-----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, V6ggRuTZ4YryWgeRHP0eJAbg1z840KHXEacqbQk4jnsmXZZ+e5HDonfjV7mEfRqC p/DpOk0VF0WfNiFKwnPSjg== 0000950135-00-001902.txt : 20000331 0000950135-00-001902.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950135-00-001902 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTONFED BANCORP INC CENTRAL INDEX KEY: 0000948515 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 521940834 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13936 FILM NUMBER: 588788 BUSINESS ADDRESS: STREET 1: 17 NEW ENGLAND EXECUTIVE OFFICE PARK CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 6172730300 MAIL ADDRESS: STREET 1: 17 NEW ENGLAND EXECUTIVE OFFICE PK CITY: BURLINGTON STATE: MA ZIP: 01803 10-K 1 BOSTONFED BANCORP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No.: 1-13936 BOSTONFED BANCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1940834 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 17 NEW ENGLAND EXECUTIVE PARK, BURLINGTON, MASSACHUSETTS 01803 (Address of principal executive offices) Registrant's telephone number, including area code: (781) 273-0300 Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered COMMON STOCK PAR VALUE $0.01 PER SHARE THE AMERICAN STOCK EXCHANGE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No (2) Yes X No --------- --------- --------- ----------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $57.8 million and is based upon the last sales price as quoted on the American Stock Exchange for March 3, 2000. The number of shares of Common Stock outstanding as of March 3, 2000 is 4,907,481. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1999 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K. 2 PORTIONS OF THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K. INDEX
PAGE ---- PART I Item 1. Business .......................................... 3 Item 2. Properties ........................................ 38 Item 3. Legal Proceedings ................................. 39 Item 4. Submission of Matters to a Vote of Security Holders 39 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters .............................. 39 Item 6. Selected Financial Data ........................... 39 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 39 Item 7A. Quantitative and Qualitative Disclosure About Market Risks ...................................... 39 Item 8. Financial Statements and Supplementary Data ....... 40 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............... 40 PART III Item 10. Directors and Executive Officers of the Registrant 40 Item 11. Executive Compensation ............................ 40 Item 12. Security Ownership of Certain Beneficial Owners and Management .................................... 40 Item 13. Certain Relationships and Related Transactions .... 40 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 41 SIGNATURES
2 3 PART I ITEM 1. BUSINESS. GENERAL BostonFed Bancorp, Inc. (also referred to as the "Company "or "Registrant") was incorporated under Delaware law on July 11, 1995, and subsequently became the holding company for Boston Federal Savings Bank ("BFS"). On October 24, 1995, BFS completed its conversion from a mutual savings bank to a stock form of ownership, while simultaneously, the Company issued 6,589,617 shares of common stock utilizing a portion of the proceeds to acquire all of the stock of BFS. On February 7, 1997, the Company acquired Broadway National Bank ("BNB"), using the purchase method of accounting, at a cost of approximately $22 million. On August 4, 1999, the Company entered into a Purchase and Sale Agreement by and among the Company, Diversified Ventures, Inc. d/b/a Forward Financial Company ("Forward Financial"), Ellsmere Insurance Agency, Inc. ("Ellsmere") and Gene J. DeFeudis, pursuant to which BFS purchased all of the outstanding capital stock of Forward Financial and BNB purchased all of the outstanding capital stock of Ellsmere in a cash transaction for approximately $38.3 million. The transaction was consummated at the close of business on December 6, 1999. The Company's business is conducted primarily through its ownership of BFS and BNB (collectively, the "Banks"). BFS' administrative and banking office is located in Burlington, Massachusetts and its seven other banking offices are located in Arlington, Bedford, Billerica, Boston, Lexington, Peabody and Wellesley, all of which are in the greater Boston metropolitan area. BFS' subsidiary, Forward Financial, maintains its headquarters in Northboro, Massachusetts and operates in approximately twenty states across the United States. BNB has two banking offices located in Chelsea and Revere, also in the greater Boston metropolitan area. As a result of the acquisition of BNB, a nationally chartered commercial bank, the Company became a multi-bank holding company subject to regulation by the Federal Reserve Board ("FRB"). Prior to its acquisition of BNB, the Company was a savings and loan holding company regulated by the Office of Thrift Supervision ("OTS"). As a bank holding company, the Company is subject to certain restrictions and requirements imposed by the FRB on the activities in which the Company may engage and the assets in which the Company may invest. See "Regulation and Supervision-Holding Company Regulation." The Company's principal business has been and continues to be attracting retail deposits from the general public in the areas surrounding its banking offices and investing those deposits, together with funds generated from operations, loan sales and borrowings, primarily in one- to four-family residential mortgage loans. To a lesser extent, the Company invests in commercial real estate, construction and land, multi-family mortgage, equity lines of credit, business and consumer loans. The Company originates mortgage loans for investment and for sale in the secondary market, generally retaining the servicing rights for loans sold. Through Forward Financial, the Company also originates consumer loans primarily with customers purchasing or refinancing manufactured homes, recreational vehicles, marine and leased equipment and subsequently sells substantially all of such loans. Loan sales are made from loans held in the Company's portfolio designated as being held for sale or originated for sale during the period. The Company's revenues are derived principally from interest on its mortgage loans, gain on sale of loans, and to a lesser extent, interest and dividends on its investment and mortgage-backed securities, fees and loan servicing income. The Company's primary sources of funds are retail deposits, wholesale brokered deposits, principal and interest payments on loans, investments and mortgage-backed securities, Federal Home Loan Bank Boston ("FHLB") advances, repurchase agreements, other borrowings and proceeds from the sale of loans. 3 4 MARKET AREA AND COMPETITION The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial products and services to meet the needs of the communities it serves. The Company's deposit gathering is concentrated in the communities surrounding its offices while its lending base extends throughout eastern Massachusetts and, to a lesser extent, other areas of New England. Forward Financial provides its consumer lending services in approximately twenty states throughout the United States. The Company faces significant competition both in generating loans and in attracting deposits. The Boston metropolitan area is a highly competitive market and the national market for consumer lending is also very competitive. The Company's share of deposits and loan originations in eastern Massachusetts amounts to less than one percent. The Company faces direct competition from a significant number of financial institutions operating in its market area, many with a state-wide or regional presence and, in some cases, a national presence. Many of these financial institutions are significantly larger and have greater financial resources than the Company. The Company's competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, consumer finance and insurance companies. Its most direct competition for deposits has historically come from savings and commercial banks and in recent years from mutual funds and equity markets. In addition, the Company faces increasing competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities. LENDING ACTIVITIES LOAN PORTFOLIO COMPOSITION. The Company's loan portfolio consists primarily of first mortgage loans secured by one- to four-family residences. At December 31, 1999, the Company had total loans outstanding, including mortgage loans held for sale, of $1,087.6 million, of which $846.7 million were one- to four-family, residential mortgage loans, or 77.9% of the Company's total loans. At such date, the remainder of the loan portfolio consisted of: $22.0 million of multi-family residential loans, or 2.0% of total loans; $76.0 million of commercial real estate loans, or 7.0% of total loans; $77.1 million of construction and land loans, or 7.1% of total loans; and other loans, primarily home equity lines of credit and business loans, of $65.8 million or 6.1% of total loans. The Company had $16.2 million of mortgage loans held for sale at December 31, 1999 consisting of one- to four-family fixed and variable-rate mortgage loans. At that same date, 66.0% of the Company's mortgage loans had adjustable interest rates, most of which, at the first adjustment date, are indexed to the one-year Constant Maturity Treasury ("CMT") Index. The types of loans that the Company may originate are subject to federal and state laws and regulations. Interest rates charged by the Company on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the FRB, and legislative tax policies. 4 5 The following table sets forth the composition of the Company's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
AT DECEMBER 31, --------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ----------------------- ----------------------- PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ----------- -------- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) Mortgage Loans: Residential: One- to four-family(1). $ 846,739 77.85% $ 829,572 84.27% $ 702,102 86.11% Multi-family .......... 22,017 2.02 22,889 2.33 18,874 2.32 Commercial real estate .. 75,999 6.99 48,951 4.97 36,400 4.46 Construction and land ... 77,079 7.09 41,608 4.23 20,497 2.51 Other loans(2)............. 65,767 6.05 41,308 4.20 37,465 4.60 --------- ------ ------- ------ ------- ------ Total loans ......... 1,087,601 100.00% 984,328 100.00% 815,338 100.00% ====== ====== ====== Less: Allowance for loan losses (10,654) (8,500) (6,600) Construction loans in process ............... (30,372) (17,133) (8,527) Net unearned premium (discount) on loans purchased ........... (7) (5) (114) Deferred loan origination (fees) costs .......... 2,200 1,980 1,448 ----------- ---------- ---------- Loans, net and mortgage loans held for sale $ 1,048,768 $ 960,670 $ 801,545 =========== ========== ==========
AT DECEMBER 31, ------------------------------------------------- 1996 1995 ----------------------- ----------------------- PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) Mortgage Loans: Residential: One- to four-family(1). $ 607,792 88.00% $ 447,033 85.44% Multi-family .......... 21,381 3.10 27,986 5.35 Commercial real estate .. 28,136 4.07 26,412 5.05 Construction and land ... 12,532 1.81 3,435 .66 Other loans(2)............. 20,850 3.02 18,343 3.50 ------- ------ ------- ------ Total loans ......... 690,691 100.00% 523,209 100.00% ====== ====== Less: Allowance for loan losses (4,400) (4,275) Construction loans in process ............... (6,936) (805) Net unearned premium (discount) on loans purchased ........... (163) (262) Deferred loan origination (fees) costs .......... 1,448 560 ---------- ---------- Loans, net and mortgage loans held for sale $ 680,640 $ 518,427 ========== ==========
- ------------------------------- (1) Includes mortgage loans held for sale of $16.2 million, $17.0 million, $9.8 million, $4.0 million and $8.9 million at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (2) These loans primarily consist of one- to four-family lines of credit secured by mostly second mortgages which amounted to $43.7 million, $32.1 million, $28.1 million,$17.4 million and $14.9 million at December 31, 1999, 1998, 1997, 1996 and 1995, respectively and business loans which amounted to $17.8 million, $3.6 million, $3.5 million, $724,000 and $664,000 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. 5 6 LOAN MATURITY. The following table shows the remaining contractual maturity of the Company's loans at December 31, 1999. There were $16.2 million of mortgage loans held for sale at December 31, 1999. The table does not include the effect of future principal prepayments. Principal prepayments on total loans were $203.3 million, $316.4 million and $167.2 million for the years ended December 31, 1999, 1998 and 1997, respectively.
AT DECEMBER 31, 1999 -------------------------------------------------------------------------------- ONE- TO FOUR- MULTI- COMMERCIAL CONSTRUCTION OTHER TOTAL FAMILY FAMILY REAL ESTATE AND LAND LOANS LOANS ----------- --------- ----------- --------- --------- ----------- (IN THOUSANDS) Amounts due: One year or less ........................ $ 1,212 $ 3 $ 2,090 $ 45,135 $ 9,041 $ 57,481 After one year: More than one year to three years ....... 4,640 200 2,315 29,604 6,609 43,368 More than three years to five years .. 11,603 117 3,262 2,198 3,483 20,663 More than five years to 10 years ..... 103,295 3,477 7,105 47 44,754 158,678 More than 10 years to 20 years ....... 182,756 13,176 33,966 45 1,288 231,231 More than 20 years ................... 543,233 5,044 27,261 50 592 576,180 ----------- --------- --------- --------- --------- ----------- Total due after one year ............. 845,527 22,014 73,909 31,944 56,726 1,030,120 ----------- --------- --------- --------- --------- ----------- Total amount due ..................... $ 846,739 $ 22,017 $ 75,999 $ 77,079 $ 65,767 $ 1,087,601 =========== ========= ========= ========= ========= Less: Allowance for loan losses ...... (10,654) Construction loans in process .. (30,372) Net unearned discount on loans purchased ............. (7) Deferred loan origination costs 2,200 ----------- Loans, net, and mortgage loans held for sale ............... 1,048,768 Mortgage loans held for sale ......... (16,174) ----------- Loans, net ........................... $ 1,032,594 ===========
The following table sets forth at December 31, 1999 the dollar amount of loans contractually due after December 31, 2000, and whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2000 ---------------------------------------- FIXED ADJUSTABLE TOTAL ---------- ---------- ---------- (IN THOUSANDS) Mortgage loans: Residential: One- to four-family $ 321,503 $ 524,024 $ 845,527 Multi-family ....... 6,332 15,682 22,014 Commercial real estate 22,948 50,961 73,909 Construction and land 70 31,874 31,944 Other loans ............. 9,272 47,454 56,726 ---------- ---------- ---------- Total loans ...... $ 360,125 $ 669,995 $1,030,120 ========== ========== ==========
6 7 ORIGINATION, SALE, SERVICING AND PURCHASE OF LOANS. The Company's mortgage and consumer finance lending activities are conducted primarily by its commissioned loan personnel, through its offices, and through wholesale brokers and other financial institutions approved by the Company. All loans originated by the Company, either through internal sources or through wholesale brokers or other correspondent financial institutions are underwritten by the Company, pursuant to the Company's policies and procedures. The Company originates both adjustable-rate and fixed-rate loans. The Company's ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate loans, which is affected by the current and expected future level of interest rates, economic conditions, and competition. The general policy of the Company is to sell a substantial majority of the one- to four-family fixed-rate mortgage loans it originates with maturities of fifteen years or over and to retain adjustable-rate and fixed-rate loans with maturities of under fifteen years sufficient to meet portfolio needs and selling the balance. The Company retains the servicing of mortgage loans sold in most cases. At December 31, 1999, the Company serviced $784.6 million of loans for others. The Company recognizes, at the time of sale, the cash gain or loss on the sale of the loans based on the difference between the net cash proceeds received and the carrying value of the loans sold, adjusted for the value of originated mortgage servicing rights. See "--Loan Servicing." The Company recognizes a gain on sale of consumer finance loans at Forward Financial when it collects its fee upon the sale of the loan to client lenders. At December 31, 1999, the Company had $16.2 million of mortgage loans held for sale consisting of fixed and adjustable-rate one- to four-family loans. The Company has, in the past, from time to time, purchased loans or participations of loans, primarily one- to four-family mortgage loans, and had $6.4 million of purchased loans at December 31, 1999. With the exception of purchases of loans from correspondent financial institutions, which are underwritten pursuant to the Company's policies and closed in the name of the correspondent financial institution but immediately purchased by the Company for its mortgage banking activities, and loans that qualify for Community Reinvestment Act ("CRA") purposes, the Company generally does not purchase loans or participate in loans. The Company engages in certain hedging activities to facilitate the sale of its originated and purchased mortgage loans in an attempt to minimize interest rate risk from the time the loan commitments are made to the time until the loans are securitized or packaged and sold. The Company currently utilizes forward loan sale commitment contracts with Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), and other approved investors as its method of hedging loan sales in an attempt to protect the Company from fluctuations in market interest rates. Generally, the Company will enter into contracts to deliver loans or agency mortgage-backed securities to purchasers at a future date for a specified price while the Company simultaneously processes and closes loans, thereby protecting the price of currently processed loans from interest rate fluctuations that may occur from the time the interest rate on the loan is fixed to the time of sale. As loans are closed and funded, they may also be pooled to create mortgage-backed securities that can be delivered to fulfill the forward commitment contracts. The amount of forward coverage of the "pipeline"of mortgages is set on a day-to-day basis by an operating officer, within policy guidelines, based on the Company's assessment of the general direction of interest rates and levels of mortgage-origination activity. For the year ended December 31, 1999, the Company had $3.0 million in net gains attributable to the sale of loans. 7 8 The following table sets forth the Company's loan originations, purchases, sales and principal repayments for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (IN THOUSANDS) Net loans: Beginning balance ................................. $ 943,662 $ 791,728 $ 676,670 Loans originated: One- to four-family ........................ 507,569 773,655 321,039 Multi-family ............................... 2,821 7,911 869 Commercial real estate ..................... 30,160 25,363 7,294 Construction and land ...................... 50,946 32,348 16,870 Other(1).................................... 70,198 37,055 34,055 ----------- ----------- ----------- Total loans originated ..................... 661,694 876,332 380,127 Loans purchased(2)............................. 41,996 25,042 17,013 Loans from BNB acquisition .................... -- -- 66,093 Loans from Forward acquisition ................ 11,345 -- -- ----------- ----------- ----------- Total .................................. 1,658,697 1,693,102 1,139,903 Less: Principal repayments and other, net ........... (307,906) (382,475) (226,143) Loan (charge-offs) recoveries, net ............ 358 258 (116) Sale of mortgage loans ........................ (302,298) (350,215) (111,566) Transfer of mortgage loans to real estate owned (83) -- (533) ----------- ----------- ----------- Loans, net and mortgage loans held for sale ... 1,048,768 960,670 801,545 Mortgage loans held for sale .................. (16,174) (17,008) (9,817) ----------- ----------- ----------- Loans, net ........................................ $ 1,032,594 $ 943,662 $ 791,728 =========== =========== ===========
- --------------------------- (1) Other loans primarily consist of one- to four-family lines of credit secured by mortgages and business loans. The amounts indicated primarily include new amounts drawn on such home-equity lines of credit, business loans and/or lines of credit during the periods presented. (2) Includes loans purchased from correspondent financial institutions which are underwritten pursuant to the Company's policies and closed in the name of the financial institution but immediately purchased by the Company for its mortgage banking activities or for CRA purposes. ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Company offers both fixed-rate and adjustable-rate mortgage loans secured by one- to four-family residences located in the Company's primary market area, with maturities of up to thirty years. Substantially all of such loans are secured by property located in the Company's primary market area. Loan originations are obtained at the Company's banking offices and from the Company's commissioned loan representatives, correspondent banking relationships and wholesale brokers and their contacts with the local real estate industry, existing or past customers, and members of the local communities. At December 31, 1999, the Company's total loans outstanding were $1,087.6 million, of which $846.7 million, or 77.9%, were one- to four-family residential mortgage loans, most of which were primarily owner-occupied properties. Of the one- to four-family residential mortgage loans outstanding at that date, 38.0% were fixed-rate loans, and 62.0% were adjustable-rate mortgage loans. The interest rates for the 8 9 majority of the Company's adjustable-rate mortgage loans are indexed to the CMT Index. The Company currently offers fixed-rate mortgage loans with amortization periods of five to thirty years. The Company currently offers a number of adjustable-rate mortgage loan programs with interest rates which adjust annually with amortization schedules of ten to thirty years. The Company's adjustable-rate mortgage loans are originated with interest rates which are fixed for an initial period of one, three, five or seven years and at the end of such period will adjust thereafter either annually or a greater period according to their terms. The Company's one- to four-family adjustable-rate loan products generally reprice based on a margin, currently 287 to 325 basis points, over the CMT Index for the Treasury security of a maturity which is comparable to the interest adjustment period for the loan. Generally, all of the Company's adjustable-rate mortgage loans provide for periodic (generally 2%) and overall caps (generally 6%) on the increase or decrease in interest rate at any adjustment date and over the life of the loan. The Company generally originates one- to four-family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan and up to 95% of the appraised value or selling price if private mortgage insurance is obtained on the portion of the loan in excess of 75% of the lesser of the appraised value or selling price. However, the Company may originate single-family owner-occupied mortgage loans in amounts up to 90% of the lesser of the appraised value or selling price without private mortgage insurance. Mortgage loans originated by the Company generally include due-on-sale clauses which provide the Company with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Company's consent. Due-on-sale clauses are an important means of adjusting the rates and maintaining quality on the Company's fixed-rate mortgage loan portfolio and the Company has generally exercised its rights under these clauses. MULTI-FAMILY MORTGAGE LENDING. The Company originates multi-family mortgage loans generally secured by five to 120 unit apartment buildings located in the Company's primary market area. The Company currently originates multi-family loans on a limited and selective basis. In reaching its decision on whether to make a multi-family loan, the Company considers the value of the underlying property as well as the qualifications of the borrower. Other factors relating to the property to be considered are: the net operating income of the mortgaged premises before debt service and depreciation; the debt service coverage ratio (the ratio of earnings before debt service to debt service); and the ratio of loan amount to appraised value. The Company generally requires a debt service ratio of 115% or greater. Pursuant to the Company's current underwriting policies, a multi-family mortgage loan may generally be made in an amount up to 85% of the appraised value of the underlying property to a maximum loan to one borrower amount of $7.5 million. However, most loans are granted at or below 80% of the appraised value. Generally, all multi-family loans made to corporations, partnerships and other business entities require personal guarantees by the principal borrowers. On an exception basis, the Company may not require a personal guarantee, or may require limited recourse on such loans depending on the creditworthiness of the borrower and amount of the down payment. When evaluating the qualifications of the borrower for a multi-family loan, the Company considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar property, and the Company's lending experience with the borrower. The Company's underwriting guidelines require that the borrower be able to demonstrate strong management skills and the ability to maintain the property from current rental income. The borrower is required to present evidence of the ability to repay the mortgage and a history of making mortgage payments on a timely basis. In making its assessment of the creditworthiness of the borrower, the Company generally reviews the financial statements and pro- forma cash-flow statement on the property and the employment and credit history of the guarantor, as well as other related documentation. The Company's multi-family loan portfolio at December 31, 1999, totalled $22.0 million or 2.0% of total loans. The Company's largest multi-family loan at December 31, 1999, was a $2.6 million performing loan secured by a 118 unit apartment complex located in Malden, Massachusetts. 9 10 Loans secured by apartment buildings and other multi-family residential properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to the then-prevailing conditions in the real estate market or the economy. The Company seeks to minimize these risks through its underwriting policies. COMMERCIAL REAL ESTATE LENDING. The Company originates commercial real estate loans that are secured by properties generally used for business purposes such as office buildings or retail facilities located in the Company's primary market area. The Company's underwriting procedures provide that commercial real estate loans may be made in amounts up to the lesser of 85% of the appraised value of the property, or the Company's current loan to one borrower limit which is $7.5 million. However, generally loans are not granted which exceed 80% of the appraised value. The Company currently originates commercial real estate loans with terms of up to twenty-five years the majority of which contain adjustable-rates and are indexed to the CMT Index. The Company's underwriting standards and procedures are similar to those applicable to its multi-family loans, whereby the Company considers the net operating income of the property and the borrower's expertise, credit history and profitability. The Company has generally required that the properties securing commercial real estate loans have debt service coverage ratios of at least 115%. Generally, all commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principal borrowers. On an exception basis, the Company may not require a personal guarantee, or may require limited recourse on such loans depending on the creditworthiness of the borrowers and the amount of the down payment. The Company's commercial real estate loan portfolio at December 31, 1999 was $76.0 million, or 7.0% of total loans. The largest commercial real estate loan in the Company's portfolio at December 31, 1999 was a $3.4 million performing loan secured by an office building located in Cambridge, Massachusetts. Loans secured by commercial real estate properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to the then prevailing conditions in the real estate market or the economy. The Company seeks to minimize these risks through its underwriting standards. CONSTRUCTION AND LAND LENDING. The Company originates loans for the acquisition and development of property to licensed and experienced contractors in its primary market area. The majority of the Company's construction loans have been made to finance the construction of one- to four-family, residential properties. While the Company originates loans secured by land, the Company generally does not originate such loans unless the borrower has also secured sub-division approval and financing with the Company for the construction of structures on the property. These loans are primarily adjustable-rate loans with maturities of less than two years. Construction and land mortgage loans are originated in amounts up to 75% of the lesser of the appraised value of the property, as improved, or sales price, unless such loan is for the construction of a residential property which cannot exceed an 80% loan to value ("LTV") ratio. Proceeds of such loans are dispersed as phases of the construction are completed. Generally, if the borrower is a corporation, partnership or other business entity, personal guarantees by the principal borrowers are required. However, personal guarantees may not be required, or limited recourse may be required on such loans depending on the creditworthiness of the borrower and amount of the down payment. The Company's current loan to one borrower limit is $7.5 million. The Company's largest construction and land loan at December 31, 1999 was a performing loan of $7.4 million with an outstanding loan-in-process balance of $4.9 million and secured by an office/warehouse building located in Marlboro and Southboro, Massachusetts. At December 31, 1999, the Company had $77.1 million of construction and land loans which amounted to 7.1% of the Company's total 10 11 loan portfolio. Working with experienced land developers in the local community, the Company will continue to expand this area of its lending business. Construction and land financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Company may be confronted with a project, when completed, having a value which is insufficient to assure full repayment. OTHER LENDING. Other loans at December 31, 1999, amounting to $65.8 million or 6.1% of the Company's total loan portfolio, consisted primarily of home equity, business loans, and improvement loans, and, to a significantly lesser extent, consumer loans, and loans secured by savings accounts. Such loans are generally originated in the Company's primary market area and generally are secured by real estate, personal property, savings accounts, automobiles and business assets such as accounts receivable, inventory and machinery. These loans are shorter term and generally contain higher interest rates than residential mortgage loans. Substantially all of the Company's home equity lines of credit are primarily secured by second mortgages on one- to two-family residences located in the Company's primary market area.At December 31, 1999, these loans totalled $43.7 million, or 4.0% of the Company's total loans and 66.4% of other loans. Generally, under the terms of the Company's home equity lines of credit, borrowers have the ability to draw on such lines of credit and repay outstanding principal and interest on a monthly basis on a certain percentage of the outstanding principal over a period of up to ten years and, thereafter, the outstanding balance drawn on such lines of credit is converted to an adjustable-rate loan with terms of up to ten years for BFS and up to five years for BNB. The underwriting standards employed by the Company for these loans include a determination of the applicant's credit history and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The stability of the applicant's monthly income may be determined by verification of gross monthly income from primary employment and, additionally, from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration. The Company began originating loans to businesses and corporations in 1998. These loans, amounting to $17.8 million at December 31, 1999, are generally secured by the assets of the borrowing entity. The most typical type of loans generated for the Company are term loans and lines of credit. These loans generally require the personal guaranty of the principals of the Company. However, in some circumstances where the borrower is extremely strong or the loan to value ratio is low, the personal guaranty may be waived or be limited in recourse. The Company has separate lending guidelines and underwriting standards for this type of lending. These guidelines currently limit the loan to one borrower to $7.5 million. The largest business loan in the Company's portfolio as of December 31, 1999 was a $4.3 million performing loan secured by the business assets of a company located in Attleboro, Massachusetts. Loans secured by rapidly depreciable assets such as equipment, machinery, automobiles, etc., or that are unsecured entail greater risks than one- to four-family residential mortgage loans. In such cases, repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral. Further, consumer loan collections on these loans are dependent on the borrower's continuing financial stability and, therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. The consumer finance loans originated by Forward Financial are substantially all sold without recourse and servicing released. Finally, the application of various federal and state laws, including federal and state 11 12 bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default. LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes the lending policies and loan approval limits of the Bank. Such limits are included in a matrix with the corresponding level of authority requirements. At BFS, Board of Directors' approval is required on all one- to four-family loans in excess of $2.5 million, on all commercial real estate, multi-family and non-owner occupied construction loans in excess of $5.0 million, and on all business loans in excess of $4.5 million. At BNB, a similar matrix has been established and Board of Directors' approval is required on all loans in excess of $500,000. Pursuant to OTS and Office of the Comptroller of the Currency ("OCC") regulations, loans to one borrower cannot, subject to certain exceptions, exceed 15% of the Bank's unimpaired capital and surplus. At December 31, 1999, the loans to one borrower limit was $10.4 million and $1.4 million for BFS and BNB, respectively. LOAN SERVICING. The Company also services mortgage loans for others. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. All of the loans currently being serviced for others are loans which have been sold by the Company. At December 31, 1999, the Company was servicing $784.6 million of loans for others. The gross servicing fee income from loans sold is generally 0.25% to 0.38% of the total balance of the loan serviced. The Company has not purchased servicing rights related to mortgage loans originated by other institutions. The Company recognizes the present value of the servicing income, net of servicing expenses, attributable to servicing rights upon sale of the loan. The Company amortizes the capitalized mortgage servicing rights using a method which approximates the level yield method in proportion to, and over the period of, estimated net servicing income. The Company reviews prepayment activity on its serviced loans at least quarterly and adjusts its capitalized mortgage servicing rights amortization schedule accordingly. As of December 31, 1999, the Company had $5.1 million of capitalized mortgage servicing rights, representing 65 basis points of loans serviced for others. NONPERFORMING AND PROBLEM ASSETS CLASSIFIED ASSETS. The Company's Asset Classification Policy and federal regulations require that the Company utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Company has incorporated the OTS and OCC internal asset classifications for BFS and BNB, respectively, as a part of its credit monitoring system. The Company currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the collateral pledged, if any, or the current net worth and paying capacity of the obligor. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "Special Mention." 12 13 When an insured institution classifies one or more assets, or portions thereof, as "Substandard" or "Doubtful," it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. BFS' and BNB's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS and OCC, respectively, which can order the establishment of additional general or specific loss allowances. The OTS and OCC, in conjunction with the other federal banking agencies, have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. As a result of the declines in local and regional real estate market values and the significant losses experienced by many financial institutions just a few years ago, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of institutions by the OTS, OCC and the Federal Deposit Insurance Corporation ("FDIC"). While the Company believes that it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the Company's loan portfolio, will not request the Company to materially increase its allowance for loan losses, thereby negatively affecting the Company's financial condition and earnings at that time. Although management believes that, based on information currently available to it, its allowance for loan losses is adequate, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary. BFS' Asset Classification Committee reviews and classifies assets on a quarterly basis and reports the results of its review to the Board of Directors. BNB's assets are reviewed by a non-lending officer who reports classifications to the BNB Board on a quarterly basis. The Company classifies assets in accordance with the management guidelines described above. At December 31, 1999, the Company had, on a consolidated basis, $4.5 million of assets designated as "Special Mention," $3.6 million of assets designated as "Substandard," $35,000 of assets designated as "Doubtful" and $679,000 of assets designated as "Loss." All assets classified as "Loss" have been charged off for financial statement purposes. Included in these amounts was $746,000 in non-performing loans at December 31, 1999. In the opinion of management, the remaining "Special Mention" and "Substandard" loans of $7.4 million evidence one or more weaknesses or potential weaknesses and, depending on the regional economy and other factors, may become non-performing assets in future periods. 13 14 The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated:
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 ---------------------------------------------- ---------------------------------------------- 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE --------------------- --------------------- --------------------- --------------------- PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Residential: One- to four-family ..... 10 $1,568 6 $ 721 16 $1,625 12 $ 618 Multi-family ............ -- -- -- -- -- -- -- -- Commercial real estate ....... 2 287 -- -- -- -- -- -- Construction and land ........ -- -- -- -- -- -- -- -- Other loans .................. 2 245 -- -- 4 121 -- -- ------ ------ ------ ------ ------ ------ ------ ------ Total ................. 14 $2,100 6 $ 721 20 $1,746 12 $ 618 ====== ====== ====== ====== ====== ====== ====== ====== Delinquent loans to loans, net and mortgage loans held for sale ........... 0.20% 0.07% 0.18% 0.06%
AT DECEMBER 31, 1997 ----------------------------------------------- 60-89 DAYS 90 DAYS OR MORE ---------------------- --------------------- PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Residential: One- to four-family ..... 36 $3,313 14 $ 865 Multi-family ............ -- -- -- -- Commercial real estate ....... -- -- 3 21 Construction and land ........ -- -- -- -- Other loans .................. 6 139 3 6 ------ ------ ------ ------ Total ................... 42 $3,452 20 $ 892 ====== ====== ====== ====== Delinquent loans to loans, net and mortgage loans held for sale ........... 0.43% 0.11%
14 15 NON-PERFORMING ASSETS AND RESTRUCTURED LOANS. The following table sets forth information regarding non-accrual loans, restructured loans and real estate owned ("REO"). At December 31, 1999, restructured loans totalled $210,000, consisting of one loan. REO, net, totalled $376,000, consisting of two properties. It is the policy of the Company to cease accruing interest on loans 90 days or more past due and charging off all accrued interest. For the years ended December 31, 1999, 1998, 1997, 1996 and 1995, the amount of additional interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $(2,000), $33,000, $149,000, $103,000 and $303,000, respectively. For the same periods, the difference between the amount of interest income that would have been recognized on impaired loans if such loans were performing in accordance with their regular terms and amounts recognized was $2,000, $1,000, $1,000, $73,000 and $77,000, respectively.
AT DECEMBER 31, ------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Non-accrual loans: Residential real estate: One- to four-family .............. $ 721 $ 784 $ 941 $1,463 $1,195 Multi-family ..................... -- -- -- -- 745 Commercial real estate ............. 25 25 458 25 3,312 Other loans ........................ -- -- 6 14 -- ------ ------ ------ ------ ------ Total(l)....................... 746 809 1,405 1,502 5,252 Real estate owned, net(1)............. 376 47 195 2,668 971 ------ ------ ------ ------ ------ Total non-performing assets ... 1,122 856 1,600 4,170 6,223 Restructured loans ................... 210 213 369 2,489 2,941 ------ ------ ------ ------ ------ Total risk elements .................. $1,332 $1,069 $1,969 $6,659 $9,164 ====== ====== ====== ====== ====== Allowance for loan losses as a percent of loans(2)......................... 1.01% 0.88% 0.82% 0.64% 0.82% Allowance for loan losses as a percent of non-performing loans(3)........... 1,428.15 1,029.06 469.75 293.02 81.40 Non-performing loans as a percent of loans(2), (3)..................... 0.07 0.09 0.17 0.22 1.00 Non-performing assets as a percent of total assets(4)................... 0.09 0.08 0.16 0.51 0.97
(1) Loans includes loans, net and mortgage loans held for sale, excluding allowance for loan losses. (2) Non-performing loans consist of all 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal. (3) REO balances are shown net of related valuation allowances. (4) Non-performing assets consist of non-performing loans and REO. 15 16 At December 31, 1999, loans which were characterized as impaired pursuant to Statement of Accounting Standards ("SFAS") 114 and 118 totalled $235,000. All of the impaired loans have been measured using the discounted cash flow method or the fair value of the collateral method if the loan is collateral dependent. During the year ended December 31, 1999, the average recorded value of impaired loans was $335,000, interest income of $15,000 was recognized, all of which was recorded on a cash basis, and $17,000 of interest income would have been recognized under original terms.
AT DECEMBER 31, ------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Impaired loans: Multi-family real estate $ -- $245 $281 Commercial real estate . 235 238 217 ---- ---- ---- Total ............. $235 $483 $498 ==== ==== ====
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. Amounts provided for fiscal years 1999, 1998, 1997, 1996 and 1995 were $1.6 million, $1.6 million, $1.7 million, $1.3 million and $3.6 million, respectively. During the year ended December 31, 1999, there were recoveries of $414,000 and charge-offs of $56,000 made against this allowance. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management. As of December 31, 1999, the Company's allowance for loan losses was 1.01% of total loans as compared to 0.88% as of December 31, 1998. Management believes this increased coverage ratio is prudent due to the balance increase in the combined total of construction and land, commercial real estate, multi-family, home equity and improvement, and business loans. These combined total balances increased from $149.2 million at December 31, 1998 to $236.6 million at December 31, 1999, an increase of 58.6%. The Company had non-accrual loans of $746,000 and $809,000 at December 31, 1999 and December 31, 1998, respectively. The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. While management believes the Company's allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Company's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses. 16 17 The following table sets forth activity in the Company's allowance for loan losses for the periods set forth in the following table.
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS) Balance at beginning of period .......... $ 8,500 $ 6,600 $ 4,400 $ 4,275 $ 3,700 BNB allowance for loan losses at acquisition date .................. -- -- 620 -- -- Forward Financial allowance for loan losses at acquisition date ........... 170 -- -- -- -- Provision for loan losses ............... 1,626 1,642 1,696 1,294 3,614 Charge-offs: Real estate loans: Residential: One- to four-family ................. 19 51 370 387 550 Multi-family ........................ 1 2 84 263 483 Commercial ............................ -- 75 45 664 2,297 Other ................................. 36 131 16 198 194 -------- -------- -------- -------- -------- Total .............................. 56 259 515 1,512 3,524 Recoveries .............................. 414 517 399 343 485 -------- -------- -------- -------- -------- Balance at end of period ................ $ 10,654 $ 8,500 $ 6,600 $ 4,400 $ 4,275 ======== ======== ======== ======== ======== Ratio of net charge-offs (net recoveries) during the period to average loans outstanding during the period ........ (0.04)% (0.03)% 0.02% 0.19% 0.60% ======== ======== ======== ======== ========
17 18 The following tables set forth the Company's percent of allowance for loan losses to total allowance for loan losses and the percent of loans to total loans in each of the categories listed at the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------------------------ 1999 1998 ---------------------------------------- --------------------------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF ALLOWANCE LOANS IN ALLOWANCE LOANS IN TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS ------- --------- -------------- ------- --------- -------------- (DOLLARS IN THOUSANDS) Residential: One- to four-family $ 2,872 26.96% 77.85% $ 2,186 25.72% 84.27% Multi-family ....... 209 1.96 2.02 214 2.52 2.33 Commercial real estate 2,090 19.62 6.99 615 7.24 4.97 Construction and land 1,285 12.06 7.09 3 0.03 4.23 Other loans .......... 1,029 9.66 6.05 731 8.60 4.20 Unallocated .......... 3,169 29.74 -- 4,751 55.89 -- ------- ------ ------ ------- ------ ------ Total allowance for loan losses $10,654 100.00% 100.00% $ 8,500 100.00% 100.00% ======= ====== ====== ======= ====== ======
AT DECEMBER 31, ----------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------- ------------------------------- PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT OF OF LOANS OF OF LOANS OF OF LOANS ALLOWANCE IN EACH ALLOWANCE IN EACH ALLOWANCE IN EACH TO CATEGORY TO CATEGORY TO CATEGORY TOTAL TO TOTAL TOTAL TO TOTAL TOTAL TO TOTAL AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS ------ --------- ------- ------ --------- -------- ------ --------- -------- (DOLLARS IN THOUSANDS) Residential: One- to four-family $1,997 30.26% 86.11% $1,899 43.16% 88.00% $1,974 46.18% 85.44% Multi-family ...... 206 3.12 2.32 274 6.23 3.10 373 8.72 5.35 Commercial real estate ........... 369 5.59 4.46 451 10.25 4.07 1,285 30.06 5.05 Construction and land ......... 152 2.30 2.51 463 10.52 1.81 580 13.57 0.66 Other loans ......... 266 4.03 4.60 61 1.39 3.02 47 1.10 3.50 Unallocated ......... 3,610 54.70 -- 1,252 28.45 -- 16 0.37 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses $6,600 100.00% 100.00% $4,400 100.00% 100.00% $4,275 100.00% 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ======
18 19 REAL ESTATE OWNED At December 31, 1999, the Company had $376,000 of real estate owned, net of valuation allowances. When the Company acquires property through foreclosure or deed in lieu of foreclosure, it is initially recorded at the lower of the recorded investment in the corresponding loan or the fair value of the related assets at the date of foreclosure, less costs to sell. Thereafter, if there is a further deterioration in value, the Company provides for a specific valuation allowance and charges operations for the diminution in value. It is the policy of the Company to have obtained an appraisal on all real estate subject to foreclosure proceedings prior to the time of foreclosure. It is the Company's policy to require appraisals on a periodic basis on foreclosed properties and conduct periodic inspections on foreclosed properties. INVESTMENT ACTIVITIES The investment policy of the Company, as approved by the Board of Directors, requires management to maintain adequate liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk and to complement the Company's lending activities. Generally, the Company's investment policy is more restrictive than the OTS and OCC regulations allow and, accordingly, the Company has invested primarily in U.S. Government and Agency securities, mutual funds which qualify as liquid assets under the OTS regulations, federal funds and U.S. government sponsored agency issued mortgage-backed securities. As required by SFAS 115, the Company has established an investment portfolio of securities that are categorized as held to maturity, available for sale or held for trading. The Company does not currently maintain a portfolio of securities categorized as held for trading. The Company's investment and mortgage-backed securities purchased for the held to maturity portfolio totalled $16.2 million, or 1.3% of assets. At December 31, 1999, the available for sale portfolio totalled $68.7 million or 5.5% of the Company's assets. The investment policy provides different management levels of approval, from the investment officer up to and including the Board of Directors, depending on the size of purchase or sale and monthly cumulative purchase or sale amounts. Generally, pursuant to the Company's policies, the Board must provide prior approval for all individual securities investments over $10.0 million and approval for all monthly purchases which aggregate $25.0 million or more. The Company's Board, BFS' Investment Committee and BNB's Board are provided with activity reports at their respective meetings and summaries of the held to maturity and available for sale investment portfolios of the Company, BFS and BNB, respectively, on a quarterly basis. At December 31, 1999, the Company had invested $29.5 million in mortgage-backed securities, or 2.4% of total assets, which were guaranteed by Ginnie Mae ("GNMA"), insured by either FNMA or FHLMC or privately issued. Of the $29.5 million, $13.2 million were GNMA securities, of which $11.3 million were adjustable-rate with 1.5% maximum annual rate adjustments and lifetime maximum interest rates of 12.5%. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby reducing or increasing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates. At December 31, 1999, mortgage-backed securities available for sale and held-to-maturity amounted to $15.5 million and $14.0 million, respectively. 19 20 The following table sets forth the composition of the Company's mortgage-backed securities portfolio in dollar amounts and in percentages of the respective portfolios at the dates indicated.
