999 1,021,938 1,032,594
Accrued interest receivable 7,669 6,267
Stock in FHLB of Boston and Federal Reserve Bank 20,649 20,311
Premises and equipment 10,298 8,212
Real estate owned 263 376
Goodwill 19,549 19,519
Other assets 32,710 30,516
----------- -----------
Total assets $ 1,320,586 $ 1,253,653
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 861,263 $ 770,049
Federal Home Loan Bank advances and other
Borrowed Money 326,031 387,555
Advance payments by borrowers for taxes
and insurance 3,252 3,298
Other liabilities 9,405 7,047
----------- -----------
Total liabilities 1,199,951 1,167,949
----------- -----------
Corporation-obligated mandatorily redeemable
capital securities 32,000 0
Commitments and contingencies
Stockholders' equity;
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued -- --
Common stock, $0.01 par value, 17,000,000 shares
authorized; 6,589,617 shares issued (4,750,881 and
4,973,081 shares outstanding at Sept. 30, 2000
and December 31, 1999, respectively) 66 66
Additional paid-in capital 67,450 67,198
Retained earnings 56,010 50,481
Accumulated other comprehensive income (loss) (760) (1,485)
Less treasury stock, (1,831,236 shares and
1,616,536 shares at Sept. 30, 2000
and December 31, 1999, respectively), at cost (32,295) (28,532)
Less unallocated ESOP shares (1,663) (1,663)
Less unearned Stock-Based Incentive Plan (173) (361)
----------- -----------
Total stockholders' equity 88,635 85,704
----------- -----------
Total liabilities and stockholders' equity $ 1,320,586 $ 1,253,653
=========== ===========
</TABLE>
See accompanying condensed notes to consolidated financial statements.
2
<PAGE> 4
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars In Thousands, except per share amount)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- --------------------------
9/30/00 9/30/99 9/30/00 9/30/99
------------------------- --------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 20,335 $ 18,543 $ 59,762 $ 54,152
Mortgage-backed securities 1,239 499 3,208 1,682
Investment securities 1,737 1,393 4,769 3,964
----------- ----------- ----------- -----------
Total interest income 23,311 20,435 67,739 59,798
----------- ----------- ----------- -----------
Interest expense:
Deposit accounts 8,350 6,490 23,303 19,046
Borrowed funds 5,687 5,474 17,335 15,776
----------- ----------- ----------- -----------
Total interest expense 14,037 11,964 40,638 34,822
----------- ----------- ----------- -----------
Net interest income 9,274 8,471 27,101 24,976
Provision for loan losses 250 390 750 1,250
----------- ----------- ----------- -----------
Net interest
income after provision 9,024 8,081 26,351 23,726
Non-interest income:
Loan processing and servicing
fees 148 158 488 437
Gain on sale of loans 2,804 541 7,581 2,237
Deposit service fees 499 445 1,432 1,293
Income from bank owned life
insurance 317 243 952 243
Other 375 305 1,061 759
----------- ----------- ----------- -----------
Total non-interest income 4,143 1,692 11,514 4,969
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and benefits 5,163 3,759 15,411 11,060
Occupancy and equipment 1,090 831 3,160 2,432
Federal deposit insurance
premiums 41 94 121 277
Data processing 394 440 1,115 1,141
Advertising expense 233 123 770 484
Real estate operations 10 (21) (264) (67)
Amortization of goodwill 355 53 1,052 159
Capital securities 257 -- 257 --
Other 1,559 978 4,835 3,109
----------- ----------- ----------- -----------
Total non-interest expense 9,102 6,257 26,457 18,595
----------- ----------- ----------- -----------
Income before income taxes 4,065 3,516 11,408 10,100
Income tax expense 1,443 1,254 4,017 3,807
----------- ----------- ----------- -----------
Net income $ 2,622 $ 2,262 $ 7,391 $ 6,293
=========== =========== =========== ===========
Basic earnings per share $ 0.56 $ 0.47 $ 1.56 $ 1.30
Diluted earnings
per share $ 0.54 $ 0.45 $ 1.53 $ 1.25
Basic weighted average shares
outstanding 4,725,990 4,820,252 4,745,855 4,827,927
Common stock equivalents
due to dilutive effect
of stock options 157,068 166,023 82,251 180,357
Diluted total weighted average
shares outstanding 4,883,058 4,986,275 4,828,106 5,008,284
</TABLE>
See accompanying condensed notes to consolidated financial statements.
3
<PAGE> 5
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2000
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Unearned
other Stock-
Additional Comprehensive Unallocated Based Total
Common paid-in Retained Treasury income ESOP Incentive stockholders'
stock capital earnings Stock (loss) shares Plan equity
------ --------- -------- --------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 66 67,198 50,481 (28,532) (1,485) (1,663) (361) 85,704
Net income -- -- 2,282 -- -- -- -- 2,282
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax of $396) -- -- -- -- 501 -- -- 501
-------
Total comprehensive income -- -- -- -- -- -- -- 2,783
Cash dividends declared and
paid ($0.12 per share) -- -- (587) -- -- -- -- (587)
Common Stock repurchased
(69 shares at an average
price of $15.63 per share) -- -- -- (1,073) -- -- -- (1,073)
Stock option exercised
(3 shares at an average price
$14.66 per share, net of tax
benefit) -- (13) -- 52 -- -- -- 39
Allocation relating to earned
portion of Stock-Based
Incentive Plan -- -- -- -- -- -- 69 69
Appreciation in fair value of
shares charged to expense for
compensation plans -- 75 -- -- -- -- -- 75
------ ------- ------- ------- ------- ------- ------- -------
Balance at March 31, 2000 $ 66 67,260 52,176 (29,553) (984) (1,663) (292) 87,010
------ ------- ------- ------- ------- ------- ------- -------
Net income -- -- 2,487 -- -- -- -- 2,487
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax benefit of $231) -- -- -- -- (181) -- -- (181)
-------
Total comprehensive income -- -- -- -- -- -- -- 2,306
Cash dividends declared and
paid ($0.13 per share) -- -- (638) -- -- -- -- (638)
Common Stock repurchased
(5 shares at an average
price of $11.42 per share) -- -- -- (52) -- -- -- (52)
Allocation relating to earned
portion of Stock-Based
Incentive Plan -- -- -- -- -- -- 62 62
Appreciation in fair value of
shares charged to expense for
compensation plans -- 61 -- -- -- -- -- 61
------ ------- ------- ------- ------- ------- ------- -------
Balance at June 30, 2000 $ 66 67,321 54,025 (29,605) (1,165) (1,663) (230) 88,749
------ ------- ------- ------- ------- ------- ------- -------
Net income -- -- 2,622 -- -- -- -- 2,622
Change in net unrealized gain/(loss)
on investments available for sale
(net of tax of $65) -- -- -- -- 405 -- -- 405
-------
Total comprehensive income -- -- -- -- -- -- -- 3,027
Cash dividends declared and
paid ($0.13 per share) -- -- (637) -- -- -- -- (637)
Common Stock repurchased
(152 shares at an average
price of $17.70 per share) -- -- -- (2,690) -- -- -- (2,690)
Allocation relating to earned
portion of Stock-Based
Incentive Plan -- -- -- -- -- -- 57 57
Appreciation in fair value of
shares charged to expense for
compensation plans -- 129 -- -- -- -- -- 129
------ ------- ------- ------- ------- ------- ------- -------
Balance at Sept. 30, 2000 $ 66 67,450 56,010 (32,295) (760) (1,663) (173) 88,635
------ ------- ------- ------- ------- ------- ------- -------
</TABLE>
See accompanying condensed notes to consolidated financial statements.
