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As filed with the Securities and Exchange Commission on March 6, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to _______.
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2976299
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 912-1900
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None NA
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
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 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 stock held by non-affiliates
of the registrant, based upon the closing price of its common stock on the
Nasdaq National Market System on February 22, 2000 was $69,238,561.
11,693,663 shares of the registrant's common stock were
outstanding on February 22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the Company's 2000
Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12
and 13 of Part III.
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TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS 3
ITEM 2 PROPERTIES 16
ITEM 3 LEGAL PROCEEDINGS 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 17
ITEM 6 SELECTED FINANCIAL DATA 18
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 34
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 64
PART III
The information called for by Items 10-13 of Part III of Form 10-K is
incorporated herein by reference to the Company's Definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 64
SIGNATURES 66
PART I
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those projected in the forward-looking statements as a
result of, among other factors, the factors listed under "Risk Factors and
Factors Affecting Forward Looking Statements," changes in loan defaults and
charge-off rates, reduction in the value or amount of deposit levels
necessitating increased borrowing to fund loans and investments, changes in
interest rates, fluctuations in assets under management and other sources of fee
income, the impact of year 2000 issues on the Company, its clients and its
vendors, and changes in assumptions used in making such forward-looking
statements.
ITEM 1. BUSINESS
GENERAL
Boston Private Financial Holdings, Inc. (the "Company"), organized on July
1, 1988, is incorporated under the laws of the Commonwealth of Massachusetts and
is registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). On July 1, 1988, the Company
became the parent holding company of Boston Private Bank & Trust Company (the
"Bank"), a trust company chartered by the Commonwealth of Massachusetts and
insured by the Federal Deposit Insurance Corporation (the "FDIC").
On October 15, 1999, the Company acquired RINET Company, Inc. ("RINET"), a
Massachusetts corporation engaged in providing financial planning services to
high net worth individuals, in exchange for 765,697 newly issued shares of the
Company's common stock. The acquisition was accounted for as a "pooling of
interests." Accordingly, the results of operations of the Company have been
restated to reflect the results of operations, including RINET, on a
consolidated basis.
On October 31, 1997, the Company acquired Westfield Capital Management
Company, Inc. ("Westfield"), a Massachusetts corporation engaged in providing a
range of investment management services to individual and institutional clients,
in exchange for 3,918,367 newly issued shares of the Company's common stock. The
acquisition was accounted for as a "pooling of interests." Accordingly, the
results of operations of the Company have been restated to reflect the results
of operations, including Westfield, on a consolidated basis.
The Company conducts substantially all of its business through its
wholly-owned subsidiaries, the Bank, Westfield and RINET. The Company's and the
Bank's principal offices are located at Ten Post Office Square, Boston,
Massachusetts, Westfield's principal office is located at One Financial Center,
Boston, Massachusetts, and RINET's principal office is located at 213 Union
Wharf, Boston, Massachusetts. The Bank also has a branch office located in
Wellesley, Massachusetts, and has received regulatory approval to open a second
branch office in the Back Bay area of Boston, Massachusetts.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products and services to
high net worth individuals, their families and businesses in the greater Boston
area and New England and, to a lesser extent, Europe and Latin America. The Bank
seeks to anticipate and respond to the financial needs of its client base by
offering high quality products, dedicated personal service and long-term banking
relationships. The Bank offers its clients a broad range of basic deposit
services, including checking and savings accounts, with automated teller machine
("ATM") access, and cash management services. The Bank also offers commercial,
residential mortgage, home equity and consumer loans. In addition, it provides
investment advisory and asset management services, securities custody and
safekeeping services, and trust and estate administration. In December 1996, the
Company received $3.4 million of additional equity capital from an offering of
its common stock, all of which was subsequently invested in the Bank. In
December 1998, the Company invested $1.0 million of additional capital in the
Bank from the proceeds of an intra-company loan from Westfield. In 1999, the
Company invested $2.0 million of additional capital in the Bank from the
proceeds of dividends received from Westfield.
3
Westfield is an investment management firm serving the investment needs of
high net worth individuals and institutions with endowments, pensions and
profit-sharing or 401(k) plans. The investment management team seeks out
opportunities to purchase growth equities at a reasonable price by applying
fundamental research techniques combined with an evaluation of screens of
securities to identify prospective investments which have broad market
opportunities, accelerating earnings growth, low financial leverage and
sufficient cash flow. They often visit companies to interview management of
prospective investments, seeking to find those situations where there is a
diversity of current investment opinion and where fundamental research can
identify company specific events that create a competitive edge. After making an
investment, Westfield monitors performance against a systematic set of sell
disciplines including: downside price limits, an alteration of the investment
case, changes in relative price momentum, valuation relative to its peer group
and attractiveness versus alternative investments. Westfield primarily manages
individually invested accounts and also acts as manager for five limited
partnerships, two invest primarily in technology stocks, two invest primarily in
midcap equities, and another invests primarily in small capitalization equities.
RINET provides fee-only financial planning, tax planning and investment
management services to high net worth individuals and their families in the
greater Boston area, New England, and other areas of the U.S. Its capabilities
include tax planning and preparation, asset allocation, estate planning,
charitable planning, planning for employment benefits, including 401(k) plans,
alternative investment analysis and mutual fund investing.
The Company's operating results depend primarily on the operating results
of the Bank, Westfield and RINET. The Company generates a significant amount of
fee income from providing investment management and trust services to its
clients at the Bank and from providing investment management services and acting
as manager for limited partnerships for clients at Westfield. Investment
management and trust fees are generally based upon the value of assets under
management, and, therefore, can be significantly affected by fluctuations in the
values of securities caused by changes in the capital markets and by investment
performance of the Bank and Westfield. Fees earned as manager for limited
partnerships are directly related to investment performance and, therefore, will
be significantly affected by the investment performance of Westfield. The Bank
also earns fees and other income from its lending and cash management services.
The net income of the Bank depends primarily on its net interest income, which
is the difference between interest income and interest expense or "cost of
money", and the quality of its assets. Interest income depends on the amount of
interest-earning assets outstanding during the period and the interest rates
earned thereon. The Bank's cost of money is a function of the average amount of
deposits and borrowed money outstanding during the period and the interest rates
paid thereon. The quality of assets further influences the amount of interest
income lost on nonaccrual loans and the amount of additions to the allowance for
loan losses. RINET earns income on a fee-only basis from providing financial
planning services to clients. RINET also earns fees for providing asset
allocation services to clients that are based on the value of such assets.
INVESTMENT MANAGEMENT AND TRUST ADMINISTRATION
The Company and its subsidiaries provide a broad range of investment
management services to individuals, family groups, trusts, endowments and
foundations, retirement plans and investment partnerships. These services
include management of equity, fixed income, balanced and strategic cash
management portfolios. Portfolios are managed based on the investment objectives
of each client, and each portfolio is positioned to benefit from long-term
market trends. Acting as fiduciary, the Bank also provides trust services to
both individuals and institutions. Westfield, acting as the manager of five
limited partnerships, also earns fees based on the performance of these limited
partnerships. For the year ended December 31, 1999, the asset management
business accounted for 83.6% of the Company's total fees and other income and
49.1% of the Company's total revenues, which is defined as net interest income
plus fees and other income. At December 31, 1999, the Company had approximately
$3.7 billion in assets under management. Of this total, $3.6 billion was in
investment advisory accounts, and $98.8 million was invested and administered
under trust arrangements.
LENDING ACTIVITIES
GENERAL. The Bank specializes in lending to individuals and small
businesses, including corporations, partnerships, associations and non-profit
organizations. Loans made by the Bank to individuals include residential
mortgage loans, unsecured and secured personal lines of credit, home equity
loans, mortgage loans on investment and vacation properties, letters of credit
and overdraft protection. Loans made by the Bank to businesses include
commercial mortgage loans, revolving lines of credit, working capital loans,
equipment financing and letters of credit. Commercial loans over $500,000, with
the exception of cash collateralized loans, are reviewed by the Credit
Committee, and commercial loans over $2 million are reviewed by the Senior Loan
Committee. Both committees consist of members of the Bank's management and
lending staff. Commercial and residential mortgage loans that exceed 10% of the
Bank's Tier I capital are reviewed by the Directors Loan Committee, which
consists of four outside Directors of the Bank.