AT DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Mortgage-backed securities: GNMA(1), (2) ............................ $13,201 44.78% $22,627 51.49% $33,106 57.60% FHLMC(3), (4) ........................... 5,965 20.23 5,684 12.94 9,544 16.60 FNMA(5) ................................. 3,263 11.07 428 0.97 894 1.56 Privately issued collateralized mortgage obligations(6), (7) .......... 7,052 23.92 15,203 34.60 13,931 24.24 ------- ----- ------- ----- ------- ----- Total mortgage-backed securities ...... 29,481 100.00% 43,942 100.00% 57,475 100.00% ====== ====== ====== Less: Mortgage-backed securities available for sale - GNMA(2) ........................ -- 5,982 10,681 Mortgage-backed securities available for sale - FHLMC(4) ................... 5,484 5,002 8,444 Mortgage-backed securities available for sale - FNMA .......................... 3,004 -- -- Privately issued collateralized mortgage obligations(7) ....................... 7,052 10,045 -- ------- ------- ------- Mortgage-backed securities held to maturity ...................... $13,941 $22,913 $38,350 ======= ======= =======
- ------------------- (1) Includes $78,000, $151,000 and $213,000 of unamortized premiums related to GNMA securities as of December 31, 1999, 1998 and 1997, respectively. (2) Is net of unrealized gain of $0, $65,000, and $128,000 at December 31, 1999, 1998 and 1997, respectively. (3) Includes $66,000, $104,000 and $144,000 of unamortized premiums related to FHLMC securities as of December 31, 1999, 1998 and 1997, respectively. (4) Is net of unrealized loss of $75,000 at December 31, 1999, an unrealized gain of $6,000 at December 31, 1998 and an unrealized loss of $10,000 at December 31, 1997. (5) Includes $4,000 of unamortized premiums related to FNMA. (6) Includes $81,000 of unamortized discounts related to privately issued collateralized mortgage obligations at December 31, 1999. (7) Is net of unrealized loss of $266,000 at December 31, 1999 and unrealized gain of $22,000 at December 31, 1998. 20 21 The following tables set forth the Company's mortgage-backed securities activities for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Beginning balance ........................ $ 43,942 $ 57,475 $ 66,612 Mortgage-backed securities purchased: Available for sale .................. 5,005 10,856 -- Less: Sale of mortgage-backed securities available for sale ................ (4,062) -- (1,084) Principal repayments ................ (14,892) (24,275) (8,448) Change in unrealized gains (losses) . (435) (24) 440 Accretion of premium, net of discount (77) (90) (45) -------- -------- -------- Ending balance ........................... $ 29,481 $ 43,942 $ 57,475 ======== ======== ========
The following table sets forth certain information regarding the carrying amount and fair values of the Company's mortgage-backed securities at the dates indicated: AT DECEMBER 31, -------------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- -------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- -------- ------- (IN THOUSANDS) Mortgage-backed securities: Held to maturity: GNMA .......................... $13,201 $13,297 $16,645 $16,991 $22,425 $22,858 FNMA .......................... 259 252 428 438 894 902 FHLMC ......................... 481 481 682 695 1,100 1,108 Privately issued collateralized mortgage obligations ....... -- -- 5,158 5,209 13,931 14,035 ------- ------- ------- ------- ------- ------- Total held to maturity ........ 13,941 14,030 22,913 23,333 38,350 38,903 ------- ------- ------- ------- ------- ------- Available for sale: GNMA .......................... -- -- 5,982 5,982 10,681 10,681 FNMA .......................... 3,004 3,004 -- -- -- -- FHLMC ......................... 5,484 5,484 5,002 5,002 8,444 8,444 Privately issued collateralized mortgage obligations ....... 7,052 7,052 10,045 10,045 -- -- ------- ------- ------- ------- ------- ------- Total available for sale ... 15,540 15,540 21,029 21,029 19,125 19,125 ------- ------- ------- ------- ------- ------- Total mortgage-backed securities .............. $29,481 $29,570 $43,942 $44,362 $57,475 $58,028 ======= ======= ======= ======= ======= =======
21 22 The following table sets forth certain information regarding the carrying amount and fair values of the Company's short-term investments and investment securities at the dates indicated:
AT DECEMBER 31, -------------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- -------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- -------- ------- (IN THOUSANDS) Daily federal funds sold and short-term investments ................ $ 2,815 $ 2,815 $18,068 $18,068 $ 3,448 $ 3,448 Investment securities: Held to maturity: U.S. Government obligations, federal agency obligations, and other obligations ..................... 2,304 2,275 7,302 7,371 20,630 20,630 ------- ------- ------- ------- ------- ------- Total held to maturity ................... 2,304 2,275 7,302 7,371 20,630 20,630 ------- ------- ------- ------- ------- ------- Available for sale: U.S. Government obligations, federal agency obligations, and other obligations ..................... 33,641 33,641 29,356 29,356 30,617 30,617 Mortgage-Related Mutual Funds ...... 16,193 16,193 16,031 16,031 -- -- Other Mutual funds(1) .............. 1,960 1,960 1,974 1,974 1,150 1,150 Marketable Equity Securities-- Common Stock ...................... 1,409 1,409 1,776 1,776 -- -- ------- ------- ------- ------- ------- ------- Total available for sale ........ 53,203 53,203 49,137 49,137 31,767 31,767 ------- ------- ------- ------- ------- ------- Total investment securities .............. $58,322 $58,293 $74,507 $74,576 $55,845 $55,845 ======= ======= ======= ======= ======= =======
- ------------------------ (1) Consists of securities issued by an institutional mutual fund which primarily invests in short-term U.S. Government securities. 22 23 The table below sets forth certain information regarding the carrying amount, weighted average yields and contractual maturities of the Company's short-term investments, investment securities and mortgage-backed securities as of December 31, 1999.
AT DECEMBER 31, 1999 -------------------------------------------------------------------- MORE THAN ONE MORE THAN FIVE ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Daily federal funds sold and short-term investments ...... $ 2,796 4.16% $ 19 4.88% $ -- --% Investment Securities: Held to maturity: U.S. Government obligations, federal agency obligations, and other obligations ............... 4 5.46 2,300 6.34 -- -- ------- ------- ------- Total held to maturity .......................... 4 5.46 2,300 6.34 -- -- ------- ------- ------- Available for sale: U.S. Government obligations, federal agency obligations, and other obligations .............. 4,997 6.50 12,187 6.11 5,740 5.28 Mortgage-Related Mutual Funds ....................... 16,193 6.44 -- -- -- -- Other Mutual Funds .................................. 1,960 4.91 -- -- -- -- Equity Investments .................................. 1,409 N/A -- -- -- -- ------- ------- ------- Total available for sale ........................ 24,559 6.32 12,187 6.11 5,740 5.28 ------- ------- ------- Total investment securities .............................. $27,359 6.09 $14,506 6.14 $ 5,740 5.28 ======= ======= ======= Mortgage-backed securities: Held to maturity: FNMA ................................................ $ -- -- $ 259 7.00 $ -- -- GNMA ................................................ -- -- 99 7.49 1,810 8.23 FHLMC ............................................... -- -- 481 7.00 -- -- ------- ------- ------- Total held to maturity .......................... -- -- 839 7.06 1,810 8.23 Held for sale: FHLMC ............................................... -- -- 3,185 6.42 1,981 7.01 FNMA ................................................ -- -- -- -- -- -- Privately issued collateralized mortgage obligation . -- -- -- -- -- -- ------- ------- ------- Total held for sale ............................... -- -- 3,185 6.42 1,981 7.01 ------- ------- ------- Total mortgage-backed securities ................ $ -- --% $ 4,024 6.55% $ 3,791 7.59% ======= ======= =======
AT DECEMBER 31, 1999 --------------------------------------------- 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 ...... $ -- --% $ 2,815 4.16% Investment Securities: Held to maturity: U.S. Government obligations, federal agency obligations, and other obligations ............... -- -- 2,304 6.34 ------- ------- Total held to maturity .......................... -- -- 2,304 6.34 ------- ------- Available for sale: U.S. Government obligations, federal agency obligations, and other obligations .............. 10,717 5.91 33,641 5.96 Mortgage-Related Mutual Funds ....................... -- -- 16,193 6.44 Other Mutual Funds .................................. -- -- 1,960 4.91 Equity Investments .................................. -- -- 1,409 N/A ------- ------- Total available for sale ........................ 10,717 5.91 53,203 6.07 ------- ------- Total investment securities .............................. $10,717 5.91 $58,322 5.99 ======= ======= Mortgage-backed securities: Held to maturity: FNMA ................................................ $ -- -- $ 259 7.00 GNMA ................................................ 11,292 7.02 13,201 7.19 FHLMC ............................................... -- -- 481 7.00 ------- ------- Total held to maturity .......................... 11,292 7.02 13,941 7.18 ------- ---- ------- Held for sale: FHLMC ............................................... 318 6.00 5,484 6.61 FNMA ................................................ 3,004 8.04 3,004 8.04 Privately issued collateralized mortgage obligation . 7,052 6.32 7,052 6.32 ------- ------- Total held for sale ............................... 10,374 6.81 15,540 6.75 ------- ------- Total mortgage-backed securities ................ $21,666 6.92% $29,481 6.95% ======= =======
23 24 SOURCES OF FUNDS GENERAL. Retail deposits, wholesale brokered deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and FHLB advances are the primary sources of the Company's funds for use in lending, investing and for other general purposes. DEPOSITS. The Company offers a variety of deposit accounts with a range of interest rates and terms. The Company's deposits consist of savings, NOW accounts, checking accounts, money market accounts and certificate accounts. For the year ended December 31, 1999, core deposits represented 50.4% of total average deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Company's deposits are obtained predominantly from the areas in which its branch offices are located. The Company relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions, mutual funds and equity markets significantly affect the Company's ability to attract and retain deposits. The Company uses traditional means of advertising its deposit products, including radio and print media and generally does not solicit deposits from outside its market area except through the use of wholesale brokered deposits which provided $53.7 million and $7.7 million of deposits during 1999 and 1998, respectively, for terms of two to five years. The following table presents the deposit activity of the Company for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------- ------- -------- (IN THOUSANDS) Net deposits (withdrawals)................................... $37,033 $63,456 $ 47,355 Interest credited on deposit accounts........................ 25,872 23,867 18,626 Deposits acquired from BNB acquisition....................... -- -- 125,022 ------- ------- -------- Total increase (decrease) in deposit accounts................ $62,905 $87,323 $191,003 ======= ======= ========
At December 31, 1999, the Company had $38.6 million in certificate accounts in amounts of $100,000 or more (excluding wholesale deposits) maturing as follows:
WEIGHTED MATURITY PERIOD AMOUNT AVERAGE RATE - --------------------------------------------------- ------- ------------ (DOLLARS IN THOUSANDS) Three months or less............................... $11,675 4.88% Over 3 through 6 months............................ 5,416 4.87 Over 6 through 12 months........................... 8,866 5.06 Over 12 months..................................... 12,644 5.73 ------- Total.............................................. $38,601 5.20% ======= ====
24 25 The following table sets forth the distribution of the Company's average deposit accounts for the periods indicated and the average cost on each category of deposits presented.
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------- ---------------------------- ----------------------------- PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST -------- -------- ------- -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) Money market deposit accounts..................... $ 59,279 8.24% 2.86% $ 62,739 9.56% 2.93% $ 61,800 11.18% 2.95% Savings accounts............. 142,399 19.81 2.48 121,092 18.45 2.48 116,247 21.03 2.43 NOW accounts................. 110,684 15.39 0.80 104,532 15.94 1.11 96,590 17.47 1.11 Non-interest-bearing accounts 49,944 6.95 -- 54,808 8.36 -- 41,017 7.42 -- -------- ------ -------- ------ -------- ------ Total................... 362,306 50.39 1.69 343,171 52.31 1.75 315,654 57.10 1.81 -------- ------ -------- ------ -------- ------ Certificate accounts: Less than six months...... 25,657 3.57 4.17 29,423 4.49 4.99 33,573 6.07 5.16 Over six through 12 months 39,741 5.53 3.63 42,483 6.48 5.42 54,876 9.93 5.41 Over 12 through 36 months. 241,689 33.62 6.00 187,285 28.55 6.02 94,157 17.04 5.99 Over 36 months............ 4,236 0.59 5.82 5,442 0.83 5.67 6,859 1.24 5.43 IRA/KEOGH................. 45,345 6.31 5.49 48,177 7.34 5.73 47,650 8.62 5.78 -------- ------ -------- ------ -------- ------ Total certificate accounts 356,668 49.61 5.54 312,810 47.69 5.79 237,115 42.90 5.68 -------- ------ -------- ------ -------- ------ Total average deposits $718,974 100.00% 3.60% $655,981 100.00% 3.68% $552,769 100.00% 3.47% ======== ====== ======== ====== ======== ======
The following table presents, by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at December 31, 1999.
PERIOD TO MATURITY FROM DECEMBER 31, 1999 AT DECEMBER 31, ------------------------------------------------------------ --------------------------------- LESS THAN TWO TO FOUR TO ONE ONE TO THREE THREE TO FIVE YEAR TWO YEARS YEARS FOUR YEARS YEARS 1999 1998 1997 -------- --------- --------- ---------- -------- -------- -------- -------- (IN THOUSANDS) Certificate accounts: 0 to 4.00% .......... $ 2,636 $ -- $ -- $ -- $ -- $ 2,636 $ 1,447 $ 1,367 4.01 to 5.00% ....... 78,980 16,468 4,809 692 909 101,858 46,814 1,885 5.01 to 6.00% ....... 90,729 62,957 2,165 1,479 1,067 158,397 255,263 203,481 6.01 to 7.00% ....... 71,716 23,988 7,306 9,395 24,092 136,497 35,135 76,802 7.01 to 8.00% ....... -- -- -- -- -- -- -- 94 -------- -------- -------- -------- -------- -------- -------- -------- Total ............ $244,061 $103,413 $ 14,280 $ 11,566 $ 26,068 $399,388 $338,659 $283,629 ======== ======== ======== ======== ======== ======== ======== ========
BORROWINGS. The Company utilizes advances from the FHLB as an alternative to retail deposits to fund its operations and may do so in the future as part of its operating strategy. These FHLB advances are collateralized primarily by certain of the Company's mortgage loans and mortgage-backed securities and secondarily by the Company's investment in capital stock of the FHLB. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, fluctuates from time to time in accordance with the policies of the OTS, OCC and the FHLB. During the year ended December 31, 1999, the Company increased its net borrowings from the FHLB by $47.0 million. At December 31, 1999, the Company had $384.5 million in outstanding advances from the FHLB. 25 26 The following tables set forth certain information regarding the Company's borrowed funds and repurchase agreements at or for the periods ended on the dates indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) FHLB advances: Average balance outstanding............................. $367,484 $306,575 $287,128 Maximum amount outstanding at any month-end during the period...................... 390,500 337,500 310,792 Balance outstanding at end of period.................... 384,500 337,500 256,500 Weighted average interest rate during the period.................................... 5.77% 5.94% 6.00% Weighted average interest rate at end 5.80% 5.69% 5.96% of period...........................................
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 ------- ------- -------- (DOLLARS IN THOUSANDS) Other Borrowed Money: Average balance outstanding............................. $ 365 $ 1,616 $ 11,948 Maximum amount outstanding at any month-end during the period...................... 3,054 7,140 21,861 Balance outstanding at end of period.................... 3,054 0 7,140 Weighted average interest rate during the period.................................... 9.21% 6.05% 5.62% Weighted average interest rate at end of period........................................... 9.25% N/A 5.98%
SUBSIDIARY ACTIVITIES Leader Corporation ("Leader Corp.") incorporated under Massachusetts law, is a wholly owned subsidiary of BFS. In 1994, BFS, through Leader Corp., permitted Liberty Financial, a third party securities broker, to offer various uninsured investment products to BFS' customers. Leader Corp. entered into a contract with such third party brokerage concern to perform brokerage services in segregated areas of BFS' branches. Under this contract, Liberty Financial leases space from BFS at BFS' branch locations, pays rent and a percentage of sales to Leader Corp. Leader Corp. had net income of $33,000 and $25,000, respectively, for the years ended December 31, 1999 and 1998. Forward Financial was acquired by BFS at the close of business December 6, 1999. Forward Financial is incorporated under Massachusetts law and operates as a subsidiary of BFS. It originates loans, primarily direct with consumers purchasing or refinancing manufactured housing, recreational vehicles, marine and leased equipment. Forward Financial operates in approximately twenty states from its headquarters in Northboro Massachusetts and five other offices. It sells the vast majority of the loans it originates to third party client lenders. 26 27 Ellsmere Insurance Agency, Inc. was acquired by BNB at the close of business December 6, 1999. It is incorporated under Massachusetts law and has limited operations as a subsidiary of BNB. It earns finder fees for customer referrals. PERSONNEL As of December 31, 1999, the Company had 320 authorized full-time employee positions and 70 authorized part-time employee positions, for a total of approximately 350 full time equivalents. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good. REGULATION AND SUPERVISION GENERAL As a result of the Company's acquisition of BNB in February 1997, the Company became a bank holding company and ceased to be a savings and loan holding company. The Company, as a bank holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the FRB under the Bank Holding Company Act of 1956, as amended ("BHCA"). In addition, the activities of savings institutions, such as BFS, are governed by the Home Owner's Loan Act ("HOLA") and the Federal Deposit Insurance Act ("FDI Act"). The activities of national banks are generally governed by the National Bank Act and the FDI Act. BFS is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the back-up regulator. BFS' deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. BFS must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other institutions. BNB is subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and the FDIC, as the back-up regulator. BNB's deposit accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF"), which is also managed by the FDIC. The OTS and OCC conduct periodic examinations to test BFS' and BNB's safety and soundness and compliance with various regulatory requirements. Federal regulations establish a comprehensive framework of activities in which an institution can engage and are intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the OCC, the FDIC or the Congress, could have a material adverse impact on the Company, BFS and/or BNB and their operations. Certain of the regulatory requirements applicable to BFS, BNB and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to depository institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on BFS, BNB and the Company. FEDERAL HOME LOAN BANK SYSTEM Both BFS and BNB are members of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Banks, as members of the Federal Home Loan Bank, are required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the 27 28 aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. BFS and BNB were in compliance with this requirement with investments in Federal Home Loan Bank stock at December 31, 1999 of $19.2 million and $1.1 million, respectively. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Banks' net interest income would likely also be reduced. Recent legislation has changed the structure of the Federal Home Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its Federal Home Loan Bank membership. HOLDING COMPANY REGULATION FEDERAL REGULATION. Due to its control of BNB, the Company is subject to examination, regulation, and periodic reporting under the BHCA, as administered by the FRB. The Company is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company or merge with another bank holding company. Prior FRB approval will also be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, the Company would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. In evaluating such transactions, the FRB considers such matters as the financial and managerial resources of and future prospects of the companies involved, competitive factors and the convenience and needs of the communities to be served. Bank holding companies may acquire additional banks in any state, subject to certain restrictions such as deposit concentration limits. In addition to the approval of the FRB, before any bank acquisition can be completed, prior approval may also be required to be obtained from other agencies having supervisory jurisdiction over banks to be acquired. A bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks to be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) finance leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association, like BFS, provided that the savings association only engages in activities permitted bank holding companies. The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the OTS for BFS and the OCC for BNB. See "Capital Requirements." The Company's total and Tier 1 capital exceeds these requirements. Bank holding companies are generally required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, 28 29 or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions. The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB's policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the Bank holding company appears consistent with the organization's capital needs, asset quality, and overall financial condition. The FRB's policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions. The status of the Company as a registered bank holding company under the BHCA does not exempt it from certain Federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the Federal securities laws. Under the FDI Act, depository institutions are potentially liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This applies to depository institutions controlled by the same bank holding company. The Company and its subsidiaries will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for the management of the Company to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company, BFS or BNB. RECENT LEGISLATION. The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including being "well capitalized" and "well managed," to opt to become a "financial holding company" and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through "financial subsidiaries" in certain of the activities permitted for financial holding companies. Financial subsidiaries are generally treated as an affiliates for purposes of restrictions on a bank's transactions with affiliates. STATE REGULATION. The Company is also a "bank holding company" within the meaning of the Massachusetts bank holding company laws. The prior approval of the Massachusetts Board of Bank Incorporation is required before the Company may acquire in Massachusetts all or substantially all of the assets of any depository institution (or holding company thereof), merge with a holding company of a depository institution or acquire more than 5% of the voting stock of a depository institution or holding company thereof. ACQUISITION OF THE HOLDING COMPANY FEDERAL REGULATION. Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company's outstanding voting stock, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the FRB has 60 days from the filing of a 29 30 complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Under the BHCA, any company would be required to obtain prior approval from the FRB before it may obtain "control" of the Company within the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25 percent or more of any class of voting securities of the Company or the ability to control in any manner the election of a majority of the Company's directors. An existing bank holding company would be required to obtain the FRB's prior approval under the BHCA before acquiring more than 5% of the Company's voting stock. See "--Holding Company Regulation." Approval of the Massachusetts Board of Bank Incorporation may also be required for acquisition of the Company under some circumstances. FEDERAL BANKING REGULATIONS CAPITAL REQUIREMENTS. The OTS capital regulations effectively require savings institutions to meet four minimum capital standards: a 2% tangible capital ratio, a 4% leverage (core) capital ratio (3% for the most highly rated institutions), a 4% risk-based Tier I capital ratio and 8% risk-based total capital ratio. The OTS regulations also require that, in meeting the tangible, leverage (core) and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as a principle not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (or Tier 1) capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital include, among other items, cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. National Banks are required by OCC regulation to maintain a leverage (core) capital at least equal to 4% of assets, net of certain exclusions, (3% for institutions receiving the highest examination rating), a risk- based Tier I capital ratio of 4% and an 8% risk-based capital ratio. Both the OTS and the OCC have the discretion to establish higher capital requirements on a case-by-case basis where deemed appropriate in the circumstances of a particular institution. The Company is subject to consolidated capital requirements pursuant to the regulations of the FRB. Generally, a bank holding company must have a consolidated ratio of core (Tier 1) capital to total assets of at least 3% if it receives the FRB's highest examination rating and 4% otherwise. A bank holding company also must maintain a total capital to risk-based assets ratio of at least 8% and a Tier 1 (core) capital to risk-based assets ratio of at least 4%. As a condition for approving the acquisition of Forward Financial, the FRB required the Company and BFS to remain "well capitalized" as defined in the regulations, for a period of one year following the date of the acquisition. The Company and BFS have to date complied with this requirement. The following table presents BFS' and BNB's capital position at December 31, 1999 relative to regulatory requirements. 30 31
FOR CAPITAL ADEQUACY TO BE WELL ACTUAL PURPOSES CAPITALIZED ----------------- ------------------ ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) As of December 31, 1999 Risk-based Total Capital: BFS....................... $67,862 10.0% $54,064 8.0% $67,581 10.0% BNB....................... 9,436 13.6 5,537 8.0 6,921 10.0 Core Capital: BFS....................... 59,396 5.4 43,906 4.0 54,882 5.0 BNB....................... 8,694 6.3 5,521 4.0 6,901 5.0 Risk-based Tier I Capital: BFS....................... 59,396 8.8 27,032 4.0 40,548 6.0 BNB....................... 8,694 12.6 2,769 4.0 4,153 6.0 Tangible Capital: BFS ..................... 59,396 5.4 21,953 2.0 54,882 5.0 As of December 31, 1998: Risk-based Total Capital: BFS ...................... $57,944 10.2% $45,538 8.0% $56,923 10.0% BNB ...................... 10,131 15.3 5,291 8.0 6,614 10.0 Core Capital: BFS ...................... 50,820 5.1 39,533 4.0 49,417 5.0 BNB ...................... 9,492 7.4 5,167 4.0 6,459 5.0 Risk-based Tier I Capital: BFS ...................... 50,820 8.9 22,769 4.0 34,154 6.0 BNB ...................... 9,492 14.4 2,645 4.0 3,968 6.0 Tangible Capital: BFS ...................... 50,820 5.1 19,767 2.0 49,417 5.0
The Company's regulatory capital ratios at December 31, 1999 were 5.5%, 8.9% and 10.2% for Tier 1 leverage ratio, Tier 1 capital ratios and total capital ratios, respectively, and 7.1%, 12.6% and 13.8%, respectively, at December 31, 1998. PROMPT CORRECTIVE REGULATORY ACTION. The OTS and OCC are required to take certain supervisory actions against undercapitalized institutions under their jurisdiction, the severity of which depends upon the institution's degree of undercapitalization. Generally, an institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." An institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the OTS and OCC are required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS or OCC within 45 days of 31 32 the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS and OCC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. INSURANCE OF DEPOSIT ACCOUNTS. Deposits of BFS and BNB are presently insured by the FDIC through the SAIF and BIF, respectively. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999, FICO payments for SAIF members approximated 6.1 basis points, while Bank Insurance Fund members paid 1.2 basis points. By law, there is equal sharing of FICO payments between SAIF and BIF members beginning on January 1, 2000. BFS' assessment rate for fiscal 1999 was approximately 6 basis points and the premium paid for this period was $355,000. BNB's assessment rate was 1.2 basis points and the premium paid was $14,000 for 1999. A significant increase in FDIC insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Company. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the regulators. The management of BFS and BNB does not know of any practice, condition or violation that might lead to termination of deposit insurance. LOANS TO ONE BORROWER. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital, surplus, and allowable general valuation allowance. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. National banks are generally subject to similar loan to one borrower limits. At December 31, 1999, BFS' limit on loans to one borrower was $10.4 million and BNB's limit was $1.4 million. At December 31, 1999, BFS' largest aggregate outstanding balance of loans to one borrower was $7.5 million and BNB's largest aggregate outstanding balance of loans to one borrower was $731,000. QTL TEST. The HOLA requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to 32 33 conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1999, BFS maintained approximately 90% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered "qualified thrift investments." National banks such as BNB are not subject to the QTL test. LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. The rule effective in the first quarter of 1999 established three tiers of institutions based primarily on an institution's capital level. An institution that exceeded all capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and had not been advised by the OTS that it was in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during the calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half the excess capital over its capital requirements at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions required prior regulatory approval. Effective April 1, 1999, the OTS's capital distribution regulation changed. Under the new regulation, an application to and the prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with OTS. In the event the Bank's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. At December 31, 1999, BFS was a Tier 1 Bank. National banks may not pay dividends out of their permanent capital and may not, without OCC approval, pay dividends in excess of the total of the Bank's retained net income for the year combined with retained net income for the prior two years. A national bank may not pay a dividend that would cause it to fall below regulatory capital standards. At December 31, 1999, BNB met all applicable regulatory capital standards. LIQUIDITY. BFS is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement is currently 4% but may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. Monetary penalties may be imposed for failure to meet these liquidity requirements. BFS' liquidity ratio for December 31, 1999 was 6.85%, which exceeded the applicable requirement. BFS has never been subjected to monetary penalties for failure to meet its liquidity requirements. BNB, under OCC regulations, is not subject to separate regulatory liquidity requirements. 33 34 ASSESSMENTS. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in BFS' latest quarterly thrift financial report. The assessments paid by BFS for the fiscal year ended December 31, 1999 totalled $180,000. National banks pay semi-annual assessments to the OCC to fund its operations based on asset size. Such assessments for BNB amounted to $46,000 for the year ended December 31, 1999. BRANCHING. OTS regulations permit nationwide branching by federally chartered savings institutions. This permits federal savings institutions to establish interstate networks and to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. National banks are authorized to establish branches within the state in which they are headquartered to the extent state law allows branching by state banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Act") provides for interstate branching for national banks. Under the Act, interstate branching by merger was authorized on June 1, 1997 unless the state in which the Bank is to branch has enacted a law opting out of interstate branching. Massachusetts did not enact any law opting out of interstate branching. De novo interstate branching is permitted by the Act to the extent the state into which BFS is to branch has enacted a law authorizing out-of-state banks to establish de novo branches. TRANSACTIONS WITH RELATED PARTIES. The authority of a depository institution to engage in transactions with related parties or "affiliates" (e.g., any company that controls or is under common control with an institution, including the Company) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the depository institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the depository institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions like BFS are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. Certain transaction between sister institutions in a holding company are exempt from these requirements. The authority of BFS and BNB to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and to not involve more than the normal risk of repayment. There is an exception to this requirement for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Regulation O also places individual and aggregate limits on the amount of loans that institutions may make to insiders based, in part, on the institution's capital position and requires certain board approval procedures to be followed. Both banks have complied with Regulation O requirements. 34 35 ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions, the OCC has primary enforcement authority over national banks and both agencies have the authority to bring actions against the respective institutions and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to OTS that enforcement action be taken with respect to a particular savings institution or the OCC with respect to a national bank. If action is not taken by the agency, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. The FRB has similar enforcement authority with respect to the Company. Neither the Company nor the Bank are under any enforcement action. STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule to implement safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final rule establishes deadlines for the submission and review of such safety and soundness compliance plans when such plans are required. FEDERAL RESERVE SYSTEM The FRB regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $44.3 million or less (subject to adjustment by the FRB) the reserve requirement is 3%; and for accounts aggregating greater than $44.3 million, the reserve requirement is $1,329 million plus 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $44.3 million. The first $5.0 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. BFS and BNB are also in compliance with these requirements. FEDERAL SECURITIES LAWS The Company's common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information and proxy solicitation requirements, insider trading restrictions, and other requirements under the Exchange Act. Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). If the Company meets the 35 36 current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed in any three-month period the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provisions may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. FEDERAL AND STATE TAXATION FEDERAL TAXATION GENERAL. The Company and the Banks report their federal income on a consolidated basis and the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly BFS' reserve for bad debts discussed below. BNB also reports its income on a consolidated basis with the Company and BFS effective February 8, 1997. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Banks or the Company. BFS was audited by the IRS during 1996, and covered the tax years 1991, 1992 and 1993. For its 1999 taxable year, the Company is subject to a maximum federal income tax rate of 35%. BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. Under the Small Business Job Protection Act of 1996 (the "1996 Act"), for its current and future taxable years, BFS is not permitted to make additions to its tax bad debt reserves. In addition, BFS is required to recapture (i.e., take into income) over a six year period the excess of the balance of its tax bad debt reserves as of December 31, 1995 other than its supplemental reserve for losses on loans, if any, over the balance of such reserves as of December 31, 1987. The Company has previously recorded a deferred tax liability equal to the bad debt recapture and as such, the new rules will have no effect on net income or income tax expense. DISTRIBUTIONS. Under the 1996 Act, if BFS makes "non-dividend distributions" to the Company, such distributions will be considered to have been made from BFS' unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the extent thereof, and then from its supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in BFS' income. Non-dividend distributions include distributions in excess of BFS' current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of BFS' current or accumulated earnings and profits will not be so included in BFS' income. The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if BFS makes a non- dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. BFS does not intend to pay dividends that would 36 37 result in a recapture of any portion of its bad debt reserves. The bad debt reserves subject to recapture amount to $13.3 million for which no deferred taxes have been provided. STATE AND LOCAL TAXATION COMMONWEALTH OF MASSACHUSETTS. Financial institutions are subject to a tax on their apportioned income to Massachusetts at the rate of 10.5% The Company's two bank subsidiaries each own a security corporation and a real estate investment trust ("REIT"). The security corporations, which don't qualify as "bank holding company" are taxed at 1.32%. The REITs pay no tax, provided they distribute 100% of their income to their respective stockholders. Subsidiary corporations of BFS and BNB conducting business in Massachusetts must file separate Massachusetts state tax returns and are taxed as financial institutions. Corporations which qualify as "securities corporations," as defined by the Massachusetts tax code, are taxed at a special rate of 0.33% of their gross income if they qualify as a "bank-holding company" under the Massachusetts tax code. The Company has applied for and received approval to be taxed at this reduced tax rate as long as it is exclusively engaged in activities of a "securities corporation." The Company believes it will continue to qualify as a securities corporation because a separate subsidiary was formed to make the loan to BFS' Employee Stock Ownership Plan and the Company's other activities qualify as activities permissible for a securities corporation. If it were determined that the Company failed to so qualify, it would be taxed as a financial institution at a rate of 10.50%. DELAWARE TAXATION. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. 37 38 ITEM 2. PROPERTIES. The Company conducts its business through an administrative and full service office located in Burlington and several other offices. The Company believes its current facilities are adequate to meet the present and immediately foreseeable needs of the Company.