4
<PAGE> 6
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 7,391 $ 6,293
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net 2,013 966
Earned SIP shares 188 280
Appreciation in fair value of shares
charged to expense for compensation plans 265 443
Income from bank owned life insurance (952) --
Provision for loan losses 750 1,250
Provision for valuation allowance for
real estate owned 6 --
Loans originated for sale (145,981) (270,698)
Proceeds from sale of loans 151,905 273,529
Gain on sale of loans (7,581) (2,237)
Gain on sale of real estate
acquired through foreclosure (4) --
Increase in accrued interest receivable (1,402) (694)
Increase in prepaid expenses
and other assets, net (1,331) (1,811)
Increase in accrued expenses and
other liabilities, net 2,127 1,609
--------- ---------
Net cash provided by
operating activities 7,394 8,930
--------- ---------
Cash flows from investing activities:
Net cash paid for Forward Financial (994) --
Proceed from sale of investment
securities available for sale 41 --
Proceeds from maturities of investment
securities held to maturity -- 5,000
Proceeds from maturities of investment
securities available for sale 5,000 13,000
Purchase of investment securities
available for sale (14,769) (26,063)
Purchase of bank owned life insurance -- (20,000)
Purchase of mortgage-backed securities
available for sale (1,986) (2,001)
Purchase of FHLB and Federal Reserve Stock (338) (2,509)
Principal payments on mortgage-backed
securities available for sale 1,790 5,167
Principal payments on mortgage-
backed securities held to maturity 6,904 8,378
Principal payments on investment
securities available for sale 451 506
Increase in loans, net (41,069) (55,329)
Purchases of premises and equipment (3,064) (858)
Proceeds from sale of real estate owned 175 47
Additional investment in real
estate owned (64) --
--------- ---------
Net cash used in
investing activities (47,923) (74,662)
--------- ---------
</TABLE>
-Continued on next page-
5
<PAGE> 7
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposit accounts 91,214 28,824
Repayments of Federal Home Loan
Bank advances (351,263) (115,291)
Proceeds from Federal Home Loan
Bank advances 292,794 168,291
Proceeds from other borrowings 1,945 --
Repayments of other borrowings (5,000) --
Proceeds from Corporation-
obligated mandatorily redeemable
capital securities 32,000 --
Cash dividends paid (1,862) (1,723)
Common stock repurchased (3,815) (1,693)
Options exercised 39 --
Increase(decrease)in advance payments
by borrowers for taxes and insurance (46) 238
--------- ---------
Net cash provided by
financing activities 56,006 78,646
--------- ---------
Net increase
in cash and cash equivalents 15,477 12,914
Cash and cash equivalents at beginning of year 34,696 37,201
--------- ---------
Cash and cash equivalents at end of quarter $ 50,173 $ 50,115
========= =========
Supplemental disclosure of cash flow
information:
Payments during the period for:
Interest $ 41,638 $ 33,509
========= =========
Taxes $ 477 $ 4,054
========= =========
Supplemental schedule of non-cash
investing activities:
Transfer of mortgage
loans to real estate owned: $ -- $ 233
========= =========
</TABLE>
See accompanying condensed notes to consolidated financial statements.
6
<PAGE> 8
BOSTONFED BANCORP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements as of September 30, 2000
and December 31, 1999 and for the three- and nine-month periods ended September
30, 2000 and 1999 of BostonFed Bancorp, Inc., ("BostonFed" or the "Company") and
its wholly-owned subsidiaries, Boston Federal Savings Bank ("BFS"), Broadway
National Bank ("BNB") and BF Funding Corporation, presented herein, should be
read in conjunction with the consolidated financial statements of the Company as
of and for the year ended December 31, 1999.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments, consisting
only of normal recurring accruals necessary for a fair presentation, have been
included. The results of operations for the three- and nine-month periods ended
September 30, 2000 and 1999 are not necessarily indicative of the results that
may be expected for the entire fiscal year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
"derivatives") and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", which delays the effective date of SFAS No. 133 to fiscal quarters
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB Statement No. 133". This statement addresses a limited
number of issues causing implementation difficulties for numerous entities that
apply SFAS No. 133. This statement amends the accounting and reporting standards
of SFAS No. 133 for certain derivative instruments and certain hedging
activities, and is effective for fiscal quarters beginning after June 15, 2000.
The adoption of these statements is not expected to have a material impact on
the Company.
NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS
At September 30, 2000, the Company had commitments of $103.3 million to
originate mortgage loans and $10.6 million to purchase loans from correspondent
lenders. Of these $113.9 million commitments, $95.5 million were adjustable rate
mortgage loans with interest rates ranging from 6.13% to 11.25% and $18.4
million were fixed rate mortgage loans with interest rates ranging from 6.88% to
10.50%. The Company also had commitments to sell $24.9 million of mortgage
loans.
At September 30, 2000, the Company was servicing first mortgage loans of
approximately $879.8 million, which are either partially or wholly-owned by
others.
