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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, 2001
| | 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 (IRS employer identification no.)
of 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 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 Part III of this Form 10-K or any
amendment to this Form 10-K.
Based upon the closing price of the registrant's common stock as of March
7, 2002, the aggregate market value of the voting and non-voting common equity
held by non-affiliates is $102.5 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, 2002, was
4,509,553.
DOCUMENTS INCORPORATED BY REFERENCE
PART II: PORTIONS OF THE ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2001.
PART III: PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR
THE 2002 ANNUAL MEETING OF STOCKHOLDERS.
INDEX
PART I PAGE
----
Item 1. Business ............................................. 3
Additional Item. Executive Officers of the Registrant
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 ................................. 39
Item 6. Selected Financial Data .............................. 39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 39
Item 7A. Quantitative and Qualitative Disclosure About
Market Risks ......................................... 39
Item 8. Financial Statements and Supplementary Data .......... 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 ....................................... 40
Item 13. Certain Relationships and Related Transactions ....... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K .................................. 40
SIGNATURES
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 may be 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 the 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
and boats and subsequently sells substantially all of these loans, servicing
released, to various purchasers ("client lenders"). This acquisition, along with
the continued increases 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
3
throughout eastern Massachusetts and, to a lesser extent, other areas of New
England. Forward Financial provides its consumer lending services in
approximately 25 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.
4
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,
-----------------------------------------------------------------------------------
2001 2000 1999
------------------------- ----------------------- ---------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ----------- ---------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential:
One- to four-family(1).............. $ 788,211 70.38% $ 800,883 73.33% $ 846,739 77.85%
Multi-family........................ 25,904 2.31 19,447 1.78 22,017 2.02
Commercial real estate.................. 107,767 9.62 89,371 8.18 75,999 6.99
Construction and land................... 99,337 8.87 92,561 8.48 77,079 7.09
Non-mortgage loans:
Home equity and improvement............. 66,539 5.94 57,571 5.27 43,721 4.02
Business................................ 28,103 2.51 26,525 2.43 17,815 1.64
Other loans............................... 4,117 0.37 5,788 0.53 4,231 0.39
---------- ------ ---------- ------ ---------- ------
Total loans...................... 1,119,978 100.00% 1,092,146 100.00% 1,087,601 100.00%
====== ====== ======
Less:
Allowance for loan losses............... (12,328) (11,381) (10,654)
Construction loans in
process............................. (30,264) (33,869) (30,372)
Net unearned premium
(discount) on loans
purchased........................... 48 (10) (7)
Deferred loan origination
costs................................. 2,976 2,365 2,200
---------- ---------- ----------
Loans, net and mortgage
loans held for sale.............. $1,080,410 $1,049,251 $1,048,768
========== ========== ==========
AT DECEMBER 31,
--------------------------------------------------------
1998 1997
------------------------- ---------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential:
One- to four-family(1).............. $829,572 84.27% $702,102 86.11%
Multi-family........................ 22,889 2.33 18,874 2.32
Commercial real estate.................. 48,951 4.97 36,400 4.47
Construction and land................... 41,608 4.23 20,497 2.51
Non-mortgage loans:
Home equity and improvement............. 32,119 3.26 28,119 3.45
Business................................ 3,618 0.37 3,528 0.43
Other loans............................... 5,571 0.57 5,818 0.71
-------- ------ -------- ------
Total loans...................... 984,328 100.00% 815,338 100.00%
====== ======
Less:
Allowance for loan losses............... (8,500) (6,600)
Construction loans in
process............................. (17,133) (8,527)
Net unearned premium
(discount) on loans
purchased........................... (5) (114)
Deferred loan origination
costs................................. 1,980 1,448
-------- --------
Loans, net and mortgage
loans held for sale.............. $960,670 $801,545
======== ========
- ----------
(1) Includes mortgage loans held for sale of $24.6 million, $12.8 million,
$16.2 million, $17.0 million and $9.8 million at December 31, 2001, 2000,
1999, 1998 and 1997, respectively.
5
LOAN MATURITY. The following table shows certain information at December
31, 2001 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, 2001
---------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION OTHER TOTAL
FAMILY FAMILY REAL ESTATE AND LAND LOANS LOANS
----------- --------- ------------- ------------ ------- -----------
(IN THOUSANDS)
Amounts due:
One year or less ....................... $ 3,151 $ 16 $ 298 $66,310 $ 5,444 $ 75,219
----------- ------- -------- ------- ------- -----------
After one year:
More than one year to three years ...... 3,859 91 2,075 33,027 3,258 42,310
More than three years to five years . 5,612 1,766 9,377 -- 6,600 23,355
More than five years to 10 years .... 100,649 717 13,833 -- 77,158 192,357
More than 10 years to 20 years ...... 120,817 11,991 28,846 -- 2,288 163,942
More than 20 years .................. 554,123 11,323 53,338 -- 4,011 622,795
----------- ------- -------- ------- ------- -----------
Total due after one year ............ 785,060 25,888 107,469 33,027 93,315 1,044,759
----------- ------- -------- ------- ------- -----------
Total amount due .................... $ 788,211 $25,904 $107,767 $99,337 $98,759 $ 1,119,978
----------- ------- -------- ------- ------- -----------
Less:
Allowance for loan losses ..... (12,328)
Construction loans in process . (30,264)
Net unearned discount on
loans purchased ............ 48
Deferred loan origination costs 2,976
-----------
Loans, net, and mortgage
loans held for sale .............. 1,080,410
-----------
Mortgage loans held for sale ........ (24,612)
Loans, net .......................... $ 1,055,798
===========
The following table sets forth, at December 31, 2001, the dollar amount of
loans contractually due after December 31, 2002, and whether such loans have
fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2002
------------------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- ----------
(IN THOUSANDS)
Mortgage loans:
Residential:
One- to four-family .... $272,138 $512,922 $ 785,060
Multi-family ........... 6,775 19,113 25,888
Commercial real estate .... 25,908 81,561 107,469
Construction and land ..... -- 33,027 33,027
Other loans .................. 5,724 87,591 93,315
-------- -------- ----------
Total loans ......... $310,545 $734,214 $1,044,759
======== ======== ==========
6
ORIGINATION, SALE, SERVICING AND PURCHASE OF MORTGAGE, BUSINESS AND
CONSUMER 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 mortgage 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. It generally retains adjustable-rate loans and fixed- rate loans with
maturities of under fifteen years sufficient to meet its portfolio needs, and
sells the remainder. 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, 2001, BostonFed was servicing $974.2
million of mortgage 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, 2001, BostonFed had $6.9
million of capitalized mortgage servicing rights, representing 71 basis points
of loans serviced for others.
