-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HFkcvoSbnqKRFj/EmqpIE/n1VX1Wsnr/t6JXj3JEAcJ2+KAO0UdK32cGJExsbuZ4 QVN5jtQyAvfcc/kUCEhHeQ== 0000896415-96-000056.txt : 19960617 0000896415-96-000056.hdr.sgml : 19960617 ACCESSION NUMBER: 0000896415-96-000056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960614 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON BANCORP CENTRAL INDEX KEY: 0000760079 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042850710 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13795 FILM NUMBER: 96581310 BUSINESS ADDRESS: STREET 1: 460 W BROADWAY CITY: SOUTH BOSTON STATE: MA ZIP: 02127 BUSINESS PHONE: 6172682500 MAIL ADDRESS: STREET 1: 460 WEST BRAODWAY CITY: SOUTH BOSTON STATE: MA ZIP: 02127 10-Q 1 FORM 10-Q QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-Q [xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 0-13795 THE BOSTON BANCORP (Exact name of registrant as specified in its charter) Massachusetts 04-2850710 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 460 West Broadway South Boston, Massachusetts 02127 (Address of principal executive offices) (Zip Code) (617) 268-2500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or 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 The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date, is: Class: Common stock, par value $1.00 per share. Outstanding at May 31, 1996: 5,290,057 shares. -1- THE BOSTON BANCORP FORM 10-Q INDEX Page Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition (Unaudited) as of April 30, 1996 and October 31, 1995...................................3 Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended April 30, 1996 and 1995....................4 Consolidated Statements of Cash Flows (Unaudited) for the Three and Six Months Ended April 30, 1996 and 1995....................5 Notes to Consolidated Financial Statements (Unaudited)................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................10 Part II. Other Information Item 1. Legal Proceedings ...................................................18 Item 2. Changes in Securities................................................18 Item 3. Defaults Upon Senior Securities......................................18 Item 4. Submission of Matters to a Vote of Security-Holders..................18 Item 5. Other Information ...................................................18 Item 6. Exhibits and Reports on Form 8-K.....................................18 Signature Page.......................................................19 - 2 - THE BOSTON BANCORP AND SUBSIDIARIES Consolidated Statements of Financial Condition (In thousands)
April 30, 1996 October 31, 1995 (Unaudited) Assets: Cash and due from banks............................................... $ 21,976 $ 15,733 Federal funds sold.................................................... 9,825 -- Short-term investments................................................ 153,671 -- Investment securities available for sale at fair value (Note C)....... 446,547 404,397 Mortgage-backed securities available for sale at fair value (Note C).. 606,135 1,041,056 Loans held for sale, net (Notes D and E).............................. 40,154 138,556 Loans, net of allowance for possible loan losses of $1,989 and $2,121, respectively ................................. 162,148 209,947 Other real estate, net................................................ 1,221 7,540 Federal Home Loan Bank stock.......................................... 11,837 25,675 Land, buildings and equipment, net.................................... 9,148 9,649 Accrued income receivable............................................. 11,118 14,531 Receivable for securities sold........................................ 75,023 11,185 Deferred income taxes................................................. 3,700 -- Other assets.......................................................... 13,116 7,815 ------- ------------ Total assets........................................................ $ 1,565,619 $ 1,886,084 ============ ============ Liabilities and stockholders' equity: Deposits.............................................................. 1,351,051 1,339,467 ESOP loan payable..................................................... 2,079 2,520 Notes payable......................................................... 5,550 5,650 Securities sold under agreements to repurchase........................ -- 92,185 Federal Home Loan Bank advances....................................... -- 236,500 Accrued interest payable.............................................. 2,721 4,244 Mortgagors' escrow accounts........................................... 439 840 Deferred income taxes................................................. -- 3,192 Other liabilities..................................................... 5,527 6,856 ------ ----- Total liabilities................................................... 1,367,367 1,691,454 ---------- --------- Commitments and contingencies (Note F)................................... -- -- Stockholders' equity: Serial preferred stock, $1.00 par value; authorized 3,000,000 shares; issued - 0 - shares.................... -- -- Common stock, $1.00 par value; authorized 20,000,000 shares; issued and outstanding 5,284,482 and 5,218,193 shares, respectively...................................... 5,284 5,218 Additional paid-in capital............................................ 30,755 28,554 Retained earnings..................................................... 161,244 139,194 Unearned compensation expense - ESOP.................................. (2,079) (2,520) Net unrealized gain on securities available for sale.................. 3,048 24,184 ------ ------ Total stockholders' equity.......................................... 198,252 194,630 -------- ------- Total liabilities and stockholders' equity.......................... $ 1,565,619 $ 1,886,084 ============ ============ See accompanying notes to unaudited consolidated financial statements.