NOTE 3: BUSINESS SEGMENTS
The Company's wholly-owned bank subsidiaries, BFS and BNB (collectively
"the Banks"), have been identified as reportable operating segments in
accordance with the provisions of SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." BF Funding Corp., a wholly-owned
subsidiary of the Company, and various subsidiaries of the Banks did not meet
the quantitative thresholds for determining reportable segments. The Banks
provide general banking services to their customers, including deposit accounts,
residential, commercial, consumer and business loans. Each Bank also invests in
mortgage-backed securities and other financial instruments. In addition to its
own operations, the Company provides managerial expertise and other professional
services. The results of the Company and BF Funding comprise the "other"
category.
The Company evaluates performance and allocates resources based on the
Banks' net income, net interest margin, return on average assets and return on
average equity. The Banks follow generally accepted accounting principles as
described in the summary of significant accounting policies. The Company and
Banks have inter-company expense and tax allocation agreements. These
inter-company expenditures are allocated at cost. Asset sales between the Banks
were accounted for at current market prices at the time of sale and approximated
cost.
Each Bank is managed separately. BNB is managed by a President and CEO, who
reports directly to BNB's Board of Directors. BFS is managed by a CEO, who is
also the Company's CEO, and reports directly to BFS' Board of Directors.
The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable segments.
7
<PAGE> 9
<TABLE>
<CAPTION> (Dollars In Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
---------- --------- ------------ ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
At or for the three-months
ended September 30, 2000:
Interest income $ 20,988 2,320 23,308 385 (382) 23,311
Interest expense 13,472 645 14,117 302 (382) 14,037
Provision for loan losses 200 50 250 250
Non-interest income 3,883 310 4,193 (50) 4,143
Non-interest expense 7,687 1,101 8,788 364 (50) 9,102
Income tax expense 1,248 289 1,537 (94) 1,443
Net income 2,290 520 2,810 (188) 2,622
Total assets 1,167,254 149,916 1,317,170 157,951 (154,535) 1,320,586
Net interest margin 2.78% 5.23% n.m. n.m. n.m. 3.06%
Return on average assets .79% 1.41% n.m. n.m. n.m. .80%
Return on average equity 11.01% 17.01% n.m. n.m. n.m. 11.46%
At or for the three-months
ended September 30, 1999:
Interest income $ 18,111 2,202 20,313 215 (93) 20,435
Interest expense 11,502 555 12,057 (93) 11,964
Provision for loan losses 360 30 390 390
Non-interest income 1,420 262 1,682 10 1,692
Non-interest expense 4,992 1,161 6,153 104 6,257
Income tax expense 953 251 1,204 50 1,254
Net income 1,725 466 2,191 71 2,262
Total assets 1,074,872 139,871 1,214,743 87,290 (77,656) 1,224,377
Net interest margin 2.62% 5.44% n.m. n.m. n.m. 2.97%
Return on average assets .65% 1.36% n.m. n.m. n.m. .75%
Return on average equity 11.62% 15.46% n.m. n.m. n.m. 10.55%
</TABLE>
n.m. = not meaningful
<TABLE>
<CAPTION> (Dollars in Thousands)
TOTAL
REPORTABLE CONSOLIDATED
BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS
---------- --------- ------------ ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
At or for the nine-months
ended Sept. 30, 2000:
Interest income $ 60,966 6,744 67,710 498 (469) 67,739
Interest expense 38,738 1,837 40,575 532 (469) 40,638
Provision for loan losses 580 170 750 750
Non-interest income 10,762 894 11,656 5 (147) 11,514
Non-interest expense 22,362 3,554 25,916 688 (147) 26,457
Income tax expense 3,534 719 4,253 (236) 4,017
Net income 6,540 1,333 7,873 (482) 7,391
Total assets 1,167,254 149,916 1,317,170 157,951 (154,535) 1,320,586
Net interest margin 2.77% 5.24% n.m. n.m. n.m. 3.02%
Return on average assets .76% 1.24% n.m. n.m. n.m. .76%
Return on average equity 10.78% 14.86% n.m. n.m. n.m. 10.97%
At or for the nine-months
ended September 30, 1999:
Interest income $ 52,877 6,519 59,396 752 (350) 59,798
Interest expense 33,553 1,619 35,172 (350) 34,822
Provision for loan losses 1,160 90 1,250 1,250
Non-interest income 4,311 648 4,959 10 4,969
Non-interest expense 14,898 3,324 18,222 373 18,595
Income tax expense 2,854 796 3,650 157 3,807
Net income 4,723 1,338 6,061 232 6,293
Total assets 1,074,872 139,871 1,214,743 87,290 (77,656) 1,224,377
Net interest margin 2.60% 5.33% n.m. n.m. n.m. 2.96%
Return on average assets .61% 1.31% n.m. n.m. n.m. .71%
Return on average equity 11.14% 14.57% n.m. n.m. n.m. 9.86%
</TABLE>
n.m. = not meaningful
8
<PAGE> 10
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended September 30: 2000 1999
------------------------------------ ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ---------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Investment securities (1) $ 101,167 $ 1,737 6.87% $ 96,802 $ 1,393 5.76%
Loan, net and mortgage loans held for sale (2) 1,034,550 20,335 7.86% 1,010,217 18,543 7.34%
Mortgage-backed securities (3) 75,941 1,239 6.53% 31,969 499 6.24%
----------- ---------- ---------- ----------
Total interest-earning assets 1,211,658 23,311 7.70% 1,138,988 20,435 7.18%
---------- --------- ---------- ---------
Non-interest-earning assets 99,050 63,145
----------- ----------
Total assets $ 1,310,708 $1,202,133
=========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 57,230 414 2.89% $ 59,625 431 2.89%
Savings accounts 163,349 1,173 2.87% 149,188 954 2.56%
NOW accounts 119,795 226 0.75% 111,308 207 0.74%
Certificate accounts 435,395 6,537 6.01% 356,169 4,898 5.50%
----------- ---------- ---------- ----------
Total 775,769 8,350 4.31% 676,290 6,490 3.84%
Borrowed Funds (4) 357,258 5,687 6.37% 374,830 5,474 5.84%
----------- ---------- ---------- ----------
Total interest-bearing liabilities 1,133,027 14,037 4.96% 1,051,120 11,964 4.55%
---------- --------- ---------- ---------
Non-interest-bearing liabilities 86,141 65,261
----------- ----------
Total liabilities 1,219,168 1,116,381
----------- ----------
Stockholders' equity 91,540 85,752
----------- ----------
Total liabilities and
stockholders' equity $ 1,310,708 $1,202,133
=========== ==========
Net interest rate spread (5) $ 9,274 2.74% $ 8,471 2.63%
========== ========= ========== =========
Net interest margin (6) 3.06% 2.97%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 106.94% 108.36%
=========== ==========
</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 6.36% and
5.82% for the nine months ended September 30, 2000 and September 30, 1999,
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.