ORIGINAL NET BOOK VALUE OF YEAR PROPERTY OR LEASED LEASED DATE OF LEASEHOLD OR OR LEASE IMPROVEMENTS AT LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1999 - ---------- ---------- ---------- ---------------- --------------------- (In thousands) ADMINISTRATIVE/BRANCH/HOME OFFICE: 17 New England Executive Park Leased 1988 November, 2008 1,250 Burlington, MA 01803 BRANCH OFFICES: 980 Massachusetts Avenue Owned 1976 -- 463 Arlington, MA 02174 60 The Great Road Owned 1971 -- 395 Bedford, MA 01730 459 Boston Road Owned 1972 -- 338 Billerica, MA 01821 75 Federal Street Leased 1988 August, 2003 74 Boston, MA 02110 457 Broadway Owned 1969 -- 707 Chelsea, MA 02150 1840 Massachusetts Avenue Owned 1960 -- 1,136 Lexington, MA 02173 31 Cross Street Owned 1971 -- 485 Peabody, MA 01960 411 Broadway Owned 1977 -- 1,166 Revere, MA 02150 200 Linden Street Leased 1973 November, 2003 149 Wellesley, MA 02181 Construction in Progress - New Billerica Branch 909 Construction in Progress - New Woburn Branch 923 Forward Financial Co. Leased with various terms and locations. 360 Church Street Northboro, MA 01532 217 ------ Total $8,212 ======
38 39 ITEM 3. LEGAL PROCEEDINGS. Except as described below, the Company is not involved in any pending material legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company's financial condition or results of operations. BNB, a national bank subsidiary of the Company, was named a defendant in the Superior Court for Suffolk County, Massachusetts, civil action No. SUCV 99-018F served on April 12, 1999 in a matter captioned "Glyptal, Inc. v. John Hetherton, Jr., Fleet Bank, NA and Broadway National Bank of Chelsea." The suit alleges that an officer of the Plaintiff, Glyptal, embezzled funds from Plaintiff, by making unauthorized transfers from Plaintiff's corporate accounts and subsequently deposited checks drawn on such account into an account at BNB. Plaintiff alleges that BNB knew or should have known of the alleged fraudulent actions of Plaintiff's officer, and that BNB owed a duty to Plaintiff to investigate the transactions and protect Plaintiff from the alleged fraudulent actions. The Plaintiff is seeking damages for the alleged breach of duty by the defendants. BNB intends to deny the allegations that it owed or breached any duty to Plaintiff or that it is liable for any losses incurred by Plaintiff. BNB intends to vigorously defend the action and believes the action is not likely to result in any material loss or adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Information relating to the market for the Company's common equity and related stockholder matters appears under "Shareholder Information" in the Company's 1999 Annual Report to Stockholders on page 71 and is incorporated herein by reference. Information relating to dividend restrictions for the Company's common stock appears under "Regulation and Supervision." ITEM 6. SELECTED FINANCIAL DATA. The above-captioned information appears under "Selected Financial Data" of the Company in the Company's 1999 Annual Report to Stockholders on pages 4 through 5 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The above-captioned information appears under "Management Discussion and Analysis of Financial Condition and Results of Operation" in the Company's 1999 Annual Report to Stockholders on pages 8 through 24 and is incorporated herein by reference. ITEMS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS. The above-captioned information appears under the heading "Market Risk and Management of Interest Rate Risk" in the Company's 1999 Annual Report to Stockholders on pages 10 through 13 and is incorporated herein by reference. 39 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements of BostonFed Bancorp, Inc. and its subsidiaries, together with the report thereon by KPMG LLP appears in the Company's 1999 Annual Report to Stockholders on pages 25 through 70 and are incorporated herein by reference. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to Directors and Executive Officers of the Company is incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2000 at pages 3 through 6. ITEM 11. EXECUTIVE COMPENSATION. The information relating to executive compensation is incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2000 at pages 8 through 17. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2000, at pages 3 through 6. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information relating to certain relationships and related transactions is incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2000, at page 17. 40 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1999 Annual Report to Stockholders:
PAGE Independent Auditors' Report .......................................... 25 Consolidated Balance Sheets as of December 31, 1999 and 1998 .......................................... 26 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 .................................... 27 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 .................... 28-30 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 .............................. 31-32 Notes to Consolidated Financial Statements ............................ 33-70
The remaining information appearing in the Annual Report to Stockholder is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 41 42 (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Restated Certificate of Incorporation of BostonFed Bancorp, Inc.(1) 3.2 BostonFed Bancorp, Inc. Amended and Restated Bylaws as of February 23, 2000, (filed herewith) 4.0 Stock Certificate of BostonFed Bancorp, Inc.(1) 10.1 Employment Agreement between BFS and David F. Holland and Employment Agreement between the Company and David F. Holland (filed herewith) 10.2 Employment Agreement between BFS and David P. Conley and Employment Agreement between the Company and David P. Conley(2) 10.3 Employment Agreement between BSF and John A. Simas and Employment Agreement between the Company and John A. Simas(2) 10.4 Change of Control Agreement between BFS and Dennis J. Furey and Change in Control Agreement Between the Company and Dennis J. Furey (filed herewith) 10.5 Boston Federal Savings Bank Employee Severance Compensation Plan(1) 10.6 Employee Stock Ownership Plan and Trust(1) 10.7 BostonFed Bancorp, Inc. 1996 Stock-Based Incentive Plan(3) 10.8 BostonFed Bancorp, Inc. 1997 Stock Option Plan(4) 10.10 Boston Federal Savings Bank Defined Benefit Restoration Plan (filed herewith) 10.11 Boston Federal Savings Bank Defined Contribution Restoration Plan (filed herewith) 10.12 Change in Control Agreement Between BFS and Marylea R. Oates and Change in Control Agreement Between the Company and Marylea R. Oates(2) 11.0 Computation of earnings per share (see Consolidated Statements of Income on page located on page 27 of the 1999 Annual Report) 13.0 1999 Annual Report to Stockholders (filed herewith) 21.0 Subsidiaries of the Registrant (filed herewith) 23.0 Consent of Independent Accountant (filed herewith) 27.0 Financial Data Schedule (filed herewith) 99.0 Proxy Statement for 2000 Annual Meeting previously filed on March 27, 2000 is herein incorporated by reference ----------------------------- (1) Incorporated herein by reference into this document from the Exhibits 3.1, 4.0 and 10.5 to the Form S-1, Registration Statement, and any amendments thereto, originally filed on July 21, 1995, as amended and declared effective on September 11, 1995. Registration No. 333-94860. (2) BFS and the Company have entered into employment or change in control agreements with each of the Executive Officers as well as certain other officers of BFS and the Company. The employment agreements for Messrs. Conley and Simas are not filed as part of this report. Rather, the Exhibits for Messrs. Conley and Simas incorporate by reference the agreements filed with this report for Mr. Holland and describe the differences between the agreements for the Named Executive Officers. The change in control agreements for Ms. Oates is also not filed as part of this report. Rather, the Exhibit for Ms. Oates incorporates by reference the agreements filed with this report for Mr. Furey and describe any differences in the agreements for the Named Executive Officers. (3) Incorporated herein by reference into this document from the Proxy Statement for the 1996 Annual Meeting of Stockholders dated March 20, 1996. 42 43 4. Incorporated herein by reference into this document from the Proxy Statement for the 1997 Annual Meeting of Stockholders dated March 28, 1997. (b) Reports on Form 8-K. The Company filed a Report on Form 8-K on August 6, 1999, announcing the fact that the Company entered into a Purchase and Sale Agreement by and among the Company, Diversified Ventures, Inc., d/b/a Forward Financial Company, Ellsmere Insurance Agency, Inc. and Gene J. DeFeudis. The 8-K also included the Company's Press Release issued on August 4, 1999. The Company filed a Report on Form 8-K on December 21, 1999, announcing that the Company had on December 6, 1999, completed its acquisition of Diversified Ventures, Inc., d/b/a Forward Financial Company and Ellsmere Insurance Agency, Inc. 44 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOSTONFED BANCORP, INC. By: /s/ David F. Holland David F. Holland President and Chief Executive Officer DATED: March 30, 2000 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ David F. Holland President and Chief Executive March 30, 2000 - --------------------------------------- Officer and Chairman of the Board David F. Holland /s/ David P. Conley Director, Executive Vice President, March 30, 2000 - --------------------------------------- Assistant Treasurer and Assistant Secretary David P. Conley /s/ John A. Simas Executive Vice President, March 30, 2000 - --------------------------------------- Corporate Secretary and Chief Financial John A. Simas Officer (Principal financial and accounting officer) /s/ Edward P. Callahan Director March 30, 2000 - --------------------------------------- Edward P. Callahan /s/ Gene J. DeFeudis Director March 30, 2000 - --------------------------------------- Gene J. DeFeudis /s/ Richard J. Dennis, Sr. Director March 30, 2000 - --------------------------------------- Richard J. Dennis, Sr. /s/ Richard J. Fahey Director March 30, 2000 - --------------------------------------- Richard J. Fahey /s/ Patricia M. Flynn Director March 30, 2000 - --------------------------------------- Patricia M. Flynn
45 /s/ Charles R. Kent Director March 30, 2000 - --------------------------------------- Charles R. Kent /s/ W. Robert Mill Director March 30, 2000 - --------------------------------------- W. Robert Mill /s/ Irwin W. Sizer Director March 30, 2000 - --------------------------------------- Irwin W. Sizer
EX-3.2 2 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.2 BOSTONFED BANCORP, INC. AMENDED AND RESTATED BYLAWS AS OF FEBRUARY 23, 2000 ARTICLE I - STOCKHOLDERS Section 1. Annual Meeting. An annual meeting of the stockholders, for the election of Directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 2. Special Meetings. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of Directors which the Corporation would have if there were no vacancies on the Board of Directors (hereinafter the "Whole Board"). Section 3. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 4. Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy (after giving effect to the provisions of Article FOURTH of the Corporation's Certificate of Incorporation), shall constitute a quorum for 2 all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes present in person or represented by proxy (after giving effect to the provisions of Article FOURTH of the Corporation's Certificate of Incorporation) shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present in person or by proxy constituting a quorum, then except as otherwise required by law, those present in person or by proxy at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 5. Organization. Such person as the Board of Directors may have designated or, in the absence of such a person, the Chairman of the Board of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 6. Conduct of Business. (a) The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. (b) At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting: (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 6(b). For business to be properly brought before an annual meeting by a stockholder, the business must relate to a proper subject matter for stockholder action and the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed to and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the date of the annual meeting; provided, however, that in the event that less than one hundred (100) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set 2 3 forth as to each matter such stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business; (iii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder; and (iv) any material interest of such stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the provisions of this Section 6(b). The Officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6(b) and, if he should so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. (c) Only persons who are qualified under Article II, Section 1 of these Bylaws and nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only: (i) by or at the direction of the Board of Directors; or (ii) by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 6(c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the date of the meeting; provided, however, that in the event that less than one hundred (100) days' notice or prior disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth: (i) as to each person whom such stockholder proposes to nominate for election or re-election as a Director, all information relating to such person that would indicate such person's qualification under Article II, Section 1, including an affidavit that such person would not be disqualified under the provisions of Section 1(d)(2), and such information that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice (x) the name and address, as they appear on the Corporation's books, of such stockholder and (y) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to establish his or her qualifications and to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the provisions of this Section 6(c) and Section 1 of Article II. The Officer of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine that a 3 4 nomination was not made in accordance with such provisions and, if he or she shall so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 7. Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting. Any facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of Directors but excepting where otherwise required by law or by the governing documents of the Corporation, may be made by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballot, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedures established for the meeting. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or the Certificate of Incorporation, all other matters shall be determined by a majority of the votes cast. Section 8. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 4 5 Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. ARTICLE II - BOARD OF DIRECTORS Section 1. General Powers, Number, Term of Office and Qualifications. (a) General Powers. The business and affairs of the Corporation shall be under the direction of its Board of Directors. The Board of Directors shall annually elect a Chairman of the Board from among its members who shall, when present, preside at its meetings. (b) Number. The number of Directors who shall constitute the Whole Board shall be such number as the Board of Directors shall from time to time have designated, except that in the absence of such designation shall be seven. (c) Terms of Office. The Directors, other than those who may be elected by the holders of any class or series of Preferred Stock, shall be divided, with respect to the time for which they severally hold office, into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years thereafter, with each Director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, Directors elected to succeed those Directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each Director to hold office until his or her successor shall have been duly elected and qualified. (d) Qualifications. (1) Age Limitation. No person 72 years of age shall be eligible for election, reelection, appointment, or reappointment to the Board of the Corporation; provided, however, that such age limitation shall not apply to any Director serving in such capacity as of August 1, 1995; provided further, however, that any such Director to which such age limitation does not apply may only serve as a Director until the later of reaching age 72 or April 30, 2001 or until their successor shall be elected and qualified. The age limitation contained in this Section shall not apply to an advisory Director. 5 6 (2) Qualifications. No person shall be eligible for election or appointment to the Board of Directors: (i) if such person has, within the previous 10 years, been the subject of supervisory action by a financial regulatory agency that resulted in a cease and desist order or an agreement or other written statement subject to public disclosure under 12 U.S.C. 1818(u), or any successor provision; (ii) if such person has been convicted of a crime involving dishonesty or breach of trust which is punishable by imprisonment for a term exceeding one year under state or federal law; (iii) if such person is currently charged in any information, indictment, or other complaint with the commission of or participation in such a crime; and (iv) unless such person has been, for a period of at least one year prior to his or her election, nomination or appointment, a resident of a county in which the Corporation or its subsidiaries maintains a banking office or of a county contiguous to any such county or had significant business ties to such counties. No person may serve on the Board of Directors and at the same time be a director or officer of another co-operative bank, credit union, savings bank, savings and loan association, trust company, bank holding company or banking association (in each case whether chartered by a state, the federal government or any other jurisdiction) that engages in business activities in the same market area as the Corporation or any of its subsidiaries. No person shall be eligible for election to the Board of Directors if such person is the representative or agent of a person or acting in concert (as that term is used to describe relationships involved in either presumptive or actual concerted action under 12 C.F.R. Section 574.4(d)) with respect to the Corporation or its subsidiaries, with a person who is ineligible for election to the Board of Directors under this Subsection 1(d)(2). No nomination of any individual who would not be qualified to be elected or appointed to or serve as a member of the Board of Directors under this Article II, Section 1(d) shall be valid, accepted or voted upon. The Board of Directors shall have the power to construe and apply the provisions of this Section 1(d) and to make all determinations necessary to implement such provisions, including but not limited to determinations as to whether any persons are a group acting in concert, as defined by this Section 1(d). The Board may request from a nominee information it deems relevant to assessing a nominee's satisfaction of the requirements of this Section 1(d). Section 2. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any class or series of Preferred Stock, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the Directors then in office, though less than a quorum, and Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such Director's successor shall have 6 7 been duly elected and qualified. No decrease in the number of authorized directors constituting the Board shall shorten the term of any incumbent Director. Section 3. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all Directors. A notice of each regular meeting shall not be required. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by one-third (1/3) of the Directors then in office (rounded up to the nearest whole number), by the Chairman of the Board or the President or, in the event that the Chairman of the Board or President are incapacitated or otherwise unable to call such meeting, by the Secretary, and shall be held at such place, on such date, and at such time as they, or he or she, shall fix. Notice of the place, date, and time of each such special meeting shall be given each Director by whom it is not waived by mailing written notice not less than five (5) days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 5. Quorum. At any meeting of the Board of Directors, a majority of the Whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 6. Participation in Meetings By Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 7. Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the Directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. 7 8 Section 8. Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any Officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any Officer upon any other person for the time being; (5) To confer upon any Officer of the Corporation the power to appoint, remove and suspend subordinate Officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for Directors, Officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for Directors, Officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (8) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation's business and affairs. Section 9. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as Directors, including, without limitation, their services as members of committees of the Board of Directors. 8 9 ARTICLE III - COMMITTEES Section 1. Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the Board of Directors, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for these committees and any others provided for herein, elect a Director or Directors to serve as the member or members, designating, if it desires, other Directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 2. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings. The quorum requirements for each such committee shall be a majority of the members of such committee unless otherwise determined by the Board of Directors by a majority vote of the Board of Directors which such quorum determined by a majority of the Board may be one-third of such members and all matters considered by such committees shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. Section 3. Nominating Committee. The Board of Directors shall appoint a Nominating Committee of the Board, consisting of not less than three (3) members. The Nominating Committee shall have authority (a) to review any nominations for election to the Board of Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of these Bylaws in order to determine compliance with such Bylaw; and (b) to recommend to the Whole Board nominees for election to the Board of Directors to replace those Directors whose terms expire at the annual meeting of stockholders next ensuing. 9 10 ARTICLE IV - OFFICERS Section 1. Generally. (a) The Board of Directors as soon as may be practicable after the annual meeting of stockholders shall choose a Chairman of the Board, Chief Executive Officer, a President, one or more Vice Presidents, a Secretary and a Treasurer and from time to time may choose such other officers as it may deem proper. The Chairman of the Board shall be chosen from among the Directors. Any number of offices may be held by the same person. (b) The term of office of all Officers shall be until the next annual election of Officers and until their respective successors are chosen but any Officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of Directors then constituting the Board of Directors. (c) All Officers chosen by the Board of Directors shall have such powers and duties as generally pertain to their respective Offices, subject to the specific provisions of this ARTICLE IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Section 2. Chairman of the Board of Directors. The Chairman of the Board shall, subject to the provisions of these Bylaws and to the direction of the Board of Directors, serve in general executive capacity and unless the Board has designated another person, when present, shall preside at all meetings of the stockholders of the Corporation. The Chairman of the Board shall perform all duties and have all powers which are commonly incident to the office of Chairman of the Board or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized. Section 3. President and Chief Executive Officer. The President and Chief Executive Officer (the "President") shall have general responsibility for the management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the offices of President and Chief Executive Officer or which are delegated to him or her by the Board of Directors. Subject to the direction of the Board of Directors, the President shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision of all of the other Officers (other than the Chairman of the Board), employees and agents of the Corporation. Section 4. Vice President. The Vice President or Vice Presidents shall perform the duties of the President in his absence or during his inability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may 10 11 be properly assigned to them by the Board of Directors, the Chairman of the Board or the President. A Vice President or Vice Presidents may be designated as Executive Vice President or Senior Vice President. Section 5. Secretary. The Secretary or Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such office and/or such other duties and powers as are properly assigned thereto by the Board of Directors, the Chairman of the Board or the President. Subject to the direction of the Board of Directors, the Secretary shall have the power to sign all stock certificates. Section 6. Treasurer. The Treasurer shall be the Comptroller of the Corporation and shall have the responsibility for maintaining the financial records of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Subject to the direction of the Board of Directors, the Treasurer shall have the power to sign all stock certificates. Section 7. Assistant Secretaries and Other Officers. The Board of Directors may appoint one or more Assistant Secretaries and such other Officers who shall have such powers and shall perform such duties as are provided in these Bylaws or as may be assigned to them by the Board of Directors, the Chairman of the Board or the President. Section 8. Action with Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any Officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V - STOCK Section 1. Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the Chairman of the Board or the President, and by the Secretary or an Assistant Secretary, or any Treasurer or Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. 11 12 Section 2. Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 3. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the next day preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment or rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5. Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. 12 13 ARTICLE VI - NOTICES Section 1. Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, Director, Officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram or mailgram or other courier. Any such notice shall be addressed to such stockholder, Director, Officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by telegram or mailgram or other courier, shall be the time of the giving of the notice. Section 2. Waivers. A written wavier of any notice, signed by a stockholder, Director, Officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, Director, Officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII - MISCELLANEOUS Section 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 2. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or an assistant to the Treasurer. Section 3. Reliance Upon Books, Reports and Records. Each Director, each member of any committee designated by the Board of Directors, and each Officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its Officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such Director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. 13 14 Section 4. Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 5. Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII - AMENDMENTS The Board of Directors may amend, alter or repeal these Bylaws at any meeting of the Board, provided notice of the proposed change was given not less than two (2) days prior to the meeting. The stockholders shall also have power to amend, alter or repeal these Bylaws at any meeting of stockholders provided notice of the proposed change was given in the notice of the meeting; provided, however, that, notwithstanding any other provisions of the Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, the Certificate of Incorporation, any Preferred Stock Designation or these Bylaws, the affirmative votes of the holders of at least 80% of the voting power of all the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal any provisions of these Bylaws. The above Bylaws initially effective as of July 11, 1995, the date of incorporation of BostonFed Bancorp, Inc., were amended and restated as of January 19, 2000. 14 EX-10.1 3 EMPLOYMENT AGREEMENT W/D.HOLLAND 1 Exhibit 10.1 BOSTON FEDERAL SAVINGS BANK EMPLOYMENT AGREEMENT This AGREEMENT ("Agreement"), originally entered into on October 24, 1995, is amended and restated, effective as of December 31, 1999, by and between Boston Federal Savings Bank (the "Bank"), a federally chartered savings institution, with its principal administrative offices at 17 New England Executive Park, Burlington, MA 01803, BostonFed Bancorp, Inc., a corporation organized under the laws of the state of Delaware, the Holding Company of the Bank (the "Holding Company") and David F. Holland ("Executive"). WHEREAS, the Bank wishes to continue to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Bank and its subsidiaries on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of Executive's employment hereunder, Executive agrees to serve as Chief Executive Officer of the Bank. Executive shall render administrative and management services to the Bank such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve as a director of the Bank. 2. TERMS. (a) The period of Executive's employment under this Agreement shall be deemed to have commenced as of the date first written above and shall continue for a period of thirty-six (36) full calendar months from the effective date of this Agreement, as amended and restated. Commencing on the first anniversary date of this Agreement, and continuing on each anniversary thereafter, the disinterested members of the board of directors of the Bank ("Board") may extend the Agreement an additional year such that the remaining term of the Agreement shall be three (3) years unless the Executive elects not to extend the term of this Agreement by giving written notice in accordance with Section 8 of this Agreement. The Board will review the Agreement and Executive's performance annually for purposes of determining whether to extend the Agreement and the rationale and results thereof shall be included in the minutes of the Board's meeting. The Board shall give notice to the Executive as soon as possible after such review as to whether the Agreement is to be extended. (b) During the period of Executive's employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and other reasonable leaves of absence, 2 Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties hereunder, including activities and services related to the organization, operation and management of the Bank and participation in industry, community and civic organizations; provided, however, that, with the approval of the Board, as evidenced by a resolution of the Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything herein contained to the contrary, either Executive or the Bank may terminate Executive's employment with the Bank at any time during the term of this Agreement, subject to the terms and conditions of this Agreement. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute consideration paid by the Bank in exchange for the duties described in Section 1 of this Agreement. The Bank shall pay Executive, as compensation, a salary of not less than $360,000 ("Base Salary"). Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Bank. Base Salary shall be payable in accordance with the normal payroll practices of the Bank. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; on or about the 15th day of December each year. Such review shall be conducted by the Board or by a committee of the Board delegated such responsibility by the Board. The committee or the Board may increase Executive's Base Salary at any time. Any increase in Base Salary shall thereafter become the new "Base Salary" for purposes of this Agreement. (b) Executive shall be entitled to participate in any employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, as amended and restated, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites (or any plans, arrangements or perquisites with respect to which Executive begins to participate at any time during the term of this Agreement, as amended and restated) which would adversely affect Executive's rights or benefits thereunder, without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse affect, unless such change is general in nature and applies in a nondiscriminatory manner to all employees covered by the plan, arrangement or perquisite. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive shall be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans (such as pension, profit sharing and employee stock ownership plans), supplemental retirement plans, incentive plans, health and welfare plans and any other employee benefit plan or arrangement made available by the Bank now or in the future to full-time employees of the Bank and/or senior executives and key management employees of the Bank, subject to and on a basis consistent with the terms, conditions and overall 2 3 administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation and benefits to which Executive is entitled under this Agreement. (c) The Bank shall pay or reimburse Executive for all reasonable expenses incurred by Executive in performing his obligations under this Agreement. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during Executive's term of employment under this Agreement, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Holding Company of Executive's full-time employment hereunder for any reason other than termination governed by Section 5(a) of this Agreement, or Termination for Cause, as defined in Section 7 of this Agreement, or Retirement or Disability, as defined in paragraph (f) of this Section 4 or; (ii) Executive's resignation from the Bank's employ, upon, any (A) notice to Executive by the Bank of non-renewal of the term of this Agreement, (B) failure to re-elect or re-appoint as Chief Executive Officer of the Bank or a failure to nominate or re-elect Executive to the Board of Directors of the Bank, unless consented to by the Executive, (C) material change in Executive's function, duties, or responsibilities with the Bank, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 of this Agreement (and any such material change shall be deemed as continuing breach of this Agreement), unless consented to by Executive, (D) relocation of Executive's principal place of employment by more than 25 miles from its location at the effective date of this Agreement, unless consented to by Executive, (E) material reduction in the benefits, arrangements or perquisites to Executive which is not general in nature and applicable on a nondiscriminatory basis to all employees covered by such benefits, arrangements, or perquisites or, pursuant to Section 3(b) of this Agreement, to which Executive does not consent or for which Executive is not or will not be provided the economic benefit, (F) liquidation or dissolution of the Bank or the Holding Company, or (G) breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E), (F) or (G), above, Executive shall have the right to elect to terminate employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within six full calendar months after the event giving rise to said right to elect. (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8 of this Agreement, the Bank shall be obligated to pay Executive, or, in the event of Executive's subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, the amount of the remaining payments and benefits that Executive would have earned if he had continued his employment with the Bank during the remaining unexpired term of this Agreement, based on Executive's Base Salary and the benefits provided to Executive as of the date of the Event of Termination, as set forth in Sections 3(a) and (b) of this Agreement, as the case may be, and the amount still due Executive under any paragraph of Section 3 for service rendered through the Date of Termination. Except as provided for in paragraphs (c) and (d) of Section 4, the determination of 3 4 Executive's benefits as of the date of the Event of Termination shall be made based on (i) the value of the allocation attributable to employer contributions for the most recent plan year under any defined contribution type plan; (ii) the percentage of salary of any incentive or bonus payment for the most recently-completed fiscal year; and (iii) the employer-provided cost of any other benefit for the most recently-completed fiscal year. At the election of Executive, which election is to be made within thirty (30) days of the Date of Termination, such payments shall be made in a lump sum (without discount for early payment) or paid monthly during the remaining term of the agreement following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. Notwithstanding anything to the contrary elsewhere in this Agreement, to the extent the Executive is entitled to continued coverage or benefit accrual under any retirement or welfare benefit plan during the remaining unexpired term of this Agreement, the amount payable under this Section 4(b) should be adjusted to the extent necessary to avoid any duplication of such benefits. (c) Upon the occurrence of an Event of Termination, Executive will be entitled to receive benefits due him under or contributed by the Bank on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or arrangement maintained by the Bank to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under the defined benefit pension plan maintained by the Bank or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (d) To the extent that the Bank continues to offer any life, medical, health, disability or dental insurance plan or arrangement in which Executive participates in on the last day of his employment (each being a "Welfare Plan"), after an Event of Termination (as herein defined), Executive and his dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event of Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. If the Bank does not offer the Welfare Plans (or if for any reason Executive's participation in said plans is prohibited) after the Event of Termination, then the Bank shall provide Executive with a payment equal to the actuarial value of the provision of such benefit for the period which runs until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) the end of the remaining term of this Agreement. (e) In the event that Executive is receiving monthly payments pursuant to Section 4(b) of this Agreement, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 4 5 (f) Termination of Executive based on "Retirement" shall mean termination by written notice to the Bank from Executive specifying an exact retirement date or termination in accordance with any retirement arrangement established with Executive's written consent with respect to him. Termination of Executive based on Disability shall mean written notice to the Bank by Executive specifying an exact date as of which he is unable to perform all of the duties and responsibilities of his position. Upon termination of Executive upon Disability, Executive shall be entitled to all benefits under any disability plan of the Bank or any other plans which Executive is a party or a participant in accordance with the terms of the plan or arrangement. Executive shall be entitled to all compensation and benefits provided for in Section 3 of this Agreement through the date of his termination of employment as specified in the notice provided by him. 5. CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Bank or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Holding Company within the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control or presumptive change in control or acting in concert or presumptive acting in concert as set forth under the rules and regulations of the OTS, ownership by a person or a group, including a presumptive group, of at least 15% of the voting stock of the Bank or the Holding Company shall be required, and provided further that ownership of stock by a tax-qualified employee benefit plan of the Bank or the Holding Company shall not be subject to presumptions of control or acting in concert); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Holding Company representing 25% or more of the Bank's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Bank purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Bank or the Holding Company, or (B) individuals who constitute the board of directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (or members who were nominated by the Incumbent Board), or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board (or members who were nominated by the Incumbent Board), shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs in which the Bank or Holding Company is not the resulting entity; provided, however, that such an 5 6 event listed above will be deemed to have occurred or to have been effectuated upon the receipt of all required regulatory approvals not including the lapse of any statutory waiting periods. (b) If any of the events described in Section 5(a) of this Agreement constituting a Change in Control have occurred, or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his termination of employment on or after the date the Change in Control occurs due to (i) Executive's dismissal at any time during the term of this Agreement, (ii) Executive's resignation for any reason within the thirty (30) day period following the date that is one-year from the date the Change in Control occurred or (iii) Executive's resignation following any demotion, loss of title, office or significant authority or responsibility, reduction in the annual compensation or benefits or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, unless such termination is because of Executive's Termination for Cause; provided, however, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 5(b) shall be strictly limited to the terms specified in such written consent. Under no circumstances can a termination of employment during the term of this Agreement on or after the date of a Change in Control occurs be considered a termination on account of retirement or disability for purposes of determining Executive's rights to the payment of benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5. (c) Upon Executive's entitlement to payment pursuant to Section 5(b) of this Agreement, the Bank shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to three (3) times the greater of (i) Executive's average annual compensation (including compensation attributable to the exercise of stock options) for the five most recently completed taxable years of Executive or (ii) the highest annual compensation (excluding compensation attributable to the exercise of stock options) for any of the five most recently completed taxable years of Executive; provided, however, that any payment under this provision shall not exceed three (3) times Executive's average annual compensation during the five (5) previous taxable years. In the event the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum regulatory capital requirements, such payments shall be deferred until such time as the Bank or successor thereto is in capital compliance. Except as provided for in the preceding sentence, for purposes of this Section 5(c), annual compensation shall include Base Salary and any other taxable income paid by the Bank or its Subsidiaries, including but not limited to amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as pension, profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately 6 7 following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty-six (36) months following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (d) Upon the occurrence of a Change in Control followed by Executive's termination of employment, Executive will be entitled to receive benefits due him under or contributed by the Bank on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or other arrangement maintained by the Bank on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under the defined benefit pension plan maintained by the Bank or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (e) Upon the occurrence of a Change in Control and Executive's termination of employment pursuant to the provisions of Section 5(b) of this Agreement in connection therewith, the Bank will cause to be continued any Welfare Plan Benefit (as described in Section 4(d) of this Agreement) substantially identical to the benefit coverage maintained by the Bank for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's dependent's participation in any such plan or program is barred, the Bank shall arrange to provide Executive and his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans and programs by operation of this provision or provide their economic equivalent to Executive and his dependents. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will at the end of the term of this Agreement no longer be available to Executive, Executive will have the option to purchase all rights then held by the Bank or its Subsidiaries to such item for a price equal to the then fair market value of the item. (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 7 8 6. CHANGE OF CONTROL RELATED PROVISIONS. Notwithstanding the provisions of Section 5 of this Agreement, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs or otherwise paid or provided by the Bank in connection with a Change in Control (the "Termination Benefits") constitute an "excess parachute payment" under Section 280G of the Code or any successor thereto, and in order to avoid such a result, the Termination Benefits will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount", as determined in accordance with said Section 280G. The allocation of any reduction required with respect to the Termination Benefits provided by Section 5 shall be determined by Executive. 7. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against the standards for professional competence generally prevailing for executive officers having comparable positions in the savings institution industry. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation and benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Bank or its Subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause except all benefits shall be deemed to have remained in effect if Executive is reinstated. 8. NOTICE. (a) Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances 8 9 claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) Except as otherwise provided for in this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay Executive's Base Salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated at the time of such notice in effect when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 8(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 9. POST-TERMINATION OBLIGATIONS. All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for two (2) full years after the earlier of the expiration of this Agreement or termination of Executive's employment with the Bank. Executive shall, upon reasonable notice, furnish such information and assistance to the Bank with regard to matters as to which he has personal knowledge and as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. The Bank shall reimburse Executive for all out-of-pocket expenses incurred and at an hourly rate equivalent to the hourly rate (based on an eight-hour work day) of his Base Salary in effect at the time of his termination from employment for any time incurred in connection with services rendered pursuant to this Section 9. 10. NON-COMPETITION. (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 of this Agreement, Executive agrees not to compete with the Bank for a period of one (1) year following such termination in any city, town or county in which the Executive's normal business office is located and the Bank has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise 9 10 serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Bank. The parties hereto, recognizing that irreparable injury will result to the Bank, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Bank will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 hereof, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and its affiliates as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of Executive's employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank and its affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or its affiliates or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. (a) All payments provided in this Agreement shall be timely paid in cash, check or other mutually agreed upon method from the general funds of the Bank subject to Section 11(b) of this Agreement. The Holding Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Holding Company. (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under the Employment Agreement in effect between Executive and the Holding Company, such payments and benefits paid by the Bank will be subtracted from any amount due simultaneously to Executive under similar 10 11 provisions of this Agreement. Payments pursuant to this Agreement and the Holding Company Agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Bank on a quarterly basis; provided, however, that except for the reduction provided by the first sentence of this Section 11(b), the Bank will be obligated to pay 100% of the amounts due Executive hereunder. 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. REQUIRED PROVISIONS. (a) The Bank may terminate Executive's employment at any time, but any termination by the Bank, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 7 hereinabove. 11 12 (b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section1818(e)(3) or (g)(1); the Bank 's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion: (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended; and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section1813(x)(1) all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution: (i) by the Director of the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. Section1823(c); or (ii) by the Director of the OTS (or his designee) at the time the Director (or his designee) approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section1828(k) and 12 C.F.R. Section545.121 and any rules and regulations promulgated thereunder. 16. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 12 13 17. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware, unless otherwise specified herein. 19. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. 20. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, if Executive is successful pursuant to a legal judgment, arbitration or settlement. 21. INDEMNIFICATION. The Bank shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of Executive having been a director or officer of the Bank or its Subsidiaries (whether or not Executive continues to be a director or officer at the time of incurring such expenses 13 14 or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 22. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally, to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. 14 15 SIGNATURES IN WITNESS WHEREOF, Boston Federal Savings Bank and BostonFed Bancorp, Inc. have caused this Agreement, as amended and restated to be executed and their seals to be affixed hereunto by their duly authorized officers and Executive has signed this Agreement, as amended and restated on March 28, 2000. ATTEST: BOSTON FEDERAL SAVINGS BANK By: /s/ Richard J. Dennis, Sr. - -------------------------- -------------------------------------- Secretary For the Entire Board of Directors [SEAL] WITNESS: By: /s/ David F. Holland - -------------------------- -------------------------------------- Executive ATTEST: BOSTONFED BANCORP, INC. (Guarantor) By: /s/ Richard J. Dennis, Sr. - -------------------------- -------------------------------------- Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE /s/ David F. Holland - -------------------------- ------------------------------------------ David F. Holland 15 16 BOSTONFED BANCORP, INC. EMPLOYMENT AGREEMENT This AGREEMENT ("Agreement"), originally entered into on October 24, 1995, is amended and restated, effective as of December 31, 1999, by and between BostonFed Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of Delaware, with its principal administrative offices at 17 New England Executive Park, Burlington, MA 01803, and David F. Holland ("Executive"). Any reference to the "Institution" in this Agreement shall mean Boston Federal Savings Bank or any successor to Boston Federal Savings Bank. WHEREAS, the Holding Company wishes to continue to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Holding Company and its subsidiaries on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of Executive's employment hereunder, Executive agrees to serve as President and Chief Executive Officer of the Holding Company. Executive shall render administrative and management services to the Holding Company such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve as a director and officer of the Institution, as well as a director of the Holding Company. 2. TERMS. (a) The period of Executive's employment under this Agreement shall be deemed to have commenced as of the date first written above and shall continue for a period of thirty-six (36) full calendar months from the effective date of this Agreement, as amended and restated. Commencing on the date of execution of this Agreement, the term of this Agreement shall be extended for one day each day, so that a constant thirty-six (36) calendar month term shall remain in effect, until such time as the Board of Directors of the Holding Company (the "Board") or Executive elects not to extend the term of the Agreement by giving written notice to the other party in accordance with Section 8 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the third anniversary of the date of such written notice. (b) During the period of Executive's employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and other reasonable leaves of absence, Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties hereunder, including activities and services related to the organization, 17 operation and management of the Holding Company and its direct or indirect subsidiaries ("Subsidiaries") and participation in industry, community and civic organizations; provided, however, that, with the approval of the Board, as evidenced by a resolution of the Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Holding Company or its Subsidiaries, or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything herein contained to the contrary, either Executive or the Holding Company may terminate Executive's employment with the Holding Company at any time during the term of this Agreement, subject to the terms and conditions of this Agreement. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute consideration paid by the Holding Company in exchange for the duties described in Section 1 of this Agreement. The Holding Company shall pay Executive, as compensation, a salary of not less than $360,000 ("Base Salary"). Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Holding Company or its Subsidiaries. Base Salary shall be payable in accordance with the normal payroll practices of the Holding Company. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; on or about the 15th day of December each year. Such review shall be conducted by the Board or by a committee of the Board delegated such responsibility by the Board. The committee or the Board may increase Executive's Base Salary at any time. Any increase in Base Salary shall thereafter become the new "Base Salary" for purposes of this Agreement. (b) Executive shall be entitled to participate in any employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, as amended and restated, and the Holding Company and its Subsidiaries will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites (or any plans, arrangements or perquisites with respect to which Executive begins to participate at any time during the term of this Agreement, as amended and restated) which would adversely affect Executive's rights or benefits thereunder, without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse affect, unless such change is general in nature and applies in a nondiscriminatory manner to all employees covered by the plan, arrangement or perquisite. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive shall be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans (such as pension, profit sharing and employee stock ownership plans), supplemental retirement plans, incentive plans, health and welfare plans and any other employee benefit plan or arrangement made available by the Holding Company or its Subsidiaries now or in the future to full-time employees of the Holding Company and/or senior executives and key management employees of 2 18 the Holding Company or its Subsidiaries, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation and benefits to which Executive is entitled under this Agreement. (c) The Holding Company shall pay or reimburse Executive for all reasonable expenses incurred by Executive in performing his obligations under this Agreement. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during Executive's term of employment under this Agreement, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Holding Company of Executive's full-time employment hereunder for any reason other than termination governed by Section 5(a) of this Agreement, or Termination for Cause, as defined in Section 7 of this Agreement, or Retirement or Disability, as defined in paragraph (f) of this Section 4 or; (ii) Executive's resignation from the Holding Company's employ, upon, any (A) notice to Executive by the Holding Company of non-renewal of the term of this Agreement, (B) failure to re-elect or re-appoint Executive as President and Chief Executive Officer of the Holding Company or a failure to nominate or re-elect Executive to the Board of Directors of the Holding Company or of the Institution, unless consented to by the Executive, (C) material change in Executive's function, duties, or responsibilities with the Holding Company or its Subsidiaries, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 of this Agreement (and any such material change shall be deemed as continuing breach of this Agreement), unless consented to by Executive, (D) relocation of Executive's principal place of employment by more than 25 miles from its location at the effective date of this Agreement, unless consented to by Executive, (E) material reduction in the benefits, arrangements or perquisites to Executive which is not general in nature and applicable on a nondiscriminatory basis to all employees covered by such benefits, arrangements, or perquisites or, pursuant to Section 3(b) of this Agreement, to which Executive does not consent or for which Executive is not or will not be provided the economic benefit, (F) liquidation or dissolution of the Holding Company or the Institution, or (G) breach of this Agreement by the Holding Company. