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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _________ to __________
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 (IRS employer identification no.)
incorporation or organization)
17 NEW ENGLAND EXECUTIVE PARK, BURLINGTON, 01803
MASSACHUSETTS (zip code)
(address of principal executive offices)
Registrant's telephone number, including area code: (781) 273-0300
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE THE AMERICAN STOCK EXCHANGE
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
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 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Park III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The issuer's gross revenues for the fiscal year ended December 31, 2000
were $106.2 million.
Based upon the closing price of the registrant's common stock as of
March 7, 2001, the aggregate market value of the voting and non-voting common
equity held by non-affiliates is $85.9 million. Solely for purposes of this
calculation, the shares held by the directors and officers of the registrant
have been excluded because such persons may be deemed to be affiliates.
The number of shares of common stock outstanding as of March 7, 2001
was 4,560,481.
DOCUMENTS INCORPORATED BY REFERENCE
PART II: PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2000.
PART III: PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2001
ANNUAL MEETING OF STOCKHOLDERS.
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INDEX
PART I PAGE
----
Item 1. Business.............................................................. 3
Item 2. Properties............................................................ 37
Item 3. Legal Proceedings..................................................... 38
Item 4. Submission of Matters to a Vote of Security Holders................... 38
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters.................................................. 38
Item 6. Selected Financial Data............................................... 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 38
Item 7A. Quantitative and Qualitative Disclosure About
Market Risks.......................................................... 39
Item 8. Financial Statements and Supplementary Data .......................... 39
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 39
Item 11. Executive Compensation................................................ 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................ 39
Item 13. Certain Relationships and Related Transactions........................ 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................... 40
SIGNATURES
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This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on BostonFed Bancorp, Inc.'s current expectations
regarding its business strategies, intended results and future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which BostonFed Bancorp Inc. Operates, as well as nationwide, BostonFed Bancorp,
Inc.'s ability to control costs and expenses, competitive products and pricing,
loan delinquency rates and changes in federal and state legislation and
regulation. These factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements. BostonFed
Bancorp Inc. Assumes no obligation to update any forward-looking statements.
PART I
ITEM 1. BUSINESS.
GENERAL
BostonFed Bancorp, Inc., ("BostonFed or the "Company") headquartered in
Burlington, Massachusetts, was organized in 1995 under Delaware law as the
holding company for Boston Federal Savings Bank ("Boston Federal") in connection
with the conversion of Boston Federal from a mutual to stock form of ownership.
BostonFed later acquired Broadway National Bank, ("Broadway National") a
nationally chartered commercial bank, as its wholly-owned subsidiary. BostonFed
is a registered multi-bank holding company whose principal business is conducted
through its wholly-owned subsidiaries, Boston Federal and Broadway National
(collectively, the "Banks").
Through its subsidiaries, Boston Federal and Broadway National,
BostonFed attracts retail deposits from the general public in greater Boston
metropolitan area and other areas of New England, and through brokers, and
invests those deposits, together with funds generated from operations, loan
sales and borrowings, primarily in one- to four-family residential mortgage
loans. BostonFed also invests in commercial real estate, construction and land,
multi-family mortgage, equity lines of credit, business and consumer loans
(secured by personal and/or real property) and other investments. BostonFed
originates mortgage loans for investment and for sale in the secondary market,
generally retaining the servicing rights.
BostonFed, through the acquisition of Diversified Ventures; d/b/a
Forward Financial ("Forward Financial"), and a related company, Ellsmere
Insurance Agency, Inc. in December 1999, also originates consumer loans
primarily with customers purchasing or refinancing manufactured homes,
recreational vehicles, marine and leased equipment and subsequently sells
substantially all of these loans, servicing released, to third party client
lenders. This acquisition, along with the continued successful increase in
business, commercial real estate, construction lending and home equity loans,
has allowed BostonFed to diversify its product line, asset mix and the
geographical area in which it operates.
MARKET AREA AND COMPETITION
BostonFed 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. BostonFed obtains deposits largely
from the communities surrounding its offices and extends loans
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throughout eastern Massachusetts and, to a lesser extent, other areas of New
England. Forward Financial provides its consumer lending services in
approximately 26 states.
BostonFed 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.
BostonFed's share of deposits and loan originations in eastern Massachusetts
amounts to less than one percent. BostonFed 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 BostonFed. BostonFed'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, BostonFed
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 and annuities.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. BostonFed's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residences. To
a lesser extent, BostonFed's loan portfolio also includes multi-family,
commercial real estate, construction and land, business and consumer loans.
The types of loans that BostonFed may originate are subject to federal
and state laws and regulations. Interest rates charged by BostonFed 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 its various regulatory agencies and
legislative tax policies.
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The following table sets forth the composition of BostonFed's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------- --------------------- ------------------ ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- --------- ----------- --------- -------- -------- --------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential:
One- to four-family(1).. $ 800,883 73.33% $ 846,739 77.85% $829,572 84.27% $702,102 86.11% $607,792 88.00%
Multi-family............ 19,447 1.78 22,017 2.02 22,889 2.33 18,874 2.32 21,381 3.10
Commercial real estate.... 89,371 8.18 75,999 6.99 48,951 4.97 36,400 4.46 28,136 4.07
Construction and land..... 92,561 8.48 77,079 7.09 41,608 4.23 20,497 2.51 12,532 1.81
Other loans(2).............. 89,884 8.23 65,767 6.05 41,308 4.20 37,465 4.60 20,850 3.02
----------- ------ ---------- ------ -------- ------ ------- ------ -------- ------
Total loans........... 1,092,146 100.00% 1,087,601 100.00% 984,328 100.00% 815,338 100.00% 690,691 100.00%
====== ====== ====== ====== ======
Less:
Allowance for loan losses. (11,381) (10,654) (8,500) (6,600) (4,400)
Construction loans in
process................. (33,869) (30,372) (17,133) (8,527) (6,936)
Net unearned premium
(discount) on loans
purchased............. (10) (7) (5) (114) (163)
Deferred loan origination
(fees) costs............ 2,365 2,200 1,980 1,448 1,448
---------- ---------- -------- -------- --------
Loans, net and mortgage
loans held for sale..... $1,049,251 $1,048,768 $960,670 $801,545 $680,640
========== ========== ======== ======== ========
- -------------------------------
(1) Includes mortgage loans held for sale of $12.8 million, $16.2 million,
$17.0 million, $9.8 million and $4.0 million at December 31, 2000, 1999,
1998, 1997 and 1996, respectively.
(2) These loans primarily consist of one- to four-family lines of credit
secured mostly by second mortgages which amounted to $57.6 million, $43.7
million, $32.1 million, $28.1 million and $17.4 million at December 31,
2000, 1999, 1998, 1997 and 1996, respectively, and business loans which
amounted to $26.5 million, $17.8 million, $3.6 million, $3.5 million and
$724,000 at December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
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LOAN MATURITY. The following table shows certain information at
December 31, 2000 regarding the dollar amount of loans maturing in BostonFed's
portfolio based on their contractual terms to maturity. The table does not
include the effect of prepayments or scheduled principal amortization.
AT DECEMBER 31, 2000
----------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION OTHER TOTAL
FAMILY FAMILY REAL ESTATE AND LAND LOANS LOANS
----------- ----------- ----------- ------------ ----------- -----------
(IN THOUSANDS)
Amounts due:
One year or less ........................ $ 2,134 $ 44 $ 2 $75,474 $ 12,335 $ 89,989
After one year:
More than one year to three years ....... 7,312 321 1,413 16,520 10,619 36,185
More than three years to five years .. 4,496 2,218 4,822 567 4,201 16,304
More than five years to 10 years ..... 98,139 627 12,233 -- 59,535 170,534
More than 10 years to 20 years ....... 136,103 10,885 37,992 -- 788 185,768
More than 20 years ................... 552,699 5,352 32,909 -- 2,406 593,366
-------- ------- ------- ------- ------- ---------
Total due after one year ............. 798,749 19,403 89,369 17,087 77,549 1,002,157
-------- ------- ------- ------- ------- ---------
Total amount due ..................... 800,883 19,447 89,371 92,561 89,884 1,092,146
======== ======= ======= ======= ======= =========
Less:
Allowance for loan losses ...... (11,381)
Construction loans in process .. (33,869)
Net unearned discount on
loans purchased ............. (10)
Deferred loan origination costs 2,365
---------
Loans, net, and mortgage
loans held for sale ............... 1,049,251
Mortgage loans held for sale ......... (12,816)
Loans, net ........................... 1,036,435
=========
The following table sets forth, at December 31, 2000, the dollar amount
of loans contractually due after December 31, 2001, and whether such loans have
fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2001
----------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ---------- ----------
(IN THOUSANDS)
Mortgage loans:
Residential:
One- to four-family $ 265,389 $ 533,360 $ 798,749
Multi-family ....... 5,571 13,832 19,403
Commercial real estate 25,309 64,060 89,369
Construction and land -- 17,087 17,087
Other loans ............. 7,102 70,447 77,549
---------- ---------- ----------
Total loans ...... $ 303,371 $ 698,786 $1,002,157
========== ========== ==========
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ORIGINATION, SALE, SERVICING AND PURCHASE OF MORTGAGE LOANS. BostonFed
conducts its mortgage and consumer finance lending activities primarily through
its offices, commissioned loan personnel, and wholesale brokers and other
correspondent financial institutions approved by BostonFed. All loans that
BostonFed originates, either through internal sources or wholesale brokers or
other correspondent financial institutions, are underwritten by BostonFed
according to its policies and procedures. BostonFed originates both
adjustable-rate and fixed-rate loans and its ability to originate these loans is
affected by the current and expected level of interest rates, economic
conditions and competition, all of which affect customer demand.
BostonFed's general policy is to sell a substantial majority of the
one- to four-family fixed-rate mortgage loans 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 its portfolio needs, and to sell the
balance. BostonFed generally retains the servicing of mortgage loans sold. 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.
At December 31, 2000, BostonFed was servicing $886.6 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. BostonFed has not purchased
servicing rights related to mortgage loans originated by other institutions.
BostonFed recognizes the present value of the servicing income, net of servicing
expenses, attributable to servicing rights upon sale of the loan. BostonFed
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. BostonFed reviews prepayment activity on its
serviced loans at least quarterly and adjusts its capitalized mortgage servicing
rights amortization schedule accordingly. As of December 31, 2000, BostonFed had
$5.1 million of capitalized mortgage servicing rights, representing 57 basis
points of loans serviced for others.
BostonFed generally does not purchase or participate in loans, except
for loans that qualify under the Community Reinvestment Act and in situations
when a correspondent financial institution has underwritten the loan according
to BostonFed's policies and closed the loan in its own name. BostonFed's
purchases of one- to four-family mortgage loans at December 31, 2000, amounted
to $5.4 million. BostonFed's participation in commercial real estate loans
originated and serviced by other financial institutions totalled $10.2 million
at December 31, 2000. Additionally, BostonFed is the lead bank in a $4.6 million
construction loan, which BostonFed participates in 60% of the commitment. The
outstanding balance of BostonFed's retained portion of this loan was $1.9
million at December 31, 2000.
BostonFed engages in certain hedging activities to facilitate the sale
of its originated and purchased mortgage loans and to minimize its interest rate
risk between the time the loan commitments are made and the time the loans are
securitized or packaged and sold. BostonFed currently utilizes forward loan sale
commitment contracts with Fannie Mae, Freddie Mac and other approved investors
as its method of hedging loan sales. Generally, BostonFed will enter into
contracts to deliver loans or agency mortgage-backed securities to purchasers
for a specified price at a future date while it 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. Loans that are closed and funded may also be pooled to
create mortgage-backed securities which 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 primarily on BostonFed's assessment of the levels of mortgage-
origination activity and, to a lesser degree, the general direction of interest
rates. For the year ended December 31, 2000, BostonFed had $1.2 million in net
gains attributable to the sale of mortgage loans.
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Forward Financial recorded $7.8 million in net gains, the vast majority of which
is attributable to the sale of consumer loans.
The following table sets forth BostonFed's loan originations,
purchases, sales and principal repayments for the periods indicated:
YEARS ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS)
Net loans:
Beginning balance ................................. $ 1,032,594 $ 943,662 $ 791,728
Loans originated:
One- to four-family ........................ 339,643 507,569 773,655
Multi-family ............................... 508 2,821 7,911
Commercial real estate ..................... 22,092 30,160 25,363
Construction and land ...................... 64,386 50,946 32,348
Other(1) ................................... 146,372 70,198 37,055
----------- ----------- -----------
Total loans originated ..................... 573,001 661,694 876,332
Loans purchased(2) ............................ 25,243 41,996 25,042
Loans from Forward acquisition ................ -- 11,345 --
----------- ----------- -----------
Total .................................. 1,630,838 1,658,697 1,693,102
Less:
Principal repayments and other, net ........... (337,267) (307,906) (382,475)
Loan (charge-offs) recoveries, net ............ (273) 358 258
Sale of mortgage loans ........................ (244,047) (302,298) (350,215)
Transfer of mortgage loans to real estate owned -- (83) --
----------- -----------
Loans, net and mortgage loans held for sale ... 1,049,251 1,048,768 960,670
Mortgage loans held for sale .................. (12,816) (16,174) (17,008)
----------- -----------
Loans, net ........................................ $ 1,036,435 $ 1,032,594 $ 943,662
=========== =========== ===========
- ------------------------------
(1) Other loans primarily consist of one- to four-family equity lines of credit
secured by mortgages and business loans and loans for sale by Forward
Financial.
(2) Includes loans purchased from correspondent financial institutions which
are underwritten pursuant to BostonFed's policies and closed in the name of
the financial institution but immediately purchased by BostonFed for its
mortgage portfolio, mortgage banking activities, or for Community
Reinvestment Act purposes.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. BostonFed offers both fixed-rate
and adjustable-rate mortgage loans with maturities of generally up to thirty
years. The interest rates for the majority of BostonFed's adjustable-rate
mortgage loans are indexed to the Constant Maturity Treasury Index ("CMT
Index"). BostonFed currently offers fixed-rate mortgage loans with amortization
periods of five to thirty years and a number of adjustable-rate mortgage loan
programs with interest rates that adjust annually and have amortization
schedules ranging from ten to thirty years. BostonFed originates adjustable-rate
mortgage loans that have fixed interest rates for an initial period of one,
three, five or seven years and then adjust annually or a greater period
according to their terms. The one- to four-family adjustable-rate loan products
generally reprice based on a margin, currently 275 to 350 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 BostonFed's
adjustable-rate mortgage loans provide for periodic (generally 2%) and overall
caps (generally
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6%) on the increase or decrease in interest rate at any adjustment date and over
the life of the loan, respectively.