BostonFed also originates business loans through its business lending
department, which was established in 1998. The loans are generally secured by
the business assets, such as equipment, machinery, receivables, inventory, etc.,
of the borrower. Typically, the loans are either term or line of credit.
Additionally, BostonFed, through Forward Financial, originates loans on
manufactured homes, recreational vehicles and boats. Forward Financial
originates and sells servicing released, substantially all of its consumer loans
to client lenders. The client lenders impose their underwriting standards and if
they consider an application satisfactory and accept it, the loan is approved
for closing. In this manner Forward Financial eliminates its exposure to
interest rate risk as well as nearly all credit risk. Forward Financial receives
a fee upon the sale of loans and records such revenue as gain on sale of loans.
Equity loans are originated in the form of lines of credit, primarily
secured by second mortgages on one- to four-family residences in BostonFed's
market area. These lines of credit generally provide consumers with a
tax-advantaged and flexible borrowing arrangement.
Occasionally, BostonFed is the lead bank in generally larger loans,
usually retaining 50% or more of the balance and participating-out the remaining
balance of the loan. At December 31, 2001, BostonFed was the lead bank in three
loans with a cumulative total balance of $29.5 million. BostonFed's portion was
$17.9 million, of which $10.8 million had been disbursed.
7
BostonFed also participates in loans when a correspondent financial
institution has underwritten the loan according to BostonFed's policies and
closed the loan in its own name. BostonFed's participation in commercial real
estate loans and business loans originated and serviced by other financial
institutions totaled $1.2 million and $8.0 million, respectively, at December
31, 2001.
BostonFed has also purchased one- to four-family whole loans that are
being serviced by others. The balance of these loans at December 31, 2001 was
approximately $3.7 million.
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 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, 2001, BostonFed had $5.4 million in net gains
attributable to the sale of mortgage loans. Forward Financial recorded $5.2
million in net gains, the vast majority of which is attributable to the sale of
consumer loans.
8
The following table sets forth BostonFed's loan originations, purchases,
sales and principal repayments for the periods indicated:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
Net loans:
Beginning balance .................................. $ 1,036,435 $ 1,032,594 $ 943,662
Loans originated:
One- to four-family ....................... 841,133 339,643 507,569
Multi-family .............................. -- 508 2,821
Commercial real estate .................... 35,333 22,092 30,160
Construction and land ..................... 62,726 64,386 50,946
Equity line of credit drawn ............... 56,511 46,633 36,363
Business line of credit drawn ............. 82,206 29,046 9,113
Manufactured housing, recreational vehicles
and boats .............................. 60,530 81,715 6,281
Other(1) .................................. 9,341 17,558 18,441
----------- ----------- -----------
Total loans originated .................... 1,147,780 601,581 661,694
Loans purchased(2) ............................ 25,129 25,243 41,996
Loans from Forward acquisition ................ -- -- 11,345
----------- ----------- -----------
Total ............................... 2,209,344 1,659,418 1,658,697
Less:
Principal repayments and other, net ........... (548,547) (282,327) (307,906)
Loan (charge-offs) recoveries, net ............ 127 (273) 358
Sale of loans ................................. (580,514) (325,762) (302,298)
Transfer of mortgage loans to real estate owned -- -- (83)
----------- ----------- -----------
Loans, net and mortgage loans held for sale ... 1,080,410 1,051,056 1,048,768
Loans held for sale ........................... (24,612) (14,621) (16,174)
----------- ----------- -----------
Loans, net ......................................... $ 1,055,798 $ 1,036,435 $ 1,032,594
=========== =========== ===========
- ----------
(1) Other loans primarily consist of business loans and other consumer loans.
(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
one, three, five and seven year 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 amortization schedules ranging from
ten to thirty years. BostonFed originates adjustable-rate mortgage loans that
have fixed interest rates for an initial period 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, in effect when the loan was
originated, 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 6%) on the
increase or decrease in interest rate at any adjustment date and over the life
of the loan, respectively.
9
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 100% 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 originate single-family owner-occupied mortgage
loans under certain loan programs 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.
If possible, personal guarantees of the principal borrower are obtained on
multi-family loans made to corporations, partnerships and other business
entities. 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, 2001, the
largest multi-family loan outstanding balance was a $1.8 million performing loan
secured by a 20 unit apartment complex located in South Boston, 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
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.
10
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, 2001 was
$107.8 million, or 9.6% of total loans. The largest commercial real estate loan
outstanding balance in BostonFed's portfolio at December 31, 2001 was a $7.0
million performing loan secured by self-storage facility located in Danvers,
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. If possible, personal
guarantees of the principal borrowers are obtained on loans to a corporation,
partnership or other business entity. In some instances, 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 loan to value ratio.
Currently, BostonFed's maximum loan limit is $7.5 million. BostonFed's largest
construction and land loan outstanding balance at December 31, 2001 was a
performing loan of $3.1 million disbursed, with a remaining loan-in-process
balance of $4.5 million, net of $5.5 million and $2.2 million respectively which
are participated with another financial institution. This property is secured by
a fourteen-unit luxury condominium project in Brookline, 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.
EQUITY LINES. 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.
11
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.
BUSINESS LOANS. BostonFed began originating loans to businesses and
corporations in 1998. These loans, amounting to $28.1 million at December 31,
2001, 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,
2001 was a $5.3 million performing loan secured by all business assets and
commercial real estate owned by a specialty textile service company located in
Taunton, Massachusetts.