9
<PAGE> 11
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30: 2000 1999
------------------------------------ ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ---------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Investment securities (1) $ 95,124 $ 4,769 6.68% $ 91,691 $ 3,964 5.76%
Loan, net and mortgage loans held for sale (2) 1,033,449 59,762 7.71% 995,428 54,152 7.25%
Mortgage-backed securities (3) 66,120 3,208 6.47% 35,772 1,682 6.27%
----------- ---------- ---------- ----------
Total interest-earning assets 1,194,693 67,739 7.56% 1,122,891 59,798 7.10%
---------- --------- ---------- ---------- ---------
Non-interest-earning assets 94,522 51,669
----------- ----------
Total assets $ 1,289,215 $1,174,560
=========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing Liabilities:
Money market deposit accounts $ 56,024 1,201 2.86% $ 59,345 1,276 2.87%
Savings accounts 158,415 3,264 2.75% 140,915 2,615 2.47%
NOW accounts 117,524 667 0.76% 110,208 680 0.82%
Certificate accounts 417,999 18,171 5.79% 348,142 14,475 5.54%
----------- ---------- ---------- ----------
Total 749,962 23,303 4.14% 658,610 19,046 3.85%
Borrowed Funds (4) 375,528 17,335 6.15% 365,495 15,776 5.75%
----------- ---------- ---------- ----------
Total interest-bearing liabilities 1,125,490 40,638 4.81% 1,024,105 34,822 4.53%
---------- --------- ---------- ---------
Non-interest-bearing liabilities 73,912 65,383
----------- ----------
Total liabilities 1,199,402 1,089,488
----------- ----------
Stockholders' equity 89,813 85,072
----------- ----------
Total liabilities and
stockholders' equity $ 1,289,215 $1,174,560
=========== ==========
Net interest rate spread (5) $ 27,101 2.75% $ 24,976 2.57%
========== ========= ========== =========
Net interest margin (6) 3.02% 2.96%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities 106.15% 109.65%
=========== ==========
</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 6.15% and
5.72% for the nine months ended September 30, 2000 and September 30, 1999,
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.
10
<PAGE> 12
NOTE 4: CAPITAL TRUST SECURITIES
On July 12, 2000, the Company sponsored the creation of BFD Preferred
Capital Trust I, (the "Trust I"), a New York common law trust. The Company is
the owner of all of the common securities of the Trust I. On July 26, 2000, the
Trust I issued $10 million of its 11.295% Capital Securities through a pooled
trust preferred securities offering. The proceeds from this issuance, along with
the Company's $309,000 capital contribution for the Trust I common securities,
were used to acquire $10,309,000 aggregate principal amount of the Company's
11.295% Junior Subordinated notes due July 19, 2030, which constitute the sole
asset of the Trust I. The Company has, through the Trust agreement establishing
the Trust, the Guarantee Agreement, the notes and the related Indenture, taken
together, fully irrevocably and unconditionally guaranteed all of the Trust I's
obligations under the Capital Securities.
On August 18, 2000, the Company sponsored the creation of BFD Preferred
Capital Trust II, (the "Trust II"), a statutory business trust created under the
laws of Delaware. The Company is the owner of all of the common securities of
the Trust II. On September 22, 2000, the Trust I issued $22 million of its
10.875% Capital Securities. The proceeds from this issuance, along with the
Company's $681,000 capital contribution for the Trust II common securities, were
used to acquire $22,681,000 aggregate principal amount of the Company's 10.875%
Junior Subordinated Debentures due October 1, 2030, which constitute the sole
assets of the Trust I. The Company has, through the Declaration of Trust and the
Amended and Restated Declaration of Trust establishing the Trust, the Common
Securities and the Capital Securities Guarantee Agreements, the Debentures and
related Indenture, taken together, fully irrevocably and unconditionally
guaranteed all of the Trust II's obligations under the Capital Securities.
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A. GENERAL
In addition to historical information, this 10-Q includes certain
forward-looking statements based on current management expectations. Generally,
verbs in the future tense and the words, "believe", "expect", "anticipate",
"intends", "opinion", "potential", and similar expressions identify
forward-looking statements. Examples of this forward-looking information can be
found in, but are not limited to, the allowance for losses discussion,
subsequent events and any quantitative and qualitative disclosure about market
risk. The Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions, which may be made to any
forward-looking statements, to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The Company is the holding company for two banking subsidiaries, Boston
Federal Savings Bank, a federally chartered savings bank, and Broadway National
Bank, a nationally chartered commercial bank. Each Is considered a business
segment and accordingly, the Company has complied with the segment reporting
requirement in Note 3 of this document and in discussion herein as appropriate.
On February 7, 1997, the Company acquired BNB and as a result of the
acquisition, the Company became a bank holding company subject to regulation by
the Federal Reserve Bank ("FRB"). Boston Federal Savings Bank is regulated by
the Office of Thrift Supervision and Broadway National Bank is regulated by the
Office of the Comptroller of the Currency ("OCC"). 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 and was recorded by the
use of the purchase method of accounting. During March 2000, an additional
$975,000 was paid by BFS to Mr. DeFeudis in order to satisfy the remaining
payments due Mr. DeFeudis in connection with the acquisition, which payment was
based on certain performance agreed to by the parties. Substantially all of the
Company's business is coordinated through its subsidiary banks and references
herein to "Company" include the banks as appropriate. The Company's principal
business has been and continues to be attracting retail deposits from the
general public in the areas surrounding its branch offices and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans. To a lesser extent,
the Company invests in multi-family mortgages, commercial real estate,
construction and land, consumer loans, business loans, and investment
securities. The Company originates loans for investment and loans for sale in
the secondary market, generally retaining the servicing rights for loans sold.
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, 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 mortgage loans, and to a lesser extent, interest and dividends on its
investments and mortgage-backed securities, fees, gains on sale of loans and
loan servicing income. The Company's primary sources of funds are retail
deposits, wholesale brokered deposits, principal and interest payments on loans
and mortgage-backed securities, FHLB advances, other borrowings and proceeds
from the sale of loans.