BostonFed generally originates one- to four-family residential mortgage
loans in amounts up to 80% of the appraised value or the selling price of the
property securing the loan, whichever is lower, and up to 95% of the appraised
value or selling price if private mortgage insurance is obtained for the portion
of the loan that exceeds 75% of the appraised value or selling price, whichever
is lower. However, BostonFed may on occasion originate single-family
owner-occupied mortgage loans in amounts up to 90% of the appraised value or
selling price, whichever is lower, without private mortgage insurance.
Generally, BostonFed originates mortgage loans with due-on-sale clauses which
provide BostonFed with the contractual right to treat the loan immediately due
and payable if a borrower transfers ownership of the property without
BostonFed's consent. These due-on-sale clauses are an important means of
adjusting the rates and maintaining quality on BostonFed's fixed-rate mortgage
loan portfolio. BostonFed has generally exercised its rights under these
clauses.
MULTI-FAMILY MORTGAGE LENDING. BostonFed originates multi-family
mortgage loans that are generally secured by five to 120 unit apartment
buildings. Its decision to make a multi-family loan is influenced by the value
of the underlying property as well as the qualifications of the borrower.
BostonFed also considers the following factors: 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. BostonFed generally requires a debt
service ratio of 115% or greater. Pursuant to BostonFed'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 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. Depending upon the creditworthiness of the borrower and
amount of the down payment, BostonFed may make an exception and not require a
personal guarantee, or may require limited recourse on such loans.
When evaluating the qualifications of the borrower for a multi-family
loan, BostonFed considers the borrower's financial resources and income level
and experience in owning or managing similar property, as well as BostonFed's
lending experience with the borrower. BostonFed's underwriting guidelines
require the borrower to demonstrate strong management skills and the ability to
maintain the property from current rental income. The borrower is also required
to present evidence of the ability to repay the mortgage and a history of making
mortgage payments on a timely basis. Generally, BostonFed assesses the
creditworthiness of a borrower by reviewing the financial and pro- forma
cash-flow statements on the property and the employment and credit history of
the guarantor, as well as other related documentation. At December 31, 2000, the
largest multi-family loan outstanding balance was a $2.2 million performing loan
secured by a 118 unit apartment complex located in Malden, Massachusetts.
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured by
multi-family properties often depend 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.
BostonFed seeks to minimize these risks through its underwriting policies.
COMMERCIAL REAL ESTATE LENDING. BostonFed originates commercial real
estate loans that are secured by properties generally used for business purposes
such as office buildings, retail facilities, hotels, manufacturing facilities,
etc. BostonFed's underwriting policies allow commercial real estate loans to be
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made in amounts up to the lesser of 85% of the appraised value of the property,
or BostonFed's current maximum loan limit. Currently, the maximum loan limit is
$7.5 million. However, BostonFed will generally not grant loans that exceed 80%
of the appraised value.
BostonFed currently originates commercial real estate loans with terms
of up to twenty-five years, the majority of which contain adjustable-rates and
are indexed primarily to the CMT or an FHLB Index. BostonFed generally applies
the same underwriting standards and procedures to commercial real estate loans
as it does for multi-family loans. BostonFed 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 exception, BostonFed may not require a
personal guarantee, or may require limited recourse on such loans depending on
the creditworthiness of the borrower and the amount of the down payment.
BostonFed's commercial real estate loan portfolio at December 31, 2000 was $89.4
million, or 8.3% of total loans. The largest commercial real estate loan
outstanding balance in BostonFed's portfolio at December 31, 2000 was a $3.4
million performing loan secured by an office building located in Cambridge,
Massachusetts.
Loans secured by commercial real estate properties are usually 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 depend 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. BostonFed seeks
to minimize these risks through its underwriting standards.
CONSTRUCTION AND LAND LENDING. BostonFed originates loans for the
acquisition and development of property to licensed and experienced contractors
in its primary market area. The majority of BostonFed's construction loans have
been made to finance the construction of one- to four-family residential
properties, multi-family residential buildings, commercial real estate, hotels
and other facilities. BostonFed originates loans secured by land, but it
generally does not originate such loans unless the borrower has also secured
sub-division approval to obtain financing for the construction of structures on
the property. These loans are primarily adjustable-rate loans with maturities of
less than two years.
BostonFed originates construction and land mortgage loans 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 ratio. BostonFed disburses proceeds of
the loans 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. On exception, BostonFed may
not require a personal guarantee, or may require limited recourse on such loans
depending on the credit worthiness of the borrower and the amount of the down
payment. Currently, BostonFed's maximum loan limit is $7.5 million. BostonFed's
largest construction and land loan outstanding balance at December 31, 2000 was
a performing loan of $5.9 million disbursed, with a remaining loan-in-process
balance of $1.1 million, secured by a hotel in Braintree, Massachusetts.
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 depends 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,
BostonFed may be confronted with a project, when completed, having a value which
is insufficient to assure full repayment.
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OTHER LENDING. Other loans consist 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 BostonFed'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 BostonFed's home equity lines of credit are
primarily secured by second mortgages on one- to two-family residences located
in BostonFed's primary market area. Generally, under the terms of BostonFed's
home equity lines of credit, borrowers may draw on such lines of credit and
repay outstanding interest on a monthly basis over a period of up to ten years.
Thereafter, the outstanding balance drawn on such lines of credit is converted
to an adjustable-rate loan with a term of up to ten years. BostonFed's
underwriting standards include evaluating an applicant's credit history and
assessing the applicant's ability to meet existing obligations and payments on
the proposed loan and the value of the collateral securing the loan.
BostonFed began originating loans to businesses and corporations in
1998. These loans, amounting to $26.5 million at December 31, 2000, are
generally secured by the assets of the borrowing entity. The most typical type
of loans generated for BostonFed are term loans and lines of credit. These loans
generally require the personal guaranty of the principals of the borrower.
Depending upon the creditworthiness of the borrower and if the loan to value
ratio is low, however, personal guarantees may not be required, or only a
limited recourse may be required on such loans. BostonFed has separate lending
guidelines and underwriting standards for this type of lending. These guidelines
currently limit the maximum loan to $7.5 million. The largest outstanding
business loan balance in BostonFed's portfolio as of December 31, 2000 was a
$4.3 million performing loan secured by the business assets of a realty company
located in Newton, Massachusetts.
Loans secured by rapidly depreciable assets such as equipment,
machinery, automobiles, etc., or that are secured by accounts receivable or
inventories or 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, because there is a greater likelihood of damage, loss
or depreciation of the underlying collateral. Further, loan collections on these
loans depend on the borrower's continuing financial stability and, therefore,
are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Substantially all of the consumer finance loans originated
by Forward Financial are sold without recourse and with servicing released.
Finally, various federal and state laws, including federal and state bankruptcy
and insolvency laws, may limit the amount which can be recovered on such loans
in the event of a default.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies and loan approval limits of the Banks. Such
limits are included in a matrix with the corresponding level of authority
requirements. At Boston Federal, Board of Directors' approval is generally
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 Broadway National, a similar matrix has been established and Board of
Directors' approval is required on all loans in excess of $500,000.
According to regulations of the Office of Thrift Supervision and Office
of the Comptroller of the Currency, loans to one borrower cannot, subject to
certain exceptions, exceed 15% of the Bank's unimpaired capital and surplus. At
December 31, 2000, the loans to one borrower limit was $11.9 million and $1.5
million for Boston Federal and Broadway National, respectively.
11
12
NONPERFORMING AND PROBLEM ASSETS
CLASSIFIED ASSETS. BostonFed's Asset Classification Policy and federal
regulations require that BostonFed use an internal asset classification system
as a means of reporting problem and potential problem assets. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets are inadequately protected by the collateral pledged, if any, or the
current net worth and paying capacity of the obligor and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. An asset classified
as loss is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as a loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset classified as loss. All or a portion of general loan loss allowances
established to cover probable losses related to assets classified substandard or
doubtful can be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that 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."
Boston Federal's Asset Classification Committee reviews and classifies
assets on a quarterly basis and reports the results of its review to the Board
of Directors. Broadway National's assets are reviewed by a non-lending officer
who reports classifications to the Broadway National Board on a quarterly basis.
BostonFed classifies assets according to management guidelines described above.
At December 31, 2000, BostonFed had, on a consolidated basis, $4.3 million of
assets designated as "special mention," $3.1 million of assets designated as
"substandard," $201,000 of assets designated as "doubtful" and $848,000 of
assets designated as "loss." All assets classified as "loss" have been charged
off for financial statement purposes. Included in these amounts was $956,000 in
non-performing loans at December 31, 2000. In the opinion of management, the
remaining "special mention" and "substandard" loans of $6.4 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.
12
13
The following table sets forth delinquencies in BostonFed's loan
portfolio as of the dates indicated:
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
-------------------------------------------- -----------------------------------------
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)
Residential:
One- to four-family ..... 7 $1,276 4 $ 418 10 $1,568 6 $ 721
Multi-family ............ -- -- -- -- -- -- -- --
Commercial real estate ....... 1 132 -- -- 2 287 -- --
Construction and land ........ -- -- -- -- -- -- -- --
Other loans .................. 3 71 6 538 2 245 -- --
------ ------ ------ ------ ------ ------ ------ ------
Total ................. 11 $1,479 10 $ 956 14 $2,100 6 $ 721
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to loans, net
and mortgage loans
held for sale............ 0.20% 0.07%
AT DECEMBER 31, 1998
--------------------------------------------
60-89 DAYS 90 DAYS OR MORE
--------------------- --------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Residential:
One- to four-family ..... 16 $1,625 12 $ 618
Multi-family ............ -- -- -- --
Commercial real estate ....... -- -- -- --
Construction and land ........ -- -- -- --
Other loans .................. 4 121 -- --
------ ------ ------ ------
Total ................... 20 $1,746 12 $ 618
====== ====== ====== ======
Delinquent loans to loans, net
and mortgage loans
held for sale.................... 0.18% 0.06%
13
14
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS. The following table sets
forth information regarding non-accrual loans, restructured loans and real
estate owned. At December 31, 2000, there was one restructured loan totalling
$206,000. Real estate owned, net, totalled $145,000, consisting of one property.
It is the policy of BostonFed to cease accruing interest on loans 90 days or
more past due and charging off all accrued interest. For the years ended
December 31, 2000, 1999, 1998, 1997 and 1996, 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 $40,000,
$(2,000), $33,000, $149,000 and $103,000, 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 $0, $2,000, $1,000, $1,000 and
$73,000, respectively.
AT DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Residential real estate:
One- to four-family .............. $ 418 $ 721 $ 784 $ 941 $1,463
Multi-family ..................... -- -- -- -- --
Commercial real estate ............. -- 25 25 458 25
Other loans ........................ 538 -- -- 6 14
-------- -------- -------- ------- -------
Total ......................... 956 746 809 1,405 1,502
Real estate owned, net(1) ............ 145 376 47 195 2,668
-------- -------- -------- ------- -------
Total non-performing assets ... 1,101 1,122 856 1,600 4,170
Restructured loans ................... 206 210 213 369 2,489
-------- -------- -------- ------- -------
Total risk elements .................. $1,307 $1,332 $1,069 $1,969 $6,659
======== ======== ======== ======= =======
Allowance for loan losses as a percent
of loans(2) ........................ 1.07% 1.01% 0.88% 0.82% 0.64%
Allowance for loan losses as a percent
of non-performing loans(3) ......... 1,190.48 1,428.15 1,050.68 469.75 292.94
Non-performing loans as a percent
of loans(2), (3) ................... 0.09 0.07 0.09 0.17 0.22
Non-performing assets as a percent ... 0.08 0.09 0.08 0.16 0.51
of total assets(4) .................
- ----------------------------
(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 BostonFed as presenting uncertainty
with respect to the collectibility of interest or principal.
(3) Real estate owned balances are shown net of related valuation allowances.
(4) Non-performing assets consist of non-performing loans and real estate
owned.
14
15
At December 31, 2000, loans which were characterized as impaired
pursuant to Statement of Accounting Standards 114 and 118 totalled $206,000. 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, 2000, the average recorded value of impaired
loans was $228,000, interest income of $15,000 was recognized, all of which was
recorded on a cash basis, and $15,000 of interest income would have been
recognized under original terms.
AT DECEMBER 31,
--------------------------------
2000 1999 1998
----- ----- -----
(IN THOUSANDS)
Impaired loans:
Multi-family real estate............ $ -- $ -- $245
Commercial real estate.............. 206 235 238
----- ----- -----
Total.......................... $206 $235 $483
==== ==== ====
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.
Management believes the allowance is adequate to absorb probable loan
losses. Management's methodology to estimate loss exposure inherent in the
portfolio includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience and an unallocated allowance that is maintained based on management's
assessment of many factors including 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
judgements 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.
Amounts provided for the years 2000, 1999 and 1998 were $1.0 million,
$1.6 million and $1.6 million, respectively. The decrease in the provision for
the year ended December 31, 2000 was due to continued low levels of
non-performing loans and improved coverage ratio of allowance for loan losses as
a percent of loans. During the year ended December 31, 2000, there were
recoveries of $181,000 credited to, and charge-offs of, $454,000 taken against
this allowance. As of December 31, 2000, the Company's allowance for loan losses
was 1.07% of total loans compared to 1.01% as of December 31, 1999. Management
believes the increased coverage ratio in 2000 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 $236.6 million at December 31, 1999
15
16
to $286.5 million at December 31, 2000, an increase of 21%. These loans
aggregated to 27.6% and 22.9% of the total loans at December 31, 2000 and 1999,
respectively. The Company had non-performing loans of $956,000 and $746,000 at
December 31, 2000 and December 31, 1999, respectively. The Company will continue
to monitor and modify its allowance for loan losses as conditions dictate. While
management believes the Company's allowance for loan losses is sufficient to
cover losses inherent in its loan portfolio at this time, no assurances can be
given that the Company's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Company or that future adjustments
to the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of allowance for loan losses.
The following table sets forth activity in BostonFed's allowance for
loan losses for the periods set forth in the following table.