OTHER LENDING. Other loans consist primarily of consumer loans such as
automobile loans, and loans secured by savings accounts. Such loans are
generally originated in BostonFed's primary market area.
COLLECTIONS. 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. 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.
MORTGAGE 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 (the "OTS")
and Office of the Comptroller of the Currency (the "OCC"), loans to one borrower
cannot, subject to certain exceptions, exceed 15% of the Bank's unimpaired
capital and surplus. At December 31, 2001, the regulatory loans to one borrower
limit was $13.8 million and $1.6 million for Boston Federal and Broadway
National, respectively.
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
12
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 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, 2001, BostonFed had, on a consolidated basis, $7.2 million of
assets designated as "special mention," $2.8 million of assets designated as
"substandard." Included in these amounts was $1.2 million in non-performing
loans at December 31, 2001. In the opinion of management, the remaining "special
mention" and "substandard" loans of $8.8 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. Additional
classified assets include $17,000 of assets designated as "doubtful" and
$721,000 of assets designated as "loss." All assets classified as "loss" have
been charged off for financial statement purposes.
13
The following table sets forth delinquencies in BostonFed's loan portfolio
as of the dates indicated:
AT DECEMBER 31, 2001 AT DECEMBER 31, 2000
----------------------------------------------- ----------------------------------------------
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........ 28 $3,726 6 $ 983 7 $1,276 4 $ 418
Multi-family............... -- -- -- -- -- -- -- --
Commercial real estate........... 2 207 -- -- 1 132 -- --
Construction and land............ 4 4,328 -- -- -- -- -- --
Other loans...................... 24 454 3 175 3 71 6 538
---- ------ --- ------ ---- ------ ---- -----
Total..................... 58 $8,715 9 $1,158 11 $1,479 10 $ 956
==== ====== === ====== ==== ====== ==== =====
Delinquent loans to loans, net,
and mortgage loans
held for sale.............. 0.81% 0.11% 0.14% 0.09%
AT DECEMBER 31, 1999
-----------------------------------------------
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........ 10 $1,568 6 $721
Multi-family............... -- -- -- --
Commercial real estate........... 2 287 -- --
Construction and land............ -- -- -- --
Other loans...................... 2 245 -- --
---- ------ --- -----
Total...................... 14 $2,100 6 $ 721
==== ====== === =====
Delinquent loans to loans, net,
and mortgage loans
held for sale.............. 0.20% 0.07%
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, 2001, there was one restructured loan totaling
$203,000. Real estate owned and repossessed assets, net, totaled $31,000
consisting of one manufactured home. 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, 2001, 2000, 1999, 1998 and 1997, 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 $32,000, $40,000, $(2,000), $33,000 and $149,000,
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, $0, $2,000, $1,000 and $1,000, respectively.
AT DECEMBER 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Residential real estate:
One- to four-family ............. $ 983 $ 418 $ 721 $ 784 $ 941
Commercial real estate ............. -- -- 25 25 458
Other loans ........................ 175 538 -- -- 6
------ ------ ------ ------ ------
Total ........................ 1,158 956 746 809 1,405
Real estate owned and other repossessed
assets, net(1) ........................ 31 145 376 47 195
------ ------ ------ ------ ------
Total non-performing assets .. 1,189 1,101 1,122 856 1,600
Restructured loans .................... 203 206 210 213 369
------ ------ ------ ------ ------
Total risk elements ................... $1,392 $1,307 $1,332 $1,069 $1,969
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans(2) ........................ 1.13% 1.07% 1.01% 0.88% 0.82%
Allowance for loan losses as a percent
of non-performing loans(3) ......... 1,064.59 1,190.48 1,428.15 1,050.68 469.75
Non-performing loans as a percent
of loans(2), (3) ................... 0.11 0.09 0.07 0.09 0.17
Non-performing assets as a percent
of total assets(4) ................. 0.08 0.08 0.09 0.08 0.16
- ----------
(1) Real estate owned and other repossessed assets are shown net of related
valuation allowances.
(2) Loans includes loans, net and mortgage loans held for sale, excluding
allowance for loan losses.
(3) 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.
(4) Non-performing assets consist of non-performing loans, real estate owned
and other repossessed assets.
15
At December 31, 2001, loans which were characterized as impaired pursuant
to Statement of Accounting Standards 114 and 118 totaled $216,000. 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, 2001, the average recorded value of impaired loans
was $214,000, interest income of $14,000 was recognized, all of which was
recorded on a cash basis, and $14,000 of interest income would have been
recognized under original terms.