11
<PAGE> 13
B. FINANCIAL CONDITION
Total assets at September 30, 2000 were $1.321 billion, compared to $1.254
billion at December 31, 1999, an increase of $67.0 million or 5.3%. Asset growth
was primarily attributable to a $44.1 million increase in mortgage-backed
securities held to maturity, partially offset by a $10.7 million decrease in
loans, net of allowance for loan losses. Mortgage-backed securities held to
maturity increased from $13.9 million at December 31, 1999 to $58.0 million at
September 30, 2000 due to the securitization of $51.0 million of loans into
Federal Home Loan Mortgage Corporation ("FHLMC") securities during the first
quarter of 2000. The securitization of loans into mortgage-backed securities
caused loans, net, to decline despite new loan portfolio volume. Other
components of asset growth included cash and cash equivalents, up $15.5 million
to a balance of $50.2 million at September 30,2000, compared to $34.7 million at
December 31, 1999, due primarily to the cash infusion from the second trust
preferred offering, which closed on September 22, 2000, and investment
securities available for sale, up $10.3 million to a balance of $63.5 million at
September 30, 2000, compared to $53.2 million at December 31, 1999. Deposit
accounts increased by $91.2 million, or 11.8%, from a balance of $770.0 million
at December 31, 1999 to a balance of $861.3 million at September 30, 2000. The
increase includes $17.1 million of deposits from the Company's new Woburn Office
and the acquisition of a net of $13.7 million of wholesale brokered certificates
of deposit. Additionally, deposit growth was believed to be enhanced by the
run-off from other institutions caused by the disruptive effects of
consolidation in the Company's primary market area. Federal Home Loan Bank
advances and other borrowings decreased by $61.5 million, to a balance of $326.0
million at September 30, 2000 from a balance of $387.6 million at December 31,
1999. Corporation-obligated mandatorily redeemable capital securities amounted
to $32.0 million at September 30, 2000 as the Company sponsored the creation of
BFD Preferred Capital Trust I and BFD Preferred Capital Trust II, which raised
$10 million and $22 million, respectively, through the issuance of trust
preferred securities during the quarter ended September 30, 2000. See Note 4
Capital Trust Securities.
C. LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, investments,
mortgage-backed and related securities and loan sales, FHLB advances and
repurchase agreements. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company has maintained in excess of the required minimum levels of liquid assets
at BFS as defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of the BFS's deposits and short-term borrowings.
BFS's current required liquidity ratio is 4%. At September 30, 2000 and December
31, 1999, BFS's liquidity ratio was 14.4% and 6.9%, respectively. Management has
maintained liquidity fairly 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. The OCC does not have specific
guidance for liquidity ratios for BNB, but does require banks to maintain
reasonable and prudent liquidity levels. Management believes such levels have
been maintained since the acquisition date.
The Company's most liquid assets are cash, overnight federal funds sold,
and loans and investments available for sale. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period. At September 30, 2000, BFS' cash and loans,
investments, and mortgage-backed securities available for sale totaled $101.4
million or 8.7% of BFS's total assets. While not all of these liquid assets
qualify for BFS's regulatory liquidity requirements, other assets in the held to
maturity category qualify for regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 2000, the Company had $326.0
million in advances outstanding from the FHLB. The Company generally does not
pay the highest deposit rates in its market and accordingly utilizes alternative
sources of funds such as FHLB advances, wholesale brokered deposits and
repurchase agreements to supplement cash flow needs.
At September 30, 2000, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $207.0 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from September 30, 2000, totaled $272.7 million.
At September 30, 2000, the consolidated stockholders' equity to total
assets ratio was 6.7%. As of September 30, 2000, the Company, BFS and BNB
exceeded all of their regulatory capital requirements. The Company's
consolidated tier 1 capital, total capital and tier 1 leverage ratios were
12.7%, 14.3% and 7.7%, respectively. BFS's tier 1, total risk-based, tier 1
risk-based and tangible equity capital ratios were 5.7%, 10.6%, 9.4% and 5.7%,
respectively. BNB's total risk-based, tier 1 risk-based and tier 1 leverage
capital ratios were 13.5%, 12.7%, and 6.6%, respectively.
12
<PAGE> 14
D. COMPARISON OF THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL
Earnings for the quarter ended September 30, 2000 were $2.6 million, or
$.56 basic and $.54 diluted earnings per share, compared to earnings of $2.3
million, or $.47 basic and $.45 diluted earnings per share for the third quarter
of 1999. The three and nine months ended September 30, 2000 includes the results
of Diversified Ventures, Inc., d/b/a Forward Financial Company and the results
of Ellsmere Insurance Agency, Inc. (collectively "Forward Financial"). Forward
Financial was not yet acquired in September 1999 and its impact on earnings is
not reflected in the results for the three- and nine-months ended September 30,
1999. The current quarter's earnings amount to a 20% improvement in diluted
earnings per share compared to last year's third quarter. Earnings for the
nine-months ended September 30, 2000 amounted to $7.4 million, or $1.56 basic
and $1.53 diluted earnings per share, compared to $6.3 million, or $1.30 basic
and $1.25 diluted earnings per share for the comparable 1999 period. The
Company's annualized return on average assets was .76% and the annualized return
on average stockholders' equity was 10.97% during the nine-months ended
September 30, 2000, compared to .71% and 9.86%, respectively, for the
nine-months ended September 30, 1999 (annualized). Comments regarding the
components of net income are detailed in the following paragraphs.
Interest Income
Total interest income on interest-earning assets for the quarter ended
September 30, 2000 increased by $2.9 million, or 14.2%, to $23.3 million,
compared to the quarter ended September 30, 1999. The increase in interest
income was due to the combined effects of an increase of $72.7 million in
average interest-earning assets and an increase of 52 basis points in the
average yield. The average yield on interest-earning assets increased to 7.70%
for the three months ended September 30, 2000 from 7.18% for the three months
ended September 30, 1999. For the nine-months ended September 30, 2000, total
interest income was $67.7 million, compared to $59.8 million for the comparable
period in 1999. The reason for the increase was also due to the combined effects
of increased average balances of interest-earning assets, which were $1.195
billion during the nine-months ended September 30, 2000, compared to $1.123
billion during the comparable period in 1999 and an increase of 46 basis points
in the average yield for the nine-months ended September 30, 2000, compared to
the nine months ended September 30, 1999.