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance at beginning of period ............ $ 10,654 $ 8,500 $ 6,600 $ 4,400 $ 4,275
Broadway National allowance for loan losses
at acquisition date .................... -- -- -- 620 --
Forward Financial allowance for loan
losses at acquisition date ............. -- 170 -- -- --
Provision for loan losses ................. 1,000 1,626 1,642 1,696 1,294
Charge-offs:
Real estate loans:
Residential:
One- to four-family ................... 125 19 51 370 387
Multi-family .......................... -- 1 2 84 263
Commercial .............................. -- -- 75 45 664
Other ................................... 329 36 131 16 198
-------- -------- -------- -------- --------
Total ................................ 454 56 259 515 1,512
Recoveries ................................ 181 414 517 399 343
-------- -------- -------- -------- --------
Balance at end of period .................. $ 11,381 $ 10,654 $ 8,500 $ 6,600 $ 4,400
======== ======== ======== ======== ========
Ratio of net charge-offs (net recoveries)
during the period to average loans
outstanding during the period........ 0.03% (0.04)% (0.03)% 0.02% 0.19%
======== ======== ======== ======== ========
16
17
The following tables set forth BostonFed'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.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
2000 1999
------------------------------------------- -------------------------------------------
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)
Residential:
One- to four-family. $ 2,883 25.33% 73.33% $ 2,872 26.96% 77.85%
Multi-family........ 252 2.21 1.78 209 1.96 2.02
Commercial real estate 1,905 16.74 8.18 2,090 19.62 6.99
Construction and land. 1,239 10.89 8.48 1,285 12.06 7.09
Other loans........... 1,410 12.39 8.23 1,029 9.66 6.05
Unallocated........... 3,692 32.44 -- 3,169 29.74 --
------- ------ ------ ------- ------ ------
Total allowance
for loan losses. $11,381 100.00% 100.00% $10,654 100.00% 100.00%
======= ====== ====== ======= ====== ======
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ----------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- --------- --------- ------- ---------- --------- ------- --------- --------
(DOLLARS IN THOUSANDS)
Residential:
One- to four-family $2,186 25.72% 84.27% $1,997 30.26% 86.11% $1,899 43.16% 88.00%
Multi-family........ 214 2.52 2.33 206 3.12 2.32 274 6.23 3.10
Commercial real
estate............. 615 7.24 4.97 369 5.59 4.46 451 10.25 4.07
Construction
and land........... 3 0.03 4.23 152 2.30 2.51 463 10.52 1.81
Other loans........... 731 8.60 4.20 266 4.03 4.60 61 1.39 3.02
Unallocated........... 4,751 55.89 -- 3,610 54.70 -- 1,252 28.45 --
----- ----- ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses $8,500 100.00% 100.00% $6,600 100.00% 100.00% $4,400 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
17
18
REAL ESTATE OWNED
At December 31, 2000, BostonFed had $145,000 of real estate owned, net
of valuation allowances. When BostonFed 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, BostonFed provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of BostonFed to obtain an appraisal on all real estate subject to foreclosure
proceedings prior to the time of foreclosure and continue to appraise foreclosed
properties and conduct inspections on a periodic basis.
INVESTMENT ACTIVITIES
The investment policy of BostonFed, 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 BostonFed's lending activities. Generally, BostonFed's
investment policy is more restrictive than federal regulations allow.
Accordingly, BostonFed has invested primarily in United States government and
agency securities, mutual funds which qualify as liquid assets under the Office
of Thrift Supervision regulations, federal funds and U.S. government-sponsored
agency issued mortgage- backed securities and privately-issued collateralized
mortgage obligations ("CMO's"). As required by the Statement of Financial
Accounting Standards No. 115, BostonFed has established an investment portfolio
of securities that are categorized as held to maturity, available for sale or
held for trading. BostonFed does not currently maintain a portfolio of
securities categorized as held for trading. 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, according to BostonFed'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. On a quarterly basis, BostonFed's Board, Boston
Federal's Investment Committee and Broadway National's Board are provided with
activity reports at their respective meetings and summaries of the held to
maturity and available for sale investment portfolios for their respective
banks.
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.
18
19
The following table sets forth the composition of BostonFed's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ---------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities:
Ginnie Mae(1), (2)........................ $10,829 15.33% $13,201 44.78% $22,627 51.49%
Freddie Mac(3), (4)....................... 48,675 68.89 5,965 20.23 5,684 12.94
Fannie Mae(5) ............................ 1,915 2.71 3,263 11.07 428 0.97
Privately issued collateralized
mortgage obligations(6), (7)............ 9,236 13.07 7,052 23.92 15,203 34.60
------- ------ ------- ------ ------- ------
Total mortgage-backed securities........ 70,655 100.00% 29,481 100.00% 43,942 100.00%
====== ====== ======
Less:
Mortgage-backed securities available for
sale - Ginnie Mae(2).................... -- -- 5,982
Mortgage-backed securities available
for sale - Freddie Mac(4)............... 4,367 5,484 5,002
Mortgage-backed securities available for
sale - Fannie Mae...................... 1,769 3,004 --
Privately issued collateralized mortgage
obligations(7)......................... 9,236 7,052 10,045
------- ------- -------
Mortgage-backed securities
held to maturity......................... $55,283 $13,941 $22,913
======= ======= =======
- --------------------
(1) Includes $64,994, $78,000 and $151,000 of unamortized premiums related to
Ginnie Mae securities as of December 31, 2000, 1999 and 1998, respectively.
(2) Is net of unrealized gains of $0, $0 and $65,000 at December 31, 2000, 1999
and 1998, respectively.
(3) Includes $52,490, $66,000 and $104,000 of unamortized premiums related to
Freddie Mac securities as of December 31, 2000, 1999 and 1998,
respectively.
(4) Is net of unrealized loss of $27,000 at December 31, 2000, unrealized loss
of $75,000 at December 31, 1999, and an unrealized gain of $6,000 at
December 31, 1998.
(5) Includes $9,191, $3,747 and $0 of unamortized premiums related to Fannie
Mae at December 31, 2000, 1999, and 1998, respectively.
(6) Includes $57,426, $80,948 and $4,858 of unamortized discounts related to
privately issued collateralized mortgage obligations at December 31, 2000,
1999 and 1998, respectively.
(7) Is net of unrealized loss of $125,000 at December 31, 2000, unrealized loss
of $266,000 at December 31, 1999, and unrealized gain of $22,000 at
December 31, 1998.
19
20
The following tables set forth BostonFed's mortgage-backed securities
activities for the periods indicated:
FOR THE YEAR
ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Beginning balance .................................... $ 29,481 $ 43,942 $ 57,475
Mortgage-backed securities purchased
available for sale ........................ 1,986 5,005 10,856
Conversion of real estate loans to mortgage-backed
securities held to maturity ............... 50,975 -- --
Less:
Sale of mortgage-backed securities
available for sale ............................ -- (4,062) --
Principal repayments ............................ (11,963) (14,892) (24,275)
Change in unrealized gains (losses) ............. 225 (435) (24)
Accretion of premium, net of discount ........... (49) (77) (90)
-------- -------- --------
Ending balance ....................................... $ 70,655 $ 29,481 $ 43,942
======== ======== ========
The following table sets forth certain information regarding the
carrying amount and fair values of BostonFed's mortgage-backed securities at the
dates indicated:
AT DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
Mortgage-backed securities:
Held to maturity:
Ginnie Mae .................... $10,829 $10,872 $13,201 $13,297 $16,645 $16,991
Fannie Mae .................... 146 147 259 252 428 438
Freddie Mac ................... 44,308 43,951 481 481 682 695
Privately issued collateralized
mortgage obligations ....... -- -- -- -- 5,158 5,209
------- ------- ------- ------- ------- -------
Total held to maturity ........ 55,283 54,970 13,941 14,030 22,913 23,333
------- ------- ------- ------- ------- -------
Available for sale:
Ginnie Mae .................... -- -- -- -- 5,982 5,982
Fannie Mae .................... 1,769 1,769 3,004 3,004 -- --
Freddie Mac ................... 4,367 4,367 5,484 5,484 5,002 5,002
Privately issued collateralized
mortgage obligations........ 9,236 9,236 7,052 7,052 10,045 10,045
------- ------- ------- ------- ------- -------
Total available for sale ... 15,372 15,372 15,540 15,540 21,029 21,029
------- ------- ------- ------- ------- -------
Total mortgage-backed
securities ............... $70,655 $70,342 $29,481 $29,570 $43,942 $44,362
======= ======= ======= ======= ======= =======
20
21
The following table sets forth certain information regarding the
carrying amount and fair values of BostonFed's short-term investments and
investment securities at the dates indicated:
AT DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
Daily federal funds sold and
short-term investments ................ $ 9,176 $ 9,176 $ 2,815 $ 2,815 $18,068 $18,068
Investment securities:
Held to maturity:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 2,304 2,328 2,304 2,275 7,302 7,371
------- ------- ------- ------- ------- -------
Total held to maturity ................... 2,304 2,328 2,304 2,275 7,302 7,371
------- ------- ------- ------- ------- -------
Available for sale:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 41,993 41,993 33,641 33,641 29,356 29,356
Mortgage-related mutual funds ...... 17,424 17,424 16,193 16,193 16,031 16,031
Other mutual funds(1) .............. 1,278 1,278 1,960 1,960 1,974 1,974
Marketable Equity Securities--
Common Stock ...................... 2,726 2,726 1,409 1,409 1,776 1,776
------- ------- ------- ------- ------- -------
Total available for sale ........ 63,421 63,421 53,203 53,203 49,137 49,137
------- ------- ------- ------- ------- -------
Total investment securities .............. $74,901 $74,925 $58,322 $58,293 $74,507 $74,576
======= ======= ======= ======= ======= =======
- ------------------------------
(1) Consists of securities issued by an institutional mutual fund which
primarily invests in short-term U.S. Government securities.
21
22
The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of BostonFed's
short-term investments, debt securities and mortgage-backed securities as of
December 31, 2000.
AT DECEMBER 31, 2000
-------------------------------------------------------------------
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)
Daily federal funds sold and short-term investments ....... $ 9,176 5.79% $ -- --% $ -- --%
Debt Securities:
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations ................... 250 7.72 2,054 6.17 -- --
------- ---- ------ ---- ------- -------
Total held to maturity ........................... 250 7.72 2,054 6.17 -- --
------- ---- ------ ---- ------- -------
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations ................... 2,501 6.55 17,806 6.64 15,924 6.76
------- ---- ------ ---- ------- -------
Total debt securities available for sale ... 2,501 6.55 17,806 6.64 15,924 6.76
------- ---- ------ ---- ------- -------
Total short-term investments and debt securities .......... 11,927 5.99 19,860 6.59 15,924 6.76
======= ==== ====== ==== ======= =======
Mortgage-backed securities:
Held to maturity:
Fannie Mae ........................................... -- -- 146 7.00 -- --
Ginnie Mae ........................................... -- -- 249 8.37 1,202 8.18
Freddie Mac .......................................... -- -- 270 7.00 213 7.00
------- ------ -------
Total held to maturity ........................... -- -- 665 7.49 1,415 8.02
------- ---- ------ ---- ------- -------
Available for sale:
Freddie Mac .......................................... -- -- 2,552 6.42 1,815 7.01
Fannie Mae ........................................... -- -- -- -- -- --
Privately issued collateralized mortgage obligation -- -- -- -- -- --
------- ------ ------- -------
Total available for sale............................ -- -- 2,552 6.42 1,815 7.01
------- ---- ------ ---- ------- -------
Total mortgage-backed securities ................. -- 6.50% $ 3,217 6.65% $ 3,230 7.45%
======= ==== ======= ==== ======= =======
AT DECEMBER 31, 2000
--------------------------------------------
MORE THAN TEN YEARS TOTAL
--------------------- ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD
--------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Daily federal funds sold and short-term investments ....... $ -- --% $ 9,176 5.79%
Debt 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 ................... 5,762 6.66 41,993 6.68
------- -------
Total debt securities available for sale ... 5,762 6.66 41,993 6.61
Total short-term investments and debt securities .......... 5,762 6.66 53,473 6.50
======= ===== ======= ====
Mortgage-backed securities:
Held to maturity:
Fannie Mae ........................................... -- -- 146 7.00
Ginnie Mae ........................................... 9,378 7.01 10,829 7.17
Freddie Mac .......................................... 43,825 5.79 44,308 5.80
Total held to maturity ........................... 53,203 6.00 55,283 6.07
------- ----- ------- ----
Held for sale:
Freddie Mac .......................................... -- -- 4,367 6.67
Fannie Mae ........................................... 1,769 7.97 1,769 7.97
Privately issued collateralized mortgage obligation 9,236 6.87 9,236 6.87
Total held for sale ................................ 11,005 7.04 15,372 6.93
------- -------
Total mortgage-backed securities ................. $64,208 6.18% $70,655 6.26%
======= ===== ======= ====
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SOURCES OF FUNDS
GENERAL. Retail deposits, wholesale brokered deposits, loan repayments
and prepayments, proceeds from sales of loans, cash flows generated from
operations and Federal Home Loan Board advances are the primary sources of
BostonFed's funds for use in lending, investing and for other general purposes.
DEPOSITS. BostonFed offers a variety of deposit accounts with a range
of interest rates and terms. BostonFed's deposits consist of savings, NOW
accounts, checking accounts, money market accounts and certificate accounts. For
the year ended December 31, 2000, core deposits represented 48.7% of total
average deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. BostonFed's deposits are obtained predominantly from the areas
in which its branch offices are located. BostonFed 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
BostonFed's ability to attract and retain deposits. BostonFed 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 declined by $17.9 million during
2000 and increased by $53.7 million during 1999.