AT DECEMBER 31,
----------------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Impaired loans:
Multi-family real estate .......... $ -- $ -- $ --
Commercial real estate ............ 216 206 235
---- ---- ----
Total ........................ $216 $206 $235
==== ==== ====
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 include 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 2001, 2000 and 1999 were $820,000,
$1.0 million and $1.6 million, respectively. The decrease in the provision for
the year ended December 31, 2001 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, 2001, there were
recoveries of $361,000 credited to, and charge-offs of, $234,000 taken against
this allowance. As of December 31, 2001, the Company's allowance for loan losses
was 1.13% of total loans compared to 1.07% as of December 31, 2000. Management
believes the increased coverage ratio in 2001 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 $285.5 million at December 31, 2000 to $327.7
million at December 31, 2001, an increase of 14.8%. These loans aggregated to
30.7% and 27.2%
16
of the total loans at December 31, 2001 and 2000, respectively. The Company had
non-performing loans of $1.2 million and $956,000 at December 31, 2001 and
December 31, 2000, 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,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- ------- -------- ------- ------
(IN THOUSANDS)
Balance at beginning of period ............ $ 11,381 $10,654 $ 8,500 $ 6,600 $4,400
Broadway National allowance for loan losses
at acquisition date .................... -- -- -- -- 620
Forward Financial allowance for loan
losses at acquisition date ............. -- -- 170 -- --
Provision for loan losses ................. 820 1,000 1,626 1,642 1,696
Charge-offs:
Real estate loans:
Residential:
One- to four-family .................. 118 125 19 51 370
Multi-family ......................... -- -- 1 2 84
Commercial .............................. -- -- -- 75 45
Other ................................... 116 329 36 131 16
-------- ------- -------- ------- ------
Total ................................ 234 454 56 259 515
Recoveries ................................ 361 181 414 517 399
-------- ------- -------- ------- ------
Balance at end of period .................. $ 12,328 $11,381 $ 10,654 $ 8,500 $6,600
======== ======= ======== ======= ======
Ratio of net charge-offs (net recoveries)
during the period to average loans
outstanding during the period ....... (0.01)% 0.03% (0.04)% (0.03)% 0.02%
======== ======= ======== ======= ======
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,
---------------------------------------------------------------------------------------------
2001 2000
------------------------------------------- ------------------------------------------
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 $ 2,925 23.73% 70.38% $ 2,883 25.33% 73.33%
Multi-family ....... 184 1.49 2.31 252 2.21 1.78
Commercial real estate 2,308 18.72 9.62 1,905 16.74 8.18
Construction and land 1,590 12.90 8.87 1,239 10.89 8.48
Other loans .......... 1,551 12.58 8.82 1,410 12.39 8.23
Unallocated .......... 3,770 30.58 -- 3,692 32.44 --
------- ------- ------- ------- ------- -------
Total allowance
for loan losses $12,328 100.00% 100.00% $11,381 100.00% 100.00%
======= ======= ======= ------- ======= =======
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- --------------------------------
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 . $ 2,872 26.96% 77.85% $ 2,186 25.72% 84.27% $ 1,997 30.26% 86.11%
Multi-family ........ 209 1.96 2.02 214 2.52 2.33 206 3.12 2.32
Commercial real
estate ............. 2,090 19.62 6.99 615 7.24 4.97 369 5.59 4.46
Construction
and land ........... 1,285 12.06 7.09 3 0.03 4.23 152 2.30 2.51
Other loans ........... 1,029 9.66 6.05 731 8.60 4.20 266 4.03 4.60
Unallocated ........... 3,169 29.74 -- 4,751 55.89 -- 3,610 54.70 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total allowance
for loan losses $10,654 100.00% 100.00% $ 8,500 100.00% 100.00% $ 6,600 100.00% 100.00%
======= ======= ======= ======= ======= ======= ======= ======= =======
18
REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
At December 31, 2001, BostonFed did not have any real estate owned and had
$31,000 of other repossessed assets, 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 OTS
regulations, federal funds and U.S. government-sponsored agency issued
mortgage-backed securities and privately-issued collateralized mortgage
obligations ("CMO's"). 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 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.
19
The following tables set forth BostonFed's mortgage-backed securities
activities for the periods indicated:
FOR THE YEAR
ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
--------- -------- --------
(IN THOUSANDS)
Beginning balance .................................... $ 70,655 $ 29,481 $ 43,942
Mortgage-backed securities purchased
available for sale ........................ 101,843 1,986 5,005
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 ........................... (36,544) (11,963) (14,892)
Change in unrealized gains (losses) ............ (116) 225 (435)
Accretion of premium, net of discount .......... (94) (49) (77)
--------- -------- --------
Ending balance ....................................... $ 135,744 $ 70,655 $ 29,481
========= ======== ========
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities at the dates
indicated.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ -------------------------------
AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR
COST OF TOTAL VALUE COST OF TOTAL VALUE COST OF TOTAL VALUE
-------- -------- -------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities and
collateralized mortgage
obligations:
Available for sale:
Ginnie Mae .................... $ 6,237 4.59% $ 6,196 $ -- -% $ -- $ -- -% $ --
Fannie Mae .................... 11,904 8.76 11,869 1,733 2.45 1,769 3,004 10.07 3,004
Freddie Mac ................... 62,952 46.30 62,634 4,394 6.21 4,367 5,559 18.64 5,484
Privately issued collateralized
mortgage obligations ....... 14,046 10.33 14,223 9,361 13.23 9,236 7,318 24.54 7,052
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total available for sale ......... 95,139 69.98 94,922 15,488 21.88 15,372 15,881 53.25 15,540
-------- -------- -------- -------- -------- -------- -------- -------- --------
Held to maturity:
Ginnie Mae .................... 7,376 5.43 7,581 10,829 15.30 10,872 13,201 44.27 13,297
Fannie Mae .................... 45 0.03 47 146 0.21 147 259 0.87 252
Freddie Mac ................... 33,401 24.57 33,919 44,308 62.61 43,951 481 1.61 481
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total held to maturity ........... 40,822 30.02 41,547 55,283 78.12 54,970 13,941 46.75 14,030
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
securities and collateralized
mortgage obligations .......... $135,961 100.00% $136,469 $ 70,771 100.00% $ 70,342 $ 29,822 100.00% $ 29,570
======== ======== ======== ======== ======== ======== ======== ======== ========
20
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,
------------------------------------------------------------------------------------
2001 2000 1999
------------------------ ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- ------- -------- -------
(IN THOUSANDS)
Daily federal funds sold and
short-term investments ................ $ 48,158 $ 48,158 $ 9,176 $ 9,176 $ 2,815 $ 2,815
Investment securities:
Held to maturity:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 554 598 2,304 2,328 2,304 2,275
-------- -------- ------- ------- ------- -------
Total held to maturity ................... 554 598 2,304 2,328 2,304 2,275
-------- -------- ------- ------- ------- -------
Available for sale:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 25,050 25,050 41,993 41,993 33,641 33,641
Mortgage-related mutual funds ...... 21,149 21,149 17,424 17,424 16,193 16,193
Other mutual funds(1) .............. 17,046 17,046 1,278 1,278 1,960 1,960
Marketable Equity Securities--
Common Stock .................... 13 13 2,726 2,726 1,409 1,409
-------- -------- ------- ------- ------- -------
Total available for sale ........ 63,258 63,258 63,421 63,421 53,203 53,203
-------- -------- ------- ------- ------- -------
Total investment securities .............. $111,970 $112,014 $74,901 $74,925 $58,322 $58,293
======== ======== ======= ======= ======= =======
- ----------
(1) Consists of securities issued by institutional mutual funds which
primarily invest in short-term U.S. Government securities and
mortgage-related securities.