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E), (F) or (G), above, Executive shall have the right to elect to terminate employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within six full calendar months after the event giving rise to said right to elect. (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8 of this Agreement, the Holding Company shall be obligated to pay Executive, or, in the event of Executive's subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, the amount of the remaining payments and benefits that Executive would have earned if he had continued his employment with the Holding Company during the remaining unexpired term of this Agreement, based on Executive's Base Salary and the benefits provided to Executive as of the date of the Event of Termination, as set forth in Sections 3(a) and (b) of this Agreement, as the 3 19 case may be, and the amount still due Executive under any paragraph of Section 3 for service rendered through the Date of Termination. Except as provided for in paragraphs (c) and (d) of Section 4, the determination of Executive's benefits as of the date of the Event of Termination shall be made based on (i) the value of the allocation attributable to employer contributions for the most recent plan year under any defined contribution type plan; (ii) the percentage of salary of any incentive or bonus payment for the most recently-completed fiscal year; and (iii) the employer- provided cost of any other benefit for the most recently-completed fiscal year. At the election of Executive, which election is to be made within thirty (30) days of the Date of Termination, such payments shall be made in a lump sum (without discount for early payment) or paid monthly during the remaining term of the agreement following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. Notwithstanding anything to the contrary elsewhere in this Agreement, to the extent Executive is entitled to continued coverage or benefit accrual under any retirement or welfare benefit plan during the remaining unexpired term of this Agreement, as amended and restated, the amount payable under this Section 4(b) should be adjusted to the extent necessary to avoid any duplication of such benefits. (c) Upon the occurrence of an Event of Termination, Executive will be entitled to receive benefits due him under or contributed by the Holding Company or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or arrangement maintained by the Holding Company or its Subsidiaries to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Institution or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (d) To the extent that the Holding Company or its Subsidiaries continue to offer any life, medical, health, disability or dental insurance plan or arrangement in which Executive participates in on the last day of his employment (each being a "Welfare Plan"), after an Event of Termination (as herein defined), Executive and his dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event of Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. If the Holding Company or its Subsidiaries does not offer the Welfare Plans (or if for any reason Executive's participation in said plans is prohibited) after the Event of Termination, then the Holding Company shall provide Executive with a payment equal to the actuarial value of the provision of such benefit for the period which runs until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) the end of the remaining term of this Agreement. (e) In the event that Executive is receiving monthly payments pursuant to Section 4(b) of this Agreement, on an annual basis, thereafter, between the dates of January 1 and January 31 of 4 20 each year, Executive shall elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. (f) Termination of Executive based on "Retirement" shall mean termination by written notice to the Holding Company or its Subsidiaries from Executive specifying an exact retirement date or termination in accordance with any retirement arrangement established with Executive's written consent with respect to him. Termination of Executive based on Disability shall mean written notice to the Holding Company or its Subsidiaries by Executive specifying an exact date as of which he is unable to perform all of the duties and responsibilities of his position. Upon termination of Executive upon Disability, Executive shall be entitled to all benefits under any disability plan of the Holding Company or its Subsidiaries or any other plans which Executive is a party or a participant in accordance with the terms of the plan or arrangement. Executive shall be entitled to all compensation and benefits provided for in Section 3 of this Agreement through the date of his termination of employment as specified in the notice provided by him. 5. CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Holding Company or the Institution shall mean an event of a nature that; (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Institution or the Holding Company within the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act, and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control as set forth under the rules and regulations of the OTS, the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Institution purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company or its Subsidiaries; or (B) individuals who constitute the board of directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (or members who were nominated by the Incumbent Board), or whose nomination for election by the Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members (or members who were nominated by the Incumbent Board), shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs or is effectuated in which the 5 21 Institution or Holding Company is not the resulting entity; provided, however, that such an event listed above will be deemed to have occurred or to have been effectuated upon the receipt of all required federal regulatory approvals not including the lapse of any statutory waiting periods; or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Institution or Holding Company then outstanding. (b) If any of the events described in Section 5(a) of this Agreement constituting a Change in Control have occurred, or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his termination of employment on or after the date the Change in Control occurs due to (i) Executive's dismissal at any time during the term of this Agreement, (ii) Executive's resignation for any reason within the thirty (30) day period following the date that is one-year from the date the Change in Control occurred or (iii) Executive's resignation following any demotion, loss of title, office or significant authority or responsibility, reduction in the annual compensation or benefits or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, unless such termination is because of Executive's Termination for Cause; provided, however, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 5(b) shall be strictly limited to the terms specified in such written consent. Under no circumstances can a termination of employment during the term of this Agreement on or after the date of a Change in Control occurs be considered a termination on account of retirement or disability for purposes of determining Executive's rights to the payment of benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5. (c) Upon Executive's entitlement to payment pursuant to Section 5(b) of this Agreement, the Holding Company shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of: (1) the payments that would have been due pursuant to Section 3 of this Agreement for the remaining term of the Agreement; or (2) three (3) times the greater of (i) Executive's average annual compensation (including compensation attributable to the exercise of stock options) for the five most recently completed taxable years of Executive or (ii) the highest annual compensation (excluding compensation attributable to the exercise of stock options) for any of the five most recently completed taxable years of Executive. Except as provided for in the preceding sentence, for purposes of this Section 5(c), annual compensation shall include Base Salary and any other taxable income paid by the Holding Company or its Subsidiaries, including but not limited to amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such 6 22 year, as well as pension, profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty-six (36) months following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (d) Upon the occurrence of a Change in Control followed by Executive's termination of employment, Executive will be entitled to receive benefits due him under or contributed by the Holding Company or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or other arrangement maintained by the Institution or the Holding Company on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Institution or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (e) Upon the occurrence of a Change in Control and Executive's termination of employment pursuant to the provisions of Section 5(b) of this Agreement in connection therewith, the Holding Company will cause to be continued any welfare Plan benefit (as described in Section 4(d) of this Agreement) substantially identical to the benefit coverage maintained by the Holding Company or its Subsidiaries for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's dependent's participation in any such plan or program is barred, the Holding Company shall arrange to provide Executive and his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans and programs by operation of this provision or provide their economic equivalent to executive and his dependents. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will at the end of the term of this Agreement no longer be available to Executive, Executive will have the option to purchase all rights then held by the Holding Company or its Subsidiaries to such item for a price equal to the then fair market value of the item. 7 23 (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 6. CHANGE OF CONTROL RELATED PROVISIONS. (a) Notwithstanding the preceding provisions of Section 5 of this Agreement, for any taxable year in which Executive shall be liable for the payment of an excise tax under Section 4999 of the Internal Revenue Code (or any successor provision thereto), with respect to any payment in the nature of the compensation made by the Holding Company or its Subsidiaries to (or for the benefit of) Executive pursuant to this Agreement or otherwise, the Holding Company (or any successor thereto) shall pay to Executive an amount determined under the following formula: An amount equal to: (E x P) + X WHERE: X = E x P -------------------------------------------------------------- 1 - [(FI x (1 - SLI)) + SLI + E + M] and E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 6; FI = the highest marginal rate of federal income, employment, and other taxes (other than taxes imposed under Section 4999 of the Code) applicable to Executive for the taxable year in question with respect to such payment (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); SLI = the sum of the highest marginal rates of income and payroll tax applicable to Executive under applicable state and local laws for the taxable year in question (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); M = highest marginal rate of Medicare tax; and 8 24 With respect to any payment in the nature of compensation that is made to (or for the benefit of) Executive under the terms of this Section 6 or otherwise and on which an excise tax under Section 4999 of the Code may or will be assessed, the payment determined under this Section 6 shall be made to Executive on the earliest of (i) the date the Holding Company is required to withhold such tax, (ii) the date the tax is required to be paid by Executive, or (iii) at the time of termination resulting from the Change in Control. It is the intention of the parties that the Holding Company provide Executive with a full tax gross-up under the provisions of this Section 6, so that on a net after-tax basis, the result to Executive shall be the same as if the excise tax under Section 4999 (or any successor provisions) of the Code had not been imposed. The tax gross-up may be adjusted, as appropriate, if alternative minimum tax rules are applicable to Executive. (b) Notwithstanding the foregoing, if its is (i) initially determined by the Holding Company's tax advisors that no excise tax under Section 4999 of the Code is due with respect to any payment or benefit described in the first paragraph of Section 6(a) and thereafter it is determined in a final judicial determination or administrative settlement that the Section 4999 excise tax is due with respect to such payments or benefits or subsequently determined in a final judicial determination or a final administrative settlement to which Executive is a party that the excise tax under Section 4999 of the Code is due or that the excess parachute payment as defined in Section 4999 of the Code is more than the amount determined as "P", above (such revised determination under (i) or (ii) above thereafter being referred to as the "Determinative Excess Parachute Payment"), then the tax advisors of the Holding Company (or any successor thereto) shall determine the amount (the "Adjustment Amount"), the Holding Company (or any successor thereto) must pay to Executive, in order to put Executive in the same position as Executive would have been if the amount determined as "P" above had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the tax advisors shall take into account any and all taxes (including any penalties and interest) paid or payable by Executive in connection with such final judicial determination or final administrative settlement As soon as practicable after the Adjustment Amount has been so determined, the Holding Company shall pay the Adjustment Amount to Executive. (c) The Holding Company (or its successor) shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, reasonable accountant's fees, interest, fines and penalties of any kind) which Executive incurs as a result of any administrative or judicial review of Executive's liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of Executive's liability for the Section 4999 excise tax or otherwise relating to the classification for purposes of Section 280G of the Code of any payment or benefit in the nature of compensation made or provided to Executive by the Holding Company or any successor thereto. Executive shall promptly notify the Holding Company in writing whenever Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Supplemental Agreement is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of Executive's liability under Section 4999). The Holding Company (or its successor) may assume 9 25 control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this contract) and Executive shall cooperate fully with the Holding Company in any such proceeding. Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Holding Company (or its successor) may have in connection therewith without prior consent to the Holding Company (or its successor). In the event that the Holding Company (or any successor thereto) elects not to assume control over such matters, the Holding Company (or any successor thereto) shall promptly reimburse Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto. (d) The preceding provisions of this Section 6 shall apply only in the event Executive's "parachute payments" (as such term is used for purposes of Section 280G of the Code) exceed the amount equal to three times Executive's "base amount" (as such term is used for purposes of Section 280G of the Code) by more than five percent. If the preceding provisions of this Section 6 shall not apply by operation of the preceding sentence and if (i) the aggregate payments or benefits to be made or afforded to Executive, which are deemed to be parachute payments (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code; and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G of the Code and the Non-Triggering Amount less the product of the marginal rate of any applicable state and federal income tax (P, FI, SLI, and M, as defined in paragraph (a) of this Section 6) and the Non-Triggering Amount would be greater than the aggregate value of the Termination Benefits (without such reduction) minus (i) the amount of tax required to be paid by the Executive thereon by Section 4999 of the Code and further minus (ii) the product of the Termination Benefits and the marginal rate of any applicable state and federal income tax (as determined above including E, as defined in paragraph (a) of this Section 6), then the Termination Benefits shall be reduced to the Non-Triggering Amount and the allocation of the reduction required hereby among the Termination Benefits shall be determined by Executive. 7. TERMINATION FOR CAUSE. 10 26 The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against the standards for professional competence generally prevailing for executive officers having comparable positions in the savings institution industry. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation and benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Holding Company or its Subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause except all benefits shall be deemed to have remained in effect if Executive is reinstated. 8. NOTICE. (a) Any purported termination by the Holding Company or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) Except as otherwise provided for in this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such 11 27 notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Holding Company will continue to pay Executive's Base Salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated at the time of such notice in effect when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 8(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 9. POST-TERMINATION OBLIGATIONS. All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for two (2) full years after the earlier of the expiration of this Agreement or termination of Executive's employment with the Holding Company. Executive shall, upon reasonable notice, furnish such information and assistance to the Holding Company with regard to matters as to which he has personal knowledge and as may reasonably be required by the Holding Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. The Holding Company shall reimburse Executive for all out-of-pocket expenses incurred and at an hourly rate equivalent to the hourly rate (based on an eight-hour work day) of his Base Salary in effect at the time of his termination from employment for any time incurred in connection with services rendered pursuant to this Section 9. 10. NON-COMPETITION. (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 of this Agreement, Executive agrees not to compete with the Holding Company or its Subsidiaries for a period of one (1) year following such termination in any city, town or county in which the Executive's normal business office is located and the Holding Company or any of its Subsidiaries has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Holding Company or its Subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Holding Company or its Subsidiaries, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Holding Company or its Subsidiaries, will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 hereof, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Holding Company or its Subsidiaries, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Holding Company or its Subsidiaries from pursuing any other remedies available to the Holding 12 28 Company or its Subsidiaries for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company and its Subsidiaries as it may exist from time to time, is a valuable, special and unique asset of the business of the Holding Company and its Subsidiaries. Executive will not, during or after the term of Executive's employment, disclose any knowledge of the past, present, planned or considered business activities of the Holding Company and its Subsidiaries thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Holding Company will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Holding Company or its Subsidiaries or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company from pursuing any other remedies available to the Holding Company for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. (a) All payments provided in this Agreement shall be timely paid in cash, check or other mutually agreed upon method from the general funds of the Holding Company subject to Section 11(b) of this Agreement. (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under the Employment Agreement in effect between Executive and the Institution, such payments and benefits paid by the Institution will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. Payments pursuant to this Agreement and the Institution Agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Institution on a quarterly basis; provided, however, that except for the reduction provided by the first sentence of this Section 11(b), the Holding Company will be obligated to pay 100% of the amounts due Executive hereunder. 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Holding Company or any predecessor of the Holding Company and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this 13 29 Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Holding Company and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 14 30 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware, unless otherwise specified herein. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Association, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company, if Executive is successful pursuant to a legal judgment, arbitration or settlement. 20. INDEMNIFICATION. The Holding Company shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of Executive having been a director or officer of the Holding Company or its Subsidiaries (whether or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 15 31 21. SUCCESSOR TO THE HOLDING COMPANY. The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Holding Company, expressly and unconditionally to assume and agree to perform the Holding Company's obligations under this Agreement, in the same manner and to the same extent that the Holding Company would be required to perform if no such succession or assignment had taken place. 16 32 SIGNATURES IN WITNESS WHEREOF, BostonFed Bancorp, Inc. has caused this Agreement, as amended and restated to be executed and its seal to be affixed hereunto by its duly authorized officer and its directors, and Executive has signed this Agreement, on March 28, 2000. ATTEST: BOSTONFED BANCORP, INC. By: /s/ Richard J. Dennis, Sr. - -------------------------- -------------------------------------- Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE By: /s/ David F. Holland - -------------------------- -------------------------------------- Executive David F. Holland 17 EX-10.2 4 EMPLOYMENT AGREEMENT W/D.P. CONLEY 1 Exhibit 10.2 Mr. Conley's Employment Agreement with the Company is substantially the same as the Employment Agreement with Company in Exhibit 10.1, which is incorporated herein by reference except as to: (i) the name of the signatory, which is David P. Conley; (ii) the signatory for Company, which is David F. Holland; (iii) the position in Section 1, which is Executive Vice President, Assistant Treasurer and Assistant Secretary; and (iv) the amount of the base salary in Section 3(a), which is $210,000. Mr. Conley's Employment Agreement with BFS is substantially the same as the Employment Agreement with BFS in Exhibit 10.1, which is incorporated herein by reference except as to: (i) the name of the signatory, which is David P. Conley; (ii) the signatory for BFS, which is David F. Holland; (iii) the position in Section 1, which is President; and (iv) the amount of the base salary in Section 3(a), which is $210,000. EX-10.3 5 EMPLOYMENT AGREEMENT WITH J. SIMAS 1 Exhibit 10.3 Mr. Simas' Employment Agreement with the Company is substantially the same as the Employment Agreement with the Company in Exhibit 10.1, which is incorporated herein by reference except as to: (i) the name of the signatory, which is John A. Simas; (ii) the signatory for the Company, which is David F. Holland; (iii) the position in Section 1, which is Executive Vice President and Chief Financial Officer, but not as a director of the Company or BFS; and (iv) the amount of the base salary in Section 3(a), which is $165,000. Mr. Simas' Employment Agreement with BFS is substantially the same as the Employment Agreement with BFS in Exhibit 10.1, which is incorporated herein by reference except as to: (i) the name of the signatory, which is John A. Simas; (ii) the signatory for BFS, which is David F. Holland; (iii) the position in Section 1, which is Executive Vice President and Chief Financial Officer, but not as a director of BFS; and (iv) the amount of the base salary in Section 3(a), which is $165,000. EX-10.4 6 BOSTON FEDERAL SAVINGS 1 EXHIBIT 10.4 BOSTON FEDERAL SAVINGS BANK CHANGE IN CONTROL AGREEMENT This AGREEMENT originally entered into on March 28, 2000, is amended and restated, effective as of December 31, 1999, by and between Boston Federal Savings Bank (the "Bank"), a federally chartered savings institution, with its principal administrative offices at 17 New England Executive Park, Burlington, MA 01803, and BostonFed Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the State of Delaware and the holding company of the Bank and Dennis J. Furey ("Executive"). WHEREAS, the Bank recognizes the substantial contribution Executive has made to the Bank and wishes to continue to protect Executive's position with the Bank for the period provided in this Agreement in the event of a Change in Control (as defined in this Agreement); and WHEREAS, Executive has agreed to continue serve in the employ of the Bank. NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT. The period of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty (30) full calendar months from the date of this Agreement, as amended and restated. Commencing on the date of execution of this Agreement and at each anniversary date thereafter, the Board of Directors of the Bank (the "Board") may extend the term of this Agreement for an additional year so that the remaining term is a full thirty (30) calendar months, unless Executive elects not to extend the term of the Agreement by providing written notice to the Board in accordance with Section 5 of the Agreement. The Board will review the Agreement and Executive's performance annually for purposes of determining whether to extend the term of the Agreement, and the results of such review shall be included in the minutes of the Board's meeting. 2. CHANGE IN CONTROL. (a) Upon the occurrence of a Change in Control (as defined in paragraph (b) of this Section 2), Executive shall be entitled to the payments and benefits provided for in Section 3 of this Agreement upon Executive's termination of employment on or after the date the Change in Control occurs due to: (i) Executive's dismissal at any time during the term of this Agreement; (ii) Executive's voluntary resignation for any reason within the thirty (30) day period following the date that is one-year from the date the Change in Control occurred, or (iii) Executive's resignation at any time during the term of this Agreement following any demotion, or loss of title, office or significant authority, or reduction in Executive's annual compensation or benefits, or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the 2 Change in Control; provided, however, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Bank or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1 of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Holding Company within the meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control or presumptive change in control or acting in concert or presumptive acting in concert as set forth under the Rules and Regulations of the OTS, ownership by a person or group, including a presumptive group, of at least 15% of the voting stock of the Bank or the Holding Company shall be required, and provided further that ownership of stock by a tax qualified employee benefit plan of the Bank or the Holding Company shall not be subject to presumptions of control or acting in concert); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Holding Company representing 25% or more of the Bank's or the Holding Company's outstanding securities except for any securities of the Bank purchased by the Holding Company in connection with the conversion of the Bank to the stock form and any securities purchased by any employee benefit plan of the Bank or the Holding Company, or (B) individuals who constitute the board of directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (or members who were nominated by the Incumbent Board), or whose nomination for election by the Holding Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board (or members who were nominated by the Incumbent Board), shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs in which the Bank or Holding Company is not the resulting entity. (c) Notwithstanding any other provision of this Agreement, Executive shall not have the right to receive termination benefits under this Agreement upon Executive's Termination for Cause. The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards of professional competence generally prevailing for officers having comparable positions in the savings institutions industry. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to Executive a 2 3 copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation or benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Holding Company or its subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination For Cause pursuant to Section 5 of this Agreement except all benefits shall be deemed to have remained in effect if Executive is reinstated, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination For Cause. 3. TERMINATION BENEFITS. (a) Upon the occurrence of a Change in Control, followed at any time by the termination of Executive's employment in accordance with the provisions of Section 2 of this Agreement, the Bank shall be obligated to pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or Executive's estate, as the case may be, a sum equal to two and one-half (2-1/2) times the greater of (i) Executive's average annual compensation (including compensation attributable to the exercise of stock options) for the five most recently completed taxable years of Executive or (ii) the highest annual compensation (excluding compensation attributable to the exercise of stock options) for any of the five most recently completed taxable years of Executive. Except as provided for in the preceding sentence, for purposes of this Section 3(a), annual compensation shall include base salary and any other taxable income, including but not limited to amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as pension, profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or agreement (whether or not taxable) made or accrued on behalf of Executive for such year. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under the defined benefit pension plan maintained by the Bank or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty (30) months following Executive's termination. In the event that no election is made, payment to Executive will be made on a monthly basis during the remaining thirty (30) month term of the Agreement. Such payments shall not be reduced in the event Executive 3 4 obtains other employment following termination of employment. However, in the event the Bank is not in compliance with its minimum capital requirements or if such payments pursuant to this Section 3 would cause the Bank's capital to be reduced below its minimum regulatory capital requirements, such payments shall be deferred until such time as the Bank or successor thereto is in capital compliance. (b) Upon the occurrence of a Change in Control and Executive's termination of employment in accordance with the provisions of Section 2 of this Agreement, the Bank will cause to be continued any life, medical, health and disability or dental insurance plan or arrangement in which Executive participates (each being a "Welfare Benefit Plan") substantially identical to the benefit coverage maintained by the Bank for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's covered dependent's participation in any such plan or program is barred, the Holding Company shall arrange to provide Executive and his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans and programs by operation of this provision or provide their economic equivalent to Executive and Executive's dependents. 4. CHANGE IN CONTROL RELATED PROVISIONS. Notwithstanding the preceding paragraphs of Section 3, in no event shall the aggregate payments or benefits to be made or afforded to Executive under this Agreement (the "Termination Benefits") constitute an "excess parachute payment" under Section 280G of the Code or any successor thereto, and in order to avoid such a result the Termination Benefits will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G. The allocation of any reduction required with respect to the Termination Benefits shall be determined by Executive. 5. NOTICE OF TERMINATION. (a) Any purported termination by the Bank, or by Executive, shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the 4 5 termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay Executive's base salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 5(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 6. SOURCE OF PAYMENTS. The parties to this Agreement intend that all payments provided for in this Agreement shall be paid in cash, check or other mutually agreed upon method from the general funds of the Bank. Further, the Holding Company guarantees such payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Holding Company. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to Executive without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Bank or shall impose on the Bank or its subsidiaries any obligation to employ or retain Executive in its employ for any period. 8. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Bank and their respective successors and assigns. 5 6 9. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10. REQUIRED REGULATORY PROVISIONS. (a) The Board may terminate Executive's employment at any time, but any termination by the board of directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 2 of this Agreement. (b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(3) or (g)(1)), the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the benefit obligations which were suspended. (c) If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(c)(4) or (g)(1)), all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. 6 7 (e) All obligations under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution: (i) by the Director of the Office of Thrift Supervision (or his or her designee) at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director of the Office of Thrift Supervision (or his or her designee) at the time the Director (or his or her designee) approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and any rules and regulations promulgated thereunder. 11. REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT. In the event Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in Section 10(b) of this Agreement (the "Notice") during the term of this Agreement and a Change in Control, as defined herein, occurs, the Bank will assume its obligation to pay and Executive will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank's receipt of a dismissal of charges in the Notice of Termination. 12. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 13. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references herein to the masculine shall apply to both the masculine and the feminine. 14. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware. 7 8 15. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 16. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank if Executive is successful pursuant to a legal judgment, arbitration or settlement. 17. INDEMNIFICATION. The Bank shall provide Executive (including his or her legal representatives, successors and assigns) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (including his or her legal representatives, successors and assigns) for reasonable costs and expenses incurred by Executive in defending or settling any judicial or administrative proceeding, or threatened proceeding, whether civil, criminal or otherwise, including any appeal or other proceeding for review. Indemnification by the Bank shall be made only upon the final judgment on the merits in the favor of Executive, in case of settlement, in case of final judgment against Executive or in the case of final judgment in favor of Executive other than on the merits, if a majority of the disinterested directors of the Bank determine Executive was acting in good faith within the scope of Executive's employment or authority in accordance with 12 C.F.R. section 545.121(c)(iii). Any such indemnification of Executive must conform with the notice provisions of 12 C.F.R. Section 545.121(c)(iii) to indemnify Executive to the fullest for such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements, such settlements to be approved by the Board, if such action is brought against Executive in his or her capacity as a officer or director of the Bank, however, shall not extend to matters as to which Executive is finally adjudged to be liable for willful misconduct in the performance of his or her duties. 8 9 18. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. 9 10 SIGNATURES IN WITNESS WHEREOF, Boston Federal Savings Bank and BostonFed Bancorp, Inc. have caused this Agreement, as amended and restated to be executed by their duly authorized officers, and Executive has signed this Agreement, as amended and restated on March 28, 2000. ATTEST: BOSTON FEDERAL SAVINGS BANK By: /s/ David F. Holland - -------------------------- ------------------------------- Secretary For the Entire Board of Directors SEAL ATTEST: BOSTONFED BANCORP, INC. (Guarantor) By: /s/ David F. Holland - -------------------------- ------------------------------ Secretary For the Entire Board of Directors SEAL WITNESS: EXECUTIVE /s/ Dennis J. Furey - -------------------------- --------------------------------- Dennis J. Furey 10 11 BOSTONFED BANCORP, INC. CHANGE IN CONTROL AGREEMENT This AGREEMENT originally entered into on March 28, 2000, is amended and restated, effective as of December 31, 1999, by and between BostonFed Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the State of Delaware, with its office at 17 New England Executive Park, Burlington, MA 01803, and Dennis J. Furey ("Executive"). Any reference to the term "Bank" in this Agreement shall mean Boston Federal Savings Bank, a wholly-owned subsidiary of the Holding Company, or any successor to Boston Federal Savings Bank. WHEREAS, the Holding Company recognizes the substantial contribution Executive has made to the Holding Company and wishes to continue to protect Executive's position with the Holding Company for the period provided in this Agreement in the event of a Change in Control (as defined in this Agreement); and WHEREAS, Executive has agreed to continue serve in the employ of the Holding Company. NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT. The period of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty (30) full calendar months from the date of this Agreement, as amended and restated. Commencing on the date of execution of this Agreement, the term of this Agreement shall be extended for one day each day until such time as the Board of Directors of the Holding Company (the "Board") or Executive elects not to extend the term of the Agreement by giving written notice to the other party in accordance with Section 5 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the thirtieth- month anniversary of the date of such written notice. 2. CHANGE IN CONTROL. (a) Upon the occurrence of a Change in Control (as defined in paragraph (b) of this Section 2), Executive shall be entitled to the payments and benefits provided for in Section 3 of this Agreement upon Executive's termination of employment on or after the date the Change in Control occurs due to: (i) Executive's dismissal at any time during the term of this Agreement; (ii) Executive's voluntary resignation for any reason within the thirty (30) day period following the date that is one-year from the date the Change in Control occurred, or (iii) Executive's resignation at any time during the term of this Agreement following any demotion, or loss of title, office or significant authority, or reduction in Executive's annual compensation or benefits, or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control; provided, however, Executive may consent in writing to any such demotion, loss, 12 reduction or relocation. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Holding Company or the Bank shall mean an event of a nature that; (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Holding Company within the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act, and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control as set forth under the rules and regulations of the OTS, the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Holding Company representing 20% or more of the Bank's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Bank purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company or its Subsidiaries; or (B) individuals who constitute the board of directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (or members who were nominated by the Incumbent Board), or whose nomination for election by the Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members (or members who were nominated by the Incumbent Board), shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs or is effectuated in which the Bank or Holding Company is not the resulting entity; provided, however, that such an event listed above will be deemed to have occurred or to have been effectuated upon the receipt of all required federal regulatory approvals not including the lapse of any statutory waiting periods; or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Bank with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Holding Company shall be distributed; or (E) a tender offer is made for 20% or more of the voting securities of the Bank or Holding Company then outstanding. (c) Notwithstanding any other provision of this Agreement, Executive shall not have the right to receive termination benefits under this Agreement upon Executive's Termination for Cause. The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal 2 13 profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards of professional competence generally prevailing for officers having comparable positions in the savings institutions industry. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation or benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Holding Company or its subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination For Cause pursuant to Section 5 of this Agreement except all benefits shall be deemed to have remained in effect if Executive is reinstated, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination For Cause. 3. TERMINATION BENEFITS. (a) Upon the occurrence of a Change in Control, followed at any time by the termination of Executive's employment in accordance with the provisions of Section 2 of this Agreement, the Holding Company shall be obligated to pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or Executive's estate, as the case may be, a sum equal to two and one-half (2-1/2) times the greater of (i) Executive's average annual compensation (including compensation attributable to the exercise of stock options) for the five most recently completed taxable years of Executive or (ii) the highest annual compensation (excluding compensation attributable to the exercise of stock options) for any of the five most recently completed taxable years of Executive. Except as provided for in the preceding sentence, for purposes of this Section 3(a), annual compensation shall include base salary and any other taxable income, including but not limited to amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as pension, profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or agreement (whether or not taxable) made or accrued on behalf of Executive for such year. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under the defined benefit pension plan maintained by the Bank or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. At the election of Executive, which election is to be made prior to or within thirty 3 14 (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty (30) months following Executive's termination. In the event that no election is made, payment to Executive will be made on a monthly basis during the remaining thirty (30) month term of the Agreement. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (b) Upon the occurrence of a Change in Control and Executive's termination of employment in accordance with the provisions of Section 2 of this Agreement, the Holding Company will cause to be continued any life, medical, health and disability or dental insurance plan or arrangement in which Executive participates (each being a "Welfare Benefit Plan") substantially identical to the benefit coverage maintained by the Holding Company or its subsidiaries for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's covered dependent's participation in any such plan or program is barred, the Holding Company shall arrange to provide Executive and his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans and programs by operation of this provision or provide their economic equivalent to Executive and Executive's dependents. 4. CHANGE IN CONTROL RELATED PROVISIONS. (a) Notwithstanding the preceding provisions of Section 3 of this Agreement, for any taxable year in which Executive shall be liable, for the payment of an excise tax under Section 4999 of the Internal Revenue Code (or any successor provision thereto), with respect to any payment in the nature of the compensation made by the Holding Company or its Subsidiaries to (or for the benefit of) Executive pursuant to this Agreement or otherwise, the Holding Company (or any successor thereto) shall pay to Executive an amount determined under the following formula: An amount equal to: (E x P) + X WHERE: X = E x P --------------------------------------- 1 - [(FI x (1 - SLI)) + SLI + E + M] and E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 4; 4 15 FI = the highest marginal rate of federal income, employment, and other taxes (other than taxes imposed under Section 4999 of the Code) applicable to Executive for the taxable year in question with respect to such payment (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); SLI = the sum of the highest marginal rates of income and payroll tax applicable to Executive under applicable state and local laws for the taxable year in question (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); and M = highest marginal rate of Medicare tax. With respect to any payment in the nature of compensation that is made to (or for the benefit of) Executive under the terms of this Section 4 or otherwise and on which an excise tax under Section 4999 of the Code may or will be assessed, the payment determined under this Section 4 shall be made to Executive on the earliest of (i) the date the Holding Company is required to withhold such tax, (ii) the date the tax is required to be paid by Executive, or (iii) at the time of termination resulting from the Change in Control. It is the intention of the parties that the Holding Company provide Executive with a full tax gross-up under the provisions of this Section 4, so that on a net after-tax basis, the result to Executive shall be the same as if the excise tax under Section 4999 (or any successor provisions) of the Code had not been imposed. The tax gross-up may be adjusted, as appropriate, if alternative minimum tax rules are applicable to Executive. (b) Notwithstanding the foregoing, if its is (i) initially determined by the Holding Company's tax advisors that no excise tax under Section 4999 of the Code is due with respect to any payment or benefit described in the first paragraph of Section 4(a) and thereafter it is determined in a final judicial determination or administrative settlement that the Section 4999 excise tax is due with respect to such payments or benefits or subsequently determined in a final judicial determination or a final administrative settlement to which Executive is a party that the excise tax under Section 4999 of the Code is due or that the excess parachute payment as defined in Section 4999 of the Code, is more than the amount determined as "P", above (such revised determination under (i) or (ii) above thereafter being referred to as the "Determinative Excess Parachute Payment"), then the tax advisors of the Holding Company (or any successor thereto) shall determine the amount (the "Adjustment Amount"), the Holding Company (or any successor thereto) must pay to Executive, in order to put Executive in the same position as Executive would have been if the amount determined as "P" above had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the tax advisors shall take into account any and all taxes (including any penalties and interest) paid or payable by Executive in connection with such final judicial determination or final administrative settlement. As soon as practicable after the Adjustment Amount has been so determined, the Holding Company shall pay the Adjustment Amount to Executive. 5 16 (c) The Holding Company (or its successor) shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, reasonable accountant's fees, interest, fines and penalties of any kind) which Executive incurs as a result of any administrative or judicial review of Executive's liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of Executive's liability for the Section 4999 excise tax or otherwise relating to the classification for purposes of Section 280G of the Code of any payment or benefit in the nature of compensation made or provided to Executive by the Holding Company or any successor thereto. Executive shall promptly notify the Holding Company in writing whenever Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Supplemental Agreement is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of Executive's liability under Section 4999). The Holding Company (or its successor) may assume control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this contract) and Executive shall cooperate fully with the Holding Company in any such proceeding. Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Holding Company (or its successor) may have in connection therewith without prior consent to the Holding Company (or its successor). In the event that the Holding Company (or any successor thereto) elects not to assume control over such matters, the Holding Company (or any successor thereto) shall promptly reimburse Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto. (d) The preceding provisions of this Section 4 shall apply only in the event Executive's "parachute payments" (as such term is used for purposes of Section 280G of the Code) exceed the amount equal to three times Executive's "base amount" (as such term is used for purposes of Section 280G of the Code) by more than five percent. If the preceding provisions of this Section 4 shall not apply by operation of the preceding sentence and if (i) the aggregate payments or benefits to be made or afforded to Executive, which are deemed to be parachute payments (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code; and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G of the Code and the Non-Triggering Amount less the product of the marginal rate of any applicable state and federal income tax (P, FI, SLI, and M, as defined in paragraph (a) of this Section 4) and the Non-Triggering Amount would be greater than the aggregate value of the Termination Benefits (without such reduction) minus 6 17 (i) the amount of tax required to be paid by the Executive thereon by Section 4999 of the Code and further minus (ii) the product of the Termination Benefits and the marginal rate of any applicable state and federal income tax (as determined above including E, as defined in paragraph (a) of this Section 4), then the Termination Benefits shall be reduced to the Non-Triggering Amount and the allocation of the reduction required hereby among the Termination Benefits shall be determined by Executive. 5. NOTICE OF TERMINATION. (a) Any purported termination by the Holding Company, or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Holding Company will continue to pay Executive's base salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 5(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 6. SOURCE OF PAYMENTS. (a) It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash, check or other mutually agreed upon method from the general funds of the Holding Company subject to Section 6(b) of this Agreement. 7 18 (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under a Change in Control Agreement in effect between Executive and the Bank (the "Bank Agreement"), such payments and benefits paid by the Bank under the Bank Agreement will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. 7. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Holding Company and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to Executive without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Holding Company or shall impose on the Holding Company or its subsidiaries any obligation to employ or retain Executive in its employ for any period. 8. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Holding Company and their respective successors and assigns. 9. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 8 19 10. REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT. In the event Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice described in the Bank Agreement during the term of this Agreement and a Change in Control, as defined herein, occurs, the Holding Company will assume its obligation to pay and Executive will be entitled to receive all of the termination benefits provided for under Section 3 of the Bank Agreement upon the notification of the Holding Company of the Bank's receipt of a dismissal of charges in the Notice. 11. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 12. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references herein to the masculine shall apply to both the masculine and the feminine. 13. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware. 14. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Holding Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 9 20 15. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company if Executive is successful pursuant to a legal judgment, arbitration or settlement. 16. INDEMNIFICATION. The Holding Company shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under Delaware law and as provided in the Holding Company's certificate of incorporation against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of Executive having been a director or officer of the Holding Company or its subsidiaries (whether or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 17. SUCCESSOR TO THE HOLDING COMPANY. The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Holding Company, expressly and unconditionally to assume and agree to perform the Holding Company's obligations under this Agreement, in the same manner and to the same extent that the Holding Company would be required to perform if no such succession or assignment had taken place. 10 21 SIGNATURES IN WITNESS WHEREOF, BostonFed Bancorp, Inc. has caused this Agreement, as amended and restated to be executed by its duly authorized officer, and Executive has signed this Agreement, as amended and restated on March 28, 2000. ATTEST: BOSTONFED BANCORP, INC. By: /s/ David F. Holland - -------------------------- -------------------------------- Secretary For the Entire Board of Directors WITNESS: EXECUTIVE /s/ Dennis J. Furey -------------------------------- Dennis J. Furey - -------------------------- Seal 11 EX-10.10 7 DEFINED BENEFIT RESTORATION PLAN 1 Exhibit 10.10 BOSTON FEDERAL SAVINGS BANK DEFINED BENEFIT RESTORATION PLAN (EFFECTIVE AS OF SEPTEMBER 21, 1999) 1. PURPOSE. The purpose of the Plan is to (a) attract and retain certain key executive employees of Boston Federal Savings Bank and certain of its subsidiaries and affiliates by providing them with supplemental retirement income (determined by reference to the FIRF Plan (as defined below)) to augment their qualified plan retirement benefits by, for purposes of the Plan only, (a) eliminating the effect of the limitations contained in Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended and in effect from time to time (the "Code"), on the benefits provided under the FIRF Plan, and (b) eliminating the effect of the early retirement factors applicable to benefits payable under the FIRF Plan. The Plan shall be construed consistent with the purposes described herein. 2. DEFINITIONS. The following terms shall have the following meanings for purposes of the Plan: 2.1 "ACCELERATION PAYMENT" means a lump sum acceleration payment, as defined in Section 7 hereof. 2.2 "ACCRUED BENEFIT" means, as of any date, (i) in the case of a Participant who has not yet retired, become disabled or otherwise terminated employment with the Employer, the Benefit which would be payable to such Participant under the Plan had he retired, become disabled or otherwise terminated employment with the Employer on such date, and (ii) in the case of a Participant who has retired, become disabled or otherwise terminated employment with the Employer, the Benefit. 2.3 "BENEFIT" means the supplemental benefit provided by the Plan, as defined in Section 5 hereof. 2.4 "BFSB" means Boston Federal Savings Bank, a federally chartered stock savings bank, and any successor entity(ies) thereto. 2.5 "BFSB BOARD" means the board of directors of BFSB or a committee of the board of directors of BFSB authorized to act on behalf of the board of directors of BFSB under this Plan. 2.6 "CHANGE IN CONTROL" means, with respect to a Participant who has an Employment Agreement, a "Change in Control" as defined in such Participant's Employment Agreement. 2 2.7 "CODE" means the Internal Revenue Code, as defined in Section 1 hereof. 2.8 "DEATH BENEFIT" means the death benefit provided by the Plan, as defined in Section 8 hereof. 2.9 "EARLY TAX OBLIGATION" means the early tax obligation, as described in Section 15 hereof. 2.10 "ELECTION DATE" means the date on which a Participant submits an election to receive an Acceleration Payment. 2.11 "EMPLOYER" means BFSB and any subsidiary or affiliate of BFSB which participates in the FIRF Plan and which adopts this Plan with the permission of the BFSB Board. References to the Employer or the Employer Board in the context of a particular Participant shall refer to that Participant's Employer and its board of directors (or authorized committee thereof). 2.12 "EMPLOYER BOARD" means, with respect to an Employer, the board of directors of such Employer or a committee of the board of directors of such Employer authorized to act on behalf of such board of directors under this Plan. 2.13 "EMPLOYMENT AGREEMENT" means, with respect to a Participant, any employment, change in control or similar agreement between such Participant and his Employer. 2.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time. 2.15 "EVENT OF TERMINATION" means, with respect to a Participant who has an Employment Agreement which defines such term, an "Event of Termination" as defined in such Participant's Employment Agreement. 2.16 "FIRF PLAN" means the Financial Institutions Retirement Fund, as amended from time to time, and as adopted by the Employer. 2.17 "INSURANCE PROCEEDS" means that portion of the proceeds of any split-dollar life insurance policy collaterally assigned to the Participant but only to the extent such proceeds are designated in advance by the Employer as Insurance Proceeds hereunder. The Employer shall at all times maintain a record identifying all such policies and the extent to which proceeds thereunder will constitute Insurance Proceeds. Such records shall be binding and conclusive for all purposes of the Plan and upon all Participants and any person(s) claiming under, through or in respect of any Participant. 2 3 2.18 "INTEREST RATE" means, for any calendar year, interest compounded annually at the rate of 120 percent of the applicable Federal mid-term rate as in effect under Section 1274 of the Code for the first month of such year. 2.19 "PARTICIPANT" means David F. Holland, David P. Conley, John A. Simas, and such other senior executives of the Employer as are selected for participation in the Plan from time to time by the Employer Board. Notwithstanding the foregoing, no person shall be a Participant until such person executes and delivers to the Employer Board a Participation Agreement. 2.20 "PARTICIPATION AGREEMENT" means a participation agreement in the form attached hereto as Exhibit A. 2.21 "PLAN" means the Boston Federal Savings Bank Defined Benefit Restoration Plan, as set forth herein and as amended from time to time. 2.22 "PRESENT VALUE" means the present value of a future (or past) lump sum payment or a series of future (or past) installment payments determined by discounting (or accreting) such future (or past) payment(s) to the determination date at an annually compounded rate equal to the Interest Rate. 3. ADMINISTRATION. 3.1 Subject to Sections 2.16, 3.2, 13(b) and 15 hereof, the Plan shall be administered by the BFSB Board. Except as otherwise provided in the Plan or by applicable law, the BFSB Board shall have full authority and discretion to determine the rights and benefits of Participants under the Plan, to establish from time to time regulations for the administration of the Plan, to interpret and construe the Plan, and to make all determinations deemed necessary or advisable for the administration of the Plan. 3.2 The BFSB Board may designate persons other than members of the BFSB Board to carry out the day-to-day ministerial administration of the Plan under such conditions and limitations as it may prescribe. The BFSB Board's determinations under the Plan shall be reasonable and shall be consistent with the provisions and purposes of the Plan; PROVIDED, HOWEVER, that, subject to the foregoing, such determinations need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. Except as otherwise provided in the Plan or by applicable law, any such determination, decision or action of the BFSB Board in connection with the construction, interpretation, administration, implementation or maintenance of the Plan shall be final, conclusive and binding upon all Participants and any person(s) claiming under, through or in respect of any Participant. 3.3 The BFSB Board and any Employer Board, and/or any member of the BFSB Board and any Employer Board, shall not be liable to or in respect of any Participant 3 4 or to any other person for or in respect of any act, omission, interpretation, construction or determination made in good faith in connection with or under the Plan. 4. PARTICIPATION. Participation in the Plan shall be limited to the Participants. This Plan is intended to constitute a non-qualified, unfunded deferred compensation plan for a select group of management or highly compensated employees under Title I of ERISA. 