- 3 - THE BOSTON BANCORP AND SUBSIDIARIES Consolidated Statements of Operations (In thousands except per share data)
Three Months Ended Six Months Ended April 30, April 30, ---------------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- (Unaudited) (Unaudited) Interest and dividend income: Interest on mortgage loans.......................... $ 6,909 $ 8,008 $ 14,566 $16,024 Interest on other loans............................. 255 184 548 476 Interest on mortgage-backed securities.............. 13,381 18,376 29,100 35,336 Interest on investment securities................... 6,067 5,937 11,439 13,825 Dividends on equity securities...................... 1,044 2,216 2,573 4,740 Interest on short-term investments.................. 788 260 1,182 354 -------- -------- -------- ------- Total interest and dividend income................ 28,444 34,981 59,408 70,755 -------- -------- -------- ------- Interest expense: Deposits............................................ 14,662 13,079 29,807 25,843 Federal Home Loan Bank advances..................... 590 7,430 2,271 14,655 Securities sold under agreements to repurchase...... 170 424 1,250 599 Notes payable....................................... 116 118 233 251 -------- -------- -------- -------- Total interest expense............................ 15,538 21,051 33,561 41,348 -------- -------- -------- -------- Net interest and dividend income....................... 12,906 13,930 25,847 29,407 Provision for possible loan losses..................... -- 500 -- 2,000 -------- -------- -------- -------- Net interest and dividend income after provision for possible loan losses.............................. 12,906 13,430 25,847 27,407 -------- -------- -------- -------- Other income: Net realized gains on securities.................... 7,692 533 23,265 560 Gain (loss) on sales of loans....................... 1,783 (618) 1,791 (617) Fees and service charges on loans................... 365 429 749 850 Other operating income.............................. 390 387 680 791 -------- -------- -------- -------- Total other income................................ 10,230 731 26,485 1,584 -------- -------- -------- -------- Other expenses: Salaries and employee benefits...................... 2,837 2,802 5,971 6,178 Professional services............................... 458 2,200 1,068 2,825 Occupancy and equipment expense..................... 510 744 1,021 1,425 FDIC deposit insurance assessment................... 107 797 301 1,602 (Gain) loss on sale of other assets................. (120) -- (120) -- Provision for losses on joint venture advances...... -- 142 -- 284 FHLB advance prepayment penalties................... 70 -- 1,253 -- Advertising expense................................. 174 185 373 380 Net gain on sale of other real estate............... (71) (376) (562) (419) Merger related expenses............................. 51 -- 228 -- Net cost of other real estate....................... 246 113 288 154 Provision for OREO valuation........................ -- -- 300 -- Other operating expenses............................ 1,455 1,212 2,657 2,299 -------- -------- -------- -------- Total other expenses.............................. 5,717 7,819 12,778 14,728 -------- -------- -------- -------- Income before income taxes............................. 17,419 6,342 39,554 14,263 -------- --------- -------- -------- Income taxes: Federal............................................. 4,702 1,782 12,267 3,976 State............................................... 2,978 132 3,233 350 -------- -------- -------- -------- Total income taxes................................ 7,680 1,914 15,500 4,326 -------- -------- -------- -------- Net income............................................. $ 9,739 $ 4,428 $ 24,054 $ 9,937 ======== ======== ======== ======== Primary earnings per common and common equivalent share (Note B)........................... $ 1.82 $ 0.85 $ 4.51 $ 1.92 ======== ========= ======== ======== Fully diluted earnings per share and common equivalent share (Note B)........................... $ 1.82 $ 0.84 $ 4.51 $ 1.90 ======== ========= ======== ======== Average number of common shares-Primary (Note B)....... 5,349 5,218 5,329 5,174 ======== ======== ======== ======== Average number of common shares - Fully Diluted (Note B) 5,349 5,249 5,337 5,228 ======== ======== ======== ======== Dividends paid per common share........................ $ .19 $ .19 $ .38 $ .38 ======== ========= ======== ======== See accompanying notes to unaudited consolidated financial statements.
- 4 - THE BOSTON BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
Six Months Ended April 30, ----------------------------------- 1996 1995 ---- ---- (Unaudited) Operating activities: Net income.......................................................... $ 24,054 $ 9,937 Adjustments to reconcile net income to net cash used in operating activities: Decrease in accrued income receivable............................... 3,413 2,026 (Decrease) increase in accrued interest payable..................... (1,523) 613 Amortization of loan discounts and premiums, net.................... (586) (233) Amortization of investment securities available for sale discounts and premiums, net........................................ (480) (692) Amortization of mortgage-backed securities available for sale discounts and premiums, net.................................. 1,105 1,080 Provision for possible loan losses.................................. -- 2,000 Provision for OREO valuation........................................ 300 -- Adjustment to carrying value of other real estate................... 42 -- Net realized gains on investment securities available for sale...... (23,797) (2,681) Net realized loss on mortgage-backed securities available for sale.. 532 2,121 Net (gain) loss on sale of loans.................................... (1,791) 618 Loans originated for sale........................................... (10,702) (16,357) Net gains on sale of other real estate.............................. (562) (419) Increase in reserve for depreciation................................ 550 493 Increase in receivable for securities sold.......................... (63,838) -- Decrease (increase) in deferred tax asset (excluding SFAS No. 115).. 6,087 (2,098) Gain on sale of other assets........................................ (120) -- (Increase) decrease in other assets................................. (5,181) 24,165 Decrease in other liabilities....................................... (782) (25,591) ---------- ---------- Net cash flow used in operating activities........................ (73,279) (5,018) ---------- ---------- Investing activities: Loans originated and principal collections, net..................... 28,153 (7,285) Proceeds from sale of loans......................................... 112,056 142 Proceeds from sale of foreclosed real estate........................ 6,311 5,304 Purchases of mortgage-backed securities available for sale.......... -- (165,677) Principal collections on mortgage-backed securities available for sale 89,728 51,812 Principal collections on investment securities available for sale... 38 -- Proceeds from sales of mortgage-backed securities available for sale 355,198 21,945 Purchases of investment securities available for sale............... (194,210) (37,410) Proceeds from sales of investment securities available for sale..... 138,421 166,598 Proceeds from maturities of investment securities available for sale 11,516 5,540 Decrease (increase) in FHLB stock................................... 13,838 (697) Other real estate expenses.......................................... (96) (287) Purchases of premises and equipment................................. (50) (535) ---------- ---------- Net cash flow from investing activities........................... 560,903 39,450 ---------- ---------