Interest income on loans, net, for the quarter ended September 30, 2000
increased by $1.8 million, or 9.7%, to $20.3 million compared to $18.5 million
for the same quarter in 1999. On a year to date basis, interest income on loans,
net, increased $5.6 million to $59.8 million from the $54.2 million earned
during the nine-months ended September 30, 1999. The increase in interest income
from loans, net, for the three- and nine-months ended September 30, 2000,
compared to the same periods last year, was primarily attributable to increases
in average yields of 52 basis points and 46 basis points, respectively. The
average yield on loans, net for the quarter ended September 30, 2000 was 7.86%,
compared to an average yield of 7.34% for the three months ended September 30,
1999. The average yield on loans, net for the nine months ended September 30,
2000 was 7.71%, compared to 7.25% for the prior year period. Interest income on
loans, net was also positively impacted in the current year periods by increases
in interest earnings balances of $24.3 million and $38.0 million for the three-
and nine-month periods ended September 30, 2000, compared to the same periods
last year.
Interest on mortgage-backed securities for the quarter ended September 30,
2000 increased by $740,000 to $1.2 million, compared to $499,000 for the same
quarter in 1999. This increase in income was due primarily to the $44.0 million
higher average balance during the quarter ended September 30, 2000, compared to
the quarter ended September 30, 1999. A 29 basis point increase in the average
yield during the current quarter, compared to the quarter ended September 30,
1999, also contributed to the increased income. The average yield during the
current quarter was 6.53%, compared to 6.24% for the quarter ended September 30,
1999. On a year to date basis, interest on mortgage-backed securities was $3.2
million, compared to last year's comparable period total of $1.7 million. The
average balance of mortgage-backed securities increased by $30.3 million to an
average balance of $66.1 million for the nine-months ended September 30, 2000
compared to the prior year period average balance of $35.8 million due to the
securitizing of loans into mortgage-backed securities. Average yields improved
by 20 basis points during the current year-to-date period.
Income from investment securities was $1.7 million for the quarter ended
September 30, 2000 compared to $1.4 million for the prior year quarter. On a
year to date basis, income from investment securities was $4.8 million and $4.0
million, respectively, for the nine-months ended September 30, 2000 and 1999.
The average yield on investment securities increased by 111 basis points and 92
basis points, respectively, in the current three- and nine-month periods,
compared to last year's periods due to overall increases in market interest
rates. The average balance increased by $4.4 million to an average of $101.2
million during the quarter ended September 30, 2000, compared to an average
balance of $96.8 million for the quarter ended September 30, 1999. On a year to
date basis, the average balance of investment securities increased by $3.4
million to an average balance of $95.1 million during the nine-months ended
September 30, 2000, compared to an average balance of $91.7 million for the
comparable prior year period.
13
<PAGE> 15
Interest Expense
Total interest expense on interest-bearing liabilities for the quarter
ended September 30, 2000 increased by $2.1 million or 17.5%, to $14.0 million
compared to the quarter ended September 30, 1999. The increase in interest
expense for the quarter ended September 30, 2000 was due in part to an increase
of $81.9 million in the average balance of interest-bearing liabilities, which
averaged $1.133 billion during the current quarter, compared to an average
balance of $1.051 billion during the quarter ended September 30, 1999. An
increase of 41 basis points in the average cost of interest-bearing liabilities
during the current quarter contributed to the remaining increase in interest
expense. The average cost of interest-bearing liabilities increased to 4.96%
during the quarter ended September 30, 2000, compared to 4.55% for last year's
comparable quarter. The increase was due to generally higher market interest
rates. On a year to date basis, interest expense on interest-bearing liabilities
totaled $40.6 million, compared to last year's to date total of $34.8 million,
an increase of $5.8 million or 16.7%. The increase is attributable to the higher
average balance of interest- bearing liabilities, which averaged $1.125 billion
during the nine-months ended September 30, 2000, compared to an average balance
of $1,024 million during the nine- months ended September 30, 1999. Also
contributing to the higher interest expense on interest-bearing liabilities for
the nine months ended September 30, 2000 was a 28 basis point increase in the
average cost of interest-bearing liabilities. For the nine-months ended
September 30, 2000 and 1999, the average cost of interest- bearing liabilities
was 4.81% and 4.53%, respectively.
Interest expense on deposit accounts was $8.4 million for the quarter ended
September 30, 2000, an increase of $1.9 million from the $6.5 million for the
quarter ended September 30, 1999. The increase in the expense was primarily due
to higher average deposit account balances of $775.8 million for the
three-months ended September 30, 2000, compared to average deposit account
balances of $676.3 million, an increase of $99.5 million. A major reason for the
higher average deposit account balance is due to the Company's acquisition of
brokered wholesale certificates of deposit, which totaled $150.1 million as of
September 30, 2000, compared to a balance of $106.7 million at September 30,
1999. Management believes that average deposit account balances have also
increased due to the benefits of deposit run-off from other financial
institutions caused by the disruptive effects of consolidation in the Company's
market area. The average cost of funds increased to 4.31% in the current
quarter, compared to 3.84% for last year's comparable quarter. The cost of funds
increased due to higher rates paid on all types of deposit accounts due to
rising market interest rates. For the nine-months ended September 30, 2000,
interest expense on deposit accounts was $23.3 million, compared to $19.0
million for the prior year period, an increase of $4.3 million. The increase was
due to the effects of higher average deposit account balances, which averaged
$750.0 million during the nine-months ended September 30, 2000, compared to
$658.6 million in the prior year period. Additionally, an increase of 29 basis
points in the total cost of deposit accounts during the current period
contributed to the increase in the interest expense on deposit accounts. The
average cost of funds for the nine- months ended September 30, 2000 and 1999 was
4.14% and 3.85%, respectively.
Interest expense on borrowed funds increased from $5.5 million for the
quarter ended September 30, 1999 to $5.7 million for the current quarter. The
average cost of borrowed funds increased from 5.84% during the quarter ended
September 30, 1999 to an average of 6.37% during the current quarter. The
average balance decreased from $374.8 million during the third quarter of 1999
to an average balance of $357.3 million during the third quarter of 2000. For
the nine-months ended September 30, 2000 interest expense on borrowed funds was
$17.3 million, compared to $15.8 million for the nine-months ended September 30,
1999. The increase in interest expense on borrowed funds was caused by the
combined effects of a 40 basis point increase in the average cost of borrowed
funds and a $10.0 million increase in the average balance. The average balance
of borrowed funds was $375.5 million for the nine-months ended September 30,
2000, compared to $365.5 million for the nine-months ended September 30, 1999.