The following table presents the deposit activity of BostonFed for the
periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Net increase in deposits .................... $47,873 $37,033 $63,456
Interest credited on deposit accounts ....... 31,725 25,872 23,867
Total increase (decrease) in deposit accounts $79,598 $62,905 $87,323
======= ======= =======
At December 31, 2000, BostonFed had $53.8 million in certificate
accounts in amounts of $100,000 or more (excluding wholesale deposits) maturing
as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------------------------- --------- ---------------------------
(DOLLARS IN THOUSANDS)
Three months or less............. $12,763 5.72%
Over 3 through 6 months.......... 14,922 5.93
Over 6 through 12 months......... 15,301 6.45
Over 12 months................... 10,814 6.57
-------
Total............................ $53,800 6.16%
=======
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The following table sets forth the distribution of BostonFed's average
deposit accounts for the periods indicated and the average cost on each category
of deposits presented.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- -------------------------- ---------------------------
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)
Money market deposit accounts $ 55,796 6.81% 2.86% $ 59,279 8.24% 2.86% $ 62,739 9.56% 2.93%
Savings accounts............. 160,118 19.55 2.80 142,399 19.81 2.48 121,092 18.45 2.48
NOW accounts................. 119,070 14.54 0.76 110,684 15.39 0.80 104,532 15.94 1.11
Non-interest-bearing accounts 64,176 7.83 -- 49,944 6.95 -- 54,808 8.36 --
-------- ------ -------- ------ -------- -----
Total................... 399,160 48.73 1.75 362,306 50.39 1.69 343,171 52.31 1.75
-------- ------ -------- ------ -------- -----
Certificate accounts:
Less than six months...... 25,127 3.07 5.18 25,657 3.57 4.17 29,423 4.49 4.99
Over six through 12 months 29,967 3.66 5.41 39,741 5.53 3.63 42,483 6.48 5.42
Over 12 through 36 months. 317,884 38.80 6.10 241,689 33.62 6.00 187,285 28.55 6.02
Over 36 months............ 4,952 0.60 6.12 4,236 0.59 5.82 5,442 0.83 5.67
IRA/KEOGH................. 42,101 5.14 5.53 45,345 6.31 5.49 48,177 7.34 5.73
-------- ------ -------- ------ -------- ------
Total certificate accounts 420,031 51.27 5.89 356,668 49.61 5.54 312,810 47.69 5.79
-------- ------ -------- ------ -------- ------
Total average deposits $819,191 100.00% 3.87 $718,974 100.00% 3.60 $655,981 100.00% 3.68
======== ======= ======== ====== ======== ======
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, 2000.
PERIOD TO MATURITY FROM DECEMBER 31, 2000 AT DECEMBER 31,
--------------------------------------------------------- --------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 2000 1999 1998
--------- --------- ----------- ----------- --------- --------- --------- ----------
(IN THOUSANDS)
Certificate accounts:
0 to 4.00%............ $ -- $ -- $ -- $ -- $ -- $ -- $ 2,636 $ 1,447
4.01 to 5.00%......... 18,944 4,907 762 626 -- 25,239 101,858 46,814
5.01 to 6.00%......... 132,538 8,025 5,888 1,113 1,231 148,795 158,397 255,263
6.01 to 7.00%......... 94,088 47,942 27,827 12,115 24,166 206,138 136,497 35,135
7.01 to 8.00%......... 7,035 12,420 10,027 5,242 1,830 36,554 -- --
--------- ------- -------- --------- ------- -------- -------- --------
Total.............. $ 252,605 $73,294 $ 44,504 $ 19,096 $27,227 $416,726 $399,388 $338,659
========= ======= ======== ========= ======= ======== ======== ========
BORROWINGS. BostonFed utilizes advances from the Federal Home Loan Bank
as an alternative to retail deposits to fund its operations and may do so in the
future as part of its operating strategy. These Federal Home Loan Bank advances
are collateralized primarily by certain of BostonFed's mortgage loans and
mortgage-backed securities and secondarily by BostonFed's investment in capital
stock of the Federal Home Loan Bank. Federal Home Loan Bank 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 Federal Home
Loan Bank will advance to member institutions, fluctuates from time to time in
accordance with the policies of the Office of Thrift Supervision, Office of
Comptroller of the Currency and the Federal Home Loan Bank. During the year
ended December 31, 2000, BostonFed decreased its net borrowings from the Federal
Home Loan Bank by $40.2 million to a balance of $344.3 million.
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The following tables set forth certain information regarding
BostonFed's borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE YEAR
ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- --------- --------
(DOLLARS IN THOUSANDS)
Federal Home Loan Board advances:
Average balance outstanding ......... $363,771 $367,484 $306,575
Maximum amount outstanding at
any month-end during the period .. 383,954 390,500 337,500
Balance outstanding at end of period 344,334 384,500 337,500
Weighted average interest rate
during the period ................ 6.10% 5.77% 5.94%
Weighted average interest rate at end
of period ....................... 6.19% 5.80% 5.69%
AT OR FOR THE YEAR
ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- --------- --------
(DOLLARS IN THOUSANDS)
Other Borrowed Money:
Average balance outstanding ............ $2,679 $ 365 $1,616
Maximum amount outstanding at
any month-end during the period ..... 5,000 3,055 7,140
Balance outstanding at end of period ... 0 3,055 0
Weighted average interest rate
during the period ................. 9.97% 9.21% 6.05%
Weighted average interest rate at end
of period .......................... N/A 9.25% N/A
CORPORATION OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES
On July 12, 2000, the Company sponsored the creation of BFD Preferred
Capital Trust I ("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 $10.0 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 $10.3 million 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 ("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 II issued $22.0 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 $22.7 million aggregate principal amount of the Company's
10.875% Junior Subordinated Debentures due October 1, 2030, which constitute the
sole assets of the Trust II. 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.
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SUBSIDIARY ACTIVITIES
Leader Corporation incorporated under Massachusetts law, is a wholly
owned subsidiary of Boston Federal.
In 1994, Boston Federal, through Leader Corporation, entered into an
agreement with Liberty Financial, a third party securities broker, to offer
various uninsured investment products to Boston Federal's customers. Leader
Corporation entered into a contract with such third party brokerage concern to
perform brokerage services in segregated areas of Boston Federal's branches.
Under this contract, Liberty Financial leases space from Boston Federal at
Boston Federal's branch locations, pays rent and a percentage of sales to Leader
Corporation. Leader Corporation had net income of $202,000 and $33,000,
respectively, for the years ended December 31, 2000 and 1999.
Forward Financial was acquired by Boston Federal in December 1999.
Forward Financial is incorporated under Massachusetts law and operates as a
subsidiary of Boston Federal. It originates loans, primarily direct with
consumers purchasing or refinancing manufactured housing, recreational vehicles,
and boats. To a lesser extent, Foward Financial originates real estate mortgages
near its headquarters for its own portfolio and for sale. Forward Financial
operates in approximately twenty-six states from its headquarters in
Northborough, Massachusetts and three other offices. It sells the vast majority
of the consumer loans it originates to third party client lenders.
Ellsmere Insurance Agency, Inc. was acquired by Broadway National in
December 1999. It is incorporated under Massachusetts law and has limited
operations as a subsidiary of Broadway National. It earns finder fees for
customer referrals to insurance companies.
PERSONNEL
As of December 31, 2000, BostonFed had 351 authorized full-time
employee positions and 76 authorized part-time employee positions, for a total
of approximately 384 full time equivalents. The employees are not represented by
a collective bargaining unit and BostonFed considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
GENERAL
As a result of BostonFed's acquisition of Broadway National in February
1997, BostonFed became a bank holding company and ceased to be a savings and
loan holding company. BostonFed, 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 Boston Federal, 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.
Boston Federal is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
back-up regulator. Boston Federal's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. Boston Federal 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. Broadway National is subject to extensive
regulation, examination and
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supervision by the OCC, as its primary federal regulator, and the FDIC, as the
back-up regulator. Broadway National'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 Boston Federal's
and Broadway National'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 BostonFed, Boston Federal
and/or Broadway National and their operations. Certain of the regulatory
requirements applicable to BostonFed, Boston Federal and to Broadway National
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 BostonFed,
Boston Federal and Broadway National.
FEDERAL HOME LOAN BANK OF BOSTON
Both Boston Federal and Broadway National are members of the Federal
Home Loan Bank of Boston, one of 12 regional Federal Home Loan Banks. The
Federal Home Loan Bank provides a central credit facility primarily for
stockholder member institutions. The Banks, as stockholders 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 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. Boston Federal and
Broadway National were in compliance with this requirement with investments in
Federal Home Loan Bank stock at December 31, 2000 of $19.5 million and $807,000,
respectively.
The Federal Home Loan Banks were 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, 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 the acquisition of Broadway National,
BostonFed became a multi-bank holding company subject to examination,
regulation, and periodic reporting under the BHCA, as administered by the
Federal Reserve Bank of Boston ("FRB").
BostonFed 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 BostonFed 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, BostonFed 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
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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.
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. BostonFed
has not opted to become a financial services holding company.
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 Boston Federal, 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 Boston Federal and the OCC for
Broadway National. See "Capital Requirements." BostonFed'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 BostonFed's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. 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 BostonFed to pay dividends or otherwise
engage in capital distributions.
The status of BostonFed 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.
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29
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.
BostonFed 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
BostonFed to accurately predict future changes in monetary policy or the effect
of such changes on the business or financial condition of BostonFed, Boston
Federal or Broadway National.
STATE REGULATION. BostonFed 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 BostonFed 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
BostonFed's outstanding voting stock, unless the FRB has found that the
acquisition will not result in a change in control of BostonFed. Under the
CIBCA, the FRB has 60 days from the filing of a complete notice to act, taking
into consideration certain factors, including the financial and managerial
resources of the acquirer and the anti-trust effects of the acquisition.
Under the BHCA, any company would be required to obtain prior approval
from the FRB before it may obtain "control" of BostonFed within the meaning of
the BHCA. Control generally is defined to mean the ownership or power to vote
25% or more of any class of voting securities of BostonFed or the ability to
control in any manner the election of a majority of BostonFed'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 BostonFed's voting
stock. See "--Holding Company Regulation." Approval of the Massachusetts Board
of Bank Incorporation may also be required for acquisition of BostonFed 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
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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.
BostonFed 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%.
The following table presents Boston Federal's and Broadway National's
capital position at December 31, 2000 relative to regulatory requirements.
FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
As of December 31, 2000
Risk-based Total Capital:
Boston Federal..... $77,766 10.8% $57,585 8.0% $71,981 10.0%
Broadway National.. 10,168 14.0 5,812 8.0 7,266 10.0
Core Capital:
Boston Federal..... 68,781 5.9 46,363 4.0 57,953 5.0
Broadway National 9,456 6.5 5,824 4.0 7,281 5.0
Risk-based Tier I Capital:
Boston Federal..... 68,781 9.6 28,792 4.0 43,188 6.0
Broadway National 9,456 13.0 2,906 4.0 4,359 6.0
Tangible Capital:
Boston Federal..... 68,781 5.9 23,181 2.0 57,953 5.0
BostonFed's regulatory capital ratios at December 31, 2000 were 7.8%,
12.7% and 14.2% for Tier 1 leverage ratio, Tier 1 capital ratios and total
capital ratios, respectively.
PROMPT CORRECTIVE REGULATORY ACTION. The Office of Thrift Supervision
and Office of Comptroller of the Currency 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
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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 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 Boston Federal and Broadway
National 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 both SAIF and BIF
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.
Boston Federal's and Broadway National's FDIC assessment rate for
fiscal 2000 was 0 basis points. A significant increase in FDIC insurance
premiums would likely have an adverse effect on the operating expenses and
results of operations of BostonFed.
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. By law, there
was equal sharing of FICO payments between SAIF and BIF members beginning on
January 1, 2000. FICO payments during 2000 were $139,000 for Boston Federal and
$25,000 for Broadway National. These payments approximated 2.07 basis points.
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 Boston Federal and Broadway National 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, 2000, Boston
Federal's limit on loans to one borrower was $11.9 million and Broadway
National's limit was $1.5 million. At December 31, 2000, Boston Federal's
largest aggregate
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outstanding balance of loans and outstanding commitments to one borrower was
$7.1 million and Broadway National's largest aggregate outstanding balance of
loans and outstanding commitments to one borrower was $932,000.
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 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, 2000, Boston Federal 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 Broadway National 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. Under the 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 Boston Federal's capital
fell below its regulatory requirements or the OTS notified it that it was in
need of more than normal supervision, Boston Federal'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.
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, 2000, Broadway
National met all applicable regulatory capital standards.
LIQUIDITY. During 2000, Boston Federal was 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 was 4%. Monetary
penalties could have been imposed for failure to meet these liquidity
requirements. Boston Federal's liquidity ratio for December 31, 2000 was 13.66%,
which exceeded the applicable requirement. Broadway National, under OCC
regulations, is not subject to separate regulatory liquidity requirements.
Recent legislation has repealed the liquidity requirement applicable to savings
associations such as Boston Federal.
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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 Boston Federal's latest
quarterly thrift financial report. The assessments paid by Boston Federal for
the fiscal year ended December 31, 2000 totalled $197,000.
National banks pay semi-annual assessments to the OCC to fund its
operations based on asset size. Such assessments for Broadway National amounted
to $47,000 for the year ended December 31, 2000.
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") provided 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 Broadway National 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 BostonFed) 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 Boston Federal
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 Boston Federal and Broadway National 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
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requires certain board approval procedures to be followed. Both banks have
complied with Regulation O requirements.
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 BostonFed.
Neither BostonFed nor the Banks 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 $42.8 million or less (subject to adjustment by the FRB) the reserve
requirement is 3%; and for accounts aggregating greater than $42.8 million, a
reserve requirement of 10% (subject to adjustment by the FRB between 8% and 14%)
is applied against that portion of total transaction accounts in excess of $42.8
million. The first $5.5 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. Boston Federal and Broadway National are in compliance with these
requirements.
FEDERAL SECURITIES LAWS
BostonFed's common stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). BostonFed is
subject to the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
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Shares of the common stock purchased by persons who are not affiliates
of BostonFed may be resold without registration. Shares purchased by an
affiliate of BostonFed will be subject to the resale restrictions of Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). If
BostonFed meets the current public information requirements of Rule 144 under
the Securities Act, each affiliate of BostonFed 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 BostonFed
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 BostonFed to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. BostonFed 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 Boston Federal's reserve for bad debts
discussed below. Broadway National also reports its income on a consolidated
basis with BostonFed and Boston Federal. 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 BostonFed. For its 2000
taxable year, BostonFed 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, Boston Federal is not permitted to make additions to its tax bad
debt reserves. In addition, Boston Federal 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. BostonFed 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 Boston Federal makes
"non-dividend distributions" to BostonFed, such distributions will be considered
to have been made from Boston Federal's unrecaptured tax bad debt reserves
(including the balance of its reserves as of December 31, 1987) to the extent
thereof, and then from its supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in Boston Federal's income.