- 5 - THE BOSTON BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In thousands)
Six Months Ended April 30, ----------------------------------- 1996 1995 ---- ---- (Unaudited) Financing activities: Increase (decrease) in deposit accounts............................. 11,584 (58,045) Proceeds from Federal Home Loan Bank advances....................... -- 340,483 Payments of Federal Home Loan Bank advances......................... (236,500) (327,562) Payments of ESOP loan payable....................................... (441) (377) Net (decrease) increase in securities sold under agreements to repurchase..................................................... (92,185) 17,963 Decrease in mortgagors' escrow accounts............................. (401) (415) Cash dividends paid on common stock................................. (1,994) (1,929) Payments for maturing notes payable................................. (100) (1,900) Proceeds from exercise of stock options............................. 1,721 2,976 Payments for repurchase of common stock............................. (10) (3,103) Unearned compensation expense - ESOP................................ 441 378 ----------- ---------- Net cash flow used in financing activities........................ (317,885) (31,531) ----------- ----------- Total increase (decrease) in cash and cash equivalents.............. 169,739 2,901 Cash and cash equivalents at beginning of period.................... 15,733 14,884 ----------- ---------- Cash and cash equivalents at end of period.......................... $ 185,472 $ 17,785 =========== ========== Supplemental cash flow disclosures: Six Months Ended April 30, ----------------------------------- 1996 1995 ---- ---- (Unaudited) Non-cash transactions: Transfer of other real estate to loans................................. 959 -- Transfer of loans to other real estate................................. 657 10,121 Conversion of real estate loans to FHLMC and FNMA mortgage-backed securities.......................................................... 19,395 11,937 Net transfers of loans to loans held for sale.......................... 39,605 -- Tax benefit of stock options exercised................................. 547 -- SFAS No. 115: Increase in stockholders' equity.................................. (21,136) 32,409 Decrease (increase) in investment securities...................... 26,361 (21,742) Increase in mortgage-backed securities............................ 7,753 (33,395) Increase in deferred tax liability................................ (12,978) 22,728 Cash transactions: Interest on deposits................................................... 30,015 25,742 Interest on borrowings................................................. 4,835 14,710 Interest on notes payable.............................................. 235 283 State taxes............................................................ 568 213 Federal taxes.......................................................... 16,672 2,400 See accompanying notes to unaudited consolidated financial statements.
- 6 - THE BOSTON BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note A) Basis of Presentation The Boston Bancorp ("Bancorp" or the "Company") was formed in October 1984 and, effective March 1, 1985, acquired all of the outstanding shares of the South Boston Savings Bank ("South Boston" or the "Bank") in exchange on a one-for-one basis for Bancorp common stock. Bancorp thereby became the holding company for the Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or all footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements, notes, and other information included in Bancorp's Form 10-K for its fiscal year ended October 31, 1995 and the Proxy Statement dated March 8, 1996. The unaudited interim financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to present fairly the consolidated financial condition as of April 30, 1996 and the consolidated results of operations for the three and six month periods ended April 30, 1996 and 1995 and the consolidated statements of cash flows for the six-month periods ended April 30, 1996 and 1995. The consolidated results of operations for the three and six months ended April 30, 1996 are not necessarily indicative of results that may be expected for the entire year. Note B) Earnings Per Share Primary earnings per share for the three and six months ended April 30, 1996 and 1995 were calculated by adding the common stock equivalents, which would arise from the exercise of outstanding stock options granted under the Company's stock option plans, to the weighted average number of shares outstanding during such quarters. The number of shares used for calculating primary earnings per share for the three and six months ended April 30, 1996 were 5,349,371 and 5,328,810 , respectively, and for the three and six months ended April 30, 1995 were 5,218,019 and 5,174,341, respectively. The weighted average number of shares outstanding during the three and six months ended April 30, 1996 were 5,271,031 and 5,251,759, respectively, and for the three and six months ended April 30, 1995 were 5,127,340 and 5,106,289, respectively The calculation of the common stock equivalents under primary earnings per share is based, in part, on an average stock price for the period. The calculation of the common stock equivalent under fully diluted earnings per share is based, in part, on the price of the stock at the end of the period, if higher than the average price during the period. Fully diluted earnings per share for the three and six months ended April 30, 1996 were based on 5,349,371 and 5,337,058 shares, respectively, and for the three and six months ended April 30, 1995 were 5,249,442 and 5,228,391, respectively. Note C) Investment and Mortgage-Backed Securities Available for Sale All investments and mortgage-backed securities are carried at fair value. Any after-tax net unrealized gain or loss on these securities will be recognized as a credit or charge to stockholders' equity. Securities classified as available for sale include securities that management intends to use as part of its asset/liability management strategy or that may be sold in response to changes