21
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, 2001.
AT DECEMBER 31, 2001
-------------------------------------------------------------------
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 ...... $ 48,158 1.41% $ -- --% $ -- --%
Debt Securities:
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations ................. 529 5.48 25 7.50 -- --
-------- -------- --------
Total held to maturity ....................... 529 -- 25 -- -- --
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations .............. 1,015 7.28 1,274 7.02 8,019 7.82
Total debt securities available for sale .. 1,015 7.28 1,274 7.02 8,019 7.82
-------- -------- --------
Total short-term investments and debt securities ......... $ 1,544 4.79 $ 1,299 6.88 $ 8,019 7.82
======== ======== ========
Mortgage-backed securities:
Held to maturity:
Ginnie Mae ......................................... 4 6.50 687 8.25 379 8.21
Fannie Mae ......................................... $ 45 7.00 $ -- -- $ -- --
Freddie Mac ........................................ 124 7.00 -- -- 19,927 5.68
-------- -------- --------
Total held to maturity ................................ 173 6.99 687 8.25 20,306 5.73
Available for sale:
Ginnie Mae ......................................... -- -- -- -- -- --
Fannie Mae ......................................... -- -- -- -- -- --
Freddie Mac ........................................ 1,450 6.42 1,120 7.01 3,957 5.42
Privately issued collateralized mortgage obligation -- -- -- -- -- --
-------- -------- --------
Total held for sale ............................. 1,450 6.42 1,120 7.01 3,957 5.42
-------- -------- --------
Total mortgage-backed securities ............. $ 1,623 7.92 $ 1,807 7.48 $ 24,263 5.68
======== ======== ========
AT DECEMBER 31, 2001
----------------------------------------------
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 ...... $ -- --% $ 48,158 1.41%
Debt Securities:
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations ................. -- -- 554 5.60
-------- --------
Total held to maturity ....................... -- -- 48,712 1.46
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations .............. 14,742 4.66 25,050 5.90
-------- --------
Total debt securities available for sale .. 14,742 4.66 25,050 5.90
-------- --------
Total short-term investments and debt securities ......... $ 14,742 4.66 $121,920 2.35
======== ========
Mortgage-backed securities:
Held to maturity:
Ginnie Mae ......................................... 6,306 7.01 7,376 7.19
Fannie Mae ......................................... $ -- -- $ 45 7.00
Freddie Mac ........................................ 13,350 5.94 33,401 5.79
-------- --------
Total held to maturity ................................ 19,656 6.28 40,822 6.04
Available for sale:
Ginnie Mae ......................................... 6,196 6.53 6,196 6.53
Fannie Mae ......................................... 11,869 6.94 11,869 6.94
Freddie Mac ........................................ 56,107 6.38 62,634 6.33
Privately issued collateralized mortgage obligation 14,223 6.21 14,223 6.21
-------- --------
Total held for sale ............................. 88,395 6.44 94,922 6.40
-------- --------
Total mortgage-backed securities ............. $108,051 6.41 $135,744 6.29
======== ========
22
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, 2001, average core deposits represented 51.9% 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 $26.6 million during
2001 and increased by $17.9 million during 2000.
The following table presents the deposit activity of BostonFed for the
periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Net increase in deposits .................... $34,869 $47,873 $37,033
Interest credited on deposit accounts ....... 30,103 31,725 25,872
------- ------- -------
Total increase (decrease) in deposit accounts $64,972 $79,598 $62,905
======= ======= =======
At December 31, 2001, BostonFed had $58.2 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......................... $16,492 4.53%
Over 3 through 6 months...................... 18,234 4.56
Over 6 through 12 months..................... 10,280 3.94
Over 12 months............................... 13,198 5.38
-------
Total........................................ $58,204 4.63
=======
23
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,
-----------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ----------------------------- ------------------------------
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...... $ 54,965 6.45% 2.51% $ 55,796 6.81% 2.86% $ 59,279 8.24% 2.86%
Savings accounts................... 174,651 20.48 2.35 160,118 19.55 2.80 142,399 19.81 2.48
NOW accounts....................... 127,779 14.98 0.58 119,070 14.54 0.76 110,684 15.39 0.80
Non-interest-bearing accounts...... 85,209 9.99 -- 64,176 7.83 -- 49,944 6.95 --
--------- ----- --------- ------ --------- ------
Total........................ 442,604 51,9 1.41 399,160 48.73 1.75 362,306 50.39 1.69
--------- ----- --------- ------ --------- ------
Certificate accounts:
Less than six months............ 57,846 6.78 4.61 25,127 3.07 5.18 25,657 3.57 4.17
Over six through 12 months...... 71,557 8.39 5.01 29,967 3.66 5.41 39,741 5.53 3.63
Over 12 through 36 months....... 229,028 26.87 6.41 317,884 38.80 6.10 241,689 33.62 6.00
Over 36 months.................. 7,527 0.88 6.20 4,952 0.60 6.12 4,236 0.59 5.82
IRA/KEOGH (various terms)....... 44,161 5.18 5.61 42,101 5.14 5.53 45,345 6.31 5.49
--------- ----- --------- ------ ---- --------- ------
Total certificate accounts... 410,119 48.1 5.82 420,031 51.27 5.89 356,668 49.61 5.54
--------- ----- --------- ------ --------- ------
Total average deposits.... $ 852,723 100.0% 3.53 $ 819,191 100.00% 3.87 $ 718,974 100.00% 3.60
========= ===== ========= ====== ========= ======
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, 2001.