4
At December 31, 1999, the Bank had loans outstanding of $450.4 million,
which represented approximately 79.4% of the Company's total assets. The
interest rates charged on these loans vary with the degree of risk, maturity
and amount, and are further subject to competitive pressures, market rates,
the availability of funds and legal and regulatory requirements. At December
31, 1999, approximately 82.6% of the Bank's outstanding loans had interest
rates that were either floating or adjustable in nature. See Part II, Item 7A
"Quantitative and Qualitative Disclosures About Market Risk - Interest Rate
Sensitivity and Market Risk." At December 31, 1999, approximately 99.2% of
the Bank's outstanding loans were secured, and approximately 84.1% were
secured, in whole or in part, by real estate, and within the commercial loan
portfolio, $122.0 million, or 64.0% of the portfolio was secured, in whole or
in part by real estate.
At December 31, 1999, the Bank's statutory lending limit to any single
borrower was approximately $7.1 million, subject to certain exceptions provided
under applicable law. At December 31, 1999, the Bank had no outstanding lending
relationships in excess of the legal lending limit. The Bank also has a policy
of extending only secured loans to Directors of the Company and its
subsidiaries, and the aggregate principal amount of loans to all Directors of
the Company and its subsidiaries is limited by law to 100% of capital. At
December 31, 1999, the aggregate principal amount of all loans to Directors and
related entities (including unused commitments under lines of credit) was $4.7
million, or 13.7% of capital.
LOAN PORTFOLIO COMPOSITION AND MATURITY. The following table sets forth the loan
balances for certain loan categories at the dates indicated and the percent of
each category to total gross loans.
DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Commercial $190,817 42.4% $154,940 44.4% $134,685 48.7% $97,740 47.4% $72,729 46.8%
Residential 234,185 52.0 173,810 49.8 124,865 45.1 96,578 46.9 74,447 48.0
mortgage
Home equity 25,039 5.5 19,866 5.7 16,969 6.1 11,481 5.6 7,783 5.0
Other 347 .1 335 .1 306 .1 308 .1 297 .2
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
450,388 100.0% 348,951 100.0% 276,825 100.0% 206,107 100.0% 155,256 100.0%
Allowance for
loan losses (5,336) (4,386) (3,645) (2,566) (1,942)
-------- -------- -------- -------- --------
Net loans $445,052 $344,565 $273,180 $203,541 $153,314
======== ======== ======== ======== ========
The following table sets forth scheduled contractual maturities of loans in
the Company's portfolio at December 31, 1999. Loans having no stated maturity
are reported as due in one year or less. The following table also sets forth the
dollar amounts of loans that are scheduled to mature after one year which have
fixed or adjustable interest rates.
RESIDENTIAL HOME
COMMERCIAL MORTGAGE EQUITY OTHER TOTAL
----------- ----------- -------- ----- -----------
(IN THOUSANDS)
Amounts due:
One year or less $ 67,531 $ -- $ 679 $347 $ 68,557
After one year through five years 96,603 50 665 -- 97,318
Beyond five years 26,683 234,135 23,695 -- 284,513
------------------------------------------------------
Total $190,817 $234,185 $25,039 $347 $450,388
======================================================
Interest rate terms on amounts due after one year:
Fixed $ 54,744 $ 19,289 $ -- $ -- $ 74,033
Adjustable 68,542 214,896 24,360 -- 307,798
------------------------------------------------------
Total $123,286 $234,185 $24,360 $ -- $381,831
======================================================
5
Scheduled contractual maturities typically do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage.
The average life of mortgage loans tends to increase when current market rates
are substantially higher than rates on existing mortgage loans and decrease when
current market rates are substantially lower than rates on existing mortgages
(due to refinancing of adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases as
higher yielding loans are repaid or refinanced at lower rates. In addition, due
to the fact that the Bank will, consistent with industry practice, "rollover" a
significant portion of commercial real estate and commercial loans at or
immediately prior to their maturity by renewing credit on substantially similar
or revised terms, the principal repayments actually received by the Bank are
anticipated to be significantly less than the amounts contractually due in any
particular period. A portion of such loans also may not be repaid due to the
borrower's inability to satisfy the contractual obligations of the loan. See
Part II, Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset Quality."
COMMERCIAL LOANS. Commercial loans include working capital loans, equipment
financings, standby letters of credit, term loans, revolving lines of credit and
commercial real estate and construction loans. Commercial loans to individuals
include construction loans, secured and unsecured personal lines of credit and
term loans.
At December 31, 1999, the Bank had outstanding commercial loans totaling
$190.8 million, which represented 42.4% of total loans and 33.6% of total assets
of the Company. Commercial loans, consisting primarily of loans to businesses,
increased $35.9 million, or 23.2%, during the year ended December 31, 1999,
compared to an increase of $20.3 million, or 15.0%, during the year ended
December 31, 1998. The growth in 1999 and 1998 reflects both an increase in
market demand and initiatives by the Bank to increase market share. Of the
Bank's total commercial loan portfolio, $67.5 million or 35.4% is due within one
year and $123.3 million or 64.6% is due after one year. Loans are typically
priced on a fixed rate basis or at a margin over the Bank's base rate. Floating
rate loans accounted for 68.9% of the Bank's commercial loan portfolio as of
December 31, 1999. The average balance of the Bank's outstanding commercial
loans was approximately $283,000 at year-end 1999.
The Bank has an independent loan review process under which loans are
reviewed for adherence to internal policies and underwriting guidelines. The
Bank also reviews a large percentage of outstanding commercial loans at least
annually. Such credit reviews are first performed by the loan review function
and, if necessary, are presented to the Credit Committee with further review in
certain situations by the Directors Loan Committee. In addition, the Directors
Loan Committee reviews loans on the Bank's internal "watch list" and classified
loan report on a monthly basis. Each of these loans is required to have an
action plan developed by the lending officer in charge of the credit.
RESIDENTIAL MORTGAGE AND HOME EQUITY LOANS. At December 31, 1999, the Bank
had outstanding residential mortgage loans and home equity loans of $234.2
million and $25.0 million, respectively, together representing 57.5% of the
Bank's total loan portfolio. Residential mortgage loans and home equity loans
increased $65.5 million, or 33.8%, during the year ended December 31, 1999,
compared to an increase of $51.8 million, or 36.6%, during 1998. The increases
in both 1999 and 1998 were primarily due to the relatively low level of
adjustable mortgage loan interest rates, as well as an increase in the resources
allocated by the Company to the residential mortgage area. While the Bank has no
minimum size for its mortgage loans, it concentrates its origination activities
in the "Jumbo" segment of the market. This segment consists of loans secured by
single family properties in excess of the amount eligible for purchase by the
Federal National Mortgage Association ("FNMA"), which was $252,700 at December
31, 1999. The average balance of the Bank's outstanding residential mortgage
loans was approximately $329,000 at year-end 1999.
In 1999, the Bank sold $22.6 million of residential mortgage loans compared
to $23.7 million in 1998. Of the loans sold during 1999, $11.8 million were sold
on a non-recourse basis without retaining servicing, and $10.8 were sold with
servicing retained by the Bank. The Bank generally holds adjustable rate
mortgage loans ("ARM's") in its own portfolio and sells most fixed rate mortgage
loans to outside investors. At December 31, 1999, $211.0 million, or 90.1%, of
loans in the Bank's residential mortgage portfolio were ARM's.
OTHER LOANS. Other loans consist of balances outstanding on credit cards
and loans arising from overdraft protection extended to individual customers. At
December 31, 1999, aggregate outstanding balances on such loans were $347,000
compared to $335,000 at December 31, 1998. Other loans increased $12,000, or
3.6%, during the year ended December 31, 1999, compared to an increase of
$29,000, or 9.5%, during 1998. The balance of other loans is primarily dependent
on client demand.