in interest rates, significant prepayment risk and other similar economic factors. - 7 - Note D) Loans Held for Sale Loans held for sale are carried at the lower of aggregate cost or market, based upon commitments from investors to purchase such loans or upon prevailing market conditions. Deferred origination fees collected, net of commitment fees paid, are included in the lower of cost or market determination and are adjustments to gains or losses on sales of loans. As of April 30, 1996 and October 31, 1995, management has identified certain loans which, depending on market conditions and other factors, may be offered for sale in the secondary market or converted to mortgage-backed securities which the Bank may then hold as mortgage-backed securities available for sale. Pursuant to the Agreement and Plan of Reorganization with Bank of Boston Corporation, the Bank's entire portfolio of commercial and multifamily real estate loans was classified as held for sale as of October 31, 1995 and was sold to BlackRock Capital Finance L.P. on April 22, 1996. A gain in the amount of $1.8 million was realized at the time of the sale. BlackRock is entitled to certain remedies in the event that certain loan-specific representations and warranties made by the Bank are breached. At the present time, Bancorp is not aware that any of these representations and warranties are incorrect. See the Proxy Statement for Bancorp's 1996 Annual Meeting of Stockholders. As of April 30, 1996 $36.4 million of loans previously purchased from other financial institutions were classified as held for sale as the Bank had entered into an agreement to sell such loans. See Note E (subsequent events) for information regarding the sale of these loans. Note E) Subsequent Events On May 24, 1996, the Bank sold $36.4 million of loans previously purchased from and serviced by other financial institutions which resulted in a pre-tax gain of $3.6 million. On May 30, 1996, the Bank sold servicing rights on $164.3 million of FNMA loans upon converting said loans from recourse to nonrecourse for a pre-tax gain of $1.4 million. On May 30, 1996, the Bank defeased its outstanding Medium-Term Mortgage-Backed Notes. Note F) Commitments and Contingencies In the normal course of business, there are outstanding various legal proceedings, claims and commitments and contingent liabilities, such as commitments to extend credit which are not reflected in the accompanying consolidated financial statements. After reviewing such matters, Bancorp believes that resolution of these matters will not materially affect its consolidated results of operations or financial position. Bancorp may be party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans and loans sold with recourse. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated statements of financial condition. The contract amounts of those instruments reflect the extent of involvement Bancorp has in particular classes of financial instruments. Bancorp's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and recourse arrangements is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. - 8 - Financial instruments with off-balance sheet risk are as follows:
Contract Amount April 30, 1996 October 31, 1995 (In thousands) Commitments to originate loans....................... $ 1,296 $ 8,326 Loans sold with recourse............................. 222,752 221,898
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitment is expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. Bancorp evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bancorp for the extension of credit, is based upon management's credit evaluation of the borrower. Collateral held includes, but is not limited to, residential and commercial real estate. The fair value of commitments to originate loans does not differ materially from the recorded balance. Bancorp has retained credit risk on certain residential mortgage loans it has converted into FNMA and FHLMC mortgage-backed securities. Accordingly, Bancorp has retained the risk of loss resulting from any foreclosures on such loans. The credit risk associated with the Bank's loans sold with recourse is considered in establishing the allowance for possible loan losses. Some of these loans were converted from recourse to nonrecourse after April 30, 1996, and the servicing rights with respect to such loans were sold. See Note E. As a nonmember of the Federal Reserve System, the Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement, included in "Cash and due from banks," was $7.8 million and $6.5 million at April 30, 1996 and October 31, 1995, respectively. The Bank is permitted to borrow from the Federal Reserve Bank "discount window" under certain conditions. Any such borrowings must be fully secured by pledges of collateral satisfactory to the Federal Reserve Bank. - 9 - THE BOSTON BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Acquisition by Bank of Boston Corporation Bancorp and Bank of Boston Corporation ("Bank of Boston") entered into an Agreement and Plan of Reorganization (as amended, the "Merger Agreement") on October 10, 1995 pursuant to which Bancorp will become a wholly-owned subsidiary of Bank of Boston. The Merger, approved by the stockholders of Bancorp on April 11, 1996, remains subject to the receipt of various regulatory approvals and the satisfaction of certain other closing conditions. It is expected that the closing will occur in June, 1996 and that the Measurement Date will be May 31, 1996. See the Proxy Statement for Bancorp's 1996 Annual Meeting of Stockholders. As a condition to the Merger, Bancorp is required to effect certain mandatory pre-closing transactions. These transactions are described in detail in the Proxy Statement for Bancorp's 1996 Annual Meeting. Some of these transactions will have a significant impact on Bancorp's operations in fiscal 1996 and on the value of the consideration to be received by stockholders in the Merger, including the liquidation of approximately two-thirds of its investment portfolio (including all of its equity securities), the liquidation of all properties held as real estate owned, the repayment of all FHLB advances (including all associated prepayment penalties), the defeasance of the Bank's medium-term notes, and the accrual of contracted severance costs and certain expenses related to the proposed acquisition. Bancorp's net income during the six months ended April 30, 1996 was favorably affected by a high level of gains on the sale of investment securities. Bancorp expects its net income to continue to be materially affected by gains and losses on the sale of loans, investment securities and other assets and by the investment of the proceeds of such sales in short-term securities which can be expected to have lower yields than the assets they replace. The Proxy Statement for Bancorp's 1996 Annual Meeting of stockholders contains a detailed description of the terms of the Merger Agreement. Financial Condition The Company's total assets declined to $1.6 