The average cost of borrowed funds increased to 6.15% for the nine-months ended
September 30, 2000, compared to 5.75% average cost for the nine-months ended
September 30, 1999. This increase was attributable to rising market interest
rates.
Net Interest Income
Net interest income during the third quarters of 2000 and 1999 was $9.3
million and $8.5 million, respectively, as increased net interest rate spreads
and margins combined with increases in interest-earning assets contributed to
the improvement in net interest income. The net interest margin and spread, at
3.06% and 2.74%, respectively, were nine and 11 basis points higher than the
comparable ratios for the quarter ended September 30, 1999. On a year to date
basis, net interest income was $27.1 million, compared to $25.0 million for the
prior year to date. The net interest margin was 3.02% for the nine-months ended
September 30, 2000, compared to 2.96% for the prior year comparable period. The
net interest margin improved due to the gradual shift to higher yielding
commercial and construction loans, equity lines and business loans. These loans
also carry a higher degree of credit risk than residential mortgage loans.
14
<PAGE> 16
Provision for Loan Losses
The Company's provision for loan losses was $250,000 for the quarter ended
September 30, 2000, compared to $390,000 for the comparable quarter last year.
For the nine-months ended September 30, 2000 and 1999, the provision was
$750,000 and $1.3 million, respectively. The allowance for loan losses increased
from $10.7 million at December 31, 1999 to $11.1 million at September 30, 2000
due to the year to date provision and net charge-offs. The provision decreased
for the three- and nine-months ended September 30, 2000, compared to the same
periods last year, due to the Company's belief that the allowance for loan
losses is at a reasonable level based on its current evaluation.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon size and type of loans and management's
assessment of the risk inherent in its loan portfolio in light of current
economic conditions, actual loss experience, industry trends and other factors
which may affect the real estate values in the Company's market area. In
addition various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses. Such
agencies may require the Company to make additional provisions for estimated
loan losses based upon judgements different from those of management. While
management believes the current allowance for loan losses is adequate, actual
losses are dependent upon future events, and as such, future provisions for loan
losses may be necessary. As part of the Company's determination of the adequacy
of the allowance for loan losses, the Company monitors its loan portfolio
through its Asset Classification Committee. The Committee classifies loans
depending on risk of loss characteristics. The most severe classification before
a charge-off is required is "sub-standard." At September 30, 2000, the Company
classified $3.1 million of loans ($2.9 million at BFS and $218,000 at BNB) as
sub-standard compared to $3.6 million ($3.0 million of BFS and $579,000 of BNB)
at December 31, 1999. The Asset Classification Committee, which meets quarterly,
determines the adequacy of the allowance for loan losses through ongoing
analysis of historical loss experience, the composition of the loan portfolios,
delinquency levels, underlying collateral values, cash flow values and state of
the real estate economy. Utilizing these procedures, management believes that
the allowance for loan losses at September 30, 2000 was sufficient to provide
for anticipated losses inherent in the loan portfolio.
The Company's allowance for loan losses at September 30, 2000 was $11.1
million, which represented 1,378% of non-performing loans or 1.06% of total
loans, compared to $10.7 million at December 31, 1999, or 1,428% of
non-performing loans and 1.01% of total loans. Management believes this coverage
ratio is prudent due to the balance increase in the combined total of
construction and land, commercial real estate, multi-family, home equity and
improvement, consumer and business loans. These combined total balances
increased from approximately $236 million at December 31, 1999 to approximately
$253 million at September 30, 2000.
Non-performing loans at September 30, 2000 amounted to $805,000 or .08% of
total loans, compared to $746,000 or .07% of total loans, at December 31, 1999.
The amount of interest income on non-performing loans that would have been
recorded had these loans been current in accordance with their original terms,
was $62,000 and $52,000 for the nine-month periods ended September 30, 2000 and
1999, respectively. The amount of interest income that was recorded on these
loans was $38,000 and $37,000 for the nine-month periods ended September 30,
2000 and 1999, respectively.
At September 30, 2000, loans characterized as impaired totaled $232,000.
During the nine-months ended September 30, 2000, the average recorded value of
impaired loans was $233,000, $11,000 interest income was recognized and $13,000
of interest income would have been recognized under the loans' original terms.
At September 30, 2000 and at December 31, 1999, the Company had $263,000
and $376,000 in real estate owned, respectively. Further, at September 30, 2000,
the Company also had restructured real estate loans amounting to $232,000 for
which interest is being recorded in accordance with the loans' restructured
terms. The amount of the interest income lost on these restructured loans is not
material to the Company's financial statements.
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Non-Interest Income
Total non-interest income in the third quarter of 2000 increased by $2.5
million, or 147.1%, to $4.1 million from $1.7 million for the three months ended
September 30, 1999. The largest component of non-interest income was gain on
sale of loans, which increased to $2.8 million during the quarter ended
September 30, 2000, from $541,000 for the quarter ended September 30, 1999. The
gain on sale of loans was higher due to the inclusion of $2.5 million of gain on
sale of loans by Forward Financial. The gains on sale of mortgage loans that BFS
recorded in the quarter ended September 30, 2000 were lower than last year's
comparable quarter as the volume of mortgage loans sold declined. Additionally,
a higher percentage of mortgage loans sold have been adjustable-rate loans,
which generally are sold at lower profit margins. BFS sold $53.4 million of
mortgage loans during the quarter ended September 30, 2000, compared to $86.8
million during last year's comparable quarter. For the nine-months ended
September 30, 2000 and 1999, total non-interest income amounted to $11.5 million
and $5.0 million, respectively. The vast majority of the increase is
attributable to the increase in gain on sale of loans which increased to $7.6
million in the current period from $2.2 million in the prior year period. The
primary reason for the increase in the gain on sale of loans was due to the
inclusion of $6.7 million of gains on sale of loans from Forward Financial. The
three- and nine-months ended September 30, 2000 also included $317,000 and
$952,000, respectively, in income from bank owned life insurance ("BOLI"),
compared to $243,000 for the three- and nine-months ended September 30, 1999 as
the Company purchased the BOLI in July of 1999. Other non-interest income
increased to $375,000 for the quarter ended September 30, 2000 from $305,000 for
the prior year comparable quarter due to increases in debit card fees, business
loan fees and the inclusion of Forward Financial's other non-interest income.