6
ALLOWANCE FOR LOAN LOSSES. The following table is an analysis of the Bank's
allowance for loan losses for the periods indicated:
YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Average loans outstanding .......................... $396,645 $308,978 $224,670 $175,332 $131,928
======== ======== ======== ======== ========
Allowance for loan losses, beginning of period ..... $4,386 $3,645 $2,566 $1,942 $1,232
Charged-off loans:
Commercial ...................................... 128 385 40 6 54
Residential Mortgage ............................ -- -- -- 52 3
Home Equity ..................................... -- -- -- 8 --
Other ........................................... 7 -- -- -- 4
-------- -------- -------- -------- --------
Total charged-off loans ..................... 135 385 40 66 61
-------- -------- -------- -------- --------
Recoveries on loans previously charged-off:
Commercial ...................................... 81 122 308 71 153
Other ........................................... 5 -- 1 -- --
-------- -------- -------- -------- --------
Total recoveries ............................ 86 122 309 71 153
-------- -------- -------- -------- --------
Net loans charged-off (recovered) .................. 49 263 (269) (5) (92)
Provision for loan losses .......................... 999 1,004 810 619 618
-------- -------- -------- -------- --------
Allowance for loan losses, end of period ........... $5,336 $4,386 $3,645 $2,566 $1,942
======== ======== ======== ======== ========
Net loans charged-off (recovered) to average loans . .01% .09% (.12%) (.01%) (.07%)
Allowance for loan losses to ending gross loans .... 1.18% 1.26% 1.32% 1.25% 1.25%
Allowance for loan losses to non-performing loans .. 405.16% 776.28% 487.95% 262.91% 304.87%
The allowance for loan losses is determined to a great extent on the
judgement and experience of management, who utilize historical experience,
product types, and industry benchmarks. The allowance is segregated into three
components; "general", "specific" and "unallocated". The general component is
determined by applying coverage percentages to groups of loans based on risk
ratings and product types. A system of periodic loan reviews is performed to
individually assess the inherent risk and assign risk ratings to each loan.
Coverage percentages applied are determined based on industry practice and
management's judgement. The specific component is established by allocating a
portion of the allowance for loan losses to individual classified loans on the
basis of specific circumstances and assessments. The unallocated component
supplements the first two components based on management's judgement of the
effect of current and forecasted economic conditions on the borrowers' abilities
to repay, an evaluation of the allowance for loan losses in relation to the size
of the overall loan portfolio, and consideration of the relationship of the
allowance for loan losses to nonperforming loans, net charge-off trends, and
other factors.
The following table represents the allocation of the Bank's allowance for loan
losses and the percent of loans in each category to total loans as of the dates
indicated:
DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Loan category:
Commercial $4,556 42.4% $3,763 44.4% $3,143 48.7% $2,296 47.4% $1,686 46.8%
Residential mortgage 585 52.0 429 49.8 312 45.1 241 46.9 237 48.0
Home equity and other 195 5.6 194 5.8 190 6.2 29 5.7 19 5.2
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
$5,336 100.0% $4,386 100.0% $3,645 100.0% $2,566 100.0% $1,942 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
This allocation of the allowance for loan losses reflects management's
judgment of the relative risks of the various categories of the Bank's loan
portfolio. This allocation should not be considered an indication of the future
amounts or types of possible loan charge-offs.
7
INVESTMENT ACTIVITIES
The investment activity of the Bank is an integral part of the overall
asset/liability management of the Company. The Bank's investment policy is to
establish a portfolio of securities which will provide liquidity necessary to
facilitate funding of loans and to cover deposit fluctuations while at the same
time achieve a satisfactory return on the funds invested. The securities in
which the Bank may invest are subject to regulation and are generally limited to
securities which are considered "investment grade" securities. In addition, the
Bank has an internal investment policy which restricts investments to the
following categories: U.S. Treasury securities, obligations of U.S. government
agencies and corporations, mortgage-backed securities, including securities
issued by FNMA, the Government National Mortgage Association ("GNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"), securities of states and
political subdivisions and corporate debt, all of which must be considered
investment grade by a recognized rating service. The credit rating of each
security or obligation in the portfolio is monitored and reviewed by the
portfolio manager and by the Asset/Liability Management Committee. See Part II,
Item 8 "Financial Statements and Supplementary Data - Notes 5 and 6 to the
Consolidated Financial Statements" for further information.
The following table summarizes the book value of investments at the dates
indicated:
DECEMBER 31,
--------------------------------
1999 1998 1997
------- -------- --------
(IN THOUSANDS)
Available for sale:
U.S. Government and related obligations ............. $34,812 $35,050 $17,583
Municipal bonds ..................................... 38,793 19,052 19,193
Mortgage-backed securities .......................... 5,510 11,909 --
------- -------- --------
Total available for sale ......................... $79,115 $66,011 $36,776
======= ======== ========
Held to maturity:
U.S. Government and related obligations ............. $ -- $ -- $ 4,654
Municipal bonds ..................................... -- -- 5,000
Mortgage-backed securities .......................... -- -- 18,123
------- -------- --------
Total held to maturity ........................... $ -- $ -- $27,777
======= ======== ========
SOURCES OF FUNDS
DEPOSITS. Deposits are the principal source of the Bank's funds for use in
lending and for other general business purposes. At December 31, 1999, the Bank
had a total of approximately 3,510 checking accounts consisting of demand
deposit and NOW accounts with an average account balance of approximately
$26,000; 640 savings accounts with an average account balance of approximately
$6,000; and 3,360 money market accounts with an average account balance of
approximately $71,000. Certificates of deposit of $100,000 or greater and
certificates of deposit under $100,000 represented approximately 19.9% and 24.6%
of total deposits at December 31, 1999 and 1998, respectively. See Part II, Item
8 "Financial Statements and Supplementary Data - Note 10 to the Consolidated
Financial Statements" for further information.
The following table sets forth the average balances and interest rates paid
on the Bank's deposits:
YEAR ENDED
DECEMBER 31, 1999
----------------------
AVERAGE AVERAGE
BALANCE RATE
------- -------
(DOLLARS IN THOUSANDS)
Non interest-bearing deposits:
Checking accounts .................................. $ 44,687 --%
Interest-bearing deposits:
Savings and NOW accounts ........................... 42,968 1.09
Money market accounts .............................. 194,209 3.69
Certificates of deposit under $100,000 ............. 26,864 5.22
Certificates of deposit of $100,000 or greater ..... 63,979 4.97
--------
Total ............................................ $372,707 3.28%
========
8
Historically, the Bank has had a higher percentage of its time deposits in
denominations of $100,000 or more than commercial banking averages. Within the
banking industry, these deposits are generally considered to be volatile.
However, a significant portion of the Bank's deposits in denominations of
$100,000 or greater are maintained by individuals or entities with other
relationships with the Company.
Time certificates of deposit in denominations of $100,000 or greater had
the following schedule of maturities:
DECEMBER 31,
--------------------------------
1999 1998
-------- --------
(IN THOUSANDS)
Less than 3 months remaining .................. $39,791 $40,776
3 to 6 months remaining ....................... 4,010 4,562
6 to 12 months remaining ...................... 11,278 7,178
More than 12 months remaining ................. 6,009 100
-------- --------
Total .................................... $61,088 $52,616
======== ========
BORROWINGS. The Bank has established various borrowing arrangements to
provide additional sources of liquidity and funding, thereby increasing
flexibility. Management believes that the Bank currently has adequate liquidity
available to respond to current demands. The Bank is a member of the FHLB of
Boston, and as such has access to both short and long-term borrowings of up to
$195.3 million at December 31, 1999. At December 31, 1999, the Bank had $80.7
million in FHLB advances outstanding with a weighted average interest rate of
5.85%, compared to $76.3 million in FHLB advances outstanding with a weighted
average interest rate of 5.74% at December 31, 1998. Of the advances outstanding
at December 31, 1999, $8.0 million have variable rates that reprice at least
annually to market rates. The Bank has the opportunity to repay variable rate
advances on their respective anniversary dates. See Part II, Item 8 "Financial
Statements and Supplementary Data - Note 11 to the Consolidated Financial
Statements" for further information.