billion at April 30, 1996 from $1.9 billion at October 31, 1995, primarily as a result of the sale of portions of the Bank's investment and mortgage-backed securities portfolios and the use of the sales proceeds to retire the Bank's indebtedness. Management expects to continue the process of liquidating its entire equity portfolio and a significant portion of its debt and mortgage-backed securities portfolio pursuant to the Merger Agreement with Bank of Boston. At April 30, 1996, the Company's investment portfolio, which is comprised of short-term investments, investment securities and mortgage-backed securities, totaled $1.2 billion compared to $1.5 billion at October 31, 1995. At April 30, 1996, $160.0 million of the mortgage-backed securities portfolio was represented by either Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") or Government National Mortgage Association ("GNMA") adjustable-rate issues. The pretax net unrealized gain on the Company's mortgage-backed securities portfolio decreased by $7.8 million during the six months ended April 30, 1996. The fair value of the Company's equity portfolio totaled $32.7 million at April 30, 1996 compared to $104.2 million at October 31, 1995. The decrease resulted primarily from sales of equity securities. The equity portfolio includes high quality, yield-oriented common and preferred stocks. The fair value of common equity investments totaled $30.6 million at April 30, 1996, compared to $94.9 million at October 31, 1995. The fair value of preferred stock issues held by the Company totaled $2.1 million at April 30, 1996 compared to $9.3 million at October 31, 1995. These amounts include the effects of Statement of Financial Accounting Standards ("SFAS") No. 115 which requires that certain investment securities be recorded at fair value. - 10 - At April 30, 1996, the fair value, after taxes, of the Company's investment portfolio, including mortgage-backed securities, was greater than its amortized cost by $3.0 million, which under SFAS 115 is included as a separate component of stockholders' equity in the Company's consolidated statements of financial condition. At October 31, 1995, the fair value, after taxes, of the investment portfolio had been $24.2 million greater than its amortized cost. Loans, net, including loans held for sale, decreased to $202.3 million at April 30, 1996 from $348.5 million at October 31, 1995. Mortgage loan originations for the three months ended April 30, 1996 decreased to $4.1 million from $16.4 million for the comparable period ended April 30, 1995. All mortgage loans originated during the three months ended April 30, 1996 were residential mortgage loans, of which $600,000 were adjustable rate loans and $3.5 million were fixed rate loans. The Company does not expect to originate additional commercial real estate and multi-family residential mortgage loans because it is required to dispose of all such loans prior to the Merger. Total deposits remained relatively constant during the six months ended April 30, 1996, increasing $11.6 million to $1.4 billion. Before interest credited of $29.8 million, deposits declined by $18.2 million from October 31, 1995 through April 30, 1996. All FHLB advances and securities sold under agreements to repurchase were paid off as of April 30, 1996. Other borrowings, including the ESOP loan payable and notes payable declined by $541,000 from October 31, 1995 through April 30, 1996. The Merger Agreement required the Bank to repay all FHLB advances, including prepayment penalties thereon, and all securities sold under agreement to repurchase prior to the Merger. The Bank is also required to defease the notes payable prior to the Merger. The ESOP loan will be repaid in conjunction with the Merger. Stockholders' equity increased by $3.6 million to $198.2 million at April 30, 1996 from $194.6 million at October 31, 1995. The increase is the result of net income for the six months ended April 30, 1996 of $24.1 million, proceeds from the exercise of stock options of $1.7 million, a tax benefit for non-qualifying stock options exercised of $.5 million and a reduction in the unearned compensation expense attributable to the ESOP loan of $.4 million. The increase in stockholders' equity was reduced by dividends paid to stockholders of $2.0 million, as well as a decrease in the unrealized gain on securities available for sale of $21.1 million. - 11 - Nonperforming Assets The following table summarizes the composition of nonperforming assets (including nonperforming loans held for sale) at the dates shown:
April 30, 1996 October 31, 1995 -------------- ----------------- (Dollars in thousands) Nonaccrual loans....................................... $ 1,807 $ 5,828 Other real estate...................................... 1,221 7,540 ----------- ------------ Total nonperforming assets........................ $ 3,028 $ 13,368 =========== ============ Nonperforming assets as a percentage of total assets .19% .71% Nonperforming assets as a percentage of total loans, including loans held for sale (before net items) 1.47% 3.76%
Nonaccrual and Restructured Loans The following table summarizes nonaccrual and restructured loans at the dates shown. Nonaccrual loans are those on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or when payments of principal or interest have become contractually past due 90 days.
April 30, 1996 October 31, 1995 -------------- ---------------- (In thousands) Real estate loans: Residential: Conventional........................................ $ 1,025 $ 2,221 FHA/VA.............................................. 44 531 Commercial.......................................... 695 3,029 ----------- ----------- 1,764 5,781 ----------- ----------- Consumer loans: Secured................................................ 4 4 Unsecured.............................................. 39 43 ----------- ----------- 43 47 ----------- ----------- Total nonaccrual loans............................ $ 1,807 $ 5,828 =========== =========== Restructured loans..................................... $ 59 $ 590 =========== ===========
Restructured loans, net, decreased to $59,000 at April 30, 1996 from $590,000 at October 31, 1995. Specific reserves established for restructured loans totaled $0 at April 30, 1996 and $143,000 at October 31, 1995. Restructured loans, net, at April 30, 1996, were comprised of one 1-4 family residential loan. This loan has an interest rate of 7.0%. - 12 - Potential Problem Loans Potential problem loans are loans which cause management to have serious doubts as to the ability of borrowers to comply with present loan repayment terms and are not already classified as nonaccrual or restructured. At April 30, 1996, potential problem loans, net totaled approximately $1.4 million. Other Real Estate Properties acquired through foreclosure or in settlement of loans are classified as other real estate, as are loans classified as such in accordance with SFAS No. 66. The following table summarizes other real estate at the dates shown.