Increases in deposit service fees also contributed to the improvement in
non-interest income fo r the current quarter and on a year to date basis.
Non-Interest Expense
Total non-interest expenses increased to $9.1 million for the quarter ended
September 30, 2000 from $6.3 million for the quarter ended September 30, 1999
primarily due to the inclusion of Forward Financial's expenses in the current
year's quarter. Compensation and benefits expense increased from $3.8 million
for the third quarter of 1999 to $5.2 million for the current quarter primarily
due to the inclusion of Forward Financial's compensation and benefits expenses
and normal salary increases. For these same reasons, compensation and benefits
increased to $15.4 million for the nine months ended September 30, 2000 from
$11.1 million for last year's comparable period. Occupancy and equipment
expenses increased from $831,000 for the quarter ended September 30, 1999 to
$1.1 million for the current quarter primarily due also to the inclusion of
Forward Financial's expenses. Advertising expense increased from $123,000 for
the quarter ended September 30, 1999 to $233,000 for the current quarter also
due primarily to the inclusion of Forward Financial's advertising expenses. The
year-to-date totals were similarly impacted. Real estate operations provided
income of $264,000 in the nine months ended September 30, 2000 compared to
income of $67,000 in the first nine months of 1999. The current period's income
is larger due to income recognized in the dissolution of a real estate
subsidiary of BFS. Other non-interest expenses were $1.6 million for the quarter
ended September 30, 2000, compared to $978,000 for the quarter ended September
30, 1999. The increase was primarily due to the inclusion of Forward Financial's
non-interest expenses during the current quarter. Capital securities expense
amounted to $257,000 for the three- and six-months ended September 30, 2000.
There were no corresponding expenses for the comparable periods last year as the
corporation-obligated mandatorily redeemable capital securities were issued
during the current quarter. See Note 4 Capital Trust Securities.
Income Tax Expense
Income tax expense for the quarters ended September 30, 2000 and 1999 was
$1.4 million and $1.3 million, respectively. The effective income tax rate was
35.5% during the current quarter, compared to 35.7% for the quarter ended
September 30, 1999. Income tax expense was $4.0 million and $3.8 million for the
nine-months ended September 30, 2000 and 1999, respectively. The effective tax
rates were 35.2% and 37.7%, respectively. The effective tax rate was lower
during the current year to date period due primarily to the effects of BOLI.
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<PAGE> 18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The principal market risk affecting the Company is interest rate risk. The
objective of the Company's interest rate risk management function is to evaluate
the interest rate risk included in certain balance sheet accounts, determine the
level of risk appropriate given the Company's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with Board of Directors' approved guidelines. Through
such management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates. The Company monitors its interest rate risk as
such risk relates to its operating strategies. The Company's Board of Directors
has established a management Asset/Liability Committee that is responsible for
reviewing the Company's asset/ liability policies and interest rate risk
position. The Committee reports trends and interest rate risk position to the
Board of Directors on a quarterly basis. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Company.
In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate, one- to four-family mortgage loans; (2) generally selling in
the secondary market substantially all fixed-rate mortgage loans originated with
terms greater than 15 years while generally retaining the servicing rights
thereof; (3) primarily investing in investment securities or mortgage- backed
securities with adjustable interest rates; and (4) attempting to reduce the
overall interest rate sensitivity of liabilities by emphasizing longer-term
deposits and utilizing FHLB advances to replace rate sensitive deposits.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. These differences are
a primary component of the risk to net interest income. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a positive gap position would be in a better position to invest
in higher yielding assets which, consequently, may result in the yield on its
assets increasing at a pace more closely matching the increase in the cost of
its interest-bearing liabilities than if it had a negative gap. During a period
of falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap which,
consequently, may tend to restrain the growth of its net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
adjustable-rate loans may decrease in the event of an interest rate increase.
At September 30, 2000, the Company's one year gap was a negative .13% of
total assets, compared to a positive 8.5% of total assets at December 31, 1999.
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.
As in the case with the gap analysis, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model used assumes that the composition
of the Company's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and also
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements and net
interest income models provide an indication of the Company's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income and will differ from actual
results. See the Company's Form 10-K for the year ended December 31, 1999 for a
detail of the GAP and NPV tables. There have been no material changes in the net
portfolio value since December 31, 1999.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, the Company is not involved in any pending
material legal proceedings other than routine legal proceedings occurring in the
ordinary course of business. Such routine legal proceedings, in the aggregate,
are believed by management to be immaterial to the Company's financial condition
or results of operations. Broadway National Bank, a national bank subsidiary of
the Company, was named a defendant in the Superior Court for Suffolk County,
Massachusetts, civil action No. SUCV 99-018F served on April 12, 1999 in a
matter captioned "Glyptal, Inc. v. John Hetherton, Jr., Fleet Bank, NA and
Broadway National Bank of Chelsea." The suit alleges that an officer of the
Plaintiff, Glyptal, embezzled funds from Plaintiff, by making unauthorized
transfers from Plaintiff's corporate accounts and subsequently deposited checks
drawn on such account into an account at Broadway National Bank. Plaintiff
alleges that Broadway National Bank knew or should have known of the alleged
fraudulent actions of Plaintiff's Officer, and that Broadway National Bank owed
a duty to Plaintiff to investigate the transactions and protect Plaintiff from
the alleged fraudulent actions. The Plaintiff is seeking damages for the alleged
breach of duty by the defendants. Broadway National Bank intends to deny the
allegations that it owed or breached any duty to Plaintiff or that it is liable
for any losses incurred by Plaintiff. Broadway National Bank intends to
vigorously defend the action and believes the action is not likely to result in
any material loss or adverse effect on the financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation*
3.2 Amended and Restated Bylaws as of February 23, 2000**
27 Financial Data Schedule
* Incorporated herein by reference into this document from 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
** Incorporated herein by reference into this document from Exhibit 3.2
to the Annual Report on Form 10-K filed on March 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTONFED BANCORP, INC.
(Registrant)
Date: November 14, 2000 By: /s/ David F. Holland
---------------------------------------------
David F. Holland
President and
Chief Executive Officer
Date: November 14, 2000 By: /s/ John A. Simas
---------------------------------------------
John A. Simas
Executive Vice President,
Chief Financial Officer
and Corporate Secretary
19