The Bank also obtains funds from the sales of securities to institutional
investors and deposit customers under repurchase agreements. In a repurchase
agreement transaction, the Bank will generally sell an investment security,
agreeing to repurchase either the same or a substantially identical security on
a specified later date (generally not more than 90 days for institutional
investors and overnight for deposit customers) at a price slightly greater than
the original sales price. The difference in the sale price and repurchase price
is the cost of the use of the proceeds. The investment securities underlying
these agreements may be delivered to securities dealers who arrange such
transactions as collateral for the repurchase obligation. Repurchase agreements
represent a cost competitive funding source for the Bank. However, the Bank is
subject to the risk that the lender of the securities may default at maturity
and not return the collateral. In order to minimize this potential risk, the
Bank generally deals with large, established investment brokerage firms when
entering into such transactions with institutional investors, and deals with
established deposit customers of the Bank on overnight transactions. Repurchase
transactions are accounted for as financing arrangements rather than as sales of
such securities, and the obligation to repurchase such securities is reflected
as a liability in the Company's Consolidated Financial Statements. At December
31, 1999, the total amount of outstanding repurchase agreements was $16.6
million with a weighted average interest rate of 4.22%, compared to $6.2 million
with a weighted average interest rate of 4.16% at December 31, 1998. See Part
II, Item 8 "Financial Statements and Supplementary Data - Note 12 to the
Consolidated Financial Statements" for further information.
From time to time the Bank purchases federal funds from the FHLB and other
banking institutions to supplement its liquidity position. The Bank has
negotiated federal fund lines of credit totaling $79.0 million with
correspondent institutions to provide the Bank with immediate access to
overnight borrowings. At December 31, 1999, the Bank did not have any borrowings
outstanding under these federal funds lines. The Bank has also negotiated
brokered deposit agreements with several institutions that have nationwide
distribution capabilities. At December 31, 1999, the Bank had $5.4 million of
brokered deposits outstanding under these agreements. See Part II, Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity."
OTHER SOURCES OF FUNDS. Other sources of funds include investment
management fees, loan repayments, maturities of investment securities, and sales
of securities from the available for sale portfolio.
9
COMPETITION
The ability of the Bank to attract loans and deposits may be limited by its
small size relative to its competitors. The Bank maintains a smaller staff and
has fewer financial and other resources than larger institutions with which it
competes in its market area.
In particular, in attempting to attract deposits and originate loans, the
Bank encounters competition from other institutions, including larger downtown
Boston and suburban-based commercial banking organizations, savings banks,
credit unions, and other financial institutions and non-bank financial service
companies serving Eastern Massachusetts and adjoining areas. The principal
methods of competition include the level of loan interest rates charged to
borrowers, interest rates paid on deposits, range of services provided and the
quality of these services.
In this competitive environment, the Bank may be unable to attract
sufficient and high-quality loans in order to continue its loan growth, which
may adversely affect the Bank's results of operations and financial condition,
including the level of its non-performing assets. The Bank's competitors include
several major financial companies whose greater resources may afford them a
marketplace advantage by enabling them to maintain numerous banking locations
and mount extensive promotional and advertising campaigns. In particular, the
Bank's current commercial borrowing customers may develop needs for credit
facilities larger than it can accommodate. Moreover, under the
Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley Act"), effective March
11, 2000, securities firms, insurance companies and other financial services
providers that elect to become financial holding companies may acquire banks and
other financial institutions. The Gramm-Leach-Bliley Act may significantly
change the competitive environment in which the Company and its subsidiaries
conduct business. See "The Financial Services Modernization Legislation" below.
The financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial
services. These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
In addition, the ability of the Bank and Westfield to attract investment
management and trust business may be inhibited by their relatively short history
and record of performance. With respect to their investment management and trust
services, the Bank and Westfield compete primarily with commercial banks and
trust companies, mutual fund companies, investment advisory firms, stock
brokerage firms, other financial companies and law firms. Competition is
especially keen in the Bank's and Westfield's market area, because Boston has a
well-established investment management industry. Many of the Bank's and
Westfield's competitors have greater resources than either the Bank, Westfield,
or the Company on a consolidated basis. In addition to competing directly for
clients, competition can impact the fee structures of the Bank and Westfield.
The Company believes that the ability of the Bank and Westfield to compete
effectively with other firms is dependent upon their products, level of
investment performance and client service, as well as the marketing and
distribution of their investment products. There can be no assurance that the
Bank and Westfield will be able to achieve favorable investment performance and
retain their existing clients.
RINET competes with a wide variety of firms including national and regional
financial services firms, accounting firms, trust companies, and law firms. Many
of these companies have greater resources and broader product lines, and may
already have relationships with RINET's clients in related product areas. The
Company believes that the ability of RINET to compete effectively with other
firms is dependent upon the quality and level of service, personal
relationships, price, and investment performance. There can be no assurance that
RINET will be able to retain their existing clients, expand existing
relationships, or add new clients.
EMPLOYEES
At December 31, 1999, the Company had 170 full-time and 3 part-time
employees. The Company's employees are not represented by a collective
bargaining unit, and the Company believes its employee relations are good.
REGULATION
Banks and bank holding companies are subject to extensive government
regulation through federal and state statutes and regulations, which are subject
to changes that significantly affect the way in which such entities conduct
business. Recently enacted legislation, as well as recent changes in regulatory
policy, has substantially increased the level of competition among commercial
banks, thrift institutions and non-banking institutions, including insurance
companies, brokerage firms, mutual funds and investment banks. The following
summary is qualified in its entirety by the text of the relevant statutes and
regulations.
10
THE FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act repeals provisions of the
Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve member banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Gramm-Leach-Bliley Act also
contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the BHCA framework
to permit a holding company system, such as the Company, to engage in a full
range of financial activities through a new entity known as a Financial Holding
Company. "Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
Generally, the Gramm-Leach-Bliley Act:
o repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
o broadens the activities that may be conducted by national banks (and
derivatively state banks), banking subsidiaries of bank holding
companies, and their financial subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act of 1977, as amended (the "CRA") (See "Community
Reinvestment Act" below); and
o addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
In order to engage in the new activities, a bank holding company, such
as the Company, must meet certain tests. Specifically, all of a bank holding
company's banks must be well-capitalized and well-managed, as measured by
regulatory guidelines, and all of the bank holding company's banks must have
been rated "satisfactory" or better in the most recent CRA evaluation of each
bank. See "Community Reinvestment Act" below. At this time, the Company has not
determined whether it will become a financial holding company.
REGULATION OF THE COMPANY
GENERAL. The Company has been incorporated as a business corporation under
Massachusetts law. Thus, the rights of the Company's stockholders are governed,
in part, by Massachusetts corporate law. As a bank holding company, the Company
is subject to regulation and supervision by the Federal Reserve Board pursuant
to the BHCA.
BHCA-ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board.
The BHCA also generally prohibits a bank holding company from engaging in
any business other than banking or managing or controlling banks or from
acquiring more than 5% of the voting shares of any company that is not a bank,
unless the Federal Reserve Board has determined its activities to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto.
11
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines that generally require bank holding companies to maintain
total capital equal to 8% of total risk-weighted assets, with at least one-half
of that amount consisting of Tier 1 capital. Tier 1 capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stock which may be included as Tier 1 capital), less
goodwill and other intangibles. Total capital consists of Tier 1 capital and
supplementary capital, which includes: hybrid capital instruments and perpetual
debt; perpetual preferred stock, which is not eligible to be included as Tier 1
capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses.
Assets are adjusted under the risk-based guidelines to take into account
different levels of credit risk, with the categories ranging from 0% (requiring
no additional capital) for assets such as cash to 100% for the bulk of assets
which are typically held by a bank, including commercial real estate loans,
commercial business loans and consumer loans. In addition to the risk-based
capital requirements, the Federal Reserve Board requires bank holding companies
to maintain a minimum ratio of Tier 1 capital to total assets of 3%, with most
bank holding companies required to maintain a 4% ratio. Furthermore, the bank
holding company rating system used by the Federal Reserve Board to analyze the
adequacy of a bank holding company's management, operations, earnings and
capital generally evaluates "primary capital" and "total capital," with the
leverage ratios for "well capitalized" institutions being 5.5% and 6%,
respectively. Finally, the Federal Reserve Board has also imposed certain
capital requirements applicable to certain non-banking activities, including
adjustments in connection with off-balance sheet items.
LIMITATIONS ON ACQUISITIONS OF COMMON STOCK. The Federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to expiration of
the disapproval period if the Federal Reserve Board issues written notice of its
intent not to disapprove the action. The acquisition of 10% or more of a class
of voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act, such as the Company, would, under certain
circumstances, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the company's outstanding
common stock, or such lesser number of shares of voting securities and other
indications of control as constitute control over the Company. Such approval
would be contingent upon, among other things, the acquiror (if not already
registered) registering as a bank holding company, divesting all impermissible
holdings and ceasing any activities not permissible for a bank holding company.