April 30, 1996 October 31, 1995 -------------- ---------------- (In thousands) Conventional........................................... $ 765 $ 1,125 Commercial............................................. 456 6,415 ----------- ----------- Total other real estate................................ $ 1,221 $ 7,540 =========== ===========
Allowance for Possible Loans Losses The allowance for possible loan losses is maintained at a level believed by management to be adequate to meet reasonably foreseeable loan losses on the basis of many factors, including the risk characteristics of the portfolio, underlying collateral, current and anticipated economic conditions that may affect the borrowers' ability to pay, specific problem loans, and trends in loan delinquencies and charge-offs. The allowance is increased by provisions charged to earnings and reduced by loan charge-offs, net of recoveries. Loans are charged off in whole or in part when, in management's opinion, collectibility is not considered probable. While management uses available information to establish the allowance for possible loan losses, future additions to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for possible loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. - 13 - An analysis of the allowance for possible loan losses is as follows:
Six Months Ended April 30, --------------------- 1996 1995 ---- ---- (In thousands) Balance at beginning of period.................................... $ 2,121 $ 9,471 Charge-offs: Commercial real estate....................................... -- 1,169 Residential real estate...................................... 152 580 Consumer..................................................... 7 72 ----------- ----------- 159 1,821 ----------- ----------- Recoveries: Commercial real estate....................................... -- 699 Residential real estate...................................... 20 124 Consumer..................................................... 7 5 ----------- ----------- 27 828 ----------- ----------- Net Charge-offs................................................ 132 993 ----------- ----------- Provisions charged to operations: Commercial real estate....................................... -- 1,480 Residential real estate...................................... -- 480 Consumer..................................................... -- 40 ----------- ----------- -- 2,000 ----------- ----------- Balance at end of period....................................... $ 1,989 $ 10,478 =========== ===========
The Bank is subject to the capital adequacy regulations adopted by the FDIC. The Bank's ability to pay dividends to the Company and expand its business can be restricted if the Bank's capital falls below levels established by the FDIC. Under the leverage capital requirement adopted by the FDIC, state nonmember banks must maintain "core" or "Tier 1" capital of at least 3% of total assets. For all but the most highly rated banks, the minimum leverage requirement is 4% to 5% of total assets. The FDIC's risk-based capital guidelines require state nonmember banks to have a ratio of total capital to total risk-weighted assets of 8% and a ratio of core capital to total risk-weighted assets of 4%. Capital requirements higher than the generally applicable minimum requirements may be established for a particular bank if the FDIC determines that the bank's capital was or may become inadequate in view of its particular circumstances. Individual minimum capital requirements may be appropriate where a bank is receiving special supervisory attention, has a high degree of exposure to interest rate risk, or poses other safety or soundness concerns. Effective January 17, 1994, the FDIC revised its risk-based capital standards to provide that a bank's concentration of credit risk and nontraditional activities also would be considered in determining whether a higher individual capital requirement should be imposed. No such requirement has been established for the Bank. At April 30, 1996, the Bank had a ratio of Tier 1 or core capital to total assets of 11.42%. At April 30, 1996, South Boston's ratio of total risk-based capital to total risk-weighted assets was 36.56% and its ratio of Tier 1 capital to total risk-weighted assets was 36.15%. Neither regulatory capital measure includes any SFAS No. 115 adjustment for securities available for sale. At April 30, 1996, the Bank met the requirements for a "well-capitalized" institution based on its capital ratios as of such date. - 14 - Result of Operations For the fiscal quarter ended April 30, 1996, net income increased to $9.7 million or $1.82 per share on a fully diluted basis from $4.4 million or $.84 per share for the fiscal quarter ended April 30, 1995. Net income for the six months ended April 30, 1996, increased to $24.1 million or $4.51 per share on a fully diluted basis from $9.9 million or $1.90 per share for the six months ended April 30, 1995. The increase in net income was due primarily to substantially higher net realized gains on securities and a lower provision for possible loan losses, offset in part by an increase in income taxes, prepayment penalties on FHLB advances, and lower net interest and dividend income. Net interest and dividend income for the three and six months ended April 30, 1996 decreased to $12.9 million and $25.8 million, respectively, as compared to $13.9 million and $29.4 million for the three and six months ended April 30, 1995, respectively. This decrease primarily reflects the decrease in investment income due to the decline in the average investment portfolio balance, as well as the increase in the weighted average rate paid on deposit accounts. The increase in the cost of deposits was offset by the decline in interest paid on FHLB advances, primarily due to the repayment of FHLB advances. Interest income on the loan portfolio for the fiscal quarter ended April 30, 1996 decreased to $7.2 million from $8.2 million for the fiscal quarter ended April 30, 1995, and decreased to $15.1 million for the six months ended April 30, 1996 from $16.5 million for the six months ended April 30, 1995. This decline is primarily due to the decrease in the average loan portfolio balance outstanding. The decrease in average balances of loans outstanding was a result of lower loan originations, as well as the conversion of $19.3 million of loans to mortgage-backed securities during the fiscal quarter ended January 31, 1996, as well as the sale of the commercial loan portfolio on April 22, 1996. This decline was offset, in part, by an increase in the weighted average yield on loans over the comparable period for the prior fiscal year. The Company's gross interest income is likely to continue to decline due to the reinvestment of the commercial real estate loan sale proceeds in short-term investments. The following table shows the Company's weighted average yields earned and rates paid, as well as the spread between the combined weighted average yields earned on interest-earning assets and weighted average rates paid on interest-bearing liabilities for the periods indicated. The weighted average yield earned on loans includes income earned on loans held for sale, as well as the effects of non-accrual loans outstanding.