PERIOD TO MATURITY FROM DECEMBER 31, 2001 AT DECEMBER 31,
---------------------------------------------------------------- -------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 2001 2000 1999
--------- --------- ----------- ---------- ---------- -------- --------- --------
(IN THOUSANDS)
Certificate accounts:
0 to 4.00%................... $ 74,452 $21,217 $ 5,210 $ 352 $ 22 $101,253 $ -- $ 2,636
4.01 to 5.00%................ 69,694 10,705 2,118 2,193 2,709 87,419 25,239 101,858
5.01 to 6.00%................ 44,428 8,988 1,433 10,787 8,002 73,638 148,795 158,397
6.01 to 7.00%................ 46,889 21,365 24,582 4,375 -- 97,211 206,138 136,497
7.01 to 8.00%................ 12,282 16,961 5,268 2,081 -- 36,592 36,554 --
--------- ------- -------- --------- ---------- -------- --------- --------
Total.................... $ 247,745 $79,236 $ 38,611 $ 19,788 $ 10,733 $396,113 $ 416,726 $399,388
========= ======= ======== ========= ========== ======== ========= ========
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 FHLB 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,
2001, BostonFed increased its net borrowings from the Federal Home Loan Bank by
$105 million to a balance of $449 million. A portion of the FHLB advances may be
called depending on the level of interest rates relative to the interest rate
being charged on the applicable call date. Accordingly, if interest rates rise
sufficient to trigger the call feature, the Company's net interest margin may be
negatively impacted if called advances are replaced by new, higher cost
advances.
24
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,
------------------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
Federal Home Loan Board advances:
Average balance outstanding ......... $451,868 $363,771 $367,484
Maximum amount outstanding at
any month-end during the period .. 467,000 383,954 390,500
Balance outstanding at end of period 449,000 344,334 384,500
Weighted average interest rate
during the period ................ 5.56% 6.10% 5.77%
Weighted average interest rate at end
of period ...................... 5.29% 6.19% 5.80%
AT OR FOR THE YEAR
ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
Other Borrowed Money:
Average balance outstanding ......... $ -- $ 2,679 $ 365
Maximum amount outstanding at
any month-end during the period .. -- 5,000 3,055
Balance outstanding at end of period -- -- 3,055
Weighted average interest rate
during the period ................ -% 9.97% 9.21%
Weighted average interest rate at end
of period ...................... -% -% 9.25%
CORPORATION OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES
On July 12, 2000, BostonFed sponsored the creation of BFD Preferred
Capital Trust I ("Trust I"), a New York common law trust. BostonFed 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
BostonFed'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. BostonFed has, through the Trust I agreement establishing
Trust I, 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, BostonFed sponsored the creation of BFD Preferred
Capital Trust II ("Trust II"), a statutory business trust created under the laws
of Delaware. BostonFed 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 BostonFed's
$681,000 capital contribution for the Trust II common securities, were used to
acquire $22.7 million aggregate principal amount of BostonFed's 10.875% Junior
Subordinated Debentures due October 1, 2030, which constitute the sole assets of
Trust II. BostonFed has, through the Declaration of Trust and the Amended and
Restated declaration of Trust establishing Trust II, the Common Securities and
the Capital Securities Guarantee Agreements, the
25
debentures and related Indenture, taken together, fully, irrevocably and
unconditionally guaranteed all of Trust II's obligations under the Capital
Securities.
SUBSIDIARY ACTIVITIES
Leader Corporation, incorporated under Massachusetts law, is a wholly
owned subsidiary of Boston Federal. During 2001, Boston Federal continued its
relationship with Independent Financial Marketing Group ("IFMG"), a third-party
marketer (previously owned by Liberty Financial), now owned by Sun Life of
Canada, to provide non-FDIC insured alternative investment products in
segregated areas of Boston Federal's branches. Under this contract, IFMG leases
space from Boston Federal's branch locations and pays rent and a percentage of
sales to Leader Corporation.
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, Forward Financial originates real estate mortgages
near its headquarters for its own portfolio and for sale. Forward Financial
operates in approximately 25 states from its headquarters in Northborough,
Massachusetts and an office in Las Vegas, Nevada. It sells the vast majority of
the consumer loans it originates to third party client lenders.
Ellsmere Insurance Agency, Inc. was acquired in December 1999 and has
limited operations as a subsidiary of Broadway National. It is incorporated
under Massachusetts law and holds a corporate broker license in Massachusetts
and holds a non-resident broker license in various states where applicable to
the conduct of business in these states. It earns fees for customer referrals to
insurance companies.
PERSONNEL
As of December 31, 2001, BostonFed had 345 authorized full-time employee
positions and 80 authorized part-time employee positions, for a total of
approximately 380 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
BostonFed, as a bank holding company, is required to file certain reports
with, and otherwise comply with the rules and regulations promulgated 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 Federal
Deposit Insurance Corporation (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 providing notice or 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 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
26
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
procedures, including procedures 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.
Ellsmere Insurance Agency, Inc. is regulated by the insurance regulatory
agencies in Massachusetts and in those states in which it holds non-resident
insurance agency licenses.
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, 2001 of $23.1 million and $832,000 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 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 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,
27
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.
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.
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.
28
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 require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% core capital (3% for institutions receiving the highest rating on
the CAMELS examination rating system) and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital ratio, a 4% 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, core and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as a principal not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks believed inherent in the type of asset. Core (or Tier 1) capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital include, among other items, cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets
and up to 45% of unrealized gains on available-for-sale equity securities with
readily determinable fair market values. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
29
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. Since adoption, the OTS has deferred implementation of the
interest rate risk capital charge.