MASSACHUSETTS LAW. Massachusetts law requires all bank holding companies to
receive prior written approval of the Board of Bank Incorporation (the "BBI")
to, among other things, acquire all or substantially all of the assets of a
banking institution or to merge or consolidate with a Massachusetts bank holding
company. The Company owns no voting stock in any banking institution other than
the Bank. In addition, prior approval of the BBI is required before any bank
holding company owning 25% or more of the stock of two banking institutions may
acquire additional voting stock in those banking institutions, or acquire more
than 5% of the voting stock of another banking institution.
REGULATION OF THE BANK
GENERAL. The Bank is subject to extensive regulation and examination by the
Commissioner of Banks of the Commonwealth of Massachusetts and by the FDIC,
which insures its deposits to the maximum extent permitted by law, and to
certain requirements established by the Federal Reserve Board. The federal and
state laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for certain loans.
FDIC INSURANCE PREMIUMS. Pursuant to the FDIC's risk-based assessment
system, an institution is assigned to one of three capital groups based solely
on the level of the institution's capital -- "well capitalized," "adequately
capitalized" and "undercapitalized" -- which would be defined in generally the
same manner as the regulations establishing the prompt corrective action system
under Section 38 of the Federal Deposit Insurance Act (the "FDIA"), as discussed
below. The three capital groups are divided into three subgroups which reflect
varying levels of supervisory concern, from those considered to be healthy to
those considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications. At December 31, 1999, the Bank
was considered "well capitalized" with regard to these regulations.
12
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
that, like the Bank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board, as described above.
PROMPT CORRECTIVE ACTION. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action established by
Section 38 of the FDIA. Under the regulations, a bank shall be deemed to be: (i)
"well capitalized" if it has total risk-based capital of 10.0% or more, has a
Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital
ratio of 5.0% or more and is not subject to any written agreement, order or
directive requiring the bank to maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more
and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the accompanying regulations also specify circumstances under which a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
REGULATORY CONSEQUENCES OF FAILING TO MEET CAPITAL REQUIREMENTS. A number
of sanctions may be imposed on FDIC-insured banks that are not in compliance
with the capital regulations, including, among other things, restrictions on
asset growth and imposition of a capital directive that may require, among other
things, an increase in regulatory capital, reduction of rates paid on savings
accounts, cessation of or limitations on deposit-gathering, lending, purchasing
loans, making specified investments, or issuing new accounts, limits on
operational expenditures, an increase in liquidity and such other restrictions
or corrective actions as the FDIC may deem necessary or appropriate. In
addition, any FDIC-insured bank that is not meeting its capital requirements
must provide the FDIC with prior notice before the addition of any new director
or senior officer.
BROKERED DEPOSITS AND PASS-THROUGH DEPOSIT INSURANCE LIMITATIONS.
Well-capitalized institutions may accept brokered deposits. A depository
institution that is adequately capitalized may not accept, renew or roll over
any brokered deposit unless it obtains a waiver of statutory limitations from
the FDIC. Even if an adequately capitalized institution receives such a waiver,
it may offer yields on brokered deposits only within specified limits. An
undercapitalized depository institution may not accept brokered deposits. The
definitions of "well capitalized," "adequately capitalized," and
"undercapitalized" generally conform to the definitions described above for
prompt corrective action. In addition, "pass-through" insurance coverage may not
be available for certain employee benefit accounts and eligible deferred
compensation plans maintained by depository institutions that cannot accept
brokered deposits.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24 of
the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), generally limits the equity investments and activities
of FDIC-insured, state non-member banks and their subsidiaries to those that are
permissible for national banks. Under the FDIC's final regulations dealing with
equity investments, an insured state bank generally may not directly or
indirectly acquire or retain any equity investment of a type, or in an amount,
that is not permissible for a national bank. An insured state bank is not
prohibited from, among other things, (i) acquiring or retaining a majority
interest in a subsidiary that engages in activities permissible for subsidiaries
of national banks, (ii) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that
such limited partnership investments may not exceed 2% of the Bank's total
assets, (iii) for insured state banks located in certain states, including
Massachusetts, retaining under certain circumstances and subject to certain
limitations, listed common and preferred shares or registered investment company
shares, (iv) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees', and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (v) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
With respect to the activities limitations, pursuant to FDIC regulation,
FDIC insured state chartered banks must obtain prior consent from the FDIC
before directly, or indirectly through a majority-owned subsidiary, engaging "as
principal" in any activity that is not allowed for a national bank. This
limitation generally does not apply, however, to activities which the Federal
Reserve Board has approved, securities activities performed in accordance with
FDIC regulations, and activities that the FDIC determines do not pose a
significant risk to the deposit insurance fund.
13
Further, the Gramm-Leach-Bliley Act includes a new section of the FDICIA
governing subsidiaries of state banks that engage in "activities as principal
that would only be permissible" for a national bank to conduct in a financial
subsidiary. This provision will permit state banks, to the extent permitted
under state law, to engage in certain new activities which are permissible for
subsidiaries of a financial holding company. Further, it expressly preserves the
ability of a state bank to retain all existing subsidiaries. In order to form a
financial subsidiary, a state bank must be well-capitalized, and the state bank
would be subject to certain capital deduction, risk management and affiliate
transaction rules which are applicable to national banks.
SAFETY AND SOUNDNESS GUIDELINES. The federal banking agencies have adopted
safety and soundness guidelines for all insured depository institutions and
depository institution holding companies, prescribing in a general manner
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation and other
operational and managerial standards.
COMMUNITY REINVESTMENT ACT
The CRA was enacted to encourage every financial institution to help meet
the credit needs of its entire community, including low-and-moderate-income
neighborhoods, consistent with its safe and sound operation. The CRA does not
establish specific lending requirements or programs for financial institutions,
nor does it limit an institution's discretion to develop the type of products
and services that it believes are best suited to its particular community,
consistent with the purposes of the CRA.
The federal bank regulatory agencies jointly issued amendments to the
regulations implementing the CRA that substantially revised the applicable CRA
framework effective January 1, 1996. The amended CRA regulations are based upon
objective criteria of the performance of institutions under three key assessment
tests: (i) a lending test, to evaluate the institution's record of making loans
in its service areas; (ii) an investment test, to evaluate the institution's
record of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and (iii)
a service test, to evaluate the institution's delivery of services through its
branches, ATMs, and other offices. As of the date of the most recent regulatory
exam in September 1997, the Bank's CRA rating was "satisfactory."
GOVERNMENT REGULATION OF OTHER ACTIVITIES
Virtually all aspects of the Company's investment management business are
subject to extensive regulation. Westfield, RINET, and Boston Private Asset
Management ("BPAM"), an investment management subsidiary of the Bank, are
registered with the Securities and Exchange Commission (the "Commission") as
investment advisers under the Investment Advisers Act of 1940, as amended (the
"Investment Advisors Act"). As an investment adviser, each is subject to the
provisions of the Investment Advisers Act and the Commission's regulations
promulgated thereunder. The Investment Advisers Act imposes numerous obligations
on registered investment advisers, including fiduciary, recordkeeping,
operational, and disclosure obligations. Westfield, RINET and BPAM are also
subject to regulation under the securities laws and fiduciary laws of certain
states. Each of the mutual funds for which Westfield acts as adviser, or
subadviser, is registered with the Commission under the Investment Company Act
of 1940, as amended (the "1940 Act"), shares of each such fund are registered
with the Commission under the Securities Act, and the shares of each fund are
qualified for sale (or exempt from such qualification) under the laws of each
state and the District of Columbia to the extent such shares are sold in any of
such jurisdictions. As an adviser or subadviser to a registered investment
company, Westfield is subject to requirements under the 1940 Act and the
Commission's regulations promulgated thereunder. The Company is also subject to
the Employee Retirement Income Security Act of 1974 ("ERISA"), and to
regulations promulgated thereunder, insofar as it is a "fiduciary" under ERISA
with respect to certain of its client. ERISA and the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), impose certain
duties on persons who are fiduciaries under ERISA, and prohibit certain
transactions by the fiduciaries (and certain other related parties) to such
plans.