Three Months Ended Six Months Ended April 30, April 30, ---------------------- --------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Weighted average yield earned on: Loans 9.13% 8.48% 9.00% 8.55% Investments (a) 7.04 6.69 6.98 6.77 Combined.................................. 7.47 7.04 7.40 7.11 Weighted average rate paid on: Deposits.................................. 4.38 4.00 4.43 3.84 Other Borrowings.......................... 4.46 6.24 5.61 6.04 Medium-term notes......................... 8.35 8.35 8.35 8.47 Federal Home Loan Bank advances........... 5.32 6.30 5.54 6.09 Overall Cost of funds..................... 4.43 4.65 4.54 4.46 Interest rate spread........... 3.04% 2.39% 2.86% 2.65% (a) Includes mortgage-backed securities and Federal Home Loan Bank stock; excludes the effects of SFAS No. 115.
- 15 - Rate/Volume Analysis The effect on net interest income due to changes in weighted average interest rates earned and paid and the weighted average amounts of interest-earning assets and interest-bearing liabilities is shown in the following table.
Increase(Decrease) Due To ------------------------------------ Three Months Ended Total Rate/ April 30, Current Prior Increase Rate Volume Volume 1996 vs. 1995 Period Period (Decrease) (a) (b) (c) -------------------------- ------- ------- -------- --------- ------ ------- (In thousands) Income from interest-earning assets: Loan portfolio(d)...................... $ 7,164 $ 8,192 $ (1,028) $ 631 $ (1,540) $ (119) Investment portfolio(e) (f)............ 21,280 26,789 (5,509) 1,386 (6,556) (339) -------- ------- --------- ------- --------- -------- Total................................ 28,444 34,981 (6,537) 2,017 (8,096) (458) -------- ------- --------- ------- --------- -------- Expense from interest-bearing liabilities: Deposit accounts....................... 14,662 13,079 1,583 1,345 217 21 Borrowings............................. 170 424 (254) (120) (187) 53 Medium term notes...................... 116 118 (2) -- (2) -- Federal Home Loan Bank advances........ 590 7,430 (6,840) (1,159) (6,723) 1,042 -------- ------- --------- ------- --------- ------- Total................................ 15,538 21,051 (5,513) 66 (6,695) 1,116 -------- ------- --------- ------ --------- ------- Net interest income....................... $ 12,906 $13,930 $ (1,024) $1,951 $ (1,401) $(1,574) ======== ======= ========= ======= ========= ======== Increase(Decrease) Due To ------------------------------------ Six Months Ended Total Rate/ April 30, Current Prior Increase Rate Volume Volume 1996 vs. 1995 Period Period (Decrease) (a) (b) (c) ------------------------------------ -------- ------- --------- ------ ------- -------- (In thousands) Income from interest-earning assets: Loan portfolio(d)...................... $ 15,114 $16,500 $ (1,386) $ 881 $ (2,152) $ (115) Investment portfolio(e) (f)............ 44,294 54,255 (9,961) 1,727 (11,327) (361) -------- ------- --------- ------- --------- -------- Total................................ 59,408 70,755 (11,347) 2,608 (13,479) (476) -------- ------- --------- ------- --------- -------- Expense from interest-bearing liabilities: Deposit accounts....................... 29,807 25,843 3,964 4,049 (74) (11) Borrowings............................. 1,250 599 651 (43) 747 (53) Medium term notes...................... 233 251 (18) (3) (15) -- Federal Home Loan Bank advances........ 2,271 14,655 (12,384) (1,344) (12,152) 1,112 -------- ------- --------- ------- --------- ------- Total................................ 33,561 41,348 (7,787) 2,659 (11,494) 1,048 -------- ------- --------- ------- --------- ------- Net interest income....................... $ 25,847 $29,407 $ (3,560) $ (51) $ (1,985) $(1,524) ======== ======= ========= ======= ========= ======== - -------------------------
(a) Determined by multiplying the change in the weighted average interest rate between the periods shown by the prior period average portfolio balance. (b) Determined by multiplying the change in average portfolio balance between periods shown by the weighted average interest rate for the prior period. (c) Determined by multiplying the change in the weighted average rate between periods shown by the change in the average portfolio balance between periods shown. (d) Includes loans held for sale. (e) Includes mortgage-backed securities and Federal Home Loan Bank stock. (f) Excludes the effect of SFAS No. 115. - 16 - The average yield on the loan portfolio increased to 9.13% and 9.00% for the three and six months ended April 30, 1996, respectively, as compared to 8.48% and 8.55% for the same periods in fiscal 1995, reflecting the decrease in the average loan portfolio as a result of both charge-offs and provisions for losses on loans held for sale related to the reclassification and recent sale of the Commercial Real Estate portfolio. The average yield on the investment portfolio increased to 7.04% and 6.98% for the three months and six months ended April 30, 1996, respectively, as compared to the 6.69% and 6.77% for the same periods in fiscal 1995, due primarily to the sale of a significant portion of the common and preferred stock portfolio, during the three and six months ended April 30,1996, which typically earns a lower yield than fixed income securities. Total interest expense decreased to $15.5 million and $33.6 million for the three and six months ended April 30, 1996 from $21.1 million and $41.3 million for the same periods in fiscal 