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, 2001 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, 2001
Risk-based total capital:
BostonFed............................ $118,631 13.4% $70,699 8.0% $88,374 10.0%
Boston Federal....................... 90,800 11.7 62,294 8.0 77,868 10.0
Broadway National.................... 10,515 13.4 6,273 8.0 7,841 10.0
Core capital:
Boston Federal....................... 81,059 6.3 51,565 4.0 64,456 5.0
Risk-based Tier I capital:
BostonFed............................ 106,683 12.1 35,350 4.0 53,024 6.0
Boston Federal....................... 81,059 10.4 31,147 4.0 46,721 6.0
Broadway National.................... 9,553 12.2 3,136 4.0 4,705 6.0
Tangible capital:
Boston Federal....................... 81,059 6.3 25,782 2.0 64,456 5.0
Leverage capital:
BostonFed............................ 106,683 7.4 58,081 4.0 72,601 5.0
Broadway National.................... 9,553 5.9 6,506 4.0 8,132 5.0
PROMPT CORRECTIVE REGULATORY ACTION. The OTS and OCC are required to take
certain supervisory actions against undercapitalized institutions under their
jurisdiction, the severity of which depends upon the institution's degree of
undercapitalization. Generally, an institution that has a ratio of total capital
to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." An institution that has a total
risk-based capital ratio less than
30
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
2001 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. The FDIC announced recently that Banks with BIF-insured
deposits face the possibility of an increase in deposit insurance premiums in
the second half of 2002. The FDIC expects an increase of no more than 5 basis
points. The FDIC's next review of the BIF is expected to occur by May 15, 2002.
There can be no assurance that the FDIC will proceed as stated and the
assessment may be lower or higher than expected.
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 2001 were $141,000 for Boston Federal and
$26,000 for Broadway National. These payments approximated 1.89 basis points of
assessable deposits.
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, 2001, Boston Federal's limit on loans to
one borrower was $13.8 million and Broadway National's limit was $1.6 million.
At December 31, 2001, Boston Federal's largest aggregate outstanding balance of
loans and outstanding commitments to one borrower was $9.1 million and Broadway
31
National's largest aggregate outstanding balance of loans and outstanding
commitments to one borrower was $1.1 million, net of portion sold.
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, 2001, 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, 2001, Broadway
National met all applicable regulatory capital standards.
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, 2001 totaled approximately $215,000
National banks pay semi-annual assessments to the OCC to fund its
operations based on asset size. Such assessments for Broadway National amounted
to approximately $50,000 for the year ended December 31, 2001.
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
32
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 opting-out
of 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, institutions like Boston Federal and
Broadway National 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 requires certain board approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions, the OCC has primary enforcement
authority over national banks and both agencies have the authority to bring
actions against the respective institutions and all institution-affiliated
parties, including stockholders, and any attorneys, appraisers and accountants
who knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of
officers and/or directors to institution of receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or even $1 million per day in
especially egregious cases. Under the FDI Act, the FDIC has the authority to
recommend to OTS that enforcement action be taken with respect to a particular
savings institution or the OCC with respect to a national bank. If action is not
taken by the agency, the FDIC has authority to take such action under certain
circumstances. Federal law also
33
establishes criminal penalties for certain violations. The FRB has similar
enforcement authority with respect to BostonFed. Neither BostonFed nor the Bank
are under any enforcement action.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
USA PATRIOT ACT. The USA Patriot Act of 2001 (the "Patriot Act"), designed
to deny terrorists and others the ability to obtain anonymous access to the
United States financial system, has significant implications for depository
institutions, brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act mandates or will require financial institutions to
implement additional policies and procedures with respect to, or additional
measures designed to address, any or all of the following matters, among others:
money laundering; suspicious activities and currency transaction reporting; and
currency crimes.
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 $41.3 million or less (subject to adjustment by the FRB) the reserve
requirement is 3%; and for accounts aggregating greater than $41.3 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 $41.3
million. The first $5.7 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
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.
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.
34
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 2001
taxable year, BostonFed is subject to a maximum federal income tax rate of 35%.
BAD DEBT RESERVES. For tax years beginning prior to December 31, 1995,
thrift institutions were allowed to establish a reserve for bad debts and deduct
reasonable annual additions to their bad debt reserves. Annual additions to bad
debt reserves were calculated using either the experience method or the
percentage of taxable income method. Federal legislation effective for tax years
beginning after January 1, 1996 eliminated the percentage of taxable income
method for all thrift institutions and prohibited thrifts with assets in excess
of $500 million from using the reserve method of accounting for bad debts.
Boston Federal is, therefore, required to use the specific charge-off method of
accounting for bad debts, with loans deducted as they are charged off. In
addition, thrifts were required to "recapture" (i.e., take into income) the
amounts added to their bad debt reserves for tax years beginning after January
1, 1988.
Thrift institutions required to change their accounting methods as a
result of federal legislation have been permitted to recapture accumulated bad
debt reserves ratably over a six-year period, starting with the tax year
beginning after December 31, 1995, with a two-year postponement available
provided the institution met certain residential loan requirements. BostonFed
previously recorded a deferred tax liability equal to the bad debt recapture; as
a result, the recapture rules have not affected net income or income tax
expenses.
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 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.
35
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.
OTHER. Forward Financial files state tax returns in various states it
operates in accordance with state tax requirements.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the executive
officers of the Company who are not also directors. All of these executive
officers also hold positions with one or more of the Company's subsidiaries. See
page 74 of the 2001 Annual Report to Stockholders.
AGE AT
NAME 12/31/01 POSITION
- --------- ---------- ------------------------------------------------------
John A. Simas.............. 52 Executive Vice President, Chief Financial Officer and
Secretary
Mark H. Kellett............ 42 Senior Vice President and Treasurer
Stephen F. Kelly........... 54 Senior Vice President and Controller
Janice M. Forster.......... 51 Vice President
Dennis J. Furey............ 53 Vice President
Dennis G. Kilduff.......... 58 Vice President
Barbara A. Martin.......... 47 Vice President
Shaun W. McGee............. 46 Vice President
John D. Mullen............. 58 Vice President
Marylea R. Oates........... 55 Vice President
36
ITEM 2. PROPERTIES.