5. SUPPLEMENTAL RETIREMENT BENEFIT. In accordance with Section 6 hereof, the Employer shall pay in respect of each Participant a supplemental benefit under the Plan (the "Benefit") in the form of two hundred forty (240) equal monthly payments. The monthly amount of the Benefit shall be determined as of the date such Benefit is to be paid or is to be commenced being paid, and shall not be subject to further adjustment (e.g., the Benefit shall not be adjusted to reflect any future cost of living adjustment under the FIRF Plan). Each monthly payment shall be determined by the following formula: X = A - B - C, where: X = the amount of the monthly payment; A = the accrued and vested monthly retirement benefit that would be payable under the FIRF Plan, in the regular form of payment (i.e., assuming the Participant was not married and made no election of any optional form of payment), commencing at the later of age 65 or the Participant's date of retirement or other termination of employment with the Employer, assuming, for purposes of the Plan only, that the provisions of the FIRF Plan designed solely to satisfy the requirements of Section 401(a)(17) and Section 415 of the Code were deleted and of no effect; B = such Participant's accrued and vested monthly retirement benefit actually payable under the FIRF Plan, in the regular form of payment (i.e., assuming the Participant was not married and made no election of any optional form of payment), commencing at the earlier of the date the Participant commences receipt of his monthly Benefit under this Plan or the date the Participant commences receipt of his benefit under the FIRF Plan; and C = the monthly installment equivalent with respect to any Acceleration Payment paid in respect of such Participant prior to his retirement or other termination of employment with the Employer. The monthly installment equivalent with respect to an Acceleration Payment shall be equal to 100% of the monthly Benefit amount used in calculating the lump sum amount of such Acceleration Payment. In no event shall the Benefit be less than zero. Notwithstanding anything to the contrary elsewhere herein, if a Participant becomes entitled to benefits under his Employment Agreement on account of either an Event of Termination or the termination of his employment with the Employer after a Change in 4 5 Control, then solely for purposes of determining A above, such Participant shall be deemed to have three (3) additional years of Service (as defined in the FIRF Plan). 6. PAYMENT OF BENEFIT. Upon thirty (30) days' prior written notice to the Employer Board, the Participant may commence receipt of his monthly Benefit payments on the first day of any month following the later of the following: 6.1 such Participant's attainment of age 55; or 6.2 such Participant's retirement or other termination of employment with the Employer. Notwithstanding the foregoing: 6.3 in a situation where a Participant's employment with the Employer terminates and such Participant is eligible for disability benefits under the FIRF Plan, then the Benefit payable hereunder shall be determined in accordance with Section 5 hereof taking into account the disability provisions of the FIRF Plan. Such a disabled Participant may commence receipt of his monthly Benefit payments on the first day of any month following the date such Participant becomes disabled, as defined in the FIRF Plan, regardless of his age at that time; and 6.4 in the event any payment to be made to a Participant (or his designated beneficiary, as the case may be) under this Section 6 (or Sections 7 or 8, as the case may be) has not been paid within 30 days after the date such payment was to be made, the Employer shall (in addition to such payment) pay to such Participant (or his designated beneficiary, as the case may be) interest on the amount of such delinquent payment, from the date such payment was to be paid through the date such payment was actually paid, at a rate equal to the Interest Rate. 7. ACCELERATION PAYMENT. At any time, upon sixty (60) days' prior written notice to the Employer Board, a Participant may elect to receive an Acceleration Payment, PROVIDED, HOWEVER, that no more than one (1) such Acceleration Payment may be paid with respect to a Participant before such Participant retires, becomes disabled or otherwise terminates employment with the Employer. Such Acceleration Payment shall be paid promptly by the Employer to such Participant in a single lump sum. The amount of such Acceleration Payment shall be determined in accordance with this Section 7. 7.1 If a Participant requests an Acceleration Payment prior to the date he retires, becomes disabled or otherwise terminates employment with the Employer, the amount of such Acceleration Payment shall equal ninety percent (90%) of the Present Value of such Participant's Accrued Benefit as of the Election Date. In all cases, the Present Value of such Accrued Benefit shall be determined on the assumption that the Participant has terminated his 5 6 employment with the Employer on such date and elected to commence receipt of such Accrued Benefit on the earliest date permitted by the Plan. 7.2 If a Participant requests an Acceleration Payment after the date he retires, becomes disabled or otherwise terminates employment with the Employer (including after commencing receipt of the Benefit), the amount of such Acceleration Payment shall equal ninety percent (90%) of the Present Value of the then unpaid monthly Benefit payments. 8. DEATH BENEFIT. Upon a Participant's death prior to the receipt of his entire Accrued Benefit under the Plan, in lieu of any further Benefit under the Plan and in lieu of any death benefit under any other non-qualified plan of the Employer which pre-dates the effectiveness of the Plan, the Employer shall make a single lump sum payment to such Participant's designated beneficiary, or, if none, to such Participant's estate, equal to the Death Benefit determined pursuant to this Section 8. 8.1 If a Participant dies prior to commencing receipt of either or both of his monthly Benefit under the Plan and/or his benefit under the FIRF Plan, the amount of such Death Benefit shall be determined by the following formula: Y = D - E - F - G, where: Y = the amount of the Death Benefit; D = the Present Value of any death benefit payable on account of such Participant's death under the FIRF Plan, assuming, for purposes of the Plan only, that the provisions of the FIRF Plan designed solely to satisfy the requirements of Section 401(a)(17) and Section 415 of the Code were deleted and of no effect; E = the Present Value of the death benefit actually payable in respect of such Participant's death under the FIRF Plan; F = the Present Value of one hundred percent (100%) of the Accrued Benefit amount used to calculate any Acceleration Payment received by the Participant; and G = the amount of any Insurance Proceeds payable in respect of such Participant. In no event shall the Death Benefit be less than zero. 8.2 If a Participant dies after commencing receipt of either or both of his monthly Benefit under the Plan and/or his benefit under the FIRF Plan, the amount of the Death Benefit shall equal the Present Value of the remaining unpaid monthly Benefit payments reduced, but not below zero, by the amount of any Insurance Proceeds payable in respect of such Participant. 6 7 9. ASSIGNMENTS AND TRANSFERS. No right or benefit of a Participant, a surviving contingent annuitant or a surviving spouse under the Plan may be assigned, alienated, encumbered, or otherwise hypothecated or transferred in any manner. No such right or benefit hereunder shall be subject to legal process or attachment for the payment of any claims of a creditor of or through a Participant or a beneficiary of a deceased Participant. 10. EMPLOYEE RIGHTS UNDER THE PLAN. Neither the Plan nor any action taken thereunder shall be construed as giving any Participant any right to be retained in the employment of the Employer, nor shall it be construed as limiting in any way the right of the Employer to discharge any Participant or to treat him without regard to the effect any such treatment would or might have upon him as a Participant in the Plan. 11. UNFUNDED PLAN. The Plan shall be unfunded and no Participant in the Plan shall have any right to any specific assets of the Employer by reason of the Plan, and the rights of each Participant hereunder shall be solely those of an unsecured creditor of the Employer. Any liability of the Employer to any Participant under the Plan shall be based solely upon the contractual obligations that may be created as a result of the Plan and such Participant's Participation Agreement. No such obligation of the Employer shall be deemed to be secured by any pledge of, encumbrance on, or other interest in, any property or asset of the Employer or any affiliate of the Employer. Nothing contained in the Plan shall be construed as creating in respect of any Participant (or beneficiary thereof or any other person) any equity or other interest of any kind in any assets of the Employer or any affiliate of the Employer, or creating a trust of any kind or a fiduciary relationship of any kind between the Employer, any affiliate of the Employer, and/or any such Participant, any beneficiary or any other person. Except as specifically provided herein, participation in the Plan shall not in any way affect any rights which a Participant may have under any other employee benefit plan of the Employer or under any individual contractual agreement between such Participant and the Employer. Notwithstanding the foregoing, timely payment of all Benefits and Death Benefits payable under the Plan (including without limitation Acceleration Payments and Early Tax Obligations) shall be fully guaranteed by BostonFed Bancorp, Inc. 12. SOURCE OF PAYMENT. Subject to Section 11 hereof, the Employer, in its sole discretion, may establish (a) a grantor or other trust of which the Employer is treated as the owner under the Code and the assets of which are subject to the claims of the Employer's general creditors in the event of its insolvency, (b) an insurance arrangement, or (c) any other arrangement or arrangements designed to provide for the payment of benefits hereunder. Any such arrangement shall be subject to such other terms and conditions as the Employer may deem necessary or advisable to ensure that benefits are not includible, by reason of the establishment of any such arrangement or the funding of any such trust, in the income of the beneficiaries of such trust or other arrangement prior to actual distribution or other payment and that the existence of such trust or other arrangement does not cause the Plan to be considered to be funded for purposes of Title I of ERISA. 7 8 13. AMENDMENT OR TERMINATION. The BFSB Board may amend, suspend, or terminate the Plan or any portion thereof at any time. Notwithstanding the foregoing, (a) without the consent of the Participant, no such amendment, suspension, or termination shall cause such Participant's (or his designated beneficiary's, as the case may be) benefits hereunder to be less than the lesser of (i) such Participant's Accrued Benefit as of the effective date of such amendment, suspension, or termination, or (ii) such Participant's Benefit payable under Section 5 (or Section 8) at the times specified in Section 6 (or Section 8) determined as if such amendment, suspension or termination had not been effected, and (b) any other Employer Board may terminate its Employer's continued participation in the Plan which shall constitute a termination of the Plan as to that Employer. 14. GOVERNING LAW; CONSTRUCTION. The Plan shall be governed by and construed, interpreted and administered in accordance with the laws of the Commonwealth of Massachusetts, except to the extent such laws are preempted by ERISA. The titles and headings of sections of the Plan are for convenience of reference only and shall have no substantive meaning in and of themselves. 15. WITHHOLDING. All payments under the Plan shall be made in cash and shall be reduced by such amounts as are required to be withheld with respect thereto under applicable federal, state and local tax laws and regulations in effect as of the date of any such payments. In the event any federal, state or local taxes are imposed with respect to any benefits under the Plan before such benefits become payable to the Participant or his beneficiary (an "Early Tax Obligation"), then the Employer shall pay such Early Tax Obligation and, in the Employer Board's sole discretion, either (a) withhold an equivalent amount of funds from any current or future compensation payable by the Employer to the Participant, or (b) require the Participant to promptly provide an equivalent amount of funds to the Employer. To the extent the Employer does not collect an equivalent amount from the Participant in accordance with the preceding sentence, then the Employer may reduce any Benefit payment hereunder by the then Present Value of such Early Tax Obligations paid by the Employer. 16. OTHER BENEFITS PLANS OR PROGRAMS. Payments and benefits received under the Plan shall not be deemed a part of any Participant's compensation for purposes of determining any benefits under any other welfare, pension or incentive benefit plans or programs, if any, maintained by the Employer or any of its affiliates or predecessors from time to time. 17. EFFECTIVE DATE. The Plan shall be effective as of September 21, 1999. 8 9 IN WITNESS WHEREOF, the Plan is executed by Boston Federal Savings Bank on this ____ day of March, 2000. BOSTON FEDERAL SAVINGS BANK By: ------------------------------- Title: 9 EX-10.11 8 DEFINED CONTRIBUTION RESTORATION PLAN 1 Exhibit 10.11 BOSTON FEDERAL SAVINGS BANK DEFINED CONTRIBUTION RESTORATION PLAN (EFFECTIVE AS OF SEPTEMBER 21, 1999) 1. PURPOSE. The purpose of the Plan is to (a) attract and retain certain key executive employees of Boston Federal Savings Bank and certain of its subsidiaries and affiliates by providing them with supplemental retirement income (determined by reference to the Savings Plan and ESOP (each as defined below)) to augment their qualified plan retirement benefits by, for purposes of the Plan only, eliminating the effect of the limitations contained in Sections 401(a)(17), 401(k)(3), 401(m)(2), 402(g) and 415 of the Internal Revenue Code of 1986, as amended and in effect from time to time (the "Code"), on the benefits provided under the Savings Plan and the ESOP. The Plan shall be construed consistent with the purposes described herein, including without limitation, the anti-conditioning rules of Section 401(k)(4) of the Code. 2. DEFINITIONS. The following terms shall have the following meanings for purposes of the Plan: 2.1 "ACCELERATION PAYMENT" means a lump sum acceleration payment, as defined in Section 8 hereof. 2.2 "ACCOUNT" means the bookkeeping account maintained for each Participant to which amounts credited on behalf of the Participant under Section 5 hereof shall be recorded. Notwithstanding any other provision of the Plan that may be interpreted to the contrary, the amounts credited to a Participant's Account under the Plan are for measurement purposes only and shall not be considered or construed in any manner as an actual contribution or investment. 2.3 "ACCOUNT BALANCE" means as of any date with respect to a Participant the number of BFBI Share equivalents credited to such Participant's Account. 2.4 "BFBI" means BostonFed Bancorp, Inc., a corporation organized under the laws of Delaware, or any successor entity(ies) thereto. 2.5 "BFBI SHARE" means a share of the voting common stock, par value $0.01, issued by BFBI, subject to adjustments pursuant to Section 6.3. 2.6 "BFSB" means Boston Federal Savings Bank, a federally chartered stock savings bank, and any successor entity(ies) thereto. 2 2.7 "BFSB BOARD" means the board of directors of BFSB or a committee of the board of directors of BFSB authorized to act on behalf of the board of directors of BFSB under this Plan. 2.8 "CLOSING PRICE" means for any day the closing price for one BFBI Share as reported for such day in The Wall Street Journal or in any successor to The Wall Street Journal or, if there is no such successor, in any trade publication selected by the BFSB Board or, if no closing price is so reported for such day, the fair market value of a BFBI Share as determined by the BFSB Board. 2.9 "CODE" means the Internal Revenue Code, as defined in Section 1 hereof. 2.10 "DIVIDEND PAYMENT DATE" means a date after the Effective Date on which a dividend (other than a dividend consisting solely of additional BFBI Shares) is paid with respect to the BFBI Shares. 2.11 "EARLY TAX OBLIGATION" means an early tax obligation, as described in Section 15 hereof. 2.12 "EFFECTIVE DATE" means September 21, 1999. 2.13 "ELECTION DATE" means the date on which a Participant submits an election to receive an Acceleration Payment. 2.14 "EMPLOYER" means BFSB and any subsidiary or affiliate of BFSB which participates in the ESOP and/or the Savings Plan and which adopts this Plan with the permission of BFSB Board. Reference to the Employer or the Employer Board in the context of a particular Participant shall refer to that Participant's Employer and its board of directors (or authorized committee thereof). 2.15 "EMPLOYER BOARD" means, with respect to an Employer, the board of directors of such Employer or a committee of the board of directors of such Employer authorized to act on behalf of such board of directors under this Plan. 2.16 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time. 2.17 "ESOP" means the Boston Federal Savings Bank Employee Stock Ownership Plan, as amended from time to time. 2.18 "INTEREST RATE" means, for any calendar year, interest compounded annually at the rate of 120 percent of the applicable Federal mid-term interest rate as in effect under Section 1274 of the Code for the first month of such year. 2 3 2.19 "LIMITATIONS" means the limitations imposed under Sections 401(a)(17), 401(k)(3), 401(m)(2), 402(g) and 415 of the Code, or any successor provisions to such sections of the Code. 2.20 "PARTICIPANT" means David F. Holland, David P. Conley, John A. Simas, and such other senior executives of the Employer as are selected for participation in the Plan from time to time by the Employer Board. Notwithstanding the foregoing, no person shall be a Participant until such person executes and delivers to the Employer Board a Participation Agreement. 2.21 "PARTICIPATION AGREEMENT" means a participation agreement in the form attached hereto as Exhibit A. 2.22 "PLAN" means the Boston Federal Savings Bank Defined Contribution Restoration Plan, as set forth herein and as amended from time to time. 2.23 "SAVINGS PLAN" means the Boston Federal Savings Bank Employees Savings & Profit Sharing Plan, as amended from time to time, and as adopted by the Employer. 2.24 "YEAR OF SERVICE" means "Year of Service," as defined in the Savings Plan. 3. ADMINISTRATION. 3.1 Subject to Sections 2.19, 3.2, 13(b) and 15 hereof, the Plan shall be administered by the BFSB Board. Except as otherwise provided in the Plan or by applicable law, the BFSB Board shall have full authority and discretion to determine the rights and benefits of Participants under the Plan, to establish from time to time regulations for the administration of the Plan, to interpret and construe the Plan, and to make all determinations deemed necessary or advisable for the administration of the Plan. 3.2 The BFSB Board may designate persons other than members of the BFSB Board to carry out the day-to-day ministerial administration of the Plan under such conditions and limitations as it may prescribe. The BFSB Board's determinations under the Plan shall be reasonable and shall be consistent with the provisions and purposes of the Plan; PROVIDED, HOWEVER, that, subject to the foregoing, such determinations need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. Except as otherwise provided in the Plan or by applicable law, any such determination, decision or action of the BFSB Board in connection with the construction, interpretation, administration, implementation or maintenance of the Plan shall be final, conclusive and binding upon all Participants and any person(s) claiming under, through or in respect of any Participant. 3 4 3.3 The BFSB Board and any Employer Board, and/or any member of the BFSB Board and any Employer Board, shall not be liable to or in respect of any Participant or to any other person for or in respect of any act, omission, interpretation, construction or determination made in good faith in connection with or under the Plan. 4. PARTICIPATION. Participation in the Plan shall be limited to the Participants. This Plan is intended to constitute a non-qualified, unfunded deferred compensation plan for a select group of management or highly compensated employees under Title I of ERISA. 5. SUPPLEMENTAL BENEFIT. Effective as of the last day of each calendar year during the effectiveness of the Plan, the Employer shall credit to each Participant's Account: 5.1 An amount equal to two percent (2%) of the amount by which the Participant's Salary (as defined in the Savings Plan without regard to the 401(a)(17) language of the Plan incorporating the 401(a)(17) limits) exceeds the compensation limit set forth in Section 401(a)(17) of the Code for such calendar year; plus 5.2 An amount equal to the maximum employer contributions and forfeitures which would have been credited to the account of the Participant under the ESOP pursuant to the plan contribution and allocation provisions contained therein if such provisions had been applied without regard to the Limitations, less the actual employer contributions and forfeitures credited to such Participant's account under the ESOP with respect to such calendar year. Notwithstanding the foregoing, to the extent such employer contributions are applied to the repayment of a Stock Obligation (as defined in the ESOP) and result in the release of BFBI Shares from the Unallocated Stock Fund (as defined in the ESOP), the preceding sentence shall be applied by substituting for employer contributions the number of released BFBI Shares which would have been credited to such Participant's account under the ESOP but for the Limitations, less the number of released BFBI Shares actually credited to such Participant's account under the ESOP. 6. MAINTENANCE OF ACCOUNTS. 6.1 FORM OF ACCOUNT BALANCE. All Account Balances under the Plan shall be recorded and maintained as a number of BFBI Share equivalents. Any dollar amount credited under Section 5 to a Participant's Account with respect to a calendar year shall be converted into, and thereafter accounted for as, a number of BFBI Share equivalents determined by the following formula: W = A divided by B, where: W = the number of BFBI Share equivalents to be credited to such Participant's Account; 4 5 A = the amount credited to such Participant's Account under Section 5 with respect to such calendar year; and B = the Closing Price on the last business day of such calendar year. Any amount of shares credited under Section 5 to a Participant's Account with respect to a calendar year shall be converted to, and thereafter accounted for, as a number of BFBI Share equivalents equal to the number of BFBI Shares so credited. In addition to the foregoing, as of the Effective Date, the Employer shall credit to the Account of each Participant listed on Appendix A hereto, the number of BFBI Share equivalents equal to the number of BFBI Share equivalents listed next to such Participant's name on said Appendix A. 6.2 DIVIDENDS. There shall be credited to each Participant's Account as of each Dividend Payment Date an additional number of BFBI Share equivalents determined by the following formula: X = (C x D) divided by E, where: X = the number of BFBI Share equivalents to be credited to such Participant's Account on such Dividend Payment Date; C = the number of BFBI Share equivalents credited to such Participant's Account as of the record date applicable to the dividend being paid on such Dividend Payment Date; D = the dividend amount (excluding any portion of the dividend consisting of additional BFBI Shares) per BFBI Share paid on such Dividend Payment Date; and E = the Closing Price on such Dividend Payment Date. 6.3 OTHER ADJUSTMENTS. If, as a result of any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in BFBI Shares, the outstanding BFBI Shares are increased or decreased or are exchanged for a different number or kind of shares or other securities of BFBI, or additional shares or new or different shares or other securities of BFBI or any successor entity (or a parent or subsidiary thereof) are distributed with respect to such BFBI Shares or other securities, or, if, as a result of any merger, consolidation, sale of all or substantially all of the assets of BFBI or similar transaction, the outstanding BFBI Shares are converted into or exchanged for a different number or kind of securities of BFBI or any successor entity (or a parent or subsidiary thereof), the BFSB Board shall make an appropriate or proportionate adjustment in each Participant's Account Balance and, if appropriate, in the definition of BFBI Shares. Any such adjustment by the BFSB Board shall be final, binding and conclusive. 5 6 If, as a result of any reorganization, liquidation, merger, consolidation, sale of all or substantially all of the assets of BFBI or similar transaction, there are no outstanding BFBI Shares and the BFSB Board determines that it is not feasible to adjust the definition of BFBI Shares pursuant to the preceding paragraph, then, notwithstanding any provision elsewhere herein to the contrary, the number of BFBI Share equivalents then credited to each Participant's Account shall be converted to a dollar amount determined by the following formula: Y = F x G, where: Y = the dollar amount to be credited; F = the number of BFBI Share equivalents then credited to such Participant's Account; and G = the most recent Closing Price. In such event, each such Account shall thereafter be credited with, and increased by, an additional dollar amount each December 31 equal to interest on such Account Balance for the year ending on such date at an annual rate equal to the Interest Rate. Thereafter, any payments made pursuant to Section 7 or Section 8 shall be made in cash rather than BFBI Shares, but otherwise applying the provisions of Section 7 or Section 8, whichever is applicable. 7. PAYMENT OF BENEFIT. Provided the Participant has completed at least five Years of Service, the Participant shall commence receipt of his Account Balance (as set forth below) on the fifteenth (15th) day of January of the year following the later of the following: 7.1 such Participant's attainment of age 55; or 7.2 such Participant's retirement, disability or other termination of employment with the Employer. Notwithstanding the foregoing, the Participant may irrevocably elect to commence receipt of his Account Balance (as set forth below) on the fifteenth (15th) day of January of any year following the year after the later of the dates set forth in Sections 7.1 and 7.2, provided that such Participant provides notice to the Employer Board, on or before the last day of the calendar year immediately preceding the calendar year containing the later of the dates set forth in Sections 7.1 and 7.2, which notice shall set forth the calendar year in which such Participant shall commence receipt of his Account Balance; PROVIDED, HOWEVER, that the making of such an election shall not preclude the Participant from subsequently electing an Acceleration Payment pursuant to Section 8. Notwithstanding the foregoing, in a situation where a Participant's employment with the Employer terminates and such Participant is eligible for disability benefits under the 6 7 Savings Plan, then such a disabled Participant may commence receipt of his Account Balance (as set forth below) on the fifteenth (15th) day of January of any year following the date such Participant becomes disabled, as defined in the Savings Plan, regardless of his age or Years of Service at that time. Notwithstanding the foregoing, when a Participant dies, such Participant's beneficiary shall commence (or continue if such Participant had already commenced) receipt of such Participant's Account Balance (as set forth below) on the fifteenth (15th) day of January of the year following such Participant's death. A Participant who commences receipt of his Account Balance shall receive annual payments in the form of BFBI Shares on or before the fifteenth (15th) day of January of each year until his Account Balance is reduced to zero. The number of BFBI Shares to be included in each such payment shall be determined by the following formula: Z = F divided by (20 - G), where: Z = the number of BFBI Shares to be included in that payment, PROVIDED, HOWEVER, that Y shall be rounded to the nearest whole share; F = the number of BFBI Share equivalents credited to such Participant's Account on the date such payment is to be made; and G = the total number of annual payments previously received by (or in respect of) such Participant. Immediately following any such payment of benefits, the number of BFBI Share equivalents credited to the Participant's Account shall be reduced by a number equal to the number of BFBI Shares actually distributed. Any fractional BFBI Share equivalents remaining in a Participant's Account after the final payment of benefits shall be forfeited. Further notwithstanding the foregoing, in the event any payment to be made to a Participant (or his designated beneficiary, as the case may be) under this Section 7 (or under Section 8) has not been paid within 30 days after the date such payment was to be made hereunder, the Employer shall, in addition to such payment, pay to such Participant (or his designated beneficiary, as the case may be) interest on the amount of such delinquent payment (determined as of the date on which such payment was to be paid), from the date such payment was to be paid hereunder through the date such payment was actually paid, at a rate equal to the Interest Rate. 8. ACCELERATION PAYMENT. At any time after a Participant completes five Years of Service or otherwise becomes eligible to receive payments under Section 7, upon sixty (60) days' prior written notice to the Employer Board, a Participant (or a Participant's beneficiary following such Participant's death) may elect to receive his current Account Balance in the 7 8 form of an Acceleration Payment; PROVIDED, HOWEVER, that no more than one (1) such Acceleration Payment may be paid with respect to a Participant before such Participant retires, becomes disabled or otherwise terminates employment with the Employer. Such Acceleration Payment shall be paid promptly by the Employer to such Participant in a single lump sum of BFBI Shares. The number of BFBI Shares to be included in such Acceleration Payment shall equal ninety percent (90%) of the number of BFBI Share equivalents credited to his Account as of the Election Date, rounded to the nearest whole share. Immediately after such Acceleration Payment, such Participant's Account Balance shall be reduced to zero. 9. ASSIGNMENTS AND TRANSFERS. No right or benefit of a Participant, a surviving contingent annuitant or a surviving spouse under the Plan may be assigned, alienated, encumbered, or otherwise hypothecated or transferred in any manner. No such right or benefit hereunder shall be subject to legal process or attachment for the payment of any claims of a creditor of or through a Participant or a beneficiary of a deceased Participant. 10. EMPLOYEE RIGHTS UNDER THE PLAN. Neither the Plan nor any action taken thereunder shall be construed as giving any Participant any right to be retained in the employment of the Employer, nor shall it be construed as limiting in any way the right of the Employer to discharge any Participant or to treat him without regard to the effect any such treatment would or might have upon him as a Participant in the Plan. 11. UNFUNDED PLAN. The Plan shall be unfunded and no Participant in the Plan shall have any right to any specific assets of the Employer by reason of the Plan, and the rights of each Participant hereunder shall be solely those of an unsecured creditor of the Employer. Any liability of the Employer to any Participant under the Plan shall be based solely upon the contractual obligations that may be created as a result of the Plan and such Participant's Participation Agreement. No such obligation of the Employer shall be deemed to be secured by any pledge of, encumbrance on, or other interest in, any property or asset of the Employer or any affiliate of the Employer. Nothing contained in the Plan shall be construed as creating in respect of any Participant (or beneficiary thereof or any other person) any equity or other interest of any kind in any assets of the Employer or any affiliate of the Employer, or creating a trust of any kind or a fiduciary relationship of any kind between the Employer, any affiliate of the Employer, and/or any such Participant, any beneficiary or any other person. Except as specifically provided herein, participation in the Plan shall not in any way affect any rights which a Participant may have under any other employee benefit plan of the Employer or under any individual contractual agreement between such Participant and the Employer. Notwithstanding the foregoing, timely payment of all Account Balances payable under the Plan (including, without limitation, Acceleration Payments and Early Tax Obligations) shall be fully guaranteed by BFBI. 12. SOURCE OF PAYMENT. Subject to Section 11 hereof, the Employer, in its sole discretion, may establish (a) a grantor or other trust of which the Employer is treated as the owner under the Code and the assets of which are subject to the claims of the Employers general creditors in the event of its insolvency, (b) an insurance arrangement, or (c) any other 8 9 arrangement or arrangements designed to provide for the payment of benefits hereunder. Any such arrangement shall be subject to such other terms and conditions as the Employer may deem necessary or advisable to ensure that benefits are not includible, by reason of the establishment of any such arrangement or the funding of any such trust, in the income of the beneficiaries of such trust or other arrangement prior to actual distribution or other payment and that the existence of such trust or other arrangement does not cause the Plan to be considered to be funded for purposes of Title I of ERISA. 13. AMENDMENT OR TERMINATION. The BFSB Board may amend, suspend, or terminate the Plan or any portion thereof at any time. Notwithstanding the foregoing, (a) without the consent of the Participant, no such amendment, suspension, or termination shall cause such Participant's (or his designated beneficiary's, as the case may be) Account Balance to be less than such Participant's Account Balance immediately prior to such amendment, suspension, or termination, and (b) any other Employer Board may terminate its Employers continued participation in the Plan which shall constitute a termination of the Plan as to that Employer. 14. GOVERNING LAW; CONSTRUCTION. The Plan shall be governed by and construed, interpreted and administered in accordance with the laws of the Commonwealth of Massachusetts, except to the extent such laws are preempted by ERISA. The titles and headings of sections of the Plan are for convenience of reference only and shall have no substantive meaning in and of themselves. 15. WITHHOLDING. All payments under the Plan shall be made in BFBI Shares and shall be reduced by such amounts (by an appropriate reduction in the number of BFBI Shares to be distributed, based on the Closing Price on the business day next prior to the date of such payment, with any such reduction increased to the next whole share) as are required to be withheld with respect thereto under applicable federal, state and local tax laws and regulations in effect as of the date of any such payments. In the event any federal, state or local taxes are imposed with respect to any benefits under the Plan before such benefits become payable to the Participant or his beneficiary (an "Early Tax Obligation"), then the Employer shall pay such Early Tax Obligation on behalf of such Participant or beneficiary and, in the Employer Boards sole discretion, either (a) withhold an equivalent amount of funds from any current or future compensation payable by the Employer to the Participant, (b) require the Participant (or beneficiary) to promptly pay an equivalent amount of funds to the Employer, or (c) reduce such Participant's Account Balance by the number of BFBI Share equivalents having a value (based on the Closing Price on the business day next prior to the date the Employer makes such payment) equal to the amount of such Early Tax Obligation. 16. OTHER BENEFITS PLANS OR PROGRAMS. Payments and benefits received under the Plan shall not be deemed a part of any Participant's compensation for purposes of determining any benefits under any other welfare, pension or incentive benefit plans or programs, if any, maintained by the Employer or any of its affiliates or predecessors from time to time. 9 10 17. EFFECTIVE DATE. The Plan shall be effective as of September 21, 1999. IN WITNESS WHEREOF, the Plan is executed by Boston Federal Savings Bank on this ___________ day of March, 2000. BOSTON FEDERAL SAVINGS BANK By: ---------------------------------- Title: 10 EX-10.12 9 CHANGE IN CONTROL AGENT M. OATES 1 Exhibit 10.12 Ms. Oates' Change in Control Agreement with the Company is substantially the same as the Change in Control Agreement with Company in Exhibit 10.4, which is incorporated herein by reference except as to the name of the signatory, which is Marylea R. Oates. Ms. Oates' Change in Control Agreement with BFS is substantially the same as the Change in Control Agreement with BFS in Exhibit 10.4, which is incorporated herein by reference except as to the names of the signatory, which is Marylea R. Oates. EX-13 10 ANNUAL REPORT 1 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report. Prior to October 24, 1995, the Company had no significant assets, liabilities or operations, and accordingly, the data prior to such time represents the financial condition and results of operations of BFS.
At December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------- (In thousands) SELECTED FINANCIAL CONDITION DATA: Total assets ........................................ $1,253,653 $1,139,123 $974,680 $820,567 $640,752 Investment securities available for sale(1) ......... 53,203 49,137 31,767 1,085 1,022 Investment securities held to maturity(1) ........... 2,304 7,302 20,630 19,170 16,906 Mortgage-backed securities available for sale(1) .... 15,540 21,029 19,125 23,593 23,873 Mortgage-backed securities held to maturity(1) ...... 13,941 22,913 38,350 43,019 35,116 Mortgage loans held for sale ........................ 16,174 17,008 9,817 3,970 8,931 Loans, net .......................................... 1,032,594 943,662 791,728 676,670 509,496 Allowance for loan losses ........................... 10,654 8,500 6,600 4,400 4,275 Deposit accounts .................................... 770,049 707,144 619,821 428,818 419,104 Borrowed funds ...................................... 387,555 337,500 263,640 300,000 126,909 Stockholders' equity ................................ 85,704 81,794 81,611 86,355 90,701
For the Year Ended December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------- (In thousands) SELECTED OPERATING DATA: Interest income ..................................... $ 80,736 $ 74,775 $ 68,037 $ 52,678 $ 42,454 Interest expense .................................... 47,208 42,557 37,129 28,891 23,552 Net interest income ................................. 33,528 32,218 30,908 23,787 18,902 Provision for loan losses ........................... 1,626 1,642 1,696 1,294 3,614 Net interest income after provision for loan losses . 31,902 30,576 29,212 22,493 15,288 Total non-interest income ........................... 6,911 6,128 4,806 3,567 2,672 Total non-interest expense .......................... 25,300 23,932 21,458 21,040 16,009 Income before income taxes .......................... 13,513 12,772 12,560 5,020 1,951 Income tax expense (benefit) ........................ 4,945 5,151 5,505 2,083 815 Net income .......................................... $ 8,568 $ 7,621 $ 7,055 $ 2,937 $ 1,136
4 2 SELECTED FINANCIAL RATIOS AND OTHER DATA
At or For the Year Ended December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------- PERFORMANCE RATIOS:(2) Return on average assets ................................. 0.72% 0.72% 0.75% 0.40% 0.19% Return on average stockholders' equity ................... 10.00 9.02 8.21 3.21 2.57 Dividend payout ratio .................................... 27.10 24.70 20.31 31.25 NM Average stockholders' equity to average assets ........... 7.21 7.99 9.11 12.35 7.36 Stockholders' equity to total assets at end of period .... 6.84 7.18 8.37 10.52 14.16 Average interest rate spread(3) .......................... 2.59 2.69 2.94 2.79 2.98 Net interest margin(4) ................................... 2.97 3.17 3.42 3.34 3.28 Average interest-earning assets to average interest-bearing liabilities .......................... 109.0 111.60 111.53 113.40 107.40 ASSET QUALITY RATIOS:(2) Non-performing loans as a percent of loans(5)(6) ......... 0.07 0.09 0.17 0.22 1.00 Non-performing assets as a percent of total assets(6) .... 0.09 0.08 0.16 0.51 0.97 Allowance for loan losses as a percent of loans(5) ....... 1.01 0.88 0.82 0.64 0.82 Allowance for loan losses as a percent of non-performing loans(6) ............................... 1,428.15 1,029.06 469.75 293.02 81.40 NUMBER OF FULL-SERVICE BANKING FACILITIES ................ 10 10 10 8 8 NUMBER OF SHARES OUTSTANDING AT END OF PERIOD (IN THOUSANDS) ........................................ 4,973 5,112 5,520 6,260 6,590 PER SHARE DATA: Basic earnings per common share .......................... $ 1.78 $ 1.50 $ 1.28 $ 0.48 $ NM Diluted earnings per common share ........................ 1.71 1.43 1.24 0.48 NM Dividends per common share ............................... 0.46 0.37 0.26 0.15 NM Book value per common share at end of period ............. 17.88 16.84 15.72 14.75 14.78 Market value per common share at end of period ........... 15.88 17.63 21.88 14.75 11.75
- --------------- (1) The balance does not include FHLB-Boston stock. (2) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. (3) The average interest rate spread represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities. (4) The net interest margin represents net interest income as a percent of average interest-earning assets. (5) Loans includes loans, net, and mortgage loans held for sale, excluding the allowance for loan losses. (6) Non-performing assets consist of non-performing loans and real estate owned ("REO"). Non-performing loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal. It is the Bank's policy to cease accruing interest on all such loans. NM -- Not Meaningful/Earnings per share is not presented for the period of October 24, 1995 (the day of conversion to stock-ownership) through December 31, 1995 as the earnings per share calculation for the sixty-nine day period was not meaningful. Earnings per share is not presented for the periods prior to the conversion to stock form, as the Bank was a mutual savings bank and no stock was outstanding. 5 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion may contain certain forward-looking statements which are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact the Company's earnings in future periods. Factors that could cause future results to vary materially from current management expectations include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services. In particular, these issues may impact management's estimates used in evaluating market risk and interest rate risk in its GAP and NPV tables, loan loss provisions, classification of assets, accounting estimates and other estimates used throughout this discussion. GENERAL BostonFed Bancorp, Inc. (the "Company") was incorporated in Delaware on July 11, 1995. On October 24, 1995, it became the holding company for Boston Federal Savings Bank ("BFS") when it issued 6,589,617 shares of common stock, utilizing a portion of the proceeds to acquire all of the outstanding stock of BFS which simultaneously completed its conversion from a mutual savings bank to a stock form of ownership. On February 7, 1997, the Company acquired Broadway National Bank ("BNB"), using the purchase method of accounting, at a cost of approximately $22 million. On December 6, 1999, the Company acquired Diversified Ventures, Inc., d/b/a Forward Financial Company ("Forward Financial") and Ellsmere Insurance Agency, Inc. ("Ellsmere") using the purchase method of accounting at a cost of approximately $38 million. Forward Financial operates as a subsidiary of BFS while Ellsmere has limited operations as a subsidiary of BNB. The Company's business has been conducted primarily through its ownership of BFS and BNB (collectively, the "Banks"). BFS operates its administrative/bank branch office located in Burlington, Massachusetts and its seven other bank branch offices located in Arlington, Bedford, Billerica, Boston, Lexington, Peabody and Wellesley, all of which are located in the greater Boston metropolitan area. BFS' subsidiary, Forward Financial, maintains its headquarters in Northboro, Massachusetts and operates in approximately twenty states across the United States. BNB operates two banking offices in Chelsea and Revere, both of which are also in the greater Boston metropolitan area. The Company's primary business is attracting retail deposits from the general public and investing those deposits and other borrowed funds in loans, mortgage-backed securities, U.S. Government and federal agency securities and other securities. The Company originates mortgage loans for its investment portfolio and for sale, generally retaining the servicing rights of loans sold. Additionally, the Company originates chattel mortgage loans, substantially all of which are sold in the secondary market, servicing released. Loan sales are made from loans held in the Company's portfolio designated as being held for sale or originated for sale during the period. The Company's revenues are derived principally from interest on its loans, and to a lesser extent, interest and dividends on its investment and mortgage-backed securities, gains on sale of loans, fees and loan servicing income. The Company's primary sources of funds are deposits, principal and interest payments on loans, investments, mortgage-backed securities, Federal Home Loan Bank of Boston ("FHLB") advances, repurchase agreements and proceeds from the sale of loans. The Company's results of operations are primarily dependent on net interest income, which is the difference between the income earned on its loan and investment portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Company's provision for loan losses, real estate operations expense, investment and loan sale activities and loan servicing. The Company's non-interest expense principally consists of compensation and benefits, occupancy and equipment expense, deposit insurance premiums, advertising, data processing expense, real estate operations and other expenses. Results of operations of the Company are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. As a result of the acquisition of BNB, the Company became a bank holding company subject to regulation by the Federal Reserve Bank ("FRB") and for the first three years following the initial public offering was also subject to the regulations of the Office of Thrift Supervision ("OTS"). BFS is regulated by the OTS and BNB is regulated by the Office of the Comptroller of the Currency ("OCC"). Since the acquisition of BNB was 8 - -------------------------------------------------------------------------------- 4 consummated at the close of business on February 7, 1997 and the acquisitions of Forward Financial and Ellsmere were consummated at the close of business on December 6, 1999, the financial statements of the Company and the following discussion regarding the Company's financial condition and results of operations at and for the years ended December 31, 1999, 1998 and 1997, include information and data related to BNB only from February 8, 1997 to December 31, 1999 and information and data related to Forward Financial and Ellsmere only from December 7, 1999 to December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, (including brokered deposits), principal and interest payments on loans, loan sales, investments, mortgage-backed and related securities, FHLB advances and repurchase agreements. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has maintained the required minimum levels of liquid assets at BFS as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of BFS's deposits and short-term borrowings. BFS's currently required liquidity ratio is 4%. At both December 31, 1999 and 1998, BFS's liquidity ratio was 6.9%. Management has maintained liquidity close to the minimum requirement so that it may invest any excess liquidity in higher yielding interest-earning assets or use such funds to repay higher cost FHLB advances or repurchase agreements. The OCC does not have specific guidance for liquidity ratios for BNB, but does require banks to maintain reasonable and prudent liquidity levels. Management believes such levels have been maintained since the acquisition date. The Company's most liquid assets are cash, overnight federal funds sold, short-term investments and investments available for sale. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At December 31, 1999, cash, short-term investments and investment securities available for sale totaled $87.9 million or 7.0% of total assets. Additional investments were available which qualified for BFS's regulatory liquidity requirements. The Company has other sources of liquidity if a need for additional funds arise, including FHLB advances and wholesale brokered deposits and repurchase agreements (collateralized borrowings). At December 31, 1999, the Company had $384.5 million in advances outstanding from the FHLB and had, with existing collateral, an additional $39.1 million in overall borrowing capacity from the FHLB. Borrowing capacity can be increased upon the delivery of mortgage notes on non owner-occupied 1-4 family loans, multi-family and commercial loans. Additional collateral was available at BNB. The Company generally avoids paying the highest deposit rates in its market and accordingly utilizes alternative sources of funds such as FHLB advances, repurchase agreements and wholesale brokered deposits to supplement cash flow needs. At December 31, 1999, the Company had commitments to originate loans and unused outstanding lines of credit totaling $159.4 million. The Company anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificate accounts, which are scheduled to mature in less than one year from December 31, 1999, totaled $244.1 million. The Company expects that a substantial majority of the maturing certificate accounts will be retained by the Company at maturity. At the time of conversion, BFS was required to establish a liquidation account in an amount equal to its retained earnings as of June 30, 1995. The liquidation account will be reduced to the extent that eligible account holders reduce their qualifying deposits. In the unlikely event of a complete liquidation of BFS, each eligible account holder will be entitled to receive a distribution from the liquidation account. BFS is not permitted to declare or pay dividends on its capital stock, or repurchase any of its outstanding stock, if the effect thereof would cause its stockholders' equity to be reduced below the amount required for the liquidation account or applicable regulatory capital requirements. The balance of the liquidation account at December 31, 1999 was approximately $8.1 million. Prior to the Company's acquisition of BNB, the Company, as a savings and loan holding company, was not required to maintain a minimum level of capital for regulatory purposes. As a result of the Company's acquisition of BNB and its resultant status as a bank holding company, the Company is required to maintain a ratio of capital to assets, on a consolidated basis, which is substantially equal to that required to be maintained by the Banks. At December 31, 1999, the consolidated capital to assets ratio of the Company was 6.8%, which exceeded the minimum regulatory capital requirements for the Company. As of December 31, 1999, BFS exceeded all of its regulatory capital requirements with tangible, core, risk-based tier 1, and risk-based total capital ratios of 5.4%, 5.4%, 8.8% and 10.0%, respectively, compared to the minimum regulatory requirements of 2.0%, 4.0%, 4.0% and 8.0%, respectively. BNB also exceeded the minimum regulatory capital requirements with leverage capital, risk-based tier 1 capital and risk-based total capital ratios of 6.3%, 12.6% and 13.6%, respectively, compared to the minimum regulatory requirements of 4.0%, 4.0% and 8.0%, respectively. 9 - -------------------------------------------------------------------------------- 5 As a condition for approving the acquisition of Forward Financial, the Federal Reserve Bank required the Company and BFS to remain "well-capitalized" as defined in the regulations, for the period of one year following the date of the acquisition. The Company and BFS have to date complied with this requirement. IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected throughout the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. MARKET RISK AND MANAGEMENT OF INTEREST RATE RISK The principal market risk affecting the Company is interest rate risk. The objective of the Company's interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of risk appropriate given the Company's business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with Board of Directors' approved guidelines. Through such management, the Company seeks to reduce the vulnerability of its operations to changes in interest rates. The Company monitors its interest rate risk as such risk relates to its operating strategies. The Company's Board of Directors has established a Management Asset/Liability Committee that is responsible for reviewing the Company's asset/liability policies and interest rate risk position. The Committee meets frequently and reports trends and interest rate risk position to the Board of Directors on a quarterly basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Company. In recent years, the Company has utilized the following strategies to manage interest rate risk: (1) emphasizing the origination and retention of adjustable-rate mortgage loans; (2) generally selling in the secondary market substantially all fixed-rate mortgage loans originated with terms of 15 years or greater while generally retaining the servicing rights thereof; (3) primarily investing in short-term investment securities or mortgage-backed securities with adjustable interest rates; and (4) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing longer-term deposits such as wholesale brokered deposits and utilizing FHLB advances to replace short-term, rate sensitive, retail deposits. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring the Company's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. These differences are a primary component of the risk to net interest income. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest rates, an institution with a positive gap position would be in a better position to invest in higher yielding assets which, consequently, may result in the yield on its assets increasing at a pace more closely matching the increase in the cost of its interest-bearing liabilities than if it had a negative gap. During a period of falling interest rates, an institution with a positive gap would tend to have its assets repricing at a faster rate than one with a negative gap which, consequently, may tend to restrain the growth of, or reduce, its net interest income. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999, which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The Gap Table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 1999, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. Annual prepayment rates for adjustable-rate and fixed-rate residential loans are assumed to be 14.5% and 9.9%, respectively. Annual prepayment rates for adjustable-rate and fixed-rate mortgage-backed securities are assumed 10 - -------------------------------------------------------------------------------- 6 to be 19.2% and 13.8%, respectively. Money market deposit accounts are assumed to be immediately rate-sensitive, while passbook accounts and negotiable order of withdrawal ("NOW") accounts are assumed to have decay rates of 12% annually. These assumptions may or may not be indicative of actual prepayment and withdrawals experienced by the Company. The table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the actual repricing dates of various assets and liabilities is subject to customer discretion and competitive and other pressures and, therefore, actual experience may vary from that indicated. The following table shows the gap position of the Company at December 31, 1999 and 1998:
3 MORE THAN MORE THAN MORE THAN MORE THAN MORE MONTHS 3 MONTHS 7 MONTHS 1 YEAR TO 3 YEARS TO THAN TOTAL OR LESS TO 6 MONTHS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS AMOUNT ------- ----------- --------- ------- ------- ------- ------ INTEREST-EARNING ASSETS (DOLLARS IN THOUSANDS) Short-term investments ......................... $ 2,641 $ 0 $ 174 $ 0 $ 0 $ 0 $ 2,815 Investment securities .......................... 37,988 2,000 2,926 2,488 6,767 3,338 55,507 Fixed Rate Loans(1) ............................ 14,351 13,884 27,029 97,688 80,106 119,880 352,938 Adjustable Rate Loans(1) ....................... 177,055 42,795 97,715 247,163 134,346 6,664 705,738 Mortgage-backed securities ..................... 10,663 2,272 2,186 7,222 4,103 3,035 29,481 Stock in FHLB-Boston ........................... 20,311 0 0 0 0 0 20,311 -------- --------- --------- -------- -------- -------- ---------- Total Interest-earning assets ............... 263,009 60,951 130,030 354,561 225,322 132,917 1,166,790 -------- --------- --------- -------- -------- -------- ---------- INTEREST-BEARING LIABILITIES Money market deposit accounts .................. 56,970 0 0 0 0 0 56,970 Savings accounts ............................... 4,371 4,371 8,741 34,965 34,965 58,275 145,688 NOW accounts ................................... 3,436 3,436 6,873 27,492 27,492 45,416 114,145 Certificate accounts ........................... 70,535 75,386 105,404 110,574 37,489 0 399,388 FHLB Advances and other borrowings ............. 64,055 80,000 77,500 89,000 57,000 20,000 387,555 -------- --------- --------- -------- -------- -------- ---------- Total interest-bearing liabilities ....... 199,367 163,193 198,518 262,031 156,946 123,691 1,103,746 -------- --------- --------- -------- -------- -------- ---------- Interest-earning assets less interest-bearing liabilities .............................. $ 63,642 $(102,242) $ (68,488) $ 92,530 $ 68,376 $ 9,226 $ 63,044 -------- --------- --------- -------- -------- -------- ---------- Cumulative interest rate sensitivity gap December 31, 1999 ........................ $ 63,642 $ (38,600) $(107,088) $(14,558) $ 53,818 $ 63,044 $ 63,044 ======== ========= ========= ======== ======== ======== ========== Cumulative interest rate gap as a percentage of total assets at December 31, 1999 ..... 5.08% (3.08)% (8.54)% (1.16)% 4.29% 5.03% Cumulative interest rate gap as a percentage of total interest-earning assets at December 31, 1999 ..................... 5.45% (3.31)% (9.18)% (1.25)% 4.61% 5.40% Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 1999 ......... 131.92% 89.35% 80.91% 98.23% 105.49% 105.71% Cumulative interest rate sensitivity gap December 31, 1998 ........................ $ 90,195 $ 96,735 $ 74,980 $ 75,113 $139,219 $120,920 $ 120,920 ======== ========= ========= ======== ======== ======== ========== Cumulative interest rate gap as a percentage of total assets at December 31, 1998 ..... 7.92% 8.49% 6.58% 6.59% 12.22% 10.62% Cumulative interest rate gap as a percentage of total interest-earning assets at December 31, 1998 ..................... 8.17% 8.76% 6.79% 6.80% 12.60% 10.95% Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 1998 ......... 168.85% 145.57% 119.06% 109.93% 116.09% 112.29%
- --------------- (1) Includes total loans net of non-performing loans. 11 - -------------------------------------------------------------------------------- 7 Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features, which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. The Company's interest rate sensitivity is also monitored by management through the use of a model which internally generates estimates of the change in net portfolio value ("NPV") over a range of interest rate change scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Company's Board of Directors has established certain NPV maximum percentage change limits by interest rate shock. These approved limits are included in the following table. The Company is operating within the maximum limits imposed by the Board of Directors. The OTS also produces a similar analysis using its own model, based upon data submitted on the Company's quarterly Thrift Financial Reports for BFS, the results of which may vary from the Company's internal model primarily due to differences in assumptions utilized between the Company's internal model and the OTS model, including estimated loan prepayment rates, reinvestment rates and deposit decay rates. For purposes of the NPV table, prepayment speeds similar to those used in the Gap table were used, reinvestment rates were those in effect for similar products currently being offered and rates on core deposits were modified to reflect recent trends. The following table sets forth the Company's NPV as of December 31, 1999 and 1998, as calculated by the Company.