1995, primarily due to the significant reduction in average borrowings outstanding, offset in part by the increase in cost of deposits. The weighted average cost of funds decreased to 4.43% for the three months ended April 30, 1996 and increased to 4.54% for the six months ended April 30, 1996 from 4.65% and 4.46% for the same periods ended April 30, 1995. Total other income increased to $10.2 million and $26.5 million for the three and six months ended April 30, 1996 from $731,000 and $1.6 million for the same periods in fiscal 1995, due primarily to higher net realized gains on securities which totaled $7.7 million and $23.3 million for the three and six months ended April 30, 1996 as compared to $533,000 and $560,000 for the same periods in fiscal 1995. The increase in other income was also due to the increase in the net realized gains on the sale of loans of $2.4 million for the three and six month periods ended April 30, 1996. Gross realized gains on the sale of securities totaled $10.8 million and $28.4 million for the three months and six months ended April 30, 1996. Gross realized losses on the sale of securities during the same periods totaled $3.1 million and $5.1 million. The Company will continue to sell investment securities, as required by the Merger Agreement. Total other expenses decreased 26.9% to $5.7 million and 13.2% to $12.8 million for the three and six months ended April 30, 1996 from $7.8 million and $14.7 million for the corresponding periods ended April 30, 1995. The decrease in other expenses is primarily attributable to a decrease in fees for professional services of $1.7 million and $1.8 million, respectively, for the three and six months ended April 30, 1996 as compared to the same periods in 1995. A significant reduction in FDIC insurance assessments also contributed to the reduction in other expenses. These decreases were offset in part by prepayment penalties on FHLB advances. The provision for federal and state taxes increased to $7.7 million and $15.5 million for the three and six months ended April 30, 1996, respectively, as compared to $1.9 million and $4.3 million for the three and six months ended April 30, 1995, respectively, reflecting higher effective tax rates resulting from significantly increased pretax income, a significant reduction in the amount of dividend income qualifying for the dividends received deduction, and unused state tax losses at the Bank. The combined federal and state income tax rate increased to approximately 44% and 39% for the three and six months ended April 30, 1996, respectively. - 17 - PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities (a) Not applicable. (b) Not applicable. Item 3. Defaults Upon Senior Securities (a) Not applicable. (b) Not applicable. Item 4. Submission of Matters to a Vote of Security-Holders The Company's 1996 annual meeting of stockholders was held on April 11, 1996. At the 1996 annual meeting it was voted to approve and adopt the Agreement and Plan of Reorganization, dated as of October 10, 1995, as amended by a letter agreement dated March 7, 1996 (the "Merger Agreement"), by and between Bank of Boston Corporation and Bancorp, and the transactions contemplated thereby, including, the sale from time to time of certain assets of Bancorp and its subsidiaries as contemplated by the Merger Agreement. Of the 5,252,899 eligible votes, 3,726,882 were cast in favor of the Merger Agreement and 436,213 against the Merger Agreement. There were 28,329 abstentions, 558,247 broker no-votes, and 503,228 shares that were not voted. In addition, Robert E. Lee and Frank G. Neal, Jr., were elected as directors of the Company for new three-year terms or, if earlier, until the effective time of the merger. Of the 5,252,899 eligible votes, 4,469,066 were cast in favor of the election of each of Mr. Lee and Mr. Neal, Jr. With respect to each nominee, 166,100 votes were withheld, 114,505 were cast with exceptions, and 503,228 shares were not voted. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: Exhibit 27 Financial Data Schedule (b) A Form 8-K was filed on February 21, 1996 reporting the agreement the Bank entered into with BlackRock Capital Finance L.P., ("BlackRock") pursuant to which BlackRock agreed to purchase the Bank's commercial real estate and multi-family loan portfolio. No financial statements were filed relating to this Form 8-K. (c) A Form 8-K was filed on April 12, 1996 reporting the results of the votes taken at the Company's 1996 Annual Meeting of Stockholders. No financial statements were filed relating to this Form 8-K. - 18 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE BOSTON BANCORP Date: June 14, 1996 By: /s/Robert E. Lee ------------- ------------------------------------ Robert E. Lee Chairman of the Board and President and Chief Executive Officer (Principal Executive Officer) Date: June 14, 1996 By: /s/David L. Smart ------------- --------------------------------------- David L. Smart Vice President and Treasurer (Principal Financial and Accounting Officer) - 19 - EX-27 2 FDS --
9 0000760079 The Boston Bancorp 1000 U.S. DOLLARS 6-MOS OCT-31-1996 NOV-01-1995 APR-30-1996 1 21,976 0 9,825 0 1,052,682 0 0 162,148 1,989 1,565,619 1,351,051 6,243 8,687 1,386 0 0 5,284 192,968 1,565,619 15,114 44,294 0 59,408 29,807 33,561 25,847 0 23,265 12,778 39,554 39,554 0 0 24,054 4.51 4.51 7.40 1,807 0 59 1,390 2,121 159 27 1,989 1,989 0 0
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