Non-dividend distributions include distributions in excess of Boston Federal's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of Boston Federal's current or
accumulated earnings and profits will not be so included in Boston Federal's
income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if Boston Federal makes a non-dividend
distribution to BostonFed, approximately one and one-half times the amount of
such
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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. Boston Federal does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves. The bad
debt reserves subject to recapture amount to $13.3 million for which no deferred
taxes have been provided.
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%.
BostonFed'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 Boston Federal and Broadway National 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. BostonFed 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." BostonFed believes it will continue to qualify as a
securities corporation because a separate subsidiary was formed to make the loan
to Boston Federal's Employee Stock Ownership Plan and BostonFed's other
activities qualify as activities permissible for a securities corporation. If it
were determined that BostonFed 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, BostonFed 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. Forward Financial files state tax returns in various states it
operates in accordance with state tax requirements.
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ITEM 2. PROPERTIES.
The Company conducts its business through Boston Federal and Broadway
National which operate through a home office in Burlington, Massachusetts and
eight other offices. BostonFed believes its current facilities are adequate to
meet the present and immediately foreseeable needs of BostonFed.
ORIGINAL NET BOOK VALUE OF
YEAR PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 2000
- ---------- ---------- ---------- ----------------- ---------------------
(In thousands)
ADMINISTRATIVE/BRANCH/HOME
OFFICE:
17 New England Executive Park Leased 1988 November, 2008 $ 2,572
Burlington, MA 01803
BRANCH OFFICES:
980 Massachusetts Avenue Owned 1976 -- 436
Arlington, MA 02174
60 The Great Road Owned 1971 -- 435
Bedford, MA 01730
449 Boston Road Leased 2000 August, 2017 1,382
Billerica, MA 01821
451 Boston Road(1) Owned 1972 -- 297
Billerica, MA 0182
75 Federal Street Leased 1988 August, 2003 72
Boston, MA 02110
457 Broadway Owned 1969 -- 670
Chelsea, MA 02150
1840 Massachusetts Avenue Owned 1960 -- 1,000
Lexington, MA 02173
31 Cross Street Owned 1971 -- 446
Peabody, MA 01960
411 Broadway Owned 1977 -- 1,128
Revere, MA 02150
200 Linden Street Leased 1973 November, 2003 110
Wellesley, MA 02181
280 Montvale Avenue Owned 2000 -- 1,923
Woburn, MA 02476
Forward Financial Co. Leased with various terms and locations. 176
360 Church Street -------
Northboro, MA 01532
Total............................ $10,647
=======
(1) Office is closed. Sale is pending.
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ITEM 3. LEGAL PROCEEDINGS.
Except as described below, BostonFed 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 BostonFed's financial condition
or results of operations.
Broadway National was named a defendant in the Superior Court for
Suffolk County, Massachusetts, civil action 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. Plaintiff alleges that Broadway
National knew or should have known of the alleged fraudulent actions of
Plaintiff's officer, and that Broadway National 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 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 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 BostonFed.
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 BostonFed's common equity and
related stockholder matters appearing under "Shareholder Information" in
BostonFed's 2000 Annual Report to Shareholders is incorporated herein by
reference. Information relating to dividend restrictions for BostonFed's common
stock appears under "Regulation and Supervision" herein.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Financial Data" in BostonFed's 2000 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The "Management Discussion and Analysis of Financial Condition and
Results of Operation" in BostonFed's 2000 Annual Report to Shareholders is
incorporated herein by reference.
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ITEMS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
The above-captioned information is incorporated herein by reference
from pages 9 through 13 of BostonFed's 2000 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The required information is incorporated herein by reference from pages
24 through 71 of BostonFed's 2000 Annual Report to Shareholders.
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.
Information regarding directors and executive officers of BostonFed is
incorporated herein by reference from pages 5 through 7 of BostonFed's Proxy
Statement for the Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of directors and executive
officers is incorporated herein by reference from pages 8 through 15 of
BostonFed's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 30, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference from pages 4 through 6 of
BostonFed's Proxy Statement for the Annual Meeting of Shareholders to be held
on April 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions
is incorporated herein by reference from pages 17 and 18 of BostonFed's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 30, 2001.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following Consolidated Financial Statements of BostonFed,
included in BostonFed's Annual Report to Shareholders for the year ended
December 31, 2000, are incorporated by reference in Item 8. The rest of
the information in the Annual Report is not deemed to be filed as part
of this Report, except as expressly provided below.
PAGE
Independent Auditors' Report...................................................................... 24
Consolidated Balance Sheets as of
December 31, 2000 and 1999......................................................................... 25
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998................................................................... 26
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 2000, 1999 and 1998................................................... 27-29
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998............................................................. 30-31
Notes to Consolidated Financial Statements........................................................... 32-71
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.
(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 (2)
4.0 Stock Certificate of BostonFed Bancorp, Inc. (1)
10.1 Employment Agreement between Boston Federal and David
F. Holland and Employment Agreement between BostonFed
and David F. Holland (2)
10.2 Employment Agreement between Boston Federal and David
P. Conley and Employment Agreement between BostonFed
and David P. Conley (2)
10.3 Employment Agreement between Boston Federal and John
A. Simas and Employment Agreement between BostonFed
and John A. Simas (2)
10.4 Boston Federal Savings Bank Employee Severance
Compensation Plan (1)
10.5 Consulting Agreement between Gene J. DeFeudis and
Diversified Ventures, Inc., d/b/a Forward Financial
Company.
10.6 BostonFed Bancorp, Inc. 1996 Stock-Based Incentive
Plan (3)
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10.7 BostonFed Bancorp, Inc. 1997 Stock Option Plan (4)
10.8 Boston Federal Savings Bank Defined Benefit
Restoration Plan (2)
10.9 Boston Federal Savings Bank Defined Contribution
Restoration Plan (2)
10.10 Employment Agreement Between Boston Federal and John
D. Mullen and Employment Agreement Between BostonFed
and John D. Mullen
10.11 Employment Agreement Between Boston Federal and Shaun
W. McGee and Employment Agreement Between BostonFed
and Shaun W. McGee
11.0 Computation of earnings per share (see Consolidated
Statements of Income located on page 26 of the 2000
Annual Report)
13.0 2000 Annual Report to Shareholders
21.0 Subsidiaries of the Registrant
23.0 Consent of Independent Auditors
99.0 Proxy Statement for 2001 Annual Meeting previously
filed on March 30, 2001 is herein incorporated by
reference.
-----------------------------
(1) Incorporated herein by reference into this document
from the Form S-1, Registration Statement, and any
amendments thereto, originally filed on July 21,
1995. Registration No. 333-94860.
(2) Incorporated herein by reference into this document
from the Form 10-K filed on March 30, 2000.
(3) Incorporated herein by reference into this document
from the Proxy Statement for the 1996 Annual Meeting
of Stockholders dated March 20, 1996.
(4) Incorporated herein by reference into this document
from the Proxy Statement for the 1997 Annual Meeting
of Stockholders dated March 28, 1997.
(5) Boston Federal and the Company have entered into
employment agreements with Messrs. Mullen and McGee.
The employment agreement for Mr. McGee is not filed
as part of this report. Rather, the Exhibit for Mr.
McGee incorporates by reference the agreements filed
with this report for Mr. Mullen and describes the
differences between the agreements for Mr. McGee.
(b) Reports on Form 8-K.
On February 7, 2001, Registrant filed a current report on
Form 8-K attaching the Press Release issued by BostonFed
Bancorp, Inc on January 19, 2001 in connection with
announcing its fourth quarter earnings.
On February 8, 2001, Registrant filed a Form S-4 comprising
of BFD Preferred Capital Trust II Prospectus.
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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, 2001
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.
NAME TITLE DATE
/s/ David F. Holland President, Chief Executive Officer March 30, 2001
- ------------------------------------------ and Chairman of the Board
David F. Holland
/s/ David P. Conley Director, Executive Vice President, March 30, 2001
- ------------------------------------------ Assistant Treasurer and Assistant Secretary
David P. Conley
/s/ John A. Simas Executive Vice President, March 30, 2001
- ------------------------------------------ Corporate Secretary and Chief Financial
John A. Simas Officer (Principal financial and accounting officer)
/s/ Edward P. Callahan Director March 30, 2001
- ------------------------------------------
Edward P. Callahan
/s/ Gene J. DeFeudis Director March 30, 2001
- ------------------------------------------
Gene J. DeFeudis
/s/ Richard J. Dennis, Sr. Director March 30, 2001
- ------------------------------------------
Richard J. Dennis, Sr.
/s/ Richard J. Fahey Director March 30, 2001
- ------------------------------------------
Richard J. Fahey
/s/ Patricia M. Flynn Director March 30, 2001
- ------------------------------------------
Patricia M. Flynn
43
/s/ Charles R. Kent Director March 30, 2001
- ------------------------------------------
Charles R. Kent
/s/ W. Robert Mill Director March 30, 2001
- ------------------------------------------
W. Robert Mill
44
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 (the "Company") as of December 31, 2000 and 1999,
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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
January 19, 2001
45
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(Dollars in thousands, except share and per share amounts)
ASSETS 2000 1999
----------- ---------
Cash and due from banks (note 1) $ 41,499 31,881
Federal funds sold 8,809 2,541
Certificates of deposit 367 274
----------- ---------
Total cash and cash equivalents 50,675 34,696
Investment securities available for sale
(amortized cost of $63,361 for 2000 and $55,051 for 1999) (note 3) 63,421 53,203
Investment securities held to maturity (fair value of $2,328
for 2000 and $2,275 for 1999) (notes 4 and 10) 2,304 2,304
Mortgage-backed securities available for sale (amortized
cost of $15,488 for 2000 and $15,881 for 1999) (notes 3 and 10) 15,372 15,540
Mortgage-backed securities held to maturity (fair value of $54,970
for 2000 and $14,030 for 1999) (notes 4 and 10) 55,283 13,941
Mortgage loans held for sale 12,816 16,174
Loans, net of allowance for loan losses of $11,381 for
2000 and $10,654 for 1999 (notes 5 and 6) 1,036,435 1,032,594
Accrued interest receivable (note 7) 7,375 6,267
Stock in FHLB of Boston, at cost (note 10) 20,649 20,311
Bank-owned life insurance 21,823 20,556
Premises and equipment, net (note 8) 10,647 8,212
Goodwill, net of amortization 19,195 19,519
Deferred income tax asset, net (note 11) 1,563 2,411
Prepaid expenses and other assets 10,224 7,925
----------- ---------
Total assets $ 1,327,782 1,253,653
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts (note 9) $ 849,647 770,049
Federal Home Loan Bank advances and other borrowings (note 10) 344,334 387,555
Advance payments by borrowers for taxes and insurance 2,864 3,298
Accrued expenses and other liabilities 9,024 7,047
----------- ---------
Total liabilities 1,205,869 1,167,949
----------- ---------
Corporation obligated mandatorily redeemable capital securities (note 13) 32,000 --
Commitments and contingencies (notes 3, 4, 5, 8 and 14)
Stockholders' equity (notes 2 and 12):
Preferred stock, $0.01 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 for 2000 and 1999 66 66
Additional paid-in capital 67,538 67,198
Retained earnings 57,696 50,481
Accumulated other comprehensive income (loss) 88 (1,485)
Treasury stock, at cost (1,956,736 and 1,616,536 shares for 2000 and 1999,
respectively) (34,281) (28,532)
Unallocated ESOP shares (1,058) (1,663)
Unearned 1996 stock-based incentive plan (136) (361)
----------- ---------
Total stockholders' equity 89,913 85,704
----------- ---------
Total liabilities and stockholders' equity $ 1,327,782 1,253,653
=========== =========
See accompanying notes to consolidated financial statements.
F-2
46
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts)
2000 1999 1998
-------- ------ ------
Interest income:
Loans (note 5) $ 80,960 73,096 66,040
Investment securities 6,272 5,312 5,258
Mortgage-backed securities 4,393 2,154 3,335
Federal funds sold 209 174 142
-------- ------ ------
Total interest income 91,834 80,736 74,775
-------- ------ ------
Interest expense:
Deposit accounts (note 9) 31,725 25,872 24,096
Borrowed funds (note 10) 22,764 21,336 18,461
-------- ------ ------
Total interest expense 54,489 47,208 42,557
-------- ------ ------
Net interest income 37,345 33,528 32,218
Provision for loan losses (note 6) 1,000 1,626 1,642
-------- ------ ------
Net interest income after provision for loan losses 36,345 31,902 30,576
-------- ------ ------
Non-interest income:
Gain on sale of loans 9,009 3,017 3,173
Deposit service fees 1,961 1,742 1,658
Income from bank owned life insurance (note 12) 1,267 556 --
Loan processing and servicing fees (note 5) 661 583 477
Gain (loss) on sale of investments (note 3) 5 (28) 19
Other 1,451 1,041 801
-------- ------ ------
Total non-interest income 14,354 6,911 6,128
-------- ------ ------
Non-interest expense:
Compensation and benefits (note 12) 20,073 14,955 13,728
Occupancy and equipment 4,256 3,284 3,187
Data processing 1,513 1,589 1,286
Advertising expense 1,051 691 523
Deposit insurance premiums 164 368 327
Real estate operations (257) (71) (71)
Goodwill amortization 1,406 284 212
Corporation obligated mandatorily redeemable capital securities
distributions (note 13) 1,137 -- --
Other 6,302 4,200 4,740
-------- ------ ------
Total non-interest expense 35,645 25,300 23,932
-------- ------ ------
Income before income taxes 15,054 13,513 12,772
Income tax expense (note 11) 5,344 4,945 5,151
-------- ------ ------
Net income $ 9,710 8,568 7,621
======== ====== ======
Basic earnings per share $ 2.07 1.78 1.50
======== ====== ======
Diluted earnings per share $ 2.01 1.71 1.43
======== ====== ======
Weighted average shares outstanding - basic 4,700 4,825 5,078
======== ====== ======
Weighted average shares outstanding - diluted 4,827 4,997 5,328
======== ====== ======
See accompanying notes to consolidated financial statements.