Net Portfolio Value as of December 31, 1999 ---------------------------------------------------------- Interest Rates In Basis Points $ $ % Board NPV (Rate Shock) Amount Change Change Limits % Ratio - ------------------------------------------------- ------ ------ ------ -------- ----- (Dollar in Thousands) 300 .......................... 97,090 (26,932) (21.7) (30.0) 7.7 200 .......................... 107,541 (16,481) (13.3) (20.0) 8.6 100 .......................... 116,545 (7,477) (6.0) (10.0) 9.3 Static ....................... 124,022 9.9 (100) ........................ 128,917 4,895 3.9 (10.0) 10.3 (200) ........................ 132,560 8,538 6.9 (20.0) 10.6 (300) ........................ 132,848 8,826 7.1 (30.0) 10.6
Net Portfolio Value as of December 31, 1998 ---------------------------------------------------------- Rates In Basis Points $ $ % Board NPV (Rate Shock) Amount Change Change Limits % Ratio - ------------------------------------------------- ------ ------ ------ -------- ----- (Dollar in Thousands) 300 .......................... 103,788 (20,956) (16.8) (25.0) 9.1 200 .......................... 113,611 (11,133) (8.9) (20.0) 10.0 100 .......................... 120,618 (4,126) (3.3) (10.0) 10.6 Static ....................... 124,744 11.0 (100) ........................ 126,627 1,883 1.5 (10.0) 11.1 (200) ........................ 126,108 1,364 1.1 (20.0) 11.1 (300) ........................ 123,260 (1,484) (1.2) (25.0) 10.8
12 - -------------------------------------------------------------------------------- 8 As in the case with the Gap Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV model presented assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results. During 1999, the Company continued to follow its past practice of selling, while generally retaining the servicing rights, certain fixed-rate and adjustable-rate mortgage loans which were either sold as whole loans or, prior to sale, converted to mortgage-backed securities. In conjunction with this mortgage banking activity, the Company uses forward contracts in order to reduce exposure to interest rate risk. The amount of forward coverage of the "pipeline" of mortgages is set on a day-to-day basis by an operating officer, within policy guidelines, based on the Company's assessment of the general direction of interest rates and the levels of mortgage origination activity. Forward Financial originates and sells, servicing released, substantially all of its consumer loans to various client lenders. The client lenders impose their underwriting standards and if they consider an application satisfactory and accept it, the loan is approved for closing. In this manner, Forward Financial eliminates its exposure to interest rate risk. ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company for the years ended December 31, 1999, 1998 and 1997. The average yields and costs are derived by dividing income or expense by the average balance of interest earning assets or interest bearing liabilities, respectively, for the periods shown. The average balance data is derived from daily balances. The yields and costs include fees, premiums and discounts which are considered adjustments to yields. 13 - -------------------------------------------------------------------------------- 9
AT FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------- DECEMBER 31, 1999 1999 1998 1997 ----------------- -------------------------- -------------------------- ----------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST ------- ------ ------- -------- ------ ------- -------- ------- ------- -------- ------ (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Investment securities(1)...... $ 78,633 6.41% $ 92,956 $ 5,486 5.90% $ 88,166 $ 5,400 6.12% $ 82,701 $ 5,003 6.05% Loans, net and mortgage loans held for sale(2)............ 1,048,768 7.32% 1,002,847 73,096 7.29% 876,344 66,040 7.54% 759,312 58,805 7.74% Mortgage-backed securities(3). 29,481 6.65% 34,241 2,154 6.29% 50,375 3,335 6.62% 62,265 4,229 6.79% ---------- ---------- ------- ---------- ------- -------- ------- Total interest-earning assets..................... 1,156,882 7.24% 1,130,044 80,736 7.14% 1,014,885 74,775 7.37% 904,278 68,037 7.52% ---- ------ ---- ------ ---- ------ ---- Non-interest-earning assets..... 96,771 58,279 42,683 39,770 ---------- ---------- ---------- -------- Total assets................ $1,253,653 $1,188,323 $1,057,568 $944,048 ========== ========== ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing Liabilities: Money market deposit accounts. $ 56,970 2.82% $ 59,279 1,693 2.86% $ 62,739 1,838 2.93% $ 61,800 1,822 2.95% Savings accounts.............. 145,688 2.54% 142,399 3,534 2.48% 121,092 2,999 2.48% 116,247 2,826 2.43% NOW accounts.................. 114,145 0.75% 110,684 884 0.80% 104,532 1,158 1.11% 96,590 1,071 1.11% Certificate accounts.......... 399,388 5.53% 356,668 19,761 5.54% 312,810 18,101 5.79% 237,115 13,457 5.68% ---------- ---------- ------- ---------- ------- -------- ------- Total....................... 716,191 3.94% 669,030 25,872 3.87% 601,173 24,096 4.01% 511,752 19,176 3.75% Borrowed Funds(4)............. 387,555 5.87% 367,849 21,336 5.80% 308,191 18,461 5.99% 299,076 17,953 6.00% ---------- ---------- ------- ---------- ------- -------- ------- Total interest-bearing liabilities................ 1,103,746 4.62% 1,036,879 47,208 4.55% 909,364 42,557 4.68% 810,828 37,129 4.58% ---- ------ ---- ------ ---- ------ ---- Non-interest-bearing liabilities................ 64,203 65,762 63,729 47,264 ---------- ---------- ---------- -------- Total liabilities........... 1,167,949 1,102,641 973,093 858,092 ---------- ---------- ---------- -------- Stockholders' equity.......... 85,704 85,682 84,475 85,956 ---------- ---------- ---------- -------- Total liabilities and stockholders' equity....... $1,253,653 $1,188,323 $1,057,568 $944,048 ========== ========== ========== ======== Net interest income........... NA $33,528 $32,218 $30,908 ==== ======= ======= ======= Net interest rate spread(5)... 2.62% 2.59% 2.69% 2.94% ==== ==== ==== ==== Net interest margin(6)........ NA 2.97% 3.17% 3.42% ==== ==== ==== ==== Ratio of interest-earning assets to interest-bearing liabilities................. 104.81% 108.99% 111.60% 111.53% ========== ========== ========== ========
- --------------- (1) Includes investment securities available for sale and held to maturity, short-term investments, stock in FHLB-Boston and daily federal funds sold. (2) Amount is net of deferred loan origination costs, construction loans in process, net unearned discount on loans purchased and allowance for loan losses and includes non-performing loans. (3) Includes mortgage-backed securities available for sale and held to maturity. (4) Interest paid on borrowed funds for the periods presented includes interest expense on FNMA deposits held in escrow accounts with the Company related to the Company's FNMA servicing, which, if such interest expense was excluded, would result in an average cost of borrowed funds of 5.78%, 5.94%, and 5.98% for the years ended December 31, 1999, 1998 and 1997, respectively. (5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (6) Net interest margin represents net interest income as a percentage of average interest-earning assets. 14 - -------------------------------------------------------------------------------- 10 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated to changes due to rate.
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998 COMPARED TO COMPARED TO YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997 ----------------------------- ----------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO ------------------ ------------------- VOLUME RATE NET VOLUME RATE NET ------ ---- --- ------ ---- --- (IN THOUSANDS) INTEREST-EARNING ASSETS: Investment securities ..................... $ 293 $ (207) $ 86 $ 331 $ 66 $ 397 Loans, net and mortgage loans held for sale 9,538 (2,482) 7,056 9,058 (1,823) 7,235 Mortgage-backed securities ................ (1,068) (113) (1,181) (807) (87) (894) -------- ------- ------- ------- ------- ------- Total interest-earning assets .......... 8,763 (2,802) 5,961 8,582 (1,844) 6,738 -------- ------- ------- ------- ------- ------- INTEREST-BEARING LIABILITIES: Money market deposit accounts ............. (101) (44) (145) 28 (12) 16 Savings accounts .......................... 528 7 535 118 55 173 NOW accounts .............................. 68 (342) (274) 88 (1) 87 Certificate accounts ...................... 2,539 (879) 1,660 4,299 345 4,644 -------- ------- ------- ------- ------- ------- Total .................................. 3,034 (1,258) 1,776 4,533 387 4,920 Borrowed funds ............................ 3,574 (699) 2,875 547 (39) 508 -------- ------- ------- ------- ------- ------- Total interest-bearing liabilities ..... 6,608 (1,957) 4,651 5,080 348 5,428 -------- ------- ------- ------- ------- ------- Net change in net interest income ............ $ 2,155 $ (845) $ 1,310 $ 3,502 $(2,192) $ 1,310 ======== ======= ======= ======= ======= =======
15 - -------------------------------------------------------------------------------- 11 ASSET QUALITY The following table sets forth information regarding non-performing assets, which consist of non-performing loans and real estate owned ("REO"). In addition to identifying non-performing loans, as discussed below, the Company identifies loans that are characterized as impaired. Accordingly, loans categorized as impaired include commercial real estate, multi-family, business loans and restructured loans which are non-performing loans as well as other identified loans. At December 31, 1999, non-performing loans totaled $746,000, impaired loans totaled $235,000, consisting of two loans, and REO totaled $376,000, consisting of two properties. It is the policy of the Company to cease accruing interest on loans 90 days or more past due and charging off all accrued interest. For the years ended December 31, 1999, 1998, and 1997, the amount of additional interest income that would have been recognized on non-performing loans if such loans had continued to perform in accordance with their contractual terms was ($2,000), $33,000, and $149,000, respectively. For the same periods, the difference between the amount of interest income which would have been recognized on impaired loans if such loans were performing in accordance with their regular terms and actual amounts recognized was $2,000, $1,000, and $1,000, respectively.
AT DECEMBER 31, ---------------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN THOUSANDS) NON-PERFORMING LOANS: Residential real estate: One- to four-family ....................................... $ 721 $ 784 $ 941 Commercial real estate ....................................... 25 25 458 Other Loans .................................................. -- -- 6 --------- --------- ------- Total ........................................................ 746 809 1,405 Real estate owned, net(3) ....................................... 376 47 195 --------- --------- ------- Total non-performing assets .................................. 1,122 856 1,600 Restructured loans .............................................. 210 213 369 --------- --------- ------- Total risk elements ............................................. $ 1,332 $ 1,069 $ 1,969 ========= ========= ======= Allowance for loan losses as a percent of loans(1) .............. 1.01% 0.88% 0.82% ========= ========= ======= Allowance for loan losses as a percent of non-performing loans(2) 1,428.15 1,029.06 469.75 Non-performing loans as a percent of loans(1)(2) ................ .07 0.09 0.17 Non-performing assets as a percent of total assets(4) ........... .09 0.08 0.16
- --------------- (1) Loans includes loans, net and mortgage loans held for sale, excluding allowance for loan losses. (2) Non-performing loans consist of all 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal. (3) REO balances are shown net of related valuation allowances. (4) Non-performing assets consist of non-performing loans and real estate owned (REO). 16 - -------------------------------------------------------------------------------- 12 At December 31, 1999, loans that were characterized as impaired totaled $235,000. All of the impaired loans have been measured using the discounted cash flow method or the fair value of the collateral method if the loan is collateral dependent. During the year ended December 31, 1999, the average recorded value of impaired loans was $335,000, $15,000 of interest income was recognized and $17,000 of interest income would have been recognized under original terms. The composition of impaired loans by type is shown below:
DECEMBER 31, ---------------------- 1999 1998 ---- ---- (IN THOUSANDS) IMPAIRED LOANS: MULTI-FAMILY REAL ESTATE -- 245 COMMERCIAL REAL ESTATE 235 238 ---- ---- TOTAL IMPAIRED LOANS $235 $483 ==== ====
The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the national and regional economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans which are deemed probable and estimable based on information currently known to management. Management's analysis of the adequacy of the allowance is based upon consideration of a number of factors, including current economic conditions, actual loss experience and industry trends. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management. Amounts provided for the years 1999, 1998 and 1997 were $1.6 million, $1.6 million and $1.7 million, respectively. During the year ended December 31, 1999, there were recoveries of $414,000 credited to, and charge-offs of $56,000 taken against this allowance. As of December 31, 1999, the Company's allowance for loan losses was 1.01% of total loans compared to 0.88% as of December 31, 1998. Management believes this increased coverage ratio is prudent due to the balance increase in the combined total of construction and land, commercial real estate, home equity and improvement, multi-family and business loans. These combined total balances increased from $149.2 million at December 31, 1998 to $236.6 million at December 31, 1999, an increase of 59%. These loans aggregated to 22.1% and 15.4% of the total loans at December 31, 1999 and 1998, respectively. The Company had non-performing loans of $746,000 and $809,000 at December 31, 1999 and December 31, 1998, respectively. The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. While management believes the Company's allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Company's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of allowance for loan losses. 17 - -------------------------------------------------------------------------------- 13 The following table sets forth activity in the Company's allowance for loan losses for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) Balance at beginning of period ........................ $ 8,500 $ 6,600 $4,400 $4,275 $3,700 Allowance for loan losses at acquisition date (BNB in 1997 and Forward Financial in 1999) ..... 170 -- 620 -- -- Provision for loan losses ............................. 1,626 1,642 1,696 1,294 3,614 Charge-offs: One-to four-family ................................. 19 51 370 387 550 Multi-family ....................................... 1 2 84 263 483 Commercial ......................................... 0 75 45 664 2,297 Other ................................................. 36 131 16 198 194 -------- ------- ------ ------ ------ Total .............................................. 56 259 515 1,512 3,524 Recoveries ............................................ 414 517 399 343 485 -------- ------- ------ ------ ------ Balance at end of period .......................................... $ 10,654 $ 8,500 $6,600 $4,400 $4,275 ======== ======= ====== ====== ====== Ratio of net charge-offs/(net recoveries) during the period to average loans outstanding during the period ............................... (0.04)% (0.03)% 0.02% 0.19% 0.60% ======== ======= ====== ====== ======
The Company has developed an internal asset classification system which classifies assets depending on risk of loss characteristics. The most severe classification before a charge-off is required is "sub-standard." At December 31, 1999, 1998 and 1997, the Company classified (excluding REO) $3.6 million, $4.2 million and $5.8 million of sub-standard assets, respectively. Included in these amounts were $746,000, $809,000, and $1.4 million in non-performing assets, respectively. In the opinion of management, the performing sub-standard loans evidence one or more weaknesses or potential weaknesses and, depending on the regional economy and other factors, may become non-performing assets in future periods. COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998. CHANGES IN FINANCIAL CONDITION The Company's assets increased $114.5 million to a balance of $1.254 billion at December 31, 1999, compared to $1.139 billion at December 31, 1998, an increase of 10.1%. Asset growth was primarily in loans, net, of $88.9 million, bank-owned life insurance of $20.6 million and goodwill of $16.7 million, partially offset by decreases in investment securities held to maturity of $5.0 million, mortgage-backed securities available for sale of $5.5 million and mortgage-backed securities held to maturity of $9.0 million. The growth in loans, net was primarily due to increased originations of adjustable-rate and ten to fifteen year fixed-rate one- to four-family mortgage loans combined with increased lending for construction and land, commercial real estate, equity, and business loans. Loans, net, increased from a balance of $943.7 million at December 31, 1998 to a balance of $1,032.6 million at December 31, 1999. Volatility in market interest rates and a generally rising interest rate environment throughout 1999 increased customer demand for adjustable-rate loans and decreased demand for longer term, fixed-rate loan products most of which the Company sells in the secondary market. Shorter-term loans, generally under 15 years, were originated for portfolio. The Company also sold certain adjustable-rate loans. Mortgage-backed securities decreased by $14.5 million, or 32.9%, from a balance of $43.9 million at December 31, 1998 to a balance of $29.5 million at December 31, 1999. Mortgage loans held for sale totaled $16.2 million at December 31, 1999, compared to $17.0 million at December 31, 1998. Deposit accounts increased by $62.9 million from a balance of $707.1 million at December 31, 1998 to a balance of $770.0 million at December 31, 1999. 18 - -------------------------------------------------------------------------------- 14 This increase is mainly attributable to growth in a premium-rate statement savings account, BFS' rollout of a new 9-month retail certificate of deposit acquisition program and growth in longer-term certificates of deposit, including wholesale brokered certificates of deposit. FHLB advances and other borrowings increased $50.1 million to a balance of $387.6 million at December 31, 1999, compared to $337.5 million at December 31, 1998 as additional funds were needed to support balance sheet growth. Total stockholders' equity was $85.7 million at December 31, 1999 or $17.88 per share, compared to $81.8 million or $16.84 per share at December 31, 1998. Stockholders' equity increased during the year ended December 31, 1999 due to the combined effects of net income and the amortization of the Stock-based Incentive Plans and Employee Stock Ownership Plan ("ESOP"), offset by the completion of the fifth and commencement of the sixth 5% stock repurchase programs, dividends paid, and the change in market valuation, net of taxes, of the available-for sale securities portfolio. The stockholders' equity to total assets ratio of the Company was 6.8% at December 31, 1999 and 7.2% at December 31, 1998. RESULTS OF OPERATIONS General Net income for the year ended December 31, 1999 was $8.6 million, or $1.78 basic earnings per share and $1.71 diluted earnings per share, compared to $7.6 million, or $1.50 basic earnings per share and $1.43 diluted earnings per share for the comparable period in 1998. The return on average stockholder's equity improved to 10.00% during the year ended December 31, 1999, compared to 9.02% for the year ended December 31, 1998. Return on average assets remained at 0.72% for the years ended December 31, 1999 and 1998. Increased earnings were primarily attributable to higher net interest income, due to increased balances of interest earning assets, and earnings from bank-owned life insurance, partially offset by lower interest margins. The net interest margin in 1999 decreased to 2.97% from 3.17% during 1998. Federal Reserve induced increases in short-term interest rates during 1999 created a flat yield curve that caused industry-wide margin compression. The Company's margin declined as substantial volumes of adjustable-rate loans either refinanced into lower interest adjustable-rate mortgages or refinanced to fixed-rate loans, the vast majority of which were sold in the secondary market. Management is attempting to mitigate the margin compression by continuing to expand the portfolio of commercial real estate, construction and land, equity, consumer and business loans. Interest Income Total interest income for the year ended December 31, 1999 increased by $6.0 million to $80.7 million compared to $74.8 million for the year ended December 31, 1998. Interest on loans increased by $7.0 million, or 9.6%, to $73.1 million, during 1999 compared to $66.0 million during 1998. The increase in interest income in 1999 was attributable to increased average balances of interest earning assets, primarily due to an increase in the average balance of loans, from $876.3 million for 1998 to $1,002.8 million for 1999. The increased average loan, net, balances generated an additional $9.5 million of interest earned while lower yields decreased interest earned on loans, net, by $2.5 million. The lower yields were generally the result of falling interest rates during 1998 and early 1999 that created an opportunity for borrowers to refinance their mortgages at lower rates. The loan portfolio average loan yield decreased to 7.29% for 1999 compared to an average yield of 7.54% for 1998. Interest income on investment securities and overnight federal funds sold increased by $86,000 to $5.5 million for the year ended December 31, 1999, compared to $5.4 million for the year ended December 31, 1998. The primary reason for the increase is due to higher average balances of investment securities averaging $93.0 million during the year ended December 31, 1999, compared to average balances of $88.2 million for the prior year, offset by the effects of an average of 22 basis point decrease in yields. Interest income on mortgage-backed securities decreased by $1.2 million for the year ended December 31, 1999 due primarily to a decrease in average balances compared to the prior year. Average mortgage-backed securities balances decreased by $16.1 million from an average of $50.4 million during 1998 to an average of $34.2 million during 1999. The majority of the mortgage-backed securities held in 1999 were adjustable GNMA securities. The yields on mortgage-backed securities decreased from an average yield of 6.62% in 1998 to 6.29% in 1999, resulting in a decrease in interest earned on such securities in 1999 of $113,000, compared to 1998. 19 - -------------------------------------------------------------------------------- 15 Interest Expense Interest expense increased by $4.7 million, or 11.0%, for the year ended December 31, 1999 to $47.2 million compared to $42.6 million for the year ended December 31, 1998. The increase in interest expense for the year ended December 31, 1999 was due primarily to higher interest expense on borrowed funds and certificate accounts. Borrowed funds consisted primarily of FHLB advances that were used generally to fund loan portfolio growth. Higher average balances of $367.8 million of borrowed funds for the year ended December 31, 1999, compared to average balances of $308.2 million for the prior year, resulted in a $2.9 million increase in interest expense. The average cost of borrowed funds declined by 19 basis points, from 5.99% for the year ended December 31, 1998 to an average of 5.80% for the current year. Interest expense on deposit accounts increased by $1.8 million for the year ended December 31, 1999 due primarily to the effects of higher average balances of $669.0 million for the year ended December 31, 1999 compared to average deposit balances of $601.2 million for the prior year. The increased average balances were primarily attributable to the net acquisition of $53.7 million of wholesale brokered certificate of deposit accounts, which contributed to the increased average balance of $356.7 million for the year ended December 31, 1999, compared to an average balance of $312.8 million for the prior year. The higher average balances in certificate accounts resulted in an increase in interest expense of $2.5 million for the year ended December 31, 1999 compared to the prior year. The average cost of deposit accounts decreased from 4.01% for the year ended December 31, 1998 to an average cost of 3.87% for the current year. Provision for Loan Losses The provision for loan losses amounted to $1.6 million for the years ended December 31, 1999 and 1998. The provision was based on management's evaluation of the growth and change in composition of the Company's loan portfolio, existing real estate market conditions, the level of charge-offs and classified assets. Total non-performing loans decreased to $746,000, or 0.07% of loans at December 31, 1999 from $809,000, or 0.08% at December 31, 1998. The Company recorded net recoveries of $358,000 during the year ended December 31, 1999, compared to net recoveries of $258,000 during 1998. The allowance for loan losses as a percentage of total loans was 1.01% at December 31, 1999 compared to 0.88% at December 31, 1998. As a percentage of total non-performing loans, the allowance for loan losses was 1,428% at December 31, 1999, compared to 1,029% a year earlier. See also "Asset Quality" included elsewhere herein. Non-Interest income Total non-interest income increased to $6.9 million for the year ended December 31, 1999 from $6.1 million for the year ended December 31, 1998. The primary contributing factor was income from bank owned life insurance ("BOLI"). The policy generated $556,000 of income through an increase in the cash surrender value. Gain on sale of loans was $3.0 million for the year ended December 31, 1999 compared to $3.2 million for the prior year. The decrease would have been greater had it not been for the approximately $572,000 of gains on sale of loans recorded by Forward Financial. Gain on sale of loans is the primary source of revenue of Forward Financial. The continuation of a strong housing market and economy contributed to the strong volume for financing of home purchases during 1999. There were no OMSR (originated mortgage servicing rights) adjustments necessary during 1999 as normal amortization was sufficient to account for loan servicing balance run-off. During 1998, the high volume of refinancing of mortgages, however, necessitated an adjustment of $481,000 to reflect the impairment to the OMSR. At December 31, 1999, the OMSR balance was $5.1 million compared to $3.8 million at December 31, 1998. Loans serviced for others increased to $784.6 million at December 31, 1999 from a balance of $648.3 million at December 31, 1998. Deposit service fees were $1.7 million for the two years ended December 31, 1999 and 1998. 20 - -------------------------------------------------------------------------------- 16 Non-Interest Expense Total non-interest expense for the year ended December 31, 1999 was $25.3 million, compared to $23.9 million for 1998. The primary reason for the increase was due to higher compensation and benefits expense, which increased to $15.0 million for the year ended December 31, 1999 from $13.7 million for the prior year. Compensation and benefits expenses were higher primarily due to increased staff levels for the establishment of the Company's corporate and business lending department, the inclusion of Forward Financial's compensation and benefits from the acquisition date to year-end, and normal year-over-year salary increases. Data processing expense was $1.6 million for the year ended December 31, 1999, compared to $1.3 million for the prior year. The increase was primarily attributable to the service bureau computer conversion costs at BNB and expenses related to the Year 2000 issue. Other non-interest expense declined to $4.5 million for the year ended December 31, 1999 from $5.0 million for the prior year. The year ended December 31, 1998 included consulting and legal costs incurred to assist in establishing the Company's tax saving strategies that included the formation of real estate investment trusts and securities subsidiaries. Income Taxes Income tax expense was $4.9 million for the year ended December 31, 1999 (resulting in an effective tax rate of 36.6%), compared to a tax expense of $5.2 million for the year ended December 31, 1998 (resulting in an effective tax rate of 40.3%). The decrease in income tax expense and rate was due to the effects of BOLI and a lower non-deductible Employee Stock Ownership Plan ("ESOP") expense. Year 2000 Year 2000 computer software compliance issues affected the Company and many other financial institutions and companies throughout the world. The primary concern was that computer programs would not recognize the proper date which could then generate erroneous data or cause systems to fail, thereby creating an adverse impact on the Company's business and possibly its operating results. The Company started its Year 2000 initiative in early 1997. It adhered to the suggested procedures established by the Federal Financial Institutions Examination Council (the "FFIEC") guidelines of awareness, assessment, renovation, validation and implementation. Software systems and hardware components were tested and contingency plans were developed. Human and financial resources were made available to complete the remediation efforts. Due to the extensive planning and testing during the past three years, the Company was able to begin the Year 2000 without any interruption in its operations, whatsoever. Included in other non-interest expenses during 1999 were charges incurred in connection with the modification or replacement of software and hardware in order for the company's computer systems to properly recognize the Year 2000. The expenses incurred totaled approximately $175,000 for the year ended December 31, 1999 and $425,000 over the course of the project. 21 - -------------------------------------------------------------------------------- 17 COMPARISON OF OPERATING RESULTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997. General Net income for the year ended December 31, 1998 was $7.6 million, or $1.50 basic earnings per share and $1.43 diluted earnings per share, compared to $7.1 million, or $1.28 basic earnings per share and $1.24 diluted earnings per share for the comparable period in 1997. The return on average stockholder's equity improved to 9.02% during the year ended December 31, 1998, compared to 8.21% for the year ended December 31, 1997. Return on average assets declined by three basis points, from 0.75% for the year ended December 31, 1997 to 0.72% for the current year. Increased earnings were primarily attributable to higher net interest income, due to increased balances of interest earning assets, although with lower interest margins, improved gains on the sale of loans, offset by a reduction in real estate operations income. The net interest margin in 1998 decreased to 3.17% from 3.42% during 1997. Generally falling longer term interest rates during 1998 created a flat yield curve that caused industry-wide margin compression. The Company's margin suffered as substantial volumes of adjustable-rate loans either refinanced into lower interest adjustable-rate mortgages or refinanced to fixed-rate loans, the vast majority of which were sold in the secondary market. Management is attempting to mitigate the margin compression by de-emphasizing one- to four-family residential lending and expanding the portfolio of commercial real estate, construction and land, consumer and business loans. Interest Income Total interest income for the year ended December 31, 1998 increased by $6.7 million to $74.8 million compared to $68.0 million for the year ended December 31, 1997. Interest on loans increased by $7.2 million, or 12.2%, to $66.0 million, during 1998 compared to $58.8 million during 1997. The increase in interest income in 1998 was attributable to increased average balances of interest earning assets, primarily due to an increase in the average balance of loans, from $759.3 million for 1997 to $876.3 million for 1998. The increased average loan, net, balances generated an additional $9.1 million of interest earned while lower yields decreased interest earned on loans, net, by $1.8 million. The lower yields were generally the result of falling interest rates during 1998 that created an opportunity for borrowers to refinance their mortgages at lower rates. The loan portfolio average loan yield decreased to 7.54% for 1998 compared to an average yield of 7.74% for 1997. Interest income on investment securities and overnight federal funds sold increased by $397,000 to $5.4 million for the year ended December 31, 1998, compared to $5.0 million for the year ended December 31, 1997. The primary reason for the increase is due to higher average balances of investment securities averaging $88.2 million during the year ended December 31, 1998, compared to average balances of $82.7 million for the prior year. Interest income on mortgage-backed securities decreased by $894,000 for the year ended December 31, 1998 due primarily to a decrease in average balances compared to the prior year. Average balances decreased by $11.9 million from an average of $62.3 million during 1997 to an average of $50.4 million during 1998. The majority of the mortgage-backed securities held in 1998 were adjustable GNMA securities. The yields on mortgage-backed securities decreased from an average yield of 6.79% in 1997 to 6.62% in 1998, resulting in a decrease in interest earned on such securities in 1998 of $87,000, compared to 1997. Interest Expense Interest expense increased by $5.4 million, or 14.6%, for the year ended December 31, 1998 to $42.6 million compared to $37.1 million for the year ended December 31, 1997. The increase in interest expense for the year ended December 31, 1998 was due primarily to higher interest expense on deposits. Interest expense on deposit accounts increased by $4.9 million for the year ended December 31, 1998 due primarily to the effects of higher average balances of $601.2 million for the year ended December 31, 1998 compared to average deposit balances of $511.8 million for the prior year. The increased average balances were primarily attributable to the acquisition of certificate accounts, which increased from an average balance of $237.1 for the year ended December 31, 1997, to an average balance of $312.8 million for the current year. The higher average balances in certificate accounts resulted in an increase in interest expense of $4.3 million for the year ended December 31, 1998 compared to the prior year. The average cost of 22 - -------------------------------------------------------------------------------- 18 deposit accounts increased from 3.75% for the year ended December 31, 1997 to an average cost of 4.01% for the current year. The acquisition of $90.8 million in the 15-month certificate of deposit program was the major contributing factor in increasing the cost of savings. Borrowed funds consisted primarily of FHLB advances that were used primarily to fund loan portfolio growth. Higher average balances of $308.2 million of borrowed funds for the year ended December 31, 1998, compared to average balances of $299.1 million for the prior year, resulted in a $547,000 increase in interest expense. The average cost of borrowed funds declined by one basis point, from 6.00% for the year ended December 31, 1997 to an average of 5.99% for the current year. Provision for Loan Losses The provision for loan losses amounted to $1.6 million for the year ended December 31, 1998 compared to $1.7 million for the prior year. The provision was based on management's evaluation of the growth and change in composition of the Company's loan portfolio, existing real estate market conditions, the level of charge-offs and classified assets. Total non-performing loans decreased to $809,000, or 0.08% of loans at December 31, 1998 from $1.4 million, or 0.16% at December 31, 1997. The Company recorded net recoveries of $258,000 during the year ended December 31, 1998, compared to net charge-offs of $116,000, or 0.02% of average loans outstanding during 1997. The allowance for loan losses as a percentage of total loans was 0.88% at December 31, 1998 compared to 0.82% at December 31, 1997. As a percentage of total non-performing loans, the allowance for loan losses was 1,029% at December 31, 1998, compared to 469.8% a year earlier. Non-Interest income Total non-interest income increased to $6.1 million for the year ended December 31, 1998 from $4.8 million for the year ended December 31, 1997. The primary contributing factor was increased gains on the sale of loans. The $3.2 million gain on sale of loans during 1998 exceeded the $1.1 million for the prior year, primarily due to the increased volume of loans sold resulting from the high volumes of refinancing to long-term fixed rate mortgages, which the Company generally sells in the secondary market. The continuation of a strong housing market and economy also contributed to increased volume for financing of home purchases during 1998. The high volume of refinancing of mortgages, however, necessitated an adjustment of $481,000 to reflect the impairment to the originated mortgage servicing rights, ("OMSR") during the year ended December 31, 1998. The adjustment for the impairment of the OMSR, combined with a decrease in the balance of loans serviced that were sold before OMSR was recorded, contributed to the decrease in loan processing and servicing fees which totaled $477,000 for the year ended December 31, 1998, compared to $1.2 million for the prior year. Deposit service fees were $1.7 million for the two years ended December 31, 1998 and 1997. Non-Interest Expense Total non-interest expense for the year ended December 31, 1998 was $23.9 million, compared to $21.5 million for 1997. The primary components of this increase were higher data processing expenses, lower real estate operations income and higher other non-interest expenses. Data processing expense was $1.3 million for the year ended December 31, 1998, compared to $968,000 for the prior year. The prior year total was lower than normal due to the receipt from the Company's data processor, of approximately $200,000 as reimbursement of expenses the Company had incurred in assisting the data processor in developing a new software program. Additionally, the Company incurred approximately $100,000 of costs related to the Year 2000 issue. For the year ended December 31, 1998, real estate operations earned $71,000, compared to earnings of $1.2 million for the prior year. The prior year total included approximately $891,000 from the sale of a land sub-division, sold by a subsidiary of BFS, during the first quarter of 1997. Other non-interest expense increased to $5.0 million for the year ended December 31, 1998 from $4.1 million for the prior year due to the inclusion of BNB's miscellaneous expenses for the full year and consulting and legal costs incurred to assist in establishing the Company's tax saving strategies that included the formation of real estate investment trusts and securities subsidiaries. 23 - -------------------------------------------------------------------------------- 19 Income Taxes Income tax expense was $5.2 million for the year ended December 31, 1998 (resulting in an effective tax rate of 40.3%), compared to a tax expense of $5.5 million for the year ended December 31, 1997 (resulting in an effective tax rate of 43.8%). The decrease in income tax expense and rate was due to the implementation of the tax saving strategies. Impact of New Accounting Standards In June 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under this statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. In June 1999, the FASB issued SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which defers the effective date of SFAS No. 133. SFAS No. 133 is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this settlement is not expected to have a material impact on the Company's financial position. 24 - -------------------------------------------------------------------------------- 20 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders BostonFed Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of BostonFed Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BostonFed Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Boston, Massachusetts January 20, 2000 25 21 BOSTONFED BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except share and per share amounts) December 31, 1999 and 1998