Under the Investment Advisers Act, every investment advisory contract
between a registered investment adviser and its clients must provide that it may
not be assigned by the investment adviser without the consent of the client. In
addition, under the 1940 Act, each contract with a registered investment company
must provide that it terminates upon its assignment. Under both the Investment
Advisers Act and the 1940 Act, an investment advisory contract is deemed to have
been assigned in the case of a direct "assignment" of the contract as well as in
the case of a sale, directly or indirectly, of a "controlling block" of the
adviser's voting securities. Such an assignment may be deemed to take place when
a firm is acquired by the Company.
14
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict
either Westfield, RINET or BPAM from conducting their business in the event that
they fail to comply with such laws and regulations. Possible sanctions that may
be imposed in the event of such noncompliance include the suspension of
individual employees, limitations on the business activities for specified
periods of time, revocation of registration as an investment adviser, commodity
trading adviser and/or other registrations, and other censures and fines.
Changes in these laws or regulations could have a material adverse impact on the
profitability and mode of operations of the Company.
FEDERAL TAXATION
The Company, the Bank, Westfield, and RINET are subject to those rules of
federal income taxation generally applicable to corporations under the Code. The
Bank is also, under Subchapter H of the Code, subject to certain special rules
applicable to banking institutions as to securities, reserves for loan losses,
and any common trust funds. The Company, the Bank, Westfield, and RINET, as
members of an affiliated group of corporations within the meaning of Section
1504 of the Code, will file a consolidated federal income tax return, which has
the effect of eliminating or deferring the tax consequences of inter-company
distributions, including dividends, in the computation of consolidated taxable
income for federal tax purposes.
In addition to regular corporate income tax, corporations are subject to an
alternative minimum tax which generally is equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items which are generally
applicable include an amount equal to 75% of the amount by which a bank's
adjusted current earnings (generally alternative minimum taxable income computed
without regard to this preference and prior to reduction for net operating
losses) exceeds its alternative minimum taxable income without regard to this
preference. Alternative minimum tax paid can be credited against regular tax due
in later years.
STATE AND LOCAL TAXATION
COMMONWEALTH OF MASSACHUSETTS. The Bank is subject to an annual
Massachusetts excise tax. The tax rate applicable to financial institutions,
including trust companies, was 10.50% during 1999 on net income apportioned to
Massachusetts. The rate was 11.72% for 1996, 11.32% for 1997 and 10.91% for
1998. Net income for years beginning before January 1, 1999 includes gross
income as defined under the provisions of the Code, plus interest from bonds,
notes and evidences of indebtedness of any state, including Massachusetts, less
the deductions, excluding the deductions for dividends received, state taxes,
and net operating losses, but not the credits as defined under the provisions of
the Code. For taxable years beginning on or after January 1, 1999, the
definition of Massachusetts net income is modified to allow a deduction for 95%
of dividends received from stock where the Bank owns 15% or more of the voting
stock of the institution paying the dividend and to allow deductions from
certain expenses allocated to federally tax exempt obligations. Finally,
affiliated financial institutions are not permitted to file a combined tax
return in Massachusetts under the new legislation.
Bank holding companies and certain non-bank subsidiaries are subject to the
Massachusetts corporate excise tax on business corporations provided they were
subject to such tax in taxable years before 1995. Under the corporate excise
tax, a corporation is taxed on its net income apportioned to Massachusetts at
the rate of 9.5% plus a tax of .26% on either its apportioned net worth or
tangible property. These grandfathered corporations may elect to file a combined
Massachusetts excise tax return through 1998. For taxable years beginning in
1999, these corporations were taxed as a financial institution and taxed at a
rate of 10.5% on their net income apportioned to Massachusetts. Certain of the
Bank's subsidiaries meeting certain definitional tests relating to investments
are not subject to either the corporate excise tax or the tax on financial
institutions, but instead are taxed on their gross income at the rate of 1.32%.
The Bank and certain of its affiliates are subject to local property taxes.
Massachusetts excise or local property taxes paid by the Bank or its affiliates
are generally deductible for federal income tax purposes.
15
ITEM 2. PROPERTIES
The Company and its subsidiaries conduct operations in leased premises.
The Company's and the Bank's headquarters are located at Ten Post Office
Square, Boston, Massachusetts with a branch office in Wellesley,
Massachusetts. The Bank has also received regulatory approval to open a
second branch office in the Back Bay area of Boston, Massachusetts. Westfield
is located at One Financial Center, Boston, Massachusetts, and RINET is
located at 213 Union Wharf, Boston, Massachusetts. Generally, the initial
terms of the leases for these properties range from five to fifteen years.
Most of the leases also include options to renew at fair market value for
periods of five to ten years. In addition to minimum rentals, certain leases
include escalation clauses based upon various price indices and include
provisions for additional payments to cover taxes.
The Company has from time to time also acquired properties through
foreclosure, which are marketed by local real estate brokers or by its lending
staff.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1999.
16
PART II
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those projected in the forward-looking statements as a
result of, among other factors, the factors listed under "Risk Factors and
Factors Affecting Forward Looking Statements," changes in loan defaults and
charge-off rates, reduction in deposit levels necessitating increased borrowing
to fund loans and investments, changes in interest rates, fluctuations in the
value or amount of assets under management and other sources of fee income, the
impact of Year 2000 issues on the Company, its clients and its vendors, and
changes in assumptions used in making such forward-looking statements.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's common stock, par value $1.00 per share (the "Common Stock"),
is traded on the Nasdaq National Market System ("Nasdaq") under the symbol
"BPFH". At February 22, 2000 there were 11,693,663 shares of Common Stock
outstanding, which were held by approximately 420 holders of record.
The following table sets forth the high and low closing sale prices for the
Company's Common Stock for the periods indicated, as reported by Nasdaq:
HIGH LOW
------ -----
FISCAL YEAR ENDED DECEMBER 31, 1999
Fourth Quarter .......................................... $9.25 $7.63
Third Quarter ........................................... 8.94 7.44
Second Quarter .......................................... 7.75 6.63
First Quarter ........................................... 8.63 6.50
FISCAL YEAR ENDED DECEMBER 31, 1998
Fourth Quarter .......................................... $ 9.25 $7.00
Third Quarter ........................................... 10.50 6.88
Second Quarter .......................................... 11.75 9.38
First Quarter ........................................... 10.38 8.00
DIVIDENDS
The Company declared its first quarterly dividend in respect of its common
stock on January 20, 2000 in the amount of $0.03 per share. The Company
presently plans to pay cash dividends on its common stock on a quarterly basis
based on the results of operations of the applicable quarters. However,
declaration of dividends by the Board of Directors of the Company will depend on
a number of factors, including capital requirements, regulatory limitations, the
Company's operating results and financial condition and general economic
conditions. The Bank, Westfield and RINET are the principal assets of the
Company, and as such, provide the only source of payment of dividends by the
Company. Under Massachusetts law, trust companies such as the Bank may pay
dividends only out of "net profits" and only to the extent that such payments
will not impair the Bank's capital stock and surplus account. These restrictions
on the ability of the Bank to pay dividends to the Company restrict the ability
of the Company to pay dividends to the holders of the Common Stock. Although
Massachusetts law does not define what constitutes "net profits" it is generally
assumed that the term includes a bank's retained earnings and does not include
its additional paid-in capital account. There are no such comparable statutory
restrictions on Westfield's or RINET's ability to pay dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On October 15, 1999, the Company issued 765,697 shares of its common stock
in a private placement exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended. The Company issued
these shares to the then shareholders of RINET in connection with the Company's
acquisition of RINET.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data for the five
fiscal years ended December 31, 1999. The data set forth below does not purport
to be complete. It should be read in conjunction with, and is qualified in its
entirety by, the more detailed information, including the Company's Consolidated
Financial Statements and related Notes, appearing elsewhere herein.