F-3
47
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts)
UNEARNED
ACCUMULATED STOCK-
OTHER BASED
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP PLAN STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES ("SIP") EQUITY
-------- ------ ---------- -------- ------------- -------- ----------- --------- ------------
Balance at December 31, 1997 6,590 $ 66 65,282 38,645 242 (18,146) (3,174) (1,304) 81,611
Common stock repurchased
(409 shares at an average
price of $19.56 per share) -- -- -- -- -- (7,998) -- -- (7,998)
Stock options exercised
(.9 shares at an average
price of $16.67 per share,
net of tax benefit) -- -- -- -- -- 16 -- -- 16
Cash dividends declared and
paid ($.37 per share) -- -- -- (2,010) -- -- -- -- (2,010)
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- 756 -- 756
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 1,135 -- -- -- -- -- 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 -- -- -- 70
Net income -- -- -- 7,621 -- -- -- -- 7,621
-------
Comprehensive income 7,691
------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1998 6,590 66 66,417 44,256 312 (26,128) (2,418) (711) 81,794
(Continued)
F-4
48
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts)
UNEARNED
ACCUMULATED STOCK-
OTHER BASED
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP PLAN STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES ("SIP") EQUITY
-------- ------ ---------- -------- ------------- -------- ----------- --------- ------------
Common stock repurchased
(144 shares at an average
price of $17.31 per share) -- $ -- -- -- -- (2,492) -- -- (2,492)
Stock options exercised
(5 shares at an average
price of $12.44 per share,
net of tax benefit) -- -- (19) -- -- 88 -- -- 69
Cash dividends declared and -- --
paid ($.46 per share) -- -- -- (2,343) -- -- (2,343)
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- 755 -- 755
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 800 -- -- -- -- -- 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) -- -- -- (1,797)
Net income -- -- -- 8,568 -- -- -- -- 8,568
-------
Comprehensive income 6,771
----- ----- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1999 6,590 66 67,198 50,481 (1,485) (28,532) (1,663) (361) 85,704
(Continued)
F-5
49
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts)
UNEARNED
ACCUMULATED STOCK-
OTHER BASED
SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP PLAN STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES ("SIP") EQUITY
-------- ------ ---------- -------- ------------- -------- ----------- --------- ------------
Common stock repurchased
(332 shares at an average
price of $17.71 per share) -- $ -- -- -- -- (5,886) -- -- (5,886)
Stock options exercised
(8 shares at an average
price of $13.06 per share,
net of tax benefit) -- -- (8) -- -- 137 -- -- 129
Cash dividends declared and
paid ($.52 per share) -- -- -- (2,495) -- -- -- -- (2,495)
Reduction in unallocated ESOP
shares charged to expense -- -- -- -- -- -- 605 -- 605
Appreciation in fair value of
shares charged to expense
for compensation plans -- -- 348 -- -- -- -- -- 348
Earned portion of SIP shares
charged to expense -- -- -- -- -- -- -- 225 225
Comprehensive income:
Changes in net unrealized
gain in investments
available for sale, net -- -- -- -- 1,573 -- -- -- 1,573
Net income -- -- -- 9,710 -- -- -- -- 9,710
-------
Comprehensive income 11,283
------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2000 6,590 $ 66 67,538 57,696 88 (34,281) (1,058) (136) 89,913
======= ======= ======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
50
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
------- ------- ------
Net cash flows from operating activities:
Net income $ 9,710 8,568 7,621
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 2,670 1,465 1,343
Earned SIP shares 225 350 593
Reduction in unallocated ESOP shares 605 755 756
Appreciation in fair value of shares charged to expense for
compensation plans 348 800 1,135
Income from bank-owned life insurance (1,267) (556) --
Provision for loan losses 1,000 1,626 1,642
Recovery for valuation allowance for real estate
owned 7 -- 17
Loans originated for sale (259,134) (301,464) (357,405)
Proceeds from sale of loans 271,501 305,315 353,387
Net loss (gain) on sale of investment securities (5) 28 (19)
Deferred income tax expense 221 185 208
Gain on sale of real estate acquired through foreclosure (4) (15) (60)
Gain on sale of loans (9,009) (3,017) (3,173)
Increase in accrued interest receivable (1,108) (718) (386)
Increase in prepaid expenses and other assets (1,993) (92) (1,520)
Increase (decrease) in accrued expenses and other liabilities 1,418 (3,190) 2,818
--------- -------- --------
Net cash provided by operating activities 15,185 10,040 6,957
--------- -------- --------
Cash flows from investing activities:
Net cash paid for acquisitions (975) (28,609) --
Proceeds from sales of investment securities available for sale 46 -- 5,000
Proceeds from sale of mortgage-backed securities available for sale -- 4,034 --
Proceeds from maturities of investment securities available for sale 6,000 20,375 --
Proceeds from maturities of investment securities held to maturity -- 5,500 14,850
Purchase of investment securities available for sale (14,904) (27,329) (32,217)
Purchase of investment securities held to maturity -- (500) (1,500)
Purchase of mortgage-backed securities available for sale (1,986) (5,005) (10,856)
Principal repayments of investments securities available-for-sale 628 657 10,000
Principal repayments on mortgage-backed securities held to maturity 9,620 8,993 15,432
Principal repayments on mortgage-backed securities available for sale 2,343 5,899 8,843
Increase in portfolio loans, net (55,816) (79,700) (153,576)
Purchase of FHLB stock (338) (2,509) (1,189)
Purchases of premises and equipment (3,743) (2,314) (887)
Proceeds from sale of real estate owned 314 61 191
Additional investment in real estate owned (86) (98) --
Purchase of bank owned life insurance -- (20,000) --
--------- -------- --------
Net cash used in investing activities (58,897) (120,545) (145,909)
--------- -------- --------
(Continued)
F-7
51
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
--------- -------- --------
Cash flows from financing activities:
Increase in deposits accounts $ 79,598 62,905 87,323
Proceeds from corporation obligated mandatorily
redeemable capital securities 32,000 -- --
Repayments of securities sold under agreement to repurchase -- -- (7,140)
Proceeds from Federal Home Loan Bank advances 476,199 356,581 546,073
Repayments of Federal Home Loan Bank advances (516,365) (309,581) (465,073)
Proceeds from other borrowings 1,945 3,055 --
Repayments of other borrowings (5,000) -- --
(Decrease) increase in advanced payments by borrowers
for taxes and insurance (434) (194) 272
Cash dividends paid (2,495) (2,343) (2,010)
Common stock repurchased (5,886) (2,492) (7,998)
Stock options exercised 129 69 16
--------- -------- --------
Net cash provided by financing activities 59,691 108,000 151,463
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 15,979 (2,505) 12,511
Cash and cash equivalents at beginning of year 34,696 37,201 24,690
--------- -------- --------
Cash and cash equivalents at end of year $ 50,675 34,696 37,201
========= ======== ========
Supplemental disclosure of cash flow information:
Payments during the year for:
Interest $ 55,475 46,460 42,017
========= ======== ========
Taxes $ 4,567 7,283 3,306
========= ======== ========
Supplemental schedule of noncash investing activities:
Transfers of mortgage loans to real estate owned $ -- 83 --
========= ======== ========
Conversion of real estate loans to mortgage-backed
securities held to maturity $ 50,975 -- --
========= ======== ========
(Continued)
See accompanying notes to consolidated financial statements.
F-8
52
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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 offices located in the greater Boston
metropolitan area municipalities of Arlington, Bedford, Billerica, Boston,
Burlington, Chelsea, Lexington, Peabody, Revere, Wellesley and Woburn.
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"), a
federally-chartered stock savings bank, 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, which were also accounted for using the
purchase method. Forward originates loans primarily direct with customers
purchasing or refinancing manufactured homes, recreational vehicles, and
boats 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 period.
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.
(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, B.F. Funding Corporation ("B.F.
Funding"), BFD Preferred Capital Trust I, and BFD Preferred Capital
Trust II.
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
(Continued)
F-9
53
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
plan trust for the purchase of stock at the initial public offering.
BFD Preferred Capital Trust I is a statutory business trust created
under the laws of New York and BFD Preferred Capital Trust II is a
statutory business trust created under the laws of Delaware. 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 $9,816 and $2,168 at BFS and BNB,
respectively, at December 31, 2000.
(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 fifteen 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.
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.
(Continued)
F-10
54
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
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 generally 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.
Management believes the allowance is adequate to absorb probable loan
losses. Management's methodology to estimate loss exposure inherent in
the portfolio includes an analysis of individual loans deemed to be
impaired, reserve allocations for various loan types based on payment
status or loss experience and an unallocated allowance that is
maintained based on management's assessment of many factors including
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.
(Continued)
F-11
55
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
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.
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.
(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.
(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.
(Continued)
F-12
56
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(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:
2000 1999 1998
------ ------ ------
Basic shares $4,700 4,825 5,078
Dilutive impact of stock options 127 172 250
------ ------ ------
Diluted shares $4,827 4,997 5,328
====== ====== ======
(Continued)
F-13
57
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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:
2000 1999 1998
-------- -------- --------
Net income $ 9,710 8,568 7,621
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period, net
of tax of $(629), $794 and $(15) for
2000, 1999 and 1998, respectively 1,576 (1,815) 81
Reclassification adjustment for losses
(gains) included in net income, net of
taxes of $2, $(10) and $8 for 2000, 1999
and 1998, respectively (3) 18 (11)
-------- -------- --------
1,573 (1,797) 70
-------- -------- --------
Comprehensive income $ 11,283 6,771 7,691
======== ======== ========
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Certain Hedging
Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an
Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all
derivative instruments be recorded on the balance sheet at their
respective fair values. The Company adopted SFAS No. 133 and SFAS No.
138 on January 1, 2001. The impact of adoption was not material to the
Company.
(2) STOCKHOLDERS' EQUITY
The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory requirements.
(Continued)
F-14
58
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
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, 2000 and 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, 2000, that BFS and BNB meet all
capital adequacy requirements to which they are subject.
As of December 31, 2000, BFS and BNB are categorized as "well capitalized"
based on the most recent notifications from the OTS and OCC, based on
regulatory definitions. 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. These regulatory capital
requirements are set forth in terms of (1) Risk-based Total Capital (Total
Capital to Risk Weighted Assets), (2) Core Capital (Tier I Capital to
Adjusted Tangible Assets), (3) Risk-based Tier I Capital (Tier I Capital to
Risk Weighted Assets), (4) Tangible Capital (Tier I Capital to Tangible
Assets), and (5) Leverage Capital (Tier I Capital to Average Assets).
BFS's and BNB's actual capital amounts and ratios are presented in the
table 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. The Company and BFS complied with
this requirement for the stated period.
(Continued)
F-15
59
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY REGULATORY
ACTUAL PURPOSES DEFINITIONS
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
As of December 31, 2000:
Risk-based Total Capital
BFS $77,766 10.8% $57,585 8.0% 71,981 10.0%
BNB 10,168 14.0 5,812 8.0 7,266 10.0
Core Capital:
BFS 68,781 5.9 46,363 4.0 57,953 5.0
Risk-based Tier I Capital:
BFS 68,781 9.6 28,792 4.0 43,188 6.0
BNB 9,456 13.0 2,906 4.0 4,359 6.0
Tangible Capital:
BFS 68,781 5.9 23,181 2.0 57,953 5.0
Leverage Capital:
BNB 9,456 6.5 5,824 4.0 7,281 5.0
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY REGULATORY
ACTUAL PURPOSES DEFINITIONS
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
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
(Continued)
F-16
60
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
At December 31, 2000 and 1999, the consolidated capital to assets ratio was
6.8%, which exceeded the minimum capital requirements for the Company.
During 2000, the Company's Board of Directors approved a program to
repurchase up to 242,646, 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,
2000, 209,247 shares were repurchased under this program.
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 $6.8 million (unaudited) and $8.1 million (unaudited)
at December 31, 2000 and 1999, respectively.
(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:
DECEMBER 31, 2000
------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
Investment securities:
U.S. government, federal agency and
other obligations:
Maturing within 1 year $ 2,499 2 -- 2,501
Maturing after 1 year but within
5 years 17,695 142 (31) 17,806
Maturing after 5 years but within
10 years 15,793 130 -- 15,924
Maturing after 10 years 5,900 -- (138) 5,762
------- ------- ------- -------
41,887 274 (169) 41,993
------- ------- ------- -------
Mutual funds 19,023 -- (321) 18,702
Marketable equity securities 2,451 315 (39) 2,726
------- ------- ------- -------
21,474 315 (360) 21,428
------- ------- ------- -------
Total investment securities $63,361 589 (529) 63,421
======= ======= ======= =======
(Continued)
F-17
61
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
DECEMBER 31, 2000
------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----
Mortgage-backed securities:
Maturing after 1 year but within 5 years $ 2,599 -- (47) 2,553
Maturing after 5 years but within 10 years 1,795 20 -- 1,815
Maturing after 10 years 11,094 37 (126) 11,004
------- ------- ------- -------
Total mortgage-backed securities $15,488 57 (173) 15,372
======= ======= ======= =======
DECEMBER 31, 1999
---------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------ ------------ -------------
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
======= ===== ====== ======
DECEMBER 31, 1999
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
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
======= ==== ===== =======
Maturities of mortgage-backed securities are shown at final contractual maturity
but are expected to have shorter lives because borrowers have the right to
prepay obligations without prepayment penalties.
(Continued)
F-18
62
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
U.S. agency notes with an amortized cost of $1,000 and a fair value of $994 at
December 31, 2000 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
$24,777 and a fair value of $24,996 at December 31, 2000.
The composition by issuer of mortgage-backed securities available for sale
follows:
DECEMBER 31,
-------------------------------------------------
2000 1999
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ------- --------- --------
FHLMC $ 4,394 4,367 5,559 5,484
FNMA 1,733 1,769 3,004 3,004
Privately issued collateralized
mortgage obligations 9,361 9,236 7,318 7,052
------- ------- ------- -------
$15,488 15,372 15,881 15,540
======= ======= ======= =======
Proceeds from the sale of investment securities and mortgage-backed securities
available for sale amounted to $46, $4,034 and $5,000, in 2000, 1999 and 1998,
respectively. Realized losses on investment securities and mortgage-backed
securities available for sale were $33 and $18 in 1999 and 1998, respectively.
There were no realized losses on investment securities and mortgage-backed
securities available for sale in 2000. Realized gains amounted to $5 in both
2000 and 1999, and $19 in 1998.
(Continued)
F-19
63
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(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.