ASSETS 1999 1998 ----------- ---------- Cash and due from banks (note 1) $ 31,881 19,133 Overnight federal funds sold 2,541 17,795 Certificates of deposit 274 273 ----------- ---------- Total cash and cash equivalents 34,696 37,201 Investment securities available for sale (amortized cost of $55,051 at 1999 and $48,837 at 1998) (note 3) 53,203 49,137 Investment securities held to maturity (fair value of $2,275 at 1999 and $7,371 at 1998) (notes 4 and 10) 2,304 7,302 Mortgage-backed securities available for sale (amortized cost of $15,881 at 1999 and $20,935 at 1998) (notes 3 and 10) 15,540 21,029 Mortgage-backed securities held to maturity (fair value of $14,030 at 1999 and $23,333 at 1998) (notes 4 and 10) 13,941 22,913 Mortgage loans held for sale 16,174 17,008 Loans, net of allowance for loan losses of $10,654 at 1999 and $8,500 at 1998 1,032,594 943,662 (notes 5 and 6) Accrued interest receivable (note 7) 6,267 5,549 Stock in FHLB of Boston, at cost (note 10) 20,311 17,802 Premises and equipment, net (note 8) 8,212 6,614 Bank owned life insurance 20,556 -- Goodwill, net of amortization 19,519 2,772 Deferred income tax asset, net (note 11) 2,411 1,812 Prepaid expenses and other assets 7,925 6,322 ----------- ---------- Total assets $ 1,253,653 1,139,123 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts (note 9) $ 770,049 707,144 Federal Home Loan Bank advances and other borrowings (note 10) 387,555 337,500 Advance payments by borrowers for taxes and insurance 3,298 3,405 Accrued expenses and other liabilities 7,047 9,280 ----------- ---------- Total liabilities 1,167,949 1,057,329 ----------- ---------- Commitments and contingencies (notes 3, 4, 5, 8, 13 and 14) Stockholders' equity (notes 2 and 13): Preferred stock, $.01 per value; 1,000,000 shares authorized; none issued -- -- Common stock, $0.01 par value; 17,000,000 shares authorized; 6,589,617 shares issued at 1999 and 1998. 66 66 Additional paid-in capital 67,198 66,417 Retained earnings 50,481 44,256 Accumulated other comprehensive (loss) income (1,485) 312 Treasury stock, at cost (1,616,536 and 1,477,176 shares at 1999 and 1998, respectively) (28,532) (26,128) Unallocated ESOP shares (1,663) (2,418) Unearned 1996 stock-based incentive plan (361) (711) ----------- ---------- Total stockholders' equity 85,704 81,794 ----------- ---------- Total liabilities and stockholders' equity $ 1,253,653 1,139,123 =========== ==========
See accompanying notes to consolidated financial statements. 26 22 BOSTONFED BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share amounts) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 -------- ------- ------- Interest income: Loans (note 5) $ 73,096 66,040 58,805 Mortgage-backed securities 2,154 3,335 4,229 Investment securities 5,312 5,258 4,736 Federal funds sold 174 142 267 -------- ------- ------- Total interest income 80,736 74,775 68,037 -------- ------- ------- Interest expense: Deposit accounts (note 9) 25,872 24,096 19,176 Borrowed funds (note 10) 21,336 18,461 17,953 -------- ------- ------- Total interest expense 47,208 42,557 37,129 -------- ------- ------- Net interest income 33,528 32,218 30,908 Provision for loan losses (note 6) 1,626 1,642 1,696 -------- ------- ------- Net interest income after provision for loan losses 31,902 30,576 29,212 -------- ------- ------- Non-interest income: Deposit service fees 1,742 1,658 1,710 Loan processing and servicing fees (note 5) 583 477 1,241 Gain on sale of loans 3,017 3,173 1,114 Income from bank owned life insurance (note 12) 556 -- -- Gain (loss) on sale of investments (note 3) (28) 19 (18) Other 1,041 801 759 -------- ------- ------- Total non-interest income 6,911 6,128 4,806 -------- ------- ------- Non-interest expense: Compensation and benefits (note 12) 14,955 13,728 13,543 Occupancy and equipment 3,284 3,187 3,087 Data processing 1,589 1,286 968 Advertising expense 691 523 682 Deposit insurance premiums 368 327 293 Real estate operations (71) (71) (1,230) Other 4,484 4,952 4,115 -------- ------- ------- Total non-interest expense 25,300 23,932 21,458 -------- ------- ------- Income before income taxes 13,513 12,772 12,560 Income tax expense (note 11) 4,945 5,151 5,505 -------- ------- ------- Net income $ 8,568 7,621 7,055 ======== ======= ======= Basic earnings per share $ 1.78 1.50 1.28 ======== ======= ======= Diluted earnings per share $ 1.71 1.43 1.24 ======== ======= ======= Weighted average shares outstanding - basic 4,825 5,078 5,505 ======== ======= ======= Weighted average shares outstanding - diluted 4,997 5,328 5,690 ======== ======= =======
See accompanying notes to consolidated financial statements. 27 23 BOSTONFED BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (In thousands, except per share amounts) Years ended December 31, 1999, 1998 and 1997
ACCUMULATED OTHER SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES ----- ------ ---------- -------- -------------- -------- ----------- Balance at December 31, 1996 6,590 $66 64,461 33,131 (322) (4,739) (3,929) Common stock repurchased (740 shares at an average price of $18.12 per share) -- -- -- -- -- (13,407) -- Cash dividends declared and paid ($.26 per share) -- -- -- (1,541) -- -- -- Reduction in unallocated ESOP shares charged to expense -- -- -- -- -- -- 755 Appreciation in fair value of shares charged to expense for compensation plans -- -- 821 -- -- -- -- Earned portion of SIP shares charged to expense -- -- -- -- -- -- -- Comprehensive income: Changes in net unrealized gain (loss) in investments -- -- -- -- 564 -- -- available for sale, net Net income -- -- -- 7,055 -- -- -- Comprehensive income ----- --- ------ ------- ---- ------- ------ Balance at December 31, 1997 6,590 $66 65,282 38,645 242 (18,146) (3,174)
UNEARNED STOCK- BASED INCENTIVE TOTAL PLAN STOCKHOLDERS' ("SIP") EQUITY --------- ------------- Balance at December 31, 1996 (2,313) 86,355 Common stock repurchased (740 shares at an average price of $18.12 per share) -- (13,407) Cash dividends declared and paid ($.26 per share) -- (1,541) Reduction in unallocated ESOP shares charged to expense -- 755 Appreciation in fair value of shares charged to expense for compensation plans -- 821 Earned portion of SIP shares charged to expense 1,009 1,009 Comprehensive income: Changes in net unrealized gain (loss) in investments -- 564 available for sale, net Net income -- 7,055 ------- Comprehensive income 7,619 ------ ------- Balance at December 31, 1997 (1,304) 81,611
(CONTINUED) 28 24 \ BOSTONFED BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity, Continued (In thousands, except per share amounts) Years ended December 31, 1999, 1998 and 1997
ACCUMULATED OTHER SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES ----- ------ ---------- -------- -------------- -------- ----------- Common stock repurchased (409 shares at an average price of $19.56 per share) -- $-- -- -- -- (7,998) -- Stock options exercised (.9 shares at an average price of $16.67 per share, net of tax benefit) -- -- -- -- -- 16 -- Cash dividends declared and paid ($.37 per share) -- -- -- (2,010) -- -- -- Reduction in unallocated ESOP shares charged to expense -- -- -- -- -- -- 756 Appreciation in fair value of shares charged to expense for compensation plans -- -- 1,135 -- -- -- -- Earned portion of SIP shares charged to expense -- -- -- -- -- -- -- Comprehensive income: Changes in net unrealized gain (loss) in investments available for sale, net -- -- -- -- 70 -- -- Net income -- -- -- 7,621 -- -- -- Comprehensive income ----- --- ------ ------- ------ ------- ------ Balance at December 31, 1998 6,590 $66 66,417 44,256 312 (26,128) (2,418)
UNEARNED STOCK- BASED INCENTIVE TOTAL PLAN STOCKHOLDERS' ("SIP") EQUITY --------- ------------- Common stock repurchased (409 shares at an average price of $19.56 per share) -- (7,998) Stock options exercised (.9 shares at an average price of $16.67 per share, net of tax benefit) -- 16 Cash dividends declared and paid ($.37 per share) -- (2,010) Reduction in unallocated ESOP shares charged to expense -- 756 Appreciation in fair value of shares charged to expense for compensation plans -- 1,135 Earned portion of SIP shares charged to expense 593 593 Comprehensive income: Changes in net unrealized gain (loss) in investments available for sale, net -- 70 Net income -- 7,621 ------- Comprehensive income 7,691 ------ ------- Balance at December 31, 1998 (711) 81,794
(Continued) 29 25 BOSTONFED BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity, Continued (In thousands, except per share amounts) Years ended December 31, 1999, 1998 and 1997
ACCUMULATED OTHER SHARES OF ADDITIONAL COMPREHENSIVE UNALLOCATED COMMON COMMON PAID-IN RETAINED (LOSS) TREASURY ESOP STOCK STOCK CAPITAL EARNINGS INCOME STOCK SHARES ----- ------ ---------- -------- -------------- -------- ----------- Common stock repurchased (144 shares at an average price of $17.31 per share) -- $-- -- -- (2,492) -- Stock options exercised (5 shares at an average price of $12.44 per share, net of tax benefit) -- -- (19) -- -- 88 -- Cash dividends declared and paid ($.46 per share) -- -- -- (2,343) -- -- -- Reduction in unallocated ESOP shares charged to expense -- -- -- -- -- -- 755 Appreciation in fair value of shares charged to expense for compensation plans -- -- 800 -- -- -- -- Earned portion of SIP shares charged to expense -- -- -- -- -- -- -- Comprehensive income: Changes in net unrealized gain (loss) in investments available for sale, net -- -- -- -- (1,797) -- -- Net income -- -- -- 8,568 -- -- -- Comprehensive income ----- --- ------- ------- ------ ------- ------ Balance at December 31, 1999 6,590 $66 67,198 50,481 (1,485) (28,532) (1,663) ===== === ======= ======= ====== ======= ======
UNEARNED STOCK- BASED INCENTIVE TOTAL PLAN STOCKHOLDERS' ("SIP") EQUITY --------- ------------- Common stock repurchased (144 shares at an average price of $17.31 per share) -- (2,492) Stock options exercised (5 shares at an average price of $12.44 per share, net of tax benefit) -- 69 Cash dividends declared and paid ($.46 per share) -- (2,343) Reduction in unallocated ESOP shares charged to expense -- 755 Appreciation in fair value of shares charged to expense for compensation plans -- 800 Earned portion of SIP shares charged to expense 350 350 Comprehensive income: Changes in net unrealized gain (loss) in investments available for sale, net -- (1,797) Net income -- 8,568 ------- Comprehensive income 6,771 ------ ------- Balance at December 31, 1999 (361) 85,704 ====== =======
See accompanying notes to consolidated financial statements. 30 26 BOSTONFED BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 --------- -------- -------- Net cash flows from operating activities: Net income $ 8,568 7,621 7,055 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 1,465 1,343 963 Earned SIP shares 350 593 1,009 Reduction in unallocated ESOP shares 755 756 755 Appreciation in fair value of shares charged to expense for compensation plans 800 1,135 821 Income from bank-owned life insurance (556) -- -- Provision for loan losses 1,626 1,642 1,696 Recovery (provision) for valuation allowance for real estate owned -- 17 (350) Loans originated for sale (301,464) (357,405) (117,413) Proceeds from sale of loans 305,315 353,387 112,680 Net loss (gain) on sale of investment securities 28 (19) 18 Gain on sale of real estate held for sale or development, net -- -- (854) Deferred income tax expense (benefit) 185 208 (483) (Gain) loss on sale of real estate acquired through foreclosure (15) (60) 189 Gain on sale of loans (3,017) (3,173) (1,114) Increase in accrued interest receivable (718) (386) (240) (Increase) decrease in prepaid expenses and other assets (92) (1,520) 3,066 (Decrease) increase in accrued expenses and other liabilities (3,190) 2,818 795 --------- -------- -------- Net cash provided by operating activities 10,040 6,957 8,593 --------- -------- -------- Cash flows from investing activities: Net cash (paid for) received from acquired institution (28,609) -- 11,908 Proceeds from sales of investment securities available for sale -- 5,000 14,008 Proceeds from sale of mortgage-backed securities available for sale 4,034 -- 1,084 Proceeds from maturities of investment securities available for sale 20,375 -- 4,000 Proceeds from maturities of investment securities held to maturity 5,500 14,850 9,100 Purchase of investment securities available for sale (27,329) (32,217) (13,013) Purchase of investment securities held to maturity (500) (1,500) (5,900) Purchase of mortgage-backed securities available for sale (5,005) (10,856) -- Principal repayments of investments securities available-for-sale 657 10,000 -- Principal repayments on mortgage-backed securities held to maturity 8,993 15,432 4,641 Principal repayments on mortgage-backed securities available for sale 5,899 8,843 3,807 Increase in portfolio loans, net (79,700) (153,576) (51,194) Purchase of FHLB stock (2,509) (1,189) (249) Purchases of premises and equipment (2,314) (887) (956) Proceeds from sale of real estate held for sale or development -- -- 2,058 Proceeds from sale of real estate owned 61 191 3,167 Additional investment in real estate owned (98) -- -- Purchase of bank owned life insurance (20,000) -- -- --------- -------- -------- Net cash used in investing activities (120,545) (145,909) (17,539) --------- -------- --------
(Continued) 31 27 BOSTONFED BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Dollars in thousands) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 --------- -------- -------- Cash flows from financing activities: Increase in deposits accounts $ 62,905 87,323 65,981 Proceeds from securities sold under agreement to repurchase -- -- 7,140 Repayments of securities sold under agreement to repurchase -- (7,140) (3,500) Proceeds from Federal Home Loan Bank advances 356,581 546,073 276,200 Repayments of Federal Home Loan Bank advances (309,581) (465,073) (316,200) Proceeds from other borrowings 3,055 -- -- (Decrease) increase in advanced payments by borrowers for taxes and insurance (194) 272 685 Cash dividends paid (2,343) (2,010) (1,541) Common stock repurchased (2,492) (7,998) (13,407) Stock options exercised 69 16 -- --------- -------- -------- Net cash provided by financing activities 108,000 151,463 15,358 --------- -------- -------- Net (decrease) increase in cash and cash equivalents (2,505) 12,511 6,412 Cash and cash equivalents at beginning of year 37,201 24,690 18,278 --------- -------- -------- Cash and cash equivalents at end of year $ 34,696 37,201 24,690 ========= ======== ======== Supplemental disclosure of cash flow information: Payments during the year for: Interest $ 46,460 42,017 36,746 ========= ======== ======== Taxes $ 7,283 3,306 4,688 ========= ======== ======== Supplemental schedule of noncash investing activities: Transfers of mortgage loans to real estate owned $ 83 -- 533 ========= ======== ========
See accompanying notes to consolidated financial statements. 32 28 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) BostonFed Bancorp Inc. (the "Company") is a Bank holding company which is headquartered in Burlington, Massachusetts and provides a variety of loan and deposit services to its customers through a network of banking and finance locations. The Company's deposit gathering is concentrated in the communities surrounding its banking and consumer finance offices located in the greater Boston metropolitan area, municipalities of Arlington, Bedford, Billerica, Boston, Burlington, Chelsea, Lexington, Peabody, Revere and Wellesley. The Company is subject to competition from other financial institutions including commercial banks, other savings banks, credit unions, mortgage banking companies and other financial service providers. The Company is subject to the regulations of, and periodic examination by the Federal Reserve Bank ("FRB"). Boston Federal Savings Bank ("BFS") is subject to the regulations of, and periodic examination by, the Office of Thrift Supervision ("OTS"). Broadway National Bank ("BNB"), a national chartered commercial bank, is subject to the regulations of, and periodic examination by the Office of the Comptroller of the Currency ("OCC"). The Federal Deposit Insurance Corporation ("FDIC") insures the deposits of BFS through the Saving Association Insurance Fund ("SAIF") and insures the deposits of BNB through the Bank Insurance Fund ("BIF"). The Company acquired BNB effective the close of business February 7, 1997, which was accounted for using the purchase method of accounting. The Company acquired Diversified Ventures, Inc. d/b/a Forward Financial Company ("Forward Financial") and Ellsmere Insurance Agency, Inc. ("Ellsmere") effective December 7, 1999, for $38.3 million in cash. The acquisition was accounted for using the purchase method. Forward originates loans primarily direct with customers purchasing or refinancing manufactured homes, recreational vehicles, boats and leased equipment and subsequently sells substantially all such loans. Forward is a subsidiary of BFS and Ellsmere is a subsidiary of BNB. In preparing these financial statements, management is required to make estimates that affect the reported amounts of assets and liabilities as of the dates of the balance sheets, and income and expense for the periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the valuation allowance for deferred tax assets and the determination of the allowance for loan losses and valuation of real estate owned. (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Boston Federal Savings Bank, Broadway National Bank and B.F. Funding Corporation ("B.F. Funding"). 33 29 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 Boston Federal Savings Bank includes its wholly-owned subsidiaries, including Forward Financial Company. Broadway National Bank includes its wholly-owned subsidiaries, including Ellsmere Insurance Agency, Inc. B.F. Funding is a business corporation formed at the direction of the Company under the laws of the Commonwealth of Massachusetts on August 25, 1995. B.F. Funding was established to lend funds to a Company sponsored employee stock ownership plan trust for the purchase of stock at the initial public offering. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts previously reported have been reclassified to conform to the current year's presentation. (b) CASH AND DUE FROM BANKS BFS and BNB are required to maintain cash and reserve balances with the Federal Reserve Bank. Such reserve is calculated based upon deposit levels and amounted to $5,979 and $1,631 at BFS and BNB, respectively, at December 31, 1999. (c) INVESTMENT AND MORTGAGE-BACKED SECURITIES Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of related income taxes. Premiums and discounts on investment and mortgage-backed securities are amortized or accreted into income by use of the interest method adjusted for prepayments. If a decline in fair value below the amortized cost basis of an investment or mortgage-backed security is judged to be other than temporary, the cost basis of the investment is written down to fair value as a new cost basis and the amount of the write-down is included as a charge against income. Gains and losses on the sale of investment and mortgage-backed securities are recognized at the time of sale on a specific identification basis. (d) LOANS Loans are reported at the principal amount outstanding, reduced by unamortized discounts and net deferred loan origination fees. Loans held for sale are carried at the lower of aggregate cost or market value, considering loan production and sales commitments and deferred fees. Generally, all longer term (typically mortgage loans with terms in excess of ten years) fixed-rate residential one to four family mortgage loans are originated for sale and adjustable-rate loans are originated both for portfolio and for sale. Occasionally, the Company generates fixed-rate loans which are designated for portfolio at the time of origination. 34 30 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 Discounts and premiums on loans are recognized as income using the interest method over the remaining contractual term to maturity of the loans adjusted for prepayments. Loan origination fees are offset with related direct incremental loan origination costs and the resulting net amount is deferred and amortized to interest income over the contractual life of the associated loan using the interest method. Net deferred amounts on loans sold are included in determining the gain or loss on the sale when the related loans are sold. The Company sells mortgage loans for cash proceeds approximately equal to the principal amount of loans sold, but with yields to investors which reflect current market rates. Gain or loss is recognized at the time of sale. Capitalized mortgage servicing rights are recognized, based on the allocated fair value of the rights to service mortgage loans for others. Mortgage servicing rights are amortized to loan processing and servicing fee income using a method which approximates the level yield method in proportion to, and over the period of, estimated net servicing income. Mortgage servicing rights are assessed for impairment based on the fair value of those rights. Prepayment experience on mortgage servicing rights is reviewed periodically and, when actual repayments exceed estimated prepayments, the balance of the mortgage servicing asset is adjusted by a charge to earnings. Any impairment in the fair value of those mortgage servicing assets is recognized by a charge to earnings through a valuation allowance. The risk characteristics of the underlying loans used to measure impairment include interest rate and loan origination date. Accrual of interest on loans is discontinued when collectibility of principal or interest is uncertain or payments of principal or interest have become contractually past due 90 days or more. Interest received on non-accrual loans is applied against the principal balance and all amortization of deferred fees is discontinued. Accrual is generally not resumed until the loan is brought current, the loan becomes well secured and in the process of collection and, in either case, when concern no longer exists as to the collectibility of principal or interest. (e) ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for losses that are inherent in the Company's loan portfolio. The allowance for loan losses is established through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management determines that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. 35 31 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 Impaired loans are multi-family, commercial real estate, construction and business loans, for which it is probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value, are accounted for at the present value of the expected future cash flows discounted at the loan's effective interest rate or as a practical expedient in the case of collateral dependent loans, the lower of the fair value of the collateral or the recorded amount of the loan. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Impaired loans are charged off when management believes that the collectibility of the loan's principal is remote. Classification of a loan as in-substance foreclosure is made only when a lender is in substantive possession of the collateral. Management believes the allowance is adequate to absorb probable loan losses. Factors considered in evaluating the adequacy of the allowance include trends in loan delinquencies and charge-offs, current economic conditions and their effect on borrowers' ability to pay, underwriting standards by loan type, mix and balance of the portfolio, and the performance of individual loans in relation to contract terms. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is affected by changes in market conditions. (f) GOODWILL Goodwill is amortized on a straight-line basis over fifteen years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. (g) PREMISES AND EQUIPMENT Premises and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets (3 to 40 years). Amortization of leasehold improvements is provided over the life of the related leases by use of the straight-line method. Rental income on leased facilities is included as a reduction of occupancy and equipment expense. 36 32 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (h) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the accounting basis and the tax basis of the Company's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Company's deferred tax asset is reviewed periodically and adjustments to such asset are recognized as deferred income tax expense or benefit based on management's judgments relating to the realizability of such asset. A valuation allowance related to deferred tax assets is recognized when, in management's judgment, it is more likely than not that all, or a portion of such deferred tax assets will not be realized. (i) PENSION Pension cost is recognized over the employees' approximate service period. (j) EMPLOYEE BENEFITS The Company continues to follow APB Opinion No. 25, Accounting for Stock Issued to Employees. See footnote 12 for the expanded disclosures required by SFAS 123 regarding pro forma net income and earnings per share. (k) EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year adjusted for the weighted average number of unallocated shares held by the Employee Stock Ownership Plan ("ESOP") and the 1996 Stock-Based Incentive Plan ("SIP"). Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method. A reconciliation of the weighted average shares outstanding for the years ended December 31 follows:
1999 1998 1997 ------- ------- ------- Basic shares 4,825 5,078 5,505 Dilutive impact of stock options 172 250 185 ------- ------- ------- Diluted shares 4,997 5,328 5,690 ======= ======= =======
37 33 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (l) COMPREHENSIVE INCOME Comprehensive income is defined as all changes to equity except investments by and distributions to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. The following table shows the components of other comprehensive income for the years ended December 31:
1999 1998 1997 ---- ---- ---- Net income $ 8,568 7,621 7,055 Other comprehensive income, net of tax: Unrealized gains (losses) on securities: Unrealized holding (losses) gains arising during the period, net of tax of ($692) for 1999 (1,815) 73 557 Reclassification adjustment for losses (gains) included in net income, net of tax of $10 for 1999 18 (3) 7 ------- ------- ------- (1,797) 70 564 ------- ------- ------- Comprehensive income $ 6,771 7,691 7,619 ======= ======= =======
(m) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under this statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which defers the effective date of SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this statement is not expected to have a material impact on the Company's financial position. 38 34 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (2) STOCKHOLDERS' EQUITY Prior to the Company's initial public offering, in order to grant priority to eligible depositors, BFS established a liquidation account at the time of conversion in an amount equal to the retained earnings of BFS as of the date of its latest balance sheet date, June 30, 1995, contained in the final Prospectus used in connection with the Conversion. In the unlikely event of a complete liquidation of BFS (and only in such an event), eligible depositors who continue to maintain accounts at BFS shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account is decreased if the balances of eligible depositors decrease on the annual determination dates. The liquidation account approximated $8.1 million (unaudited) at December 31, 1999. The Company may not declare or pay dividends on its stock if such declaration and payment would violate statutory or regulatory requirements. In addition to the 17,000,000 authorized shares of common stock, the Company has authorized 1,000,000 shares of preferred stock with a par value of $0.01 per share (the "Preferred Stock"). The Board of Directors is authorized, subject to any limitations by law, to provide for the issuance of the shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. As of December 31, 1999, there were no shares of preferred stock issued. BFS and BNB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, BFS and BNB must meet specific capital guidelines that involve quantitative measures of BFS's and BNB's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. BFS's and BNB's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require BFS and BNB to maintain minimum amounts and ratios (set forth in the table below) of risk-weighted, core and tangible capital (as defined). Management represents, as of December 31, 1999, that BFS and BNB meets all capital adequacy requirements to which it is subject. As of December 2, 1999, the most recent notification from the OTS categorized BFS as "well capitalized" by regulatory definition. As of December 4, 1998, the most recent notification from the OCC categorized BNB as "well capitalized." Under "capital adequacy" guidelines and the regulatory framework to be categorized as "well capitalized" BFS and BNB must maintain minimum risk-weighted capital, core capital, leverage, and tangible ratios as set forth in the table. As of December 31, 1999, BFS and BNB are categorized as "well capitalized" based on their ratios of risk-weighted core and tangible capital. These regulatory capital requirements are set forth in terms of (1) Risk-based Total Capital (Total Capital to Risk Weighted Assets), (2) Core Capital (Tier I Capital to Adjusted (Continued) 39 35 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 Tangible Assets), (3) Risk-based Tier I Capital (Tier I Capital to Risk Weighted Assets), (4) Tangible Capital (Tier I Capital to Tangible Assets), and (5) Leverage Capital (Tier I Capital to Average Assets). BFS's and BNB's actual capital amounts and ratios are presented in the table below. As a condition for approving the acquisition of Forward Financial, the Federal Reserve Board required the Company and BFS to remain "well capitalized" as defined in the regulations for a period of one year following the date of the acquisition. To date, the Company and BFS have complied with this requirement.
TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY REGULATORY ACTUAL PURPOSES DEFINITIONS ----------------- ---------------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) As of December 31, 1999: Risk-based Total Capital: BFS $ 67,862 10.0% $ 54,064 8.0% $ 67,581 10.0% BNB 9,436 13.6 5,537 8.0 6,921 10.0 Core Capital: BFS 59,396 5.4 43,906 4.0 54,882 5.0 Risk-based Tier I Capital: BFS 59,396 8.8 27,032 4.0 40,548 6.0 BNB 8,694 12.6 2,769 4.0 4,153 6.0 Tangible Capital: BFS 59,396 5.4 21,953 2.0 54,882 5.0 Leverage Capital: BNB 8,694 6.3 5,521 4.0 6,901 5.0
TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY REGULATORY ACTUAL PURPOSES DEFINITIONS ----------------- ---------------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) As of December 31, 1998: Risk-based Total Capital: BFS 57,944 10.2 45,538 8.0 56,923 10.0 BNB 10,131 15.3 5,291 8.0 6,614 10.0 Core Capital: BFS 50,820 5.1 39,533 4.0 49,417 5.0 Risk-based Tier I Capital: BFS 50,820 8.9 22,769 4.0 34,154 6.0 BNB 9,492 14.4 2,645 4.0 3,968 6.0 Tangible Capital: BFS 50,820 5.1 19,767 2.0 49,417 5.0 Leverage Capital: BNB 9,492 7.4 5,167 4.0 6,459 5.0
(Continued) 40 36 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 At December 31, 1999 and 1998, the consolidated capital to assets ratio was 6.8% and 7.2%, respectively, which exceeded the minimum capital requirements for the Company. During 1999, the Company's Board of Directors approved a program to repurchase up to 254,996, or approximately 5%, of its outstanding common shares. The Company plans to hold the repurchased shares as treasury stock to be used for general company purposes. During the year ended December 31, 1999, 131,843 shares were repurchased under this program. (3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE (IN THOUSANDS) The amortized cost and fair values of investment and mortgage-backed securities available for sale are shown below by contractual maturity:
DECEMBER 31, 1999 --------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ----- Investment securities: U.S. Government, federal agency and other obligations: Maturing within 1 year $ 4,993 5 (1) 4,997 Maturing after 1 year but within 5 years 12,434 5 (252) 12,187 Maturing after 5 years but within 10 years 5,914 -- (174) 5,740 Maturing after 10 years 10,836 29 (148) 10,717 --------- ----- ------ -------- 34,177 39 (575) 33,641 --------- ----- ------ -------- Mutual funds 19,089 -- (936) 18,153 Marketable equity securities 1,785 -- (376) 1,409 --------- ----- ------ -------- 20,874 -- (1,312) 19,562 --------- ----- ------ -------- Total investment securities $ 55,051 39 (1,887) 53,203 ========= ===== ====== ========
DECEMBER 31, 1999 --------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ----- Mortgage-backed securities: Maturing after 1 year but within 5 years $ 3,250 -- (65) 3,185 Maturing after 5 years but within 10 years 1,985 -- (4) 1,981 Maturing after 10 years 10,646 -- (272) 10,374 --------- ----- ------ -------- Total mortgage-backed securities $ 15,881 (341) 15,540 ========= ===== ====== ========
(Continued) 41 37 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999
DECEMBER 31, 1998 --------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ----- Investment securities: U.S. Government, federal agency and other obligations: Maturing within 1 year $ 13,013 51 -- 13,064 Maturing after 1 year but within 5 years 15,975 329 (12) 16,292 --------- ----- ------ -------- 28,988 380 (12) 29,356 --------- ----- ------- -------- Mutual funds 18,064 6 (65) 18,005 Marketable equity securities 1,785 42 (51) 1,776 --------- ----- ------ -------- 19,849 48 (116) 19,781 --------- ----- ------ -------- Total investment securities $ 48,837 428 (128) 49,137 ========= ===== ====== ========
DECEMBER 31, 1998 --------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ----- Mortgage-backed securities: Maturing after 5 years but within 10 years $ 4,996 6 -- 5,002 Maturing after 10 years 15,939 255 (167) 16,027 --------- ----- ------ -------- Total mortgage-backed securities $ 20,935 261 (167) 21,029 ========= ===== ====== ========
Maturities of mortgage-backed securities are shown at final contractual maturity but are expected to have shorter lives because borrowers have the right to prepay obligations without prepayment penalties. U.S. agency notes with an amortized cost and a fair value of $1,000 at December 31, 1999 were pledged to provide collateral for customers and the Company's employee tax withholdings that are to be remitted to the federal government in excess of the $100 of withholdings insured by the FDIC. Included in U.S. government, federal agency and other obligations are investments that can be called prior to final maturity with an amortized cost of $11,445 and a fair value of $11,064 at December 31, 1999. 42 38 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 The composition by issuer of mortgage-backed securities available for sale follows:
DECEMBER 31, ---------------------------------------------- 1999 1998 -------------------- ------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------- ----- --------- ----- FHLMC $ 5,559 5,484 4,996 5,002 GNMA -- -- 5,916 5,982 FNMA 3,004 3,004 -- -- Privately issued collateralized mortgage obligations 7,318 7,052 10,023 10,045 --------- --------- -------- -------- $ 15,881 15,540 20,935 21,029 ========= ========= ======== ========
Proceeds from the sale of investment securities and mortgage-backed securities available for sale amounted to $4,034, $5,000 and $15,092 in 1999, 1998 and 1997, respectively. Realized losses on investment securities and mortgage-backed securities available for sale were $33 and $18 in 1999 and 1997, respectively. Realized gains amounted to $5 and $19 in 1999 and 1998, respectively. (4) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY (IN THOUSANDS) The amortized cost and fair values of investment and mortgage-backed securities held to maturity are shown below by contractual maturity.