The Company conducts its business through Boston Federal and Broadway
National which operate through a home office in Burlington, Massachusetts and
ten 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, 2001
- ------------- -------- ---------- -------------------- --------------------
(In thousands)
ADMINISTRATIVE/BRANCH/HOME OFFICE:
17 New England Executive Park Leased 1988 November, 2008 $ 2,791
Burlington, MA 01803
BRANCH OFFICES:
980 Massachusetts Avenue Owned 1976 -- 411
Arlington, MA 02174
60 The Great Road Owned 1971 -- 420
Bedford, MA 01730
449 Boston Road Leased 2000 -- 1,325
Billerica, MA 01821
75 Federal Street Leased 1988 August, 2003 64
Boston, MA 02110
457 Broadway Owned 1969 -- 976
Chelsea, MA 02150
1840 Massachusetts Avenue Owned 1960 -- 971
Lexington, MA 02173
31 Cross Street Owned 1971 -- 418
Peabody, MA 01960
411 Broadway Owned 1977 -- 1,078
Revere, MA 02150
200 Linden Street Leased 1973 November, 2003 83
Wellesley, MA 02181
280 Montvale Avenue Owned 2000 -- 1,632
Woburn, MA 02476
Forward Financial Co. Two locations leased. 126
360 Church Street -------
Northboro, MA 01532
Total............................. $10,295
=======
- ----------
* Land is leased.
37
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. All parties reached a mutually acceptable settlement on March 4, 2002.
Broadway National Bank agreed to pay $500,000 in order to settle the suit with
the Plaintiff. The settlement agreement is scheduled to be executed by all
parties within 30 days and the Company will record the expense in the first
quarter of 2002.
Another action is pending against Diversified (a wholly owned indirect
subsidiary of BostonFed Bancorp, Inc.), doing business as Forward Financial
Company, in the United States District Court for the Northern District of New
York. It was filed by a bank, in New York state court, served on December 1,
2000, and removed to federal court. The bank alleges that Diversified has
breached a written agreement between the parties under which Diversified
originated loans secured by manufactured homes and then sold and assigned those
loans to the bank. The bank claims that Diversified breached express warranties
in the agreement, including an alleged warranty that all information in the loan
documents supplied by Diversified was true with regard to certain loans. The
bank also claims that Diversified committed fraud in connection with some of
these loans. On February 6, 2002, the Court denied Diversified's Motion to
Dismiss and, at the same time, ruled on the parties' cross-motions for summary
judgment. The Court's decision on the motions for summary judgment appears to be
ambiguous and inconsistent in certain important respects. The Court's decision
does not resolve the case; it does, however, leave Diversified with significant
defenses, which Diversified will pursue vigorously. Diversified filed its Answer
to the bank's Second Amended Complaint on March 7, 2002, and filed a Motion to
Clarify the Court's decision on the summary judgment motions on March 12, 2002.
Diversified continues to believe its defenses are strong. Because of the
numerous uncertainties that surround the litigation, management and legal
counsel are unable to estimate the amount of loss, if any, that the Company may
incur with respect to this litigation. Consequently, no loss provision has been
recorded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
38
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 2001 Annual Report to Shareholders is incorporated herein by
reference. Information relating to dividend restrictions for BostonFed's common
stock appears under "Regulation and Supervision."
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Financial Data" in BostonFed's 2001 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 2001 Annual Report to Shareholders is incorporated
herein by reference.
ITEMS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The above-captioned information is incorporated by reference to pages 9
through 13 of BostonFed's 2001 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The required information is incorporated herein by reference to pages 24
through 72 of BostonFed's 2001 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 who are also
directors of BostonFed is incorporated herein by reference to pages 6 through 8
of BostonFed's Proxy Statement for the Annual Meeting of Shareholders. See also
Part I - Additional Item - Executive Officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of directors and executive
officers is incorporated herein by reference pages 9 through 16 of BostonFed's
Proxy Statement for the Annual Meeting of Shareholders.
39
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 to pages 4 through 6 of
BostonFed's Proxy Statement for the Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions is
incorporated herein by reference to pages 16 and 19 of BostonFed's Proxy
Statement for the Annual Meeting of Shareholders.
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, 2001, 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, 2001 and 2000......................................... 25
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999................................... 26
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 2001, 2000 and 1999................... 27-29
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001, 2000 and 1999............................. 30-31
Notes to Consolidated Financial Statements........................... 32-72
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.
40
(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 Employee Stock Ownership Plan and Trust (1)
10.6 BostonFed Bancorp, Inc. 1996 Stock-Based Incentive Plan
(3)
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 (5)
10.11 Employment Agreement Between Boston Federal and Shaun W.
McGee and Employment Agreement Between BostonFed and
Shaun W. McGee (5)
11.0 Computation of earnings per share (see Consolidated
Statements of Income located on page 26 of the 2001
Annual Report)
13.0 2001 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant
23.0 Consent of Independent Auditors
99.0 Proxy Statement for 2002 Annual Meeting previously filed
on March 29, 2002 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) Incorporated herein by reference into this document from the Form 10-k
filed on March 30, 2001.
(b) Reports on Form 8-K.
None.
41
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 29, 2002
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 and Chief Executive March 29, 2002
- -------------------------- Officer and Chairman of the Board
David F. Holland
/s/ David P. Conley Director, Executive Vice President, March 29, 2002
- -------------------------- Assistant Treasurer and Assistant Secretary
David P. Conley
/s/ John A. Simas Executive Vice President, March 29, 2002
- -------------------------- Corporate Secretary and Chief Financial
John A. Simas Officer (Principal financial and accounting officer)
/s/ Gene J. DeFeudis Director March 29, 2002
- --------------------------
Gene J. DeFeudis
/s/ Richard J. Fahey Director March 29, 2002
- --------------------------
Richard J. Fahey
/s/ Patricia M. Flynn Director March 29, 2002
- --------------------------
Patricia M. Flynn
/s/ Kija Kim Director March 29, 2002
- --------------------------
Kija Kim
/s/ Joanna T. Lau Director March 29, 2002
- --------------------------
Joanna T. Lau
/s/ W. Russell Scott, Jr. Director March 29, 2002
- --------------------------
W. Russell Scott
/s/ Catherine Friend White Director March 29, 2002
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Catherine Friend White