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
AT DECEMBER 31:
Total balance sheet assets ............................... $ 567,373 $ 457,815 $ 369,543 $ 294,424 $ 245,926
Total loans .............................................. 450,388 348,951 276,825 206,107 155,256
Allowance for loan losses ................................ 5,336 4,386 3,645 2,566 1,942
Investment securities .................................... 73,605 54,102 46,430 33,024 35,101
Mortgage-backed securities ............................... 5,510 11,909 18,123 25,289 32,052
Cash and cash equivalents ................................ 11,190 23,949 13,578 15,702 9,918
Excess of cost over net assets acquired .................. 3,015 3,424 3,746 4,068 4,390
Deposits ................................................. 420,535 334,852 258,301 209,302 178,885
Borrowed funds ........................................... 97,259 82,643 79,753 54,864 41,983
Stockholders' equity ..................................... 39,145 32,613 26,292 26,140 19,224
Non-performing assets .................................... 1,317 565 832 1,061 882
Client assets under management ........................... $3,660,000 $2,839,000 $2,410,000 $2,075,000 $1,683,000
FOR THE YEAR ENDED DECEMBER 31:
Interest and dividend income ............................. $34,942 $29,285 $22,728 $18,688 $15,949
Interest expense ......................................... 17,407 15,137 11,334 9,377 8,451
---------- ---------- ---------- ---------- ----------
Net interest income ...................................... 17,535 14,148 11,394 9,311 7,498
Provision for loan losses ................................ 999 1,004 810 619 618
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses....... 16,536 13,144 10,584 8,692 6,880
Fees and other income .................................... 24,960 19,886 16,198 14,866 10,929
Operating expense ........................................ 30,657 24,694 21,334 16,838 13,304
---------- ---------- ---------- ---------- ----------
Income before income taxes ............................... 10,839 8,336 5,448 6,720 4,505
Income tax expense (benefit) ............................. 3,643 2,865 1,922 1,227 103
---------- ---------- ---------- ---------- ----------
Net income ............................................... $ 7,196 $ 5,471 $ 3,526(2) $ 5,493 $ 4,402
========== ========== ========== ========== ==========
PER SHARE DATA:
Basic earnings per share ................................. $0.62 $0.48 $0.31 $0.53 $0.44
Diluted earnings per share ............................... $0.60 $0.46 $0.30(2) $0.52 $0.43
Average common shares outstanding ........................ 11,590,757 11,483,814 11,355,697 10,363,000 9,957,000
Average diluted shares outstanding ....................... 11,910,444 11,888,357 11,725,697 10,646,000 10,160,000
Book value ............................................... $3.37 $2.83 $2.44 $2.50 $2.03
SELECTED OPERATING RATIOS:
Return on average assets ................................. 1.41% 1.34% 1.13% 2.14% 1.99%
Return on average equity ................................. 20.05% 18.54% 13.39% 29.00% 27.05%
Interest rate spread (1) ................................. 3.21% 3.20% 3.33% 3.24% 2.90%
Net interest margin (1) .................................. 3.76% 3.78% 3.99% 3.85% 3.52%
Total Fees and Other Income / Total Revenue (3) .......... 58.74% 58.43% 58.71% 61.49% 59.31%
ASSET QUALITY RATIOS:
Non-performing loans to total loans ...................... 0.29% 0.16% 0.27% 0.47% 0.41%
Non-performing assets to total assets .................... 0.23% 0.12% 0.23% 0.36% 0.36%
Allowance for loan losses to total loans ................. 1.18% 1.26% 1.32% 1.25% 1.25%
Allowance for loan losses to non-performing loans ........ 405.16% 776.28% 487.95% 262.10% 304.87%
Loans charged-off to average loans ....................... 0.03% 0.13% 0.02% 0.04% 0.05%
CAPITAL RATIOS:
Average equity to average assets ......................... 7.05% 7.22% 8.46% 7.39% 7.35%
Tier I leverage capital ratio ............................ 6.57% 6.54% 6.64% 7.90% 6.21%
Tier I risk-based capital ratio .......................... 9.59% 10.61% 9.94% 12.95% 11.38%
Total risk-based capital ratio ........................... 10.84% 11.87% 11.20% 14.20% 12.63%
- -------------------------------------------------------------------------------------------------------------------------
(1) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets on a fully-taxable equivalent basis, and
the weighted average cost of interest-bearing liabilities, and net interest
margin represents net interest income on a fully-taxable equivalent basis
as a percent of average interest-earning assets.
(2) After deducting $1.2 million of non-recurring merger expenses, net income
for the year ended December 31, 1997 was $4.7 million, or $0.40 per share,
return on average assets was 1.52%, and return on average equity was 17.94%.
(3) Total revenue is defined as net interest income plus fees and other income.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, their notes, and other statistical information included in this
annual report. The discussions set forth below and elsewhere herein contain
certain statements that may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company's actual
results could differ materially from those projected in the forward-looking
statements as a result of, among other factors, the factors listed under "Risk
Factors and Factors Affecting Forward Looking Statements," changes in loan
defaults and charge-off rates, reduction in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
fluctuations in the value or amount of assets under management and other sources
of fee income, the impact of Year 2000 issues on the Company, its clients, and
its vendors, and changes in assumptions used in making such forward-looking
statements. In addition, prevailing economic conditions, as well as government
policies and regulations concerning, among other things, monetary and fiscal
affairs, could significantly affect the operations of financial institutions
such as the Company.
LIQUIDITY
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity as the
ability to respond to the needs of depositors and borrowers as well as to
earnings enhancement opportunities in a changing marketplace. Primary sources of
liquidity consist of investment management fees, deposit inflows, loan
repayments, borrowed funds, and maturity and sales of investment securities.
These sources fund the Company's lending and investment activities.
Management is responsible for establishing and monitoring liquidity targets
as well as strategies to meet these targets. In general, the Company maintains a
relatively high degree of liquidity. At December 31, 1999, cash, federal funds
sold and securities available for sale amounted to $90.3 million, or 15.9% of
total assets of the Company. This compares to $90.0 million, or 19.7% of total
assets, at December 31, 1998.
In general, the Bank maintains a liquidity target of 10% to 20% of total
assets. The Bank is a member of the FHLB of Boston, and as such has access to
both short and long-term borrowings of up to $195.3 million at the current time.
In addition, the Bank maintains a line of credit at the FHLB of Boston as well
as other lines of credit and brokered deposit lines with other correspondent
banks. Management believes that the Bank has adequate liquidity to meet its
commitments for the foreseeable future.
Westfield's primary source of liquidity consists of investment management
fees that are collected on a quarterly basis. At December 31, 1999, Westfield
had working capital of approximately $2.5 million. Management believes that
Westfield has adequate liquidity to meet its commitments for the foreseeable
future.
RINET's primary source of liquidity consists of financial planning fees
which are collected on a quarterly basis. At December 31, 1999, RINET had
working capital of approximately $300,000. Management believes that RINET has
adequate liquidity to meet its commitments for the foreseeable future.
The Company's primary sources of funds are dividends from its
subsidiaries, issuance of its common stock and borrowings. The Company has
executed a $7.5 million line of credit with a correspondent bank to provide
short-term working capital to the Company and its subsidiaries, if necessary.
As of December 31, 1999, there were no borrowings under this line of credit.
Management believes that the Company has adequate liquidity to meet its
commitments for the foreseeable future.
CAPITAL RESOURCES
Total stockholders' equity of the Company at December 31, 1999 was $39.1
million, compared to $32.6 million at December 31, 1998. This increase of $6.5
million was primarily the result of the Company's net income for 1999 of $7.2
million combined with common stock issued in connection with stock grants and
proceeds from options exercised, less the change in the unrealized loss on
investment securities available for sale.
19
As a bank holding company, the Company is subject to a number of regulatory
capital requirements that have been adopted by the Federal Reserve Board. At
December 31, 1999, the Company's Tier I leverage capital ratio stood at 6.57%,
compared to 6.54% at December 31, 1998. The Company is also subject to a
risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. According to these standards, the Company had a Tier I risk-based
capital ratio of 9.59% and a Total risk-based capital ratio of 10.84% at
December 31, 1999. This compares to a Tier I risk-based capital ratio of 10.61%
and a Total risk-based capital ratio of 11.87% at December 31, 1998. The minimum
Tier I leverage, Tier I risk-based, and Total risk-based capital ratios
necessary to enable the Company to be classified for regulatory purposes as a
"well capitalized" institution are 5.00%, 6.00% and 10.00%, respectively. The
Company was considered to be "well capitalized" as of December 31, 1999 and
1998. See Part I, Item 1, "Business - Regulation of the Company - Capital
Requirements."