DECEMBER 31, 1999 ---------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ----- Investment securities: U.S. government, federal agency and other obligations: Maturing within one year $ 4 21 -- 25 Maturing after 1 year but within 5 years 2,300 -- (50) 2,250 -------- ---- ------ ------- Total investment securities $ 2,304 21 (50) 2,275 ======== ==== ===== ======= Mortgage-backed securities: Maturing after 1 year but within 5 years $ 839 1 (7) 833 Maturing after 5 years but within 10 years 1,810 47 (1) 1,856 Maturing after 10 years 11,292 54 (5) 11,341 -------- ---- ----- -------- Total mortgage-backed securities $ 13,941 102 (13) 14,030 ======== ==== ===== ========
(Continued) 43 39 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999
DECEMBER 31, 1998 ---------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- --------- ----- Investment securities: U.S. government, federal agency and other obligations: Maturing within one year $ 1,250 1 -- 1,251 Maturing after 1 year but within 5 years 5,027 63 -- 5,090 Maturing after 5 years but within 10 years 1,025 5 -- 1,030 --------- ----- ----- ------ Total investment securities $ 7,302 69 -- 7,371 ========= ===== ===== ====== Mortgage-backed securities: Maturing after 1 year but within 5 years 1,205 23 -- 1,228 Maturing after 5 years but within 10 years 2,309 118 -- 2,427 Maturing after 10 years 19,399 279 -- 19,678 --------- ----- ----- ------ Total mortgage-backed securities $ 22,913 420 -- 23,333 ========= ===== ===== ======
Maturities of mortgage-backed securities are shown at final contractual maturity but are expected to have shorter lives because borrowers have the right to prepay obligations without prepayment penalties. At December 31, 1999, a U.S. agency note with an amortized cost of $500 and a fair value of $476 was pledged to secure certain of BFS's recourse liabilities relating to loans sold as described in note 5. At December 31, 1999, investment securities with an amortized cost of $500 and a fair value of $481 were pledged to provide collateral for customers and the Company's employee tax withholdings that are to be remitted to the federal government in excess of the $100 of withholdings insured by the FDIC. Included in U.S. government, federal agency and other obligations are investments that can be called prior to final maturity with an amortized cost of $2,000 and a fair value of $1,950 at December 31, 1999. 44 40 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 The composition by issuer of mortgage-backed securities held to maturity follows:
DECEMBER 31, -------------------------------------------------- 1999 1998 ---------------------- ----------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- --------- --------- -------- FHLMC, FNMA and GNMA $13,941 14,030 17,755 18,124 Privately issued collateralized mortgage obligation -- -- 5,158 5,209 ------ --------- --------- -------- $13,941 14,030 22,913 23,333 ====== ========= ========= ========
(5) LOANS (IN THOUSANDS) The Company's primary banking activities are conducted principally in eastern Massachusetts. The Company grants single-family and multi-family residential loans, commercial real estate loans, business loans and a variety of consumer loans. In addition, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and for land development. Except for loans processed by Forward Financial, the vast majority of the loans granted by the Company are secured by real estate collateral. Through BFS' subsidiary, Forward Financial, the Company originates loans, primarily direct with the consumer, on manufactured housing, recreational vehicles, boats and leased equipment in approximately 20 states across the United States. Forward Financial sells substantially all of the loans it originates. The ability and willingness of the one to four family residential and consumer borrowers to honor their repayment commitments is generally dependent, among other things, on the level of overall economic activity within the borrowers' geographic areas and real estate values. The ability and willingness of commercial real estate, commercial and construction loan borrowers to honor their repayment commitments is generally affected by the health of the real estate economic sector in the borrowers' geographic areas and the general economy. (Continued) 45 41 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 The Company's loan portfolio was comprised of the following at December 31:
1999 1998 ----------- -------- Mortgage loans: Residential 1-4 family $ 830,565 812,564 Multi-family 22,017 22,889 Construction and land 77,079 41,608 Commercial real estate 75,999 48,951 ----------- -------- 1,005,660 926,012 ----------- -------- Consumer and other loans: Home equity and improvement 43,721 32,119 Secured by deposits 682 934 Consumer 3,549 4,637 Business 17,815 3,618 ----------- -------- 65,767 41,308 ----------- -------- Total loans, gross 1,071,427 967,320 ----------- -------- Less: Allowance for loan losses (note 6) (10,654) (8,500) Construction loans in process (30,372) (17,133) Net unearned discount on loans purchased (7) (5) Deferred loan origination costs 2,200 1,980 ----------- -------- Loans, net $ 1,032,594 943,662 =========== ========
The Company services mortgage loans for investors which are not included in the accompanying consolidated balance sheets totaling approximately $784,597 and $648,279 at December 31, 1999 and 1998, respectively. Of these loans serviced for others, $383 and $473 at December 31, 1999 and 1998, respectively, had been sold with recourse by the Company. In addition, at December 31, 1999 and 1998, respectively, the Company had retained the secondary layer of recourse risk on $3,190 and $4,737 of serviced loans, with such risk limited to $221 and $221 after the first layer is exhausted. There were no losses incurred on loans subject to recourse during 1999 and 1998. The loss incurred on loans subject to recourse amounted to $44 for the year ended December 31, 1997. (Continued) 46 42 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 A summary of the activity of the mortgage servicing rights, which is included as a component of other assets, for the years ended December 31 follows:
1999 1998 1997 ------- ------ ------ Balance, beginning of year $ 3,571 1,534 988 Capitalized mortgage servicing rights 2,813 3,149 836 Amortization (1,304) (1,112) (290) ------- ------ ------ Balance, end of year $ 5,080 3,571 1,534 ======= ====== ======
The Company has determined that the fair value of mortgage servicing rights at December 31, 1999 approximates their carrying amount. There was an adjustment of $481 recorded to reflect impairment value of mortgage servicing rights during 1998. A valuation allowance for the mortgage servicing rights was not established, as the mortgage servicing rights were adjusted through additional amortization. Regulatory limits for loans to one borrower are limited to 15% of capital and general valuation reserves. These regulatory limits for BFS and BNB, at December 31, 1999, are $10.4 million and $1.4 million, respectively. BFS and BNB did not have any borrower relationships which exceeded the limit at December 31, 1999. In the ordinary course of business, the Company makes loans to its directors and senior officers and their related interests at substantially the same terms prevailing at the time of origination for comparable transactions with borrowers. The following is a summary of related party loan activity:
1999 1998 ----- ------ Balance, beginning of year $ 785 1,209 Originations 145 145 Payments (152) (581) Other changes 7 12 ----- ------ Balance, end of year $ 785 785 ===== ======
At December 31, 1999 and 1998, total impaired loans were $235 and $483, respectively. In the opinion of management, no impaired loans required a specific valuation allowance at December 31, 1999 and 1998. The average recorded value of impaired loans was $335 during 1999 and $488 during 1998. The Company follows the same policy for recognition of income on impaired loans as it does for nonaccrual loans. At December 31, 1999 and 1998, there were no commitments to lend additional funds to those borrowers whose loans were classified as impaired. (Continued) 47 43 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 The following table summarizes information regarding the reduction of interest income on impaired loans at December 31:
1999 1998 1997 ---- ---- ---- Income in accordance with original terms $17 47 52 Income recognized 15 46 51 --- --- --- Foregone interest income during year $ 2 1 1 === === ===
Non-accrual loans at December 31, 1999 and 1998 were $746 and $809, respectively. The following table summarizes information regarding the reduction or (increase) in interest income on non-accrual loans as of December 31:
1999 1998 1997 ---- ---- ---- Income in accordance with original terms $ 62 68 208 Income recognized 64 35 59 ---- ---- ---- Foregone (net earned) interest income during year $ (2) 33 149 ==== ==== ====
(6) ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS) The following is a summary of the activity in the allowance for loan losses for the years ended December 31:
1999 1998 1997 ---- ---- ---- Balance, beginning of year $ 8,500 6,600 4,400 Allowance for loan losses from acquired companies 170 -- 620 Provision charged to income 1,626 1,642 1,696 Recoveries 414 517 399 Charge-offs (56) (259) (515) -------- -------- -------- Balance, end of year $ 10,654 8,500 6,600 ======== ======== ========
(Continued) 48 44 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (7) ACCRUED INTEREST RECEIVABLE (IN THOUSANDS) Accrued interest receivable as of December 31 is presented in the following table:
1999 1998 ---- ---- Investment and mortgage-backed securities $ 739 886 Loans 5,528 4,663 ------ ------ $6,267 5,549 ====== ======
(8) PREMISES AND EQUIPMENT (IN THOUSANDS) A summary of the cost, accumulated depreciation and amortization of land, buildings and equipment is as follows at December 31:
1999 1998 ---- ---- Land $ 2,503 2,083 Buildings 5,464 4,074 Furniture, fixtures and equipment 8,337 6,876 Leasehold improvements 1,395 1,402 -------- -------- 17,699 14,435 Less accumulated depreciation and amortization (9,487) (7,821) -------- -------- $ 8,212 6,614 ======== ========
The Company presently leases office space at four locations to which it is committed to minimum annual rentals plus lease escalations. Such leases expire at various dates with options to renew. Minimum future rentals are as follows:
YEARS ENDED DECEMBER 31, - ------------------------ 2000 $ 1,458 2001 1,458 2002 1,458 2003 1,342 2004 and thereafter 5,825 ------------ $ 11,541 ============
Rent expense was $1,418 in 1999, $1,257 in 1998 and $1,178 in 1997. (Continued) 49 45 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 The Company leases, as lessor, office space at two of its branch locations. The leases expire at various dates with options to renew. Minimum future rental income is as follows:
YEARS ENDED DECEMBER 31, - ------------------------ 2000 $ 182 2001 124 2002 73 2003 66 2004 and thereafter 44 ------------ $ 489 ============
Rental income was $172, $165 and $160 in 1999, 1998 and 1997, respectively. (9) DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS) A summary of deposit balances by type is as follows at December 31:
1999 1998 ---- ---- NOW $114,145 114,934 Regular and statement savings 145,688 130,843 Money market 56,970 61,756 Demand deposits and official checks 53,858 60,952 -------- -------- Total non-certificate accounts 370,661 368,485 -------- -------- Certificate accounts: 3 to 6 months 22,975 26,066 9 months 16,800 -- 1 to 3 year 278,393 262,103 Greater than 3 years 37,551 4,442 IRA/Keogh 43,669 46,048 -------- -------- Total certificate accounts 399,388 338,659 -------- -------- $770,049 707,144 ======== ======== Expected maturity of certificate accounts: Within one year $244,061 198,124 One to two years 103,413 125,285 Two to three years 14,280 9,415 Over three years 37,634 5,835 -------- -------- $399,388 338,659 ======== ========
(Continued) 50 46 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 Aggregate amount of certificate accounts of $100 or more were $38,601 and $29,006 at December 31, 1999 and 1998, respectively. Deposit amounts in excess of $100 are not federally insured. Interest expense on deposits consisted of the following for the years ended December 31:
1999 1998 1997 ---- ---- ---- NOW $ 884 1,158 1,071 Regular and statement savings 3,534 2,999 2,826 Money market 1,693 1,838 1,822 Certificate accounts 19,761 18,101 13,457 ------- ------- ------- $25,872 24,096 19,176 ======= ======= =======
The Company has $136,394 of brokered deposits with a weighted average rate of 6.58% at December 31, 1999. Brokered deposits of $67,644, $27,957, $7,306, $9,395 and $24,092 mature in 2000, 2001, 2002, 2003 and thereafter, respectively. There were $82,722 of brokered deposits outstanding at December 31, 1998. (10) FEDERAL HOME LOAN BANK ("FHLB") OF BOSTON ADVANCES AND OTHER BORROWINGS (DOLLARS IN THOUSANDS) FHLB of Boston advances by year of maturity at December 31 were:
1999 1998 --------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE 1999 $ -- -- % $114,000 5.56% 2000 218,500 5.74 113,500 5.85 2001 46,000 5.63 49,000 5.59 2002 43,000 6.02 1,000 6.55 2003 40,000 5.57 40,000 5.57 2004 17,000 6.59 -- -- Beyond 2004 20,000 5.99 20,000 5.99 -------- ---- -------- ---- $384,500 5.80% $337,500 5.69% ======== ==== ======== ====
(Continued) 51 47 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 The advances are secured by FHLB of Boston stock and a blanket lien on certain qualified collateral. The amount of advances is principally limited to 90% of the market value of U.S. Government and federal agency obligations and 75% of the carrying value of first mortgage loans on owner-occupied residential property. Applying these ratios, and other ratios on other qualifying collateral, the Company's overall borrowing capacity was approximately $423,620 and $474,168 at December 31, 1999 and 1998, respectively. Other borrowings total $3,055 and consist of a line of credit from a financial institution which is utilized for general corporate purposes. As a member of the FHLB of Boston, the Company is required to maintain a minimum investment in the capital stock of the Federal Home Loan Bank of Boston, at cost, in an amount not less than 1% of its outstanding home loans or 1/20 of its outstanding notes payable to the Federal Home Loan Bank of Boston, whichever is greater, as calculated at December 31 of each year. The investment exceeds the required level by $436 and $927 at December 31, 1999 and 1998, respectively. Any excess may be redeemed by the Company or called by FHLB of Boston at par. Interest expense on FHLB advances was $21,207 in 1999, $18,219 in 1998 and $17,226 in 1997. (11) INCOME TAXES (DOLLARS IN THOUSANDS) An analysis of the current and deferred federal and state income tax expense (benefit) follows:
1999 1998 1997 ---- ---- ---- Current income tax expense: Federal income tax $4,620 4,654 4,581 State income tax 140 287 1,407 ------ ------ ------ Total current expense 4,760 4,941 5,988 ------ ------ ------ Deferred income tax expense (benefit): Federal deferred income tax 137 313 (371) State income tax 48 107 (29) Change in valuation allowance -- (210) (83) ------ ------ ------ Total deferred expense (benefit) 185 210 (483) ------ ------ ------ Total income tax expense $4,945 5,151 5,505 ====== ====== ======
(Continued) 52 48 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 The temporary differences (the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases) that give rise to significant portions of the deferred tax asset and liability are as follows at December 31:
1999 1998 ---- ---- Deferred tax assets: Allowance for loan losses $4,575 3,676 Deferred compensation 596 856 Unrealized loss on securities available for sale 702 -- Other 78 90 ------ ------ Gross deferred assets 5,951 4,622 ------ ------ Deferred liabilities: Premium on loans sold 2,138 1,527 Deferred loan fees 879 806 Unrealized gain on securities available for sale -- 82 Premises and equipment 523 358 Other -- 37 ------ ------ Gross deferred liabilities 3,540 2,810 ------ ------ Net deferred tax asset $2,411 1,812 ====== ======
At December 31, 1999, the net deferred tax asset is supported by recoverable income taxes. For the year ended December 31, 1999, the Company generated approximately $13,000 of taxable income In addition, management believes that existing net deductible temporary differences which give rise to the net deferred tax asset will reverse during periods in which the Company generates net taxable income. Factors beyond management's control, such as the general state of the economy and real estate values, can affect future levels of taxable income and no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences. Management believes it is more likely than not that the net deferred tax asset will be realized. As a result of the Tax Reform Act of 1996, the special tax bad debt provisions were amended to eliminate the reserve method. However, the base year reserve of approximately $13,300 remains subject to recapture in the event that the Company pays dividends in excess of its earnings and profits or redeems its stock. (Continued) 53 49 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 A reconciliation between the amount of total tax expense and expected tax expense, computed by applying the federal statutory rate to income before taxes, follows:
1999 1998 1997 ---- ---- ---- Computed expected expense at statutory rate $ 4,615 4,343 4,396 Items affecting federal income tax rate: State income tax, net of federal income tax benefit 124 261 896 Change in valuation allowance -- (210) (83) Allocated ESOP share appreciation 185 273 212 Bank-owned life insurance (189) -- -- Other 210 484 84 ------- ------- ------- Effective income tax expense $ 4,945 5,151 5,505 ======= ======= ======= Effective income tax rate 36.6% 40.3% 43.8% ======= ======= =======
(12) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (a) EMPLOYEE STOCK OWNERSHIP PLAN Effective January 1, 1995, the Company adopted an Employee Stock Ownership Plan ("ESOP"). The Plan is designed to provide retirement benefits for eligible employees of BFS. Because the Plan invests primarily in the stock of the Company, it will also give eligible employees an opportunity to acquire an ownership interest in the Company. Employees are eligible to participate in the Plan after reaching age twenty-one, completing one year of service and working at least one thousand hours of consecutive service during the previous year. Contributions are allocated to eligible participants on the basis of compensation. During October 1995, the Company issued a total of 529,000 shares to the ESOP at a total purchase price of $5,290. The purchase was made from the proceeds of a $5,290 loan from B.F. Funding Corporation, a wholly-owned subsidiary of the Company, bearing interest at the prime rate. Repayment of the loan is secured by contributions BFS is obliged to make under a contribution agreement with the ESOP. BFS made contributions to the ESOP totaling $755 in 1999, 1998 and 1997 to enable the ESOP to make principal payments on the loan. The amount contributed was charged to compensation and benefits expense. The Company recognized $550 in 1999, $803 in 1998 and $604 in 1997 in compensation and benefit expense and an increase in additional paid-in capital related to the appreciation in the fair value of allocated ESOP shares. The balance of the loan will be repaid over a period of approximately three years, principally with funds from BFS's future contributions to ESOP, subject to IRS limitations. (Continued) 54 50 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal balance of the loan is repaid. Employees vest in their ESOP account at a rate of 33-1/3% annually commencing after the completion of one year of credited service or immediately if service was terminated due to death, retirement, disability, or change in control. Dividends on released shares are credited to the participants' ESOP accounts. At December 31, 1999 and 1998, shares held in suspense to be released annually as the loan is paid down amounted to 166,279 and 241,829, respectively. The fair value of unallocated ESOP shares was $2,640 and $4,263 at December 31, 1999 and 1998, respectively. Dividends on ESOP shares are charged to retained earnings and ESOP shares committed-to-be released are considered outstanding in determining earnings per share. (b) 1996 STOCK-BASED INCENTIVE PLAN On April 30, 1996, the Company's stockholders approved the 1996 Stock-Based Incentive Plan ("SIP"). The objective of the SIP is to enable the Company to provide officers and directors with a proprietary interest in the Company as an incentive to encourage such persons to remain with the Company. The SIP acquired 263,584 shares in the open market at an average price of $12.255 per share. This acquisition represents deferred compensation which is initially recorded as a reduction in stockholders' equity and charged to compensation expense over the vesting period of the award. Awards are granted in the form of common stock held by the SIP. A total of 242,500 shares were awarded on April 30, 1996 and 8,584 shares were awarded on October 15, 1996. During 1999, 52,381 shares were distributed. Awards outstanding vest in five annual installments generally commencing one year from the date of the award. As of December 31, 1999, 12,500 shares remain unawarded under the SIP. Compensation expense in the amount of the fair value of the stock at the date of the grant, will be recognized over the applicable service period for the portion of each award that vests equally over a five-year period. The Company recognized $350, $593 and $1,009 related to the earned shares in compensation and benefit expense in 1999, 1998 and 1997, respectively. A recipient will be entitled to all voting and other stockholder rights. The unallocated SIP shares, with the exception of the unawarded SIP shares, are considered outstanding in the calculation of earnings per share. (Continued) 55 51 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (c) STOCK OPTION PLANS The Company adopted a stock option plan in 1996 (the "1996 Plan") for officers, key employees and directors. Pursuant to the terms of the 1996 plan, the number of common shares reserved for issuance is 658,961, of which 25,000 options remain unawarded. All options have been issued at not less than fair market value at the date of the grant and expire in 10 years from the date of the grant. All stock options granted vest over a five year period from the date of grant. During 1997, the Company adopted the 1997 stock option plan (the "1997 Plan"). Pursuant to the terms of the 1997 plan, 250,000 common shares are reserved for issuance of which 68,600 remain unawarded. During 1999, the Company granted employees options to purchase 61,000 shares of common stock between $14.56 and $18.50 per share. During 1998, the Company granted employees options to purchase 40,500 shares of common stock at between $18.13 and $24.81 per share. A summary of option activity follows:
1999 1998 -------------------- -------------------- WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE SHARES PRICE SHARES PRICE ------ ----- ------ ----- Balance, beginning of year 772,961 $14.12 733,361 $13.63 Granted 61,000 15.53 40,500 22.77 Forfeited (19,500) 18.82 -- -- Exercised (5,000) 12.44 (900) 16.43 -------- -------- Balance, end of year 809,461 $14.12 772,961 $14.12 ======== ====== ======== ====== Options exercisable 418,784 $13.61 273,992 $13.40 ======== ====== ======== ======
(Continued) 56 52 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 A summary of options outstanding and exercisable by price range as of December 31 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- --------------------------- WEIGHTED OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AS OF REMAINING AVERAGE AS OF AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE 1999 LIFE PRICE 1999 PRICE ---- ---- ----- ---- ----- 565,000 6.3 $ 12.44 337,000 $ 12.44 25,000 6.8 13.44 15,000 13.44 7,500 6.9 14.82 4,500 14.82 100,461 7.5 18.82 40,184 18.82 10,000 7.9 19.75 4,000 19.75 15,000 8.2 22.22 6,000 22.22 15,000 8.3 24.81 6,000 24.81 5,000 8.4 23.38 2,000 23.38 5,500 9.0 18.13 1,100 18.13 15,000 9.2 18.50 3,000 18.50 46,000 10.0 14.56 -- -- ------- ------- 809,461 6.9 $ 14.12 418,784 $ 13.61 ======= ==== ========= ======= =========
The Company applies APB Opinion No. 25 in accounting for stock options and, accordingly, no compensation expense has been recognized in the financial statements. Had the Company determined compensation expense based on the fair value at the grant date for its stock options under SFAS 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1999 1998 ---- ---- Net income as reported $ 8,568 7,621 Pro forma net income 7,766 6,847 Basic earnings per share as reported 1.78 1.50 Diluted earnings per share as reported 1.71 1.43 Pro forma basic earnings per share 1.61 1.35 Pro forma diluted earnings per share 1.55 1.29
The per share weighted average fair value of stock options granted during 1999 was $3.76 per share determined using the Flexible Binomial option pricing model with the following weighted average assumptions: 1999 1998 Expected dividend yield 3.00% 2.50% Risk-free interest rate 5.66% 5.23% Expected volatility 28.99% 24.88% Expected life (years) 4.0 4.6
(Continued) 57 53 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (d) PENSION PLAN All eligible officers and employees are included in a noncontributory defined benefit pension plan provided by BFS and BNB as participating employers with Pentegra. Salaried employees are eligible to participate in the plan after reaching age twenty-one and completing one year of service. Pentegra does not segregate the assets or liabilities by participating employer and, accordingly, disclosure of accumulated vested and nonvested benefits and net assets available for benefits required by SFAS No. 87 is not possible. Contributions are based on individual employer experience. According to Pentegra's Administrators, as of June 30, 1999, the date of the latest actuarial valuation, the market value of Pentegra's net assets exceeded the actuarial present value of vested benefits in the aggregate. There was no pension expense recorded for 1999, 1998 and 1997, except for an administration fee of approximately $5 per year. (e) DEFERRED THRIFT INCENTIVE PLAN BFS and BNB have employee tax deferred thrift incentive plans (the "401K plans") under which employee contributions to the plans are matched pursuant to the provisions of the respective plans. All employees who meet specified age and length of service requirements are eligible to participate in the 401K plans. The amounts matched by BFS and BNB are included in compensation and employee benefits expense. The amounts matched were $153 in 1999 and $143 for 1998. (f) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company established a supplemental executive retirement plan (the "SERP") in October 1999 for certain of its senior executives under which participants are entitled to an annual retirement benefit. Expenses associated with SERP totaled $194 in 1999. (g) SHORT TERM INCENTIVE PLAN The Company established a short-term incentive plan during 1997. Generally, all BFS (effective in 1997) and BNB (effective in 1998) employees are eligible to participate in the incentive plan, and awards are granted based on the achievement of certain performance measures. Compensation expense related to this award amounted to $1,151 and $721 during 1999 and 1998, respectively. (h) BANK-OWNED LIFE INSURANCE Bank owned life insurance represents life insurance on the lives of certain employees. The Company is the beneficiary of the insurance policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes. (Continued) 58 54 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (i) EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS The Company and BFS entered into employment agreements with its President and Chief Executive Officer, and two Executive Vice Presidents. The employment agreements generally provide for the continued payment of specified compensation and benefits for three years and provide payments for the remaining term of the agreement after the officers are terminated, unless the termination is for "cause" as defined in the employment agreements. The agreements also provide for payments to the officer upon voluntary or involuntary termination of the officer following a change in control, as defined in the agreements. In addition, BFS and BNB entered into change in control agreements with certain other executives which provide for the payment, under certain circumstances, to the officer upon the officer's termination after a change of control, as defined in their change of control agreements. (j) EMPLOYEE SEVERANCE COMPENSATION PLAN The Company established an Employee Severance Compensation Plan. The Plan provides eligible employees with severance pay benefits in the event of a change in control of the Company or its two banks. Generally, employees are eligible to participate in the Plan if they have completed at least one year of service with the Company and are not eligible to receive benefits under the executive officer employment agreements. The Plan provides for the payment, under certain circumstances, of lump-sum amounts upon termination following a change of control, as defined in the Plan. (13) LITIGATION Broadway National Bank was named a defendant in the Superior Court for Suffolk County, Massachusetts, civil action No. SUCV 99-018F served on April 12, 1999 in a matter captioned "Glyptal, Inc. v. John Hetherton, Jr., Fleet Bank, NA and Broadway National Bank of Chelsea." The suit alleges that an officer of the Plaintiff, Glyptal, embezzled funds from Plaintiff, by making unauthorized transfers from Plaintiff's corporate accounts and subsequently deposited checks drawn on such account into an account at Broadway National Bank. Plaintiff alleges that Broadway National Bank knew or should have known of the alleged fraudulent actions of Plaintiff's officer, and that Broadway National Bank owed a duty to Plaintiff to investigate the transactions and protect Plaintiff from the alleged fraudulent actions. The Plaintiff is seeking damages for the alleged breach of duty by the defendants. Broadway National Bank intends to deny the allegations that it owed or breached any duty to Plaintiff or that it is liable for any losses incurred by Plaintiff. Broadway National Bank intends to vigorously defend the action and believes the action is not likely to result in any material loss or adverse effect on the financial condition of the Company. Various other legal proceedings are pending against the Company which have arisen in the normal course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position, the annual results of operations, or liquidity of the Company. (Continued) 59 55 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (IN THOUSANDS) In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk, including commitments to originate or purchase loans, unadvanced amounts of construction loans, unused credit lines, standby letters of credit and forward commitments to sell loans and recourse agreements on assets sold. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party with respect to loan commitments, unused credit lines and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For forward commitments, the contract or notional amounts exceed the Company's exposure to credit loss. Commitments to originate loans and unused credit lines are agreements to lend to a customer, provided the customer meets all conditions established in the contract. Commitments have fixed expiration dates and may require payment of a fee. The total commitment amounts do not necessarily represent total future cash requirements since many commitments are not expected to be drawn upon. The amount of collateral obtained, if necessary for the extension of credit, is based on the credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company sells the vast majority of its loans held for sale to various private institutional investors on a best efforts basis. In addition, forward commitments to sell loans are contracts which the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. In order to fulfill a forward commitment, the Company typically exchanges through FNMA or FHLMC its current production of loans for mortgage-backed securities which are then delivered to a securities firm at a future date at prices or yields specified by the contracts. Risks may arise from the possible inability of the Company to originate loans to fulfill the contracts, in which case the Company may purchase securities in the open market to deliver against the contracts. (Continued) 60 56 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 In addition to construction loans in process, the Company had the following outstanding commitments at December 31:
1999 1998 ---- ---- Commitments to originate mortgage loans $74,668 97,658 Commitments to originate business loans 6,319 -- Unused lines of credit: Home equity 68,019 56,166 Business loans 8,840 3,454 Credit card 1,507 1,453 Standby letters of credit 1,112 765 Optional commitments to sell loans and commitments to sell loans or swap loans for mortgage-backed securities 23,478 44,942
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS (IN THOUSANDS) Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include real estate acquired by foreclosure, the deferred income tax asset, office properties and equipment, and core deposit and other intangibles. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for some of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. (a) CASH AND CASH EQUIVALENTS The fair values of cash and cash equivalents approximate the carrying amounts as reported in the balance sheet. (Continued) 61 57 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (b) INVESTMENT AND MORTGAGE-BACKED SECURITIES Fair values for investment securities and mortgage-backed securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. (c) MORTGAGE LOANS HELD FOR SALE Fair values for mortgage loans held for sale are based on quoted market prices. Commitments to originate loans and forward commitments to sell loans have been considered in the determination of the fair value of mortgage loans held for sale. (d) LOANS The fair values of loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The incremental credit risk for nonperforming loans has been considered in the determination of the fair value of loans. (e) ACCRUED INTEREST RECEIVABLE The fair value of accrued interest receivable approximates the carrying amount as reported in the balance sheet because of its short-term nature. (f) STOCK IN FHLB OF BOSTON The fair value of Federal Home Loan Bank of Boston ("FHLB") stock approximates its carrying amount as reported in the balance sheet. If redeemed, the Company will receive an amount equal to the par value of the stock. (g) DEPOSIT ACCOUNTS AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE The fair values of demand deposits (e.g., NOW, regular and statement savings and money market accounts and advance payments by borrowers for taxes and insurance) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates with similar remaining maturities to a schedule of aggregated expected monthly maturities on such time deposits. (h) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS Fair values for FHLB advances and other borrowings are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities of FHLB advances. (Continued) 62 58 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (i) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Fair values of securities sold under agreements to repurchase are estimated using a discounted cash flow technique that applies interest rates currently being offered on securities sold under agreements to repurchase to a schedule of expected maturities of securities sold under agreements to repurchase. (j) OFF-BALANCE-SHEET INSTRUMENTS The Company's commitments for unused lines and outstanding standby letters of credit and unadvanced portions of loans and loans sold with recourse are considered in estimating the fair value of loans. The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows:
1999 1998 ------------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Financial assets: Cash and cash equivalents $ 34,696 34,696 37,201 37,201 Investment securities available for sale 53,203 53,203 49,137 49,137 Investment securities held to maturity 2,304 2,275 7,302 7,371 Mortgage-backed securities available for sale 15,540 15,540 21,029 21,029 Mortgage-backed securities held to maturity 13,941 14,030 22,913 23,333 Loans, net and mortgage loans held for sale 1,048,768 1,035,526 960,670 968,762 Accrued interest receivable 6,267 6,267 5,549 5,549 Stock in FHLB of Boston 20,311 20,311 17,802 17,802 Financial liabilities: Deposit accounts 770,049 770,686 707,144 711,063 FHLB advances and other borrowings 387,555 384,631 337,500 341,415 Advance payments by borrowers for taxes and insurance 3,298 3,298 3,405 3,405
(Continued) 63 59 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (16) BUSINESS SEGMENTS (DOLLARS IN THOUSANDS) The Company's wholly-owned bank subsidiaries, BFS and BNB (collectively "the Banks"), have been identified as reportable operating segments in accordance with the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. BF Funding a wholly-owned subsidiary of the Company and various subsidiaries of the Banks, did not meet the quantitative thresholds for determining reportable segments. The Banks provide general banking services to their customers, including deposit accounts, residential, commercial, consumer and business loans. Each Bank also invests in mortgage-backed securities and other financial instruments. In addition to its own operations, the Company provides managerial expertise and other professional services. The results of the Company and BF Funding comprise the "Other" category. The Company evaluates performance and allocates resources based on the Banks' net income, net interest margin, return on average assets and return on average equity. The Banks follow generally accepted accounting principles as described in the summary of significant accounting policies. The Company and Banks have intercompany expense and tax allocation agreements. These inter-company expenditures are allocated at cost. Asset sales between the Banks were accounted for at current market prices at the time of sale and approximated cost. Each Bank is managed separately with its own president, who reports directly to the respective Boards of Directors of each Bank and the Chief Executive Officer of the Company and its Board of Directors. The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments. The table includes information of BNB from the close of business of February 7, 1997, the date of its acquisition by the Company, through December 31, 1999.
TOTAL REPORTABLE CONSOLIDATED BFS BNB SEGMENTS OTHER ELIMINATIONS TOTALS --- --- -------- ----- ------------ ------ At or for the year ended December 31, 1999: Interest income $ 71,583 8,679 80,262 971 (497) 80,736 Interest expense 45,478 2,192 47,670 35 (497) 47,208 Provision for loan losses 1,506 120 1,626 -- -- 1,626 Non-interest income 6,183 923 7,106 (23) (172) 6,911 Non-interest expense 20,505 4,442 24,947 525 (172) 25,300 Income tax expense 3,729 1,046 4,775 170 -- 4,945 ----------- ------- --------- ------ ------- --------- Net income $ 6,548 1,802 8,350 218 -- 8,568 =========== ======= ========= ====== ======= ========= Total assets $ 1,112,607 139,287 1,251,894 90,574 (88,815) 1,253,653 =========== ======= ========= ====== ======= ========= Net interest margin 2.62% 5.30% n.m n.m n.m 2.97% Return on average assets .63% 1.32% n.m n.m n.m .72% Return on average equity 11.27% 14.72% n.m n.m n.m 10.00%
(Continued) 64 60 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 At or for the year ended December 31, 1998: Interest income $ 65,411 8,429 73,840 1,452 (517) 74,775 Interest expense 41,069 1,912 42,981 93 (517) 42,557 Provision for loan losses 1,542 100 1,642 -- -- 1,642 Non-interest income 5,579 704 6,283 10 (165) 6,128 Non-interest expense 19,393 4,234 23,627 470 (165) 23,932 Income tax expense 3,611 1,169 4,780 371 -- 5,151 --------- --------- --------- --------- --------- --------- Net income $ 5,375 1,718 7,093 528 -- 7,621 ========= ========= ========= ========= ========= ========= Total assets $ 988,747 137,209 1,125,956 87,464 (74,297) 1,139,123 ========= ========= ========= ========= ========= ========= Net interest margin 2.66% 5.14% n.m n.m n.m 3.17% Return on average assets 0.59% 1.36% n.m n.m n.m 0.72% Return on average equity 10.30% 13.90 n.m n.m n.m 9.02% At or for the year ended December 31, 1997: Interest income $ 59,282 7,436 66,718 2,017 (696) 68,037 Interest expense 35,531 1,623 37,154 671 (696) 37,129 Provision for loan losses 1,651 45 1,696 -- -- 1,696 Non-interest income 4,296 645 4,941 45 (180) 4,806 Non-interest expense 17,662 3,546 21,208 430 (180) 21,458 Income tax expense 4,104 1,049 5,153 352 -- --------- --------- --------- --------- --------- --------- 5,505 Net income $ 4,630 1,818 6,448 607 -- ========= ========= ========= ========= ========= ========= 7,055 Total assets $ 832,133 123,165 955,298 92,559 (73,177) 974,680 ========= ========= ========= ========= ========= ========= Net interest margin 2.92% 5.12% n.m. n.m. n.m. 3.42% Return on average assets 0.65% 1.06% n.m. n.m. n.m. 0.75% Return on average equity 10.00% 7.43% n.m. n.m. n.m. 8.21%
n.m. = not meaningful (Continued) 65 61 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (17) ACQUISITION On December 7, 1999 the Company acquired Diversified Ventures, Inc, d/b/a/ Forward Financial ("Forward") in a 100% cash transaction. Forward is located in Northborough, MA. As part of the transaction, the Company acquired Ellsmere Insurance Agency, Inc., a Massachusetts licensed insurance agency with limited operations. The purchase price was $38.3 million and was accounted for using the purchase method of accounting. The results of operations include the effect of the purchase from the date of acquisition to year-end. In connection with the acquisition the value of the assets acquired and liabilities assumed were as follows:
DECEMBER 7, 1999 ---------------- (in thousands) Assets acquired: Cash $ 9,687 Loans 11,345 Accounts receivable 1,100 Premises and equipment 309 Other real estate owned 194 Other assets 256 ------- Total assets acquired 22,891 ------- Liabilities assumed: Accrued expenses and other liabilities 1,627 ------- Total liabilities assumed 1,627 ------- Assets in excess of liabilities 21,264 Cash paid to Forward owner 38,296 ------- Goodwill $17,032 =======
The following condensed consolidated pro-forma results of the Company were prepared as if the acquisition had taken place on January 1, 1998. The pro-forma results are not necessarily indicative of the actual results of operations had the Company's acquisition of Forward actually occurred on January 1 of the respective year.
(unaudited) YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 ---- ---- (in thousands) Net interest and dividend income $ 95,318 $ 88,865 Net income 6,988 6,030 Basic earnings per share 1.45 1.19 Diluted earnings per share 1.40 1.13
(Continued) 66 62 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (18) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS) The following are the condensed financial statements for BostonFed Bancorp, Inc. (the "Parent Company") only:
ASSETS 1999 1998 ---- ---- Cash and interest bearing deposit in subsidiary bank $ 27 6,716 Certificates of deposit 71 74 ------- ------- Total cash and cash equivalents 98 6,790 ------- ------- Mortgage-backed securities available for sale (amortized cost of $10,913 at 1998) -- 10,983 Investment securities available for sale (amortized cost of $2,035 at 1999 and 1998) 1,649 2,032 Investment in subsidiaries, at equity 87,090 64,423 Accrued interest receivable -- 63 Other assets 13 15 ------- ------- Total assets $88,850 84,306 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings $ 3,055 -- Accrued expenses and other liabilities 91 2,512 ------- ------- Total liabilities 3,146 2,512 ------- ------- Total stockholders' equity 85,704 81,794 ------- ------- Total liabilities and stockholders' equity $88,850 84,306 ======= =======
(Continued) 67 63 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999
STATEMENTS OF INCOME 1999 1998 1997 ---- ---- ---- Interest income $ 750 1,186 1,684 Interest expense 34 93 671 ------ ------ ------ Net interest income 716 1,093 1,013 Non-interest income 43 13 45 Non-interest expense 561 469 428 ------ ------ ------ Income before income taxes 198 637 630 Income tax expense 90 261 226 ------ ------ ------ Income before equity in net income of subsidiaries 108 376 404 Equity in net income of subsidiaries 8,460 7,245 6,651 ------ ------ ------ Net income $8,568 7,621 7,055 ====== ====== ======
The Parent Company's statement of changes in stockholders' equity are identical to the consolidated statements of changes in stockholders' equity and therefore are not presented here.
STATEMENTS OF CASH FLOWS 1999 1998 1997 ---- ---- ---- Net cash flows from operating activities: Net income $ 8,568 7,621 7,055 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of subsidiaries (8,460) (7,245) (6,651) Amortization and accretion, net 88 81 17 Appreciation in fair value of shares charged to expense for compensation plans 800 1,135 821 Earned SIP shares 350 593 1,009 Reduction in unallocated ESOP shares 755 756 755 Loss on sale of investment securities 28 -- -- Decrease in accrued interest receivable 63 41 21 Decrease (increase) in other assets 2 1,283 (1,098) (Decrease) increase in accrued expenses and other liabilities (2,421) 2,505 175 ------- ------- ------- Net cash (used in) provided by operating activities (227) 6,770 2,104 ------- ------- -------
(Continued) 68 64 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999
STATEMENTS OF CASH FLOWS, CONTINUED 1999 1998 1997 ---- ---- ---- Cash flow from investing activities: Purchase of BNB $ -- -- (22,000) Proceeds from sale of mortgage-backed securities available for sale 7,354 -- 1,084 Principal repayments on mortgage-backed securities available for sale 3,444 8,012 3,807 Purchase of investment securities available for sale -- (2,035) -- Change in investment in subsidiaries (15,552) 4,340 22,276 -------- -------- -------- Net cash used in investing activities (4,754) 10,317 5,167 -------- -------- -------- Cash flow from financing activities: Proceeds from securities sold under agreement to purchase -- -- 7,140 Repayments of securities sold under agreement to purchase -- (7,140) (3,500) Proceeds from other borrowed money 3,055 -- -- Common stock repurchases (2,492) (7,998) (13,407) Cash dividends paid (2,343) (2,005) (1,541) Stock options exercised 69 16 -------- -------- -------- Net cash provided (used) from financing activities (1,711) (17,127) (11,308) -------- -------- -------- Net decrease in cash and cash equivalents (6,692) (40) (4,037) Cash and cash equivalents at beginning of year 6,790 6,830 10,867 -------- -------- -------- Cash and cash equivalents at end of year $ 98 6,790 6,830 ======== ======== ======== Supplemental cash flow information: Cash paid during the year for: Interest $ 23 93 662 Income taxes 2,444 296 268
(Continued) 69 65 BOSTONFED BANCORP. INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999 (19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Summaries of consolidated operating results on a quarterly basis for the years ended December 31 follow:
1999 QUARTERS 1998 QUARTERS ------------------------------------------ ------------------------------------------ FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST ------ ----- ------ ----- ------ ----- ------ ----- Interest and dividend income $20,938 20,435 19,832 19,531 19,227 19,054 18,293 18,201 Interest expense 12,386 11,964 11,495 11,363 11,101 11,057 10,402 9,997 ------- ------- ------- ------- ------- ------- ------- ------- Net interest income 8,552 8,471 8,337 8,168 8,126 7,997 7,891 8,204 ------- ------- ------- ------- ------- ------- ------- ------- Provision for loan losses 376 390 430 430 455 442 342 403 Non-interest income 1,975 1,692 1,730 1,547 1,632 1,506 1,586 1,404 Non-interest expense 6,738 6,257 6,295 6,043 5,997 5,862 6,093 5,980 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes 3,413 3,516 3,342 3,242 3,306 3,199 3,042 3,225 Income tax expense 1,138 1,254 1,315 1,238 1,295 1,281 1,239 1,336 ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 2,275 2,262 2,027 2,004 2,011 1,918 1,803 1,889 ======= ======= ======= ======= ======= ======= ======= ======= Basic earnings per share $ 0.47 0.47 0.42 0.41 0.41 0.38 0.35 0.37 ======= ======= ======= ======= ======= ======= ======= ======= Diluted earnings per share $ 0.46 0.45 0.40 0.40 0.39 0.36 0.33 0.35 ======= ======= ======= ======= ======= ======= ======= =======
70 66 ANNUAL MEETING The annual meeting of stockholders will be held on Wednesday, April 26, 2000, at 2:00 p.m. The meeting will take place at the Renaissance Bedford Hotel, 44 Middlesex Turnpike, Bedford, MA. STOCK LISTING BostonFed Bancorp, Inc. became a public company on October 24, 1995. BostonFed Bancorp, Inc. Common Stock is traded on the American Stock Exchange with the symbol "BFD." The stock is listed as "Bostnfd" in the Boston Globe and as "BstnfdBcp" in the Wall Street Journal. COMMON STOCK INFORMATION Initial Public Offering Price $10.00 per share. COMMON STOCK PRICE AND DIVIDENDS PAID (UNAUDITED) 1998 1999 By Quarter 1 2 3 4 1 2 3 4 Stock Price ------------------------------- ------------------------------------- - ----------------------------------------------------------------------------------------- High............. 23% $25 1/8 $24 $18 7/8 $19 $18 3/4 $18 1/2 $17 5/8 Low.............. 20 22 3/8 15 3/4 13 1/2 17 5/16 16 1/6 15 13 13/15 Dividend Paid...... 07 10 10 10 10 12 12 12
As of December 31, 1999, the Company had 4,973,081 shares outstanding and approximately 600 stockholders of record, not including persons of entities holding stock in nominee or street name through brokers or banks. 10-K REPORT A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge upon written request to BostonFed Bancorp, Inc., Investor Relations, 17 New England Executive Park, Burlington, MA 01803. TRANSFER AGENT EquiServe EquiServe Mail Stop: 45-02-62 Mail Stop: 45-02-62 P.O. Box 8040 150 Royall Street Boston, MA 02266-8040 Canton, MA 02266-8040 Shareholder Inquiries: (781) 575-3170 INDEPENDENT AUDITOR KPMG LLP 99 High Street Boston, MA 02110 REGULATORY COUNSEL LOCAL COUNSEL Muldoon, Murphy & Faucette Goodwin, Procter, & Hoar LLP 5101 Wisconsin Avenue NW Exchange Place Washington, DC 20016 Boston, MA 02109 71 EX-21 11 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.0 SUBSIDIARIES OF THE REGISTRANT The following are descriptions of subsidiaries which are directly or indirectly owned by the Company. BFS Preferred Capital Corp. BFS Preferred Capital Corp. is a subsidiary of BFS and was organized under Massachusetts law in 1998 as a real estate investment trust, in satisfaction of Section 858 of the Internal Revenue Code of 1986, as amended. BNB Preferred Capital Corp. BNB Preferred Capital Corp. is a subsidiary of BNB and was organized under Massachusetts law in 1998 as a real estate investment trust, in satisfaction of Section 858 of the Internal Revenue Code of 1986, as amended. BFS Security Corp. BFS Security Corp. is a subsidiary of BFS and was organized under Massachusetts law in 1998 as an investment subsidiary. BNB Security Corp. BNB Security Corp. is a subsidiary of BNB and was organized under Massachusetts law in 1998 as an investment subsidiary. BF Funding Corporation. BF Funding Corporation is a subsidiary of the Company and was organized under Massachusetts law in 1995 for purposes of funding the BFS' ESOP plan. Diversified Ventures, Inc. d/b/a Forward Financial Company. Forward Financial Company was acquired by BFS in December 1999. It is incorporated under Massachusetts law and operates as a subsidiary of BFS. Ellsmere Insurance Agency, Inc. Ellsmere Insurance Agency, Inc. was acquired by BNB in December 1999. It is incorporated under Massachusetts law and operates as a subsidiary of BNB. Leader Corporation. Leader Corporation is incorporated under Massachusetts law and is a subsidiary of BFS. BFS Service Corp. BFS Service Corp. was a subsidiary of BFS organized under Massachusetts law. In November 1999, BFS Service Corp. was dissolved. Agyro Corp. Agyro Corp. was a subsidiary of BNB organized under Massachusetts law. In November 1999, Agyro Corp. was dissolved. EX-23 12 CONSENT OF KPMG 1 Exhibit 23 [LETTERHEAD OF KPMG LLP] CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Nos. 333-23995 and 333-34521) on Form S-8 of BostonFed Bancorp, Inc. (the "Company") of our report, dated January 20, 2000, related to the consolidated balance sheets of the Company as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, which report is incorporated by reference in the Annual Report on Form 10-K of the Company for the year ended December 31, 1999. /s/ KPMG LLP Boston, Massachusetts March 28, 2000 EX-27 13 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 31,881 274 2,541 0 68,743 16,245 16,305 1,048,768 10,654 1,253,653 770,049 218,500 10,345 169,055 0 0 68 85,638 1,253,653 73,096 7,640 0 80,736 25,872 47,208 33,528 1,626 (28) 25,300 13,513 13,513 0 0 8,568 1.78 1.71 2.97 746 0 210 0 8,670 56 414 10,654 0 0 10,654
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