DECEMBER 31, 2000
-------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Investment securities:
U.S. government, federal agency
and other obligations:
Maturing within 1 year $ 250 -- -- 250
Maturing after 1 year but
within 5 years 2,054 31 (7) 2,078
------- ------- ------- -------
Total investment
securities $ 2,304 31 (7) 2,328
======= ======= ======= =======
Mortgage-backed securities:
Maturing after 1 year but within 5 years $ 665 6 -- 671
Maturing after 5 years but
within 10 years 1,415 28 -- 1,443
Maturing after 10 years 53,203 129 (476) 52,856
------- ------- ------- -------
Total mortgage-backed
securities $55,283 163 (476) 54,970
======= ======= ======= =======
DECEMBER 31, 1999
------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Investment securities:
U.S. government, federal agency
and other obligations:
Maturing within 1 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
======= ======= ======= =======
(Continued)
F-20
64
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
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, 2000, a U.S. agency note with an amortized cost of $500 and
a fair value of $496 was pledged to secure certain of BFS's recourse
liabilities relating to loans sold as described in note 5.
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 $1,993 at December 31, 2000.
The composition by issuer of mortgage-backed securities held to maturity
follows:
DECEMBER 31,
------------------------------------------------
2000 1999
--------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
FHLMC $44,308 43,951 481 481
FNMA 146 147 259 252
GNMA 10,829 10,872 13,201 13,297
------- ------- ------- -------
$55,283 54,970 13,941 14,030
======= ======= ======= =======
(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 26 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)
F-21
65
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The Company's loan portfolio was comprised of the following at December 31:
2000 1999
----------- -----------
Mortgage loans:
Residential 1-4 family $ 788,067 830,565
Multi-family 19,447 22,017
Construction and land 92,561 77,079
Commercial real estate 89,371 75,999
----------- -----------
989,446 1,005,660
----------- -----------
Consumer and other loans:
Home equity and improvement 57,571 43,721
Secured by deposits 568 682
Consumer 5,220 3,549
Business 26,525 17,815
----------- -----------
89,884 65,767
----------- -----------
Total loans, gross 1,079,330 1,071,427
----------- -----------
Less:
Allowance for loan losses (11,381) (10,654)
Construction loans in process (33,869) (30,372)
Net unearned discount on loans purchased (10) (7)
Deferred loan origination costs 2,365 2,200
----------- -----------
Loan, net $ 1,036,435 1,032,594
=========== ===========
The Company services mortgage loans for investors which are not included in the
accompanying consolidated balance sheets totaling approximately $886,629 and
$784,597 at December 31, 2000 and 1999, respectively. Of these loans serviced
for others, $373 and $383 at December 31, 2000 and 1999, respectively, had been
sold with recourse by the Company. In addition, at December 31, 2000 and 1999,
respectively, the Company had retained the secondary layer of recourse risk on
$2,513 and $3,190 of serviced loans, with such risk limited to $221 after the
first layer is exhausted. There were no losses incurred on loans subject to
recourse during 2000 and 1999.
(Continued)
F-22
66
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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:
2000 1999 1998
------- ------- -------
Balance, beginning of year $ 5,080 3,571 1,534
Capitalized mortgage servicing rights 1,598 2,813 3,149
Amortization (1,610) (1,304) (1,112)
------- ------- -------
Balance, end of year $ 5,068 5,080 3,571
======= ======= =======
The Company has determined that the fair value of mortgage servicing rights at
December 31, 2000 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, 2000, are $11.9 million and $1.5 million, respectively. BFS and BNB did not
have any borrower relationships which exceeded the limit at December 31, 2000.
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:
2000 1999
------ ------
Balance, beginning of year $ 785 785
Originations 160 145
Payments (233) (152)
Other changes 47 7
----- -----
Balance, end of year $ 759 785
===== =====
At December 31, 2000 and 1999, total impaired loans were $206 and $235,
respectively. In the opinion of management, no impaired loans required a
specific valuation allowance at December 31, 2000 and 1999. The average recorded
value of impaired loans was $228 during 2000 and $335 during 1999. The Company
follows the same policy for recognition of income on impaired loans as it does
for nonaccrual loans. At December 31, 2000 and 1999, there were no commitments
to lend additional funds to those borrowers whose loans were classified as
impaired.
(Continued)
F-23
67
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The following table summarizes information regarding the reduction of
interest income on impaired loans at December 31:
2000 1999 1998
---- ---- ----
Income in accordance with original terms $15 17 47
Income recognized 15 15 46
--- --- ---
Foregone interest income during year $-- 2 1
=== === ===
Non-accrual loans at December 31, 2000 and 1999 were $956 and $746,
respectively.
The following table summarizes information regarding the reduction or
(increase) in interest income on non-accrual loans as of December 31:
2000 1999 1998
---- ---- ----
Income in accordance with original terms $83 62 68
Income recognized 43 64 35
--- --- ---
Foregone (net earned) interest income
during year $40 (2) 33
=== === ===
(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:
2000 1999 1998
-------- -------- -------
Balance, beginning of year $10,654 8,500 6,600
Allowance for loan losses from acquisition -- 170 --
Provision charged to income 1,000 1,626 1,642
Recoveries 181 414 517
Charge-offs (454) (56) (259)
------- ------- ------
Balance, end of year $11,381 10,654 8,500
======= ======= ======
(Continued)
F-24
68
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(7) ACCRUED INTEREST RECEIVABLE (IN THOUSANDS)
Accrued interest receivable as of December 31 is presented in the following
table:
2000 1999
------ ------
Investment and mortgage-backed securities $1,314 739
Loans 6,061 5,528
------ ------
Balance, end of year $7,375 6,267
====== ======
(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:
2000 1999
-------- --------
Land $ 2,727 2,503
Buildings 6,287 5,464
Furniture, fixtures and equipment 10,711 8,337
Leasehold improvements 1,490 1,395
-------- --------
21,215 17,699
Less accumulated depreciation and amortization (10,568) (9,487)
-------- --------
$ 10,647 8,212
======== ========
The Company presently leases office space at five 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:
YEARS ENDED DECEMBER 31,
------------------------
2001 $ 1,458
2002 1,458
2003 1,342
2004 1,045
2005 and thereafter 4,780
--------
$ 10,083
========
Rent expense was $1,703 in 2000, $1,418 in 1999 and $1,257 in 1998.
(Continued)
F-25
69
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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:
YEARS ENDED DECEMBER 31,
------------------------
2001 $124
2002 73
2003 66
2004 44
2005 and thereafter --
----
$307
====
Rental income was $198, $172 and $165 in 2000, 1999 and 1998, respectively.
(9) DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS)
A summary of deposit balances by type is as follows at December 31:
2000 1999
-------- --------
NOW $132,915 114,145
Regular and statement savings 167,457 145,688
Money market 54,642 56,970
Demand deposits and official checks 77,907 53,858
-------- --------
Total non-certificate accounts 432,921 370,661
-------- --------
Certificate accounts:
3 to 6 months 33,128 22,975
9 months 14,791 16,800
1 to 3 year 292,066 278,393
Greater than 3 years 35,002 37,551
IRA/Keogh 41,739 43,669
-------- --------
Total certificate accounts 416,726 399,388
-------- --------
$849,647 770,049
======== ========
Expected maturity of certificate accounts:
Within one year $252,605 244,061
One to two years 73,294 103,413
Two to three years 44,504 14,280
Over three years 46,323 37,634
-------- --------
$416,726 399,388
======== ========
(Continued)
F-26
70
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Aggregate amount of certificate accounts of $100 or more were $53,800 and
$38,601 at December 31, 2000 and 1999, 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:
2000 1999 1998
-------- -------- -------
NOW $ 899 884 1,158
Regular and statement savings 4,476 3,534 2,999
Money market 1,597 1,693 1,838
Certificate accounts 24,753 19,761 18,101
------- ------- -------
$31,725 25,872 24,096
======= ======= =======
The Company has $118,513 of brokered deposits with a weighted average rate
of 6.88% at December 31, 2000. Brokered deposits of $42,667, $25,427,
$22,012, and $28,407 mature in 2001, 2002, 2003, and 2004, respectively.
There were $136,394 of brokered deposits outstanding at December 31, 1999.
(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:
2000 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- -------- --------
2000 $ -- -- % $218,500 5.74%
2001 108,334 5.98 46,000 5.63
2002 94,000 6.23 43,000 6.02
2003 70,000 6.04 40,000 5.57
2004 27,000 6.35 17,000 6.59
2005 15,000 7.15 -- --
Beyond 30,000 6.47 20,000 5.99
--------- ------ -------- ----
$344,334 6.18% $384,500 5.80%
========= ====== ======== ====
(Continued)
F-27
71
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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 $520,189 and $423,620 at December 31, 2000 and
1999, respectively.
As a member of the FHLB of Boston, the Company is required to maintain a
minimum investment in the capital stock of the Federal Home Loan Bank of
Boston, at cost, in an amount not less than 1% of its outstanding home
loans or 1/20 of its outstanding notes payable to the Federal Home Loan
Bank of Boston, whichever is greater, as calculated at December 31 of each
year. The investment exceeds the required level by approximately $2,458 and
$412 at December 31, 2000 and 1999, respectively. Any excess may be
redeemed by the Company or called by FHLB of Boston at par.
Interest expense on FHLB advances was $22,476 in 2000, $21,207 in 1999 and
$18,219 in 1998.
At December 31, 1999, other borrowings totaled $3,055 and consisted of
amounts owed on a $5.0 million line of credit from a financial institution.
The line of credit had no outstanding balance at December 31, 2000 and can
be used for general corporate purposes.
(11) INCOME TAXES (IN THOUSANDS)
An analysis of the current and deferred federal and state income tax
expense follows:
2000 1999 1998
------ ------ ------
Current income tax expense:
Federal $4,729 4,620 4,654
State 394 140 287
------ ------ ------
Total current expense 5,123 4,760 4,941
------ ------ ------
Deferred income tax expense:
Federal 166 137 313
State 55 48 107
Change in valuation allowance -- -- (210)
------ ------ ------
Total deferred expense 221 185 210
------ ------ ------
Total income tax expense $5,344 4,945 5,151
====== ====== ======
(Continued)
F-28
72
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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:
2000 1999
------ ------
Deferred tax assets:
Allowance for loan losses $4,758 4,575
Deferred compensation 262 596
Unrealized loss on securities available for sale 75 702
Other 15 78
------ ------
Gross deferred assets 5,110 5,951
------ ------
Deferred liabilities:
Premium on loans sold 2,121 2,138
Deferred loan fees 934 879
Premises and equipment 339 523
Other 153 --
------ ------
Gross deferred liabilities 3,547 3,540
------ ------
Net deferred tax asset $1,563 2,411
====== ======
At December 31, 2000 and 1999, the net deferred tax asset is supported by
recoverable income taxes. For the year ended December 31, 2000, the Company
generated approximately $15,000 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)
F-29
73
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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:
2000 1999 1998
------- ------- -------
Computed expected expense at statutory rate $ 5,141 4,615 4,343
Items affecting federal income tax rate:
State income tax, net of federal income tax benefit 296 124 261
Change in valuation allowance -- -- (210)
Allocated ESOP share appreciation 66 185 273
Bank-owned life insurance (433) (189) --
Other 274 210 484
------- ------- -------
Effective income tax expense $ 5,344 4,945 5,151
------- ------- -------
Effective income tax rate 35.5% 36.6% 40.3%
======= ======= =======
(12) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(a) EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan ("ESOP"), which
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.
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 $605 in 2000, and $755 in 1999 and 1998 to enable the
ESOP to make principal payments on the loan. The amount contributed
was charged to compensation and benefits expense. The Company
recognized $348 in 2000, $550 in 1999 and $803 in 1998 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 two years, principally with funds from BFS's future
contributions to ESOP, subject to IRS limitations.
(Continued)
F-30
74
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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, 2000 and 1999, shares held in suspense to be released
annually as the loan is paid down amounted to 105,839 and 166,279,
respectively. The fair value of unallocated ESOP shares was $2,209 and
$2,640 at December 31, 2000 and 1999, 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
The Company maintains a 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, a total of
8,584 shares were awarded on October 15, 1996 and 7,500 shares were
awarded on February 17, 2000. During 2000, a total of 58,057 shares
were distributed. Awards outstanding vest in five annual installments
generally commencing one year from the date of the award. As of
December 31, 2000, a total of 5,000 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 $225, $350 and $593 related
to the earned shares in compensation and benefit expense in 2000, 1999
and 1998, 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)
F-31
75
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 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 10,000 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 46,600 remain unawarded. During
2000, the Company granted employees options to purchase 38,000 shares
of common stock at between $12.91 and $19.41 per share. During 1999,
the Company granted employees options to purchase 61,000 shares of
common stock between $14.56 and $18.50 per share.
A summary of option activity follows:
2000 1999
--------------------- ----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
Balance, beginning of year 809,461 $14.12 772,961 $14.12
Granted 38,000 16.98 61,000 15.53
Forfeited (1,000) 18.82 (19,500) 18.82
Exercised (7,800) 13.06 (5,000) 12.44
-------- -------
Balance, end of year 838,661 $14.26 809,461 $14.12
======== ====== ======== ======
Option exercisable 576,277 $13.76 418,784 $13.61
======== ====== ======== ======
(Continued)
F-32
76
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
A summary of options outstanding and exercisable by price range as of
December 31 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------- --------------------------
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
2000 LIFE PRICE 2000 PRICE
------------ ----------- -------- ------------ --------
562,000 5.3 $12.44 448,000 $12.44
20,200 5.8 13.44 15,200 13.44
7,500 5.9 14.82 6,000 14.82
99,461 6.5 18.82 59,677 18.82
10,000 6.9 19.75 6,000 19.75
15,000 7.2 22.22 9,000 22.22
15,000 7.3 24.81 9,000 24.81
5,000 7.4 23.38 3,000 23.38
5,500 8.0 18.13 2,200 18.13
15,000 8.2 18.50 6,000 18.50
46,000 9.0 14.57 9,200 14.57
15,000 9.2 13.82 3,000 13.82
1,000 9.5 12.91 -- --
1,000 9.7 19.81 -- --
2,500 9.8 18.44 -- --
18,500 10.0 19.41 -- --
- ------------- -------
838,661 6.0 $14.26 576,277 $13.76
============= ======= ====== ======= ======
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:
2000 1999 1998
------ ------ ------
Net income as reported $9,710 8,568 7,621
Pro forma net income 9,166 8,056 7,127
Basic earnings per share as reported 2.07 1.78 1.50
Diluted earnings per share as reported 2.01 1.71 1.43
Pro forma basic earnings per share 1.95 1.67 1.40
Pro forma diluted earnings per share 1.90 1.61 1.34
(Continued)
F-33
77
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The per share weighted average fair value of stock options granted during
2000 was $4.83 per share determined using the Black-Scholes option pricing
model with the following weighted average assumptions:
2000 1999
------ ------
Expected dividend yield 3.00% 3.00%
Risk-free interest rate 5.95% 5.66%
Expected volatility 29.79% 28.99%
Expected life (years) 5.8 4.0
(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, 2000, 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 2000, 1999 and 1998, 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 $340 in 2000 and $194 for 1999.
(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 $269 and $194 in 2000 and 1999, respectively.
(Continued)
F-34
78
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(g) SHORT-TERM INCENTIVE PLAN
The Company maintains a short-term incentive plan. Except Forward
Financial, generally all BFS and BNB employees are eligible to participate
in the incentive plan, and awards are granted based on the achievement of
certain performance measures. Forward Financial has individualized plans
for senior management, focused on profitability and the attainment of
measurable business goals. Compensation expense related to these awards
amounted to $1,477 and $1,151 during 2000 and 1999, 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.
(i) EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with its President and Chief
Executive Officer, and two Executive Vice Presidents and Forward
Financial's President and Senior Vice President. The employment agreements
generally provide for the continued payment of specified compensation and
benefits for two or three years, as applicable, 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.
(Continued)
F-35
79
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(13) CORPORATION OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES (IN
THOUSANDS)
On July 12, 2000, the Company sponsored the creation of BFD Preferred
Capital Trust I, ("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 $10,000 of its 11.295% Capital Securities through a
pooled trust preferred securities offering. The proceeds from this
issuance, along with the Company's $309 capital contribution for the Trust
I common securities, were used to acquire $10,309 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, ("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 II issued
$22,000 of its 10.875% Capital Securities. The proceeds from this issuance,
along with the Company's $681 capital contribution for the Trust II common
securities, were used to acquire $22,681 aggregate principal amount of the
Company's 10.875% junior subordinated debentures due October 1, 2030, which
constitute the sole assets of the Trust II. 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.
The aggregate amount of Trust I and II securities outstanding totaled
$32,000 at December 31, 2000. A summary of the trust securities issued and
outstanding follows:
AMOUNT
OUTSTANDING PREPAYMENT DISTRIBUTION
--------------- OPTION PAYMENT
DECEMBER 31 2000 1999 RATE DATE MATURITY FREQUENCY
- --------------------- ------ ---- ------- ----------- -------- -------------
BFD Preferred Capital
Trust I $10,000 -- 11.295% 7/19/2010 7/19/2030 Semi-annually
BFD Preferred Capital
Trust II 22,000 -- 10.875% 10/1/2010 10/1/2030 Semi-annually
All of the corporation obligated mandatorily redeemable capital securities
may be prepaid at the option of the Trusts in whole or in part, on or after
the prepayment dates listed in the table above. Trust I is subject to a
prepayment penalty fee of 6 months worth of interest reduced each year by
10% commencing at 7/19/2001. There is no prepayment penalty fee imposed on
Trust II.
(Continued)
F-36
80
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The Company has the right, at one or more times, to defer interest payments
on the Trust II Junior Subordinated Debentures for up to ten consecutive
semi-annual periods. All deferrals will end on an interest payment date and
will not extend beyond October 1, 2030, the stated maturity date of the
Trust II Junior Subordinated Debentures. If the Company defers interest
payments on the Trust II Junior Subordinated Debentures, the Trust II will
also defer distributions on the Trust II Capital Securities.
In addition, the Company also has the right at any time during the term of
the Trust I Capital Securities to defer the payment of interest on those
securities from time to time for a period of up to ten consecutive
semi-annual interest payment periods. No deferral period will end on a date
other than an interest payment date and no deferral will extend beyond July
19, 2030, the stated maturity of the Trust I Capital Securities. During any
deferral period, each installment of interest that would otherwise have
been due and payable will bear additional interest (to the extent payment
of such interest would be legally enforceable) at the rate of 13.95%,
compounded semi-annually.
(14) LITIGATION
Broadway National Bank was named a defendant in the Superior Court for
Suffolk County, Massachusetts, in a civil action 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.
(15) 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
(Continued)
F-37
81
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
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 adjustable rate loans held for
sale to various private institutional investors on a best efforts basis and
most fixed rate loans held for sale to FHLMC and FNMA. 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.
In addition to construction loans in process, the Company had the following
outstanding commitments at December 31:
2000 1999
-------- -------
Commitments to originate mortgage loans $107,106 74,668
Commitments to originate business loans 7,360 6,319
Unused lines of credit:
Home equity 77,690 68,019
Business loans 21,613 8,840
Credit card -- 1,507
Standby letters of credit 1,810 1,112
Optional commitments to sell loans and commitments to sell loans
or swap loans for mortgage-backed securities 31,433 23,478
(Continued)
F-38
82
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(16) 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.
(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.
(Continued)
F-39
83
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(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.
(i) CORPORATION OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES
Fair values for the corporation obligated manditorily redeemable
capital securities are estimated using a discounted cash flow
technique that applies interest rates currently being offered on
similar securities to a schedule of expected maturities of these
capital securities.
(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.
(Continued)
F-40
84
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The carrying amounts and fair values of the Company's financial
instruments at December 31 are as follows:
2000 1999
------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- ---------- ---------
Financial assets:
Cash and cash equivalents $ 50,675 50,675 34,696 34,696
Investment securities available for sale 63,421 63,421 53,203 53,203
Investment securities held to maturity 2,304 2,328 2,304 2,275
Mortgage-backed securities available for sale 15,372 15,372 15,540 15,540
Mortgage-backed securities held to maturity 55,283 54,970 13,941 14,030
Loans, net and mortgage loans held for sale 1,049,251 1,050,012 1,048,768 1,035,526
Accrued interest receivable 7,375 7,375 6,267 6,267
Stock in FHLB of Boston 20,649 20,649 20,311 20,311
Financial liabilities:
Deposit accounts 849,647 852,530 770,049 770,686
FHLB advances and other borrowings 344,334 349,456 387,555 384,631
Advance payments by borrowers for taxes
and insurance 2,864 2,864 3,298 3,298
Corporation obligated mandatorily redeemable
capital securities 32,000 32,000 -- --
(17) 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.
(Continued)
F-41
85
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable segments.
TOTAL CONSOLI-
REPORTABLE ELIMINA- DATED
BFS BNB SEGMENTS OTHER TIONS TOTALS
---------- ---------- ---------- ---------- ---------- ----------
At or for the year ended
December 31, 2000:
Interest income $ 82,673 9,113 91,786 1,800 (1,752) 91,834
Interest expense 52,304 2,498 54,802 1,439 (1,752) 54,489
Provision for loan losses 800 200 1,000 -- -- 1,000
Non-interest income 13,651 1,190 14,841 5 (492) 14,354
Non-interest expense 29,738 4,685 34,423 1,714 (492) 35,645
Income tax expense 4,760 1,032 5,792 (448) -- 5,344
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 8,722 1,888 10,610 (900) -- 9,710
========== ========== ========== ========== ========== ==========
Total assets $1,174,902 148,834 1,323,736 159,296 (155,250) 1,327,782
========== ========== ========== ========== ========== ==========
Net interest margin 2.83% 5.25% n.m. n.m. n.m. 3.11%
Return on average assets .76% 1.31% n.m. n.m. n.m. .75%
Return on average equity 10.58% 15.46% n.m. n.m. n.m. 10.72%
TOTAL CONSOLI-
REPORTABLE ELIMINA- DATED
BFS BNB SEGMENTS OTHER TIONS TOTALS
---------- ---------- ---------- ---------- ---------- ----------
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%
(Continued)
F-42
86
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
TOTAL CONSOLI-
REPORTABLE ELIMINA- DATED
BFS BNB SEGMENTS OTHER TIONS TOTALS
---------- ---------- ---------- ---------- ---------- ----------
At or for the year ended
December 31, 1998:
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%
n.m. = not meaningful
(18) ACQUISITIONS (DOLLARS IN THOUSANDS)
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. The Company also acquired Ellsmere Insurance
Agency, Inc., a Massachusetts licensed insurance agency with limited
operations. The purchase price of both was $38.3 million and the
transactions were accounted for using the purchase method of accounting.
The results of operations include the effect of the purchases from the date
of the acquisitions to year-end. In connection with the acquisitions the
value of the assets acquired and liabilities assumed were as follows:
DECEMBER 7, 1999
----------------
Assets acquired $22,891
Liabilities assumed 1,627
Goodwill 17,032
The following condensed consolidated pro-forma results of the Company were
prepared as if the acquisitions 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 acquisitions of Forward and Ellsmere actually
occurred on January 1 of the respective year.
(Continued)
F-43
87
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(UNAUDITED)
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
------- -------
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
During 2000, the Company paid approximately $975 in contingent
consideration to the former owner of Forward Financial in connection to
this acquisition. The consideration was contingent upon earnings of Forward
Financial.
88
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(19) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS)
The following are the condensed financial statements for BostonFed Bancorp,
Inc. (the "Parent Company") only:
ASSETS 2000 1999
-------- ------
Cash and interest bearing deposit in subsidiary bank $ 21,352 27
Certificates of deposit 69 71
-------- ------
Total cash and cash equivalents 21,421 98
-------- ------
Investment securities available for sale (amortized cost of
$2,379 and $2,035 at 2000 and 1999) 2,692 1,649
Investment in subsidiaries, at equity 98,545 87,090
Other assets 1,283 13
-------- ------
Total assets $123,941 88,850
======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $ -- 3,055
Subordinated debentures supporting corporation obligated
mandatorily redeemable capital securities 32,990 --
Accrued expenses and other liabilities 1,038 91
-------- ------
Total liabilities 34,028 3,146
-------- ------
Total stockholders' equity 89,913 85,704
-------- ------
Total liabilities and stockholders' equity $123,941 88,850
======== ======
F-45-
89
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
STATEMENTS OF INCOME 2000 1999 1998
-------- ----- -----
Interest income $ 474 750 1,186
Interest expense 1,439 34 93
-------- ----- -----
Net interest income (965) 716 1,093
Non-interest income 5 43 13
Non-interest expense 574 561 469
-------- ----- -----
Income before income taxes (1,534) 198 637
Income tax expense (528) 90 261
-------- ----- -----
(Loss) income before equity in net income
of subsidiaries (1,006) 108 376
Equity in net income of subsidiaries 10,716 8,460 7,245
-------- ----- -----
Net income $ 9,710 8,568 7,621
======== ===== =====
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.
STATEMENTS OF CASH FLOWS 2000 1999 1998
-------- ------ -----
Net cash flows from operating activities:
Net income $ 9,710 8,568 7,621
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in undistributed earnings of
subsidiaries (10,716) (8,460) (7,245)
Amortization and accretion, net -- 88 81
Appreciation in fair value of shares charged
to expense for compensation plans 348 800 1,135
Earned SIP shares 225 350 593
Reduction in unallocated ESOP shares 605 755 756
(Gain) loss on sale of investment securities (5) 28 --
Decrease in accrued interest receivable -- 63 41
(Increase) decrease in other assets (1,270) 2 1,283
Increase (decrease) in accrued expenses
and other liabilities 947 (2,421) 2,505
-------- ------ -----
Net cash provided by (used in)
operating activities (156) (227) 6,770
-------- ------ -----
(Continued)
F-46
90
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
STATEMENTS OF CASH FLOWS, CONTINUED 2000 1999 1998
-------- -------- --------
Cash flow from investing activities:
Proceeds from sale of mortgage-backed
securities available for sale $ -- 7,354 --
Proceeds from sale of investment
securities available for sale 46 -- --
Principal repayments on mortgage-backed
securities available for sale -- 3,444 8,012
Purchase of investment securities available
for sale 385 -- (2,035)
Change in investment in subsidiaries (635) (15,552) 4,340
-------- -------- --------
Net cash (used in) provided by investing
activities (204) (4,754) 10,317
-------- -------- --------
Cash flow from financing activities:
Repayments of securities sold under
agreement to purchase -- -- (7,140)
Proceeds from other borrowed money 1,945 3,055 --
Repayments of other borrowed money (5,000) -- --
Proceeds from subordinated debentures supporting corporation
obligated mandatorily redeemable capital securities 32,990 -- --
Common stock repurchases (5,886) (2,492) (7,998)
Cash dividends paid (2,495) (2,343) (2,005)
Stock options exercised 129 69 16
-------- -------- --------
Net cash provided (used) from
financing activities 21,683 (1,711) (17,127)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 21,323 (6,692) (40)
Cash and cash equivalents at beginning of year 98 6,790 6,830
-------- -------- --------
Cash and cash equivalents at end of year $ 21,421 98 6,790
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 277 23 93
======== ======== ========
Income taxes $ (321) 2,444 296
======== ======== ========
(Continued)
F-47
91
BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(20) 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:
2000 QUARTERS 1999 QUARTERS
-------------------------------------------- --------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------ ----- ------ ----- ------ ----- ------ -----
Interest and dividend income $24,095 23,311 22,682 21,746 20,938 20,435 19,832 19,531
Interest expense 13,851 14,037 13,705 12,896 12,386 11,964 11,495 11,363
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 10,244 9,274 8,977 8,850 8,552 8,471 8,337 8,168
------- ------- ------- ------- ------- ------- ------- -------
Provision for loan losses 250 250 249 251 376 390 430 430
Non-interest income 2,840 4,143 4,205 3,166 1,975 1,692 1,730 1,547
Non-interest expense 9,188 9,102 9,128 8,227 6,738 6,257 6,295 6,043
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 3,646 4,065 3,805 3,538 3,413 3,516 3,342 3,242
Income tax expense 1,327 1,443 1,318 1,256 1,138 1,254 1,315 1,238
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 2,319 2,622 2,487 2,282 2,275 2,262 2,027 2,004
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share $ 0.51 0.56 0.52 0.48 0.47 0.47 0.42 0.41
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share $ 0.48 0.54 0.52 0.48 0.46 0.45 0.40 0.40
======= ======= ======= ======= ======= ======= ======= =======
F-48