The Bank is also subject to a number of regulatory capital measures. At
December 31, 1999, the Bank's Tier I leverage capital ratio stood at 5.99%, as
compared to 5.96% at December 31, 1998. The Bank is also subject to a risk-based
capital measure. The risk-based capital guidelines include both a definition of
capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories.
According to these standards, the Bank had a Tier I risk-based capital ratio of
9.46% and a Total risk-based capital ratio of 10.72% at December 31, 1999. This
compares to a Tier I risk-based capital ratio of 9.62% and a Total risk-based
capital ratio of 10.87% at December 31, 1998. The minimum Tier I leverage, Tier
I risk-based, and Total risk-based capital ratios necessary to be classified for
regulatory purposes as a "well capitalized" institution are 5.00%, 6.00% and
10.00%, respectively. The Bank was considered to be "well capitalized" as of
December 31, 1999 and 1998. See Part I, Item 1, "Business - Regulation of the
Company - Capital Requirements."
FINANCIAL CONDITION
TOTAL ASSETS. Total assets increased $109.6 million, or 23.9%, to $567.4
million at December 31, 1999 from $457.8 at December 31, 1998. This increase was
mainly attributed to an increase in residential and commercial loan balances and
was primarily funded by an increase in deposits.
INVESTMENTS. Total investments (consisting of federal funds sold,
investment securities and mortgage-backed securities) were $79.1 million, or
13.9% of total assets, at December 31, 1999, compared to $77.0 million, or 16.8%
of total assets, at December 31, 1998. This increase of $2.1 million, or 2.7%,
was due to purchases of securities necessary to maintain the Company's liquidity
ratios, and reinvestment of interest income within the investment portfolio. As
of December 31, 1999, all investments are classified as available for sale. The
investment portfolio carried a total of $1.9 million of net unrealized losses at
December 31, 1999, compared to $175,000 in net unrealized gains at December 31,
1998.
LOANS. Loans totaled $450.4 million, or 79.4% of total assets, at December
31, 1999, compared with $349.0 million, or 76.2% of total assets, at December
31, 1998. This increase of $101.4 million, or 29.1%, was due to a larger
allocation of resources devoted to loan origination, as well as the combination
of a healthy local economy and relatively low interest rates which helped fuel
loan demand. During 1999, commercial loans increased $35.9 million, or 23.2%, to
$190.8 million from $154.9 million at December 31, 1998; residential mortgage
loans increased $60.4 million, or 34.8%, to $234.2 million from $173.8 million
at December 31, 1998; and home equity and other loans increased $5.1 million, or
25.7%, to $25.3 million from $20.2 million at December 31, 1998.
DEPOSITS. The Company experienced an increase of $85.6 million, or 25.6%,
in deposits during 1999, from $334.9 million, or 73.1% of total assets, at
December 31, 1998, to $420.5 million, or 74.1% of total assets, at December 31,
1999. The Company opened a new banking office in Wellesley, Massachusetts in
April 1998, which contributed approximately $38.8 million of deposits as of
December 31, 1999, compared to $11.5 million of deposits as of December 31,
1998.
BORROWINGS. Total borrowings (consisting of securities sold under
agreements to repurchase ("repurchase agreements"), federal funds purchased,
FHLB borrowings, and other short-term borrowings) increased $14.7 million, or
17.8%, during 1999 to $97.3 million from $82.6 million at December 31, 1998. The
increase was mainly attributable to an increase in FHLB borrowings to help fund
loan growth. Management takes advantage of opportunities to fund asset growth
with borrowings, but on a long-term basis, the Company intends to replace a
portion of its borrowings with lower-cost core deposits.
20
ASSET QUALITY
The Company's non-performing assets include non-performing loans and OREO.
Non-performing loans include both nonaccrual loans and loans past due 90 days or
more but still accruing.
The following table sets forth information regarding non-performing loans,
other real estate owned, and delinquent loans 30-89 days past due as to interest
or principal, held by the Company at the dates indicated.
DECEMBER 31,
--------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------
(DOLLARS IN THOUSANDS)
Loans accounted for on a nonaccrual basis .................... $1,317 $565 $722 $ 976 $443
Loans past due 90 days or more, but still accruing ........... -- -- 25 -- 194
--------------------------------------------
Total non-performing loans ................................... 1,317 565 747 976 637
Other real estate owned ...................................... -- -- 85 85 245
--------------------------------------------
Total non-performing assets .................................. $1,317 $565 $832 $1,061 $882
============================================
Delinquent loans 30-89 days past due ......................... $2,042 $3,307 $1,632 $3,066 $304
Non-performing loans as a % of total loans ................... 0.29% 0.16% 0.27% 0.47% 0.41%
Non-performing assets as a % of total assets ................. 0.23% 0.12% 0.23% 0.37% 0.37%
Delinquent loans 30-89 days past due as a % of total loans ... 0.45% 0.95% 0.59% 1.49% 0.20%
RISK ELEMENTS OF THE LOAN PORTFOLIO
The Company discontinues the accrual of interest on a loan when the
collectibility of principal or interest is in doubt. In certain instances, loans
that have become 90 days past due may remain on accrual status if the value of
the collateral securing the loan is sufficient to cover principal and interest
and the loan is in the process of collection. OREO consists of real estate
acquired through foreclosure proceedings and real estate acquired through
acceptance of a deed in lieu of foreclosure. In addition, the Company may, under
certain circumstances, restructure loans as a concession to a borrower.
NON-PERFORMING ASSETS. At December 31, 1999, the Company had
non-performing assets of $1.3 million, which were 0.23% of total assets,
representing an increase of $752,000, or 133.1%, from $565,000 at December
31, 1998. As of December 31, 1999 and 1998, the Company's non-performing
assets consisted entirely of nonaccruing loans. The Company continues to
evaluate the underlying collateral of each non-performing loan and pursues
the collection of interest and principal. Also see Part II, Item 8,
"Financial Statements and Supplementary Data Notes 7 and 8 to the
Consolidated Financial Statements" for further information on non-performing
assets.
DELINQUENCIES. At December 31, 1999, $2.0 million of loans were 30 to 89
days past due, a decrease of $1.3 million, or 38.3%, from the $3.3 million
reported at December 31, 1998. Most of these loans are adequately secured and
the payment performance of these borrowers varies from month to month.
ADVERSELY CLASSIFIED LOANS. The Company's management adversely classifies
certain loans using an internal rating system based on criteria established by
federal bank regulatory authorities. These loans evidence weakness or potential
weakness related to repayment history, the borrower's financial condition, or
other factors. Delinquent loans may or may not be adversely classified depending
upon management's judgment with respect to each individual loan. Certain of
these loans are non-performing or may become non-performing in future periods.
At December 31, 1999, the Company had classified $2.1 million of loans as
substandard or doubtful based on the rating system adopted by the Company.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through provisions charged to operations. Assessing the adequacy of the
allowance for loan losses involves substantial uncertainties and is based upon
management's evaluation of the amounts required to meet estimated charge-offs in
the loan portfolio after weighing various factors. Among these factors are the
risk characteristics of the loan portfolio, the quality of specific loans, the
level of nonaccruing loans, current economic conditions, trends in delinquencies
and charge-offs, and the value of underlying collateral, all of which can change
frequently. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties.
21
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review a financial
institution's allowance for loan losses and carrying amounts of other real
estate owned. Such agencies may require the financial institution to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
NET INTEREST INCOME AND MARGIN
Net interest income represents the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits and borrowings. Net interest margin is the amount of net
interest income, on a fully taxable-equivalent basis, expressed as a percentage
of average interest-earning assets. The average yield on interest earning assets
is the amount of taxable equivalent interest income expressed as a percentage of
average earnings assets. The average rate paid on funding sources is equal to
interest expense as a percentage of average interest-earning assets.
The following table sets forth average assets, liabilities, and
stockholders' equity, interest income and interest expense, average yields and
rates, and the composition of the Company's net interest margin for the years
ended December 31, 1999, 1998, and 1997.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
---------- ---------- -------- ---------- --------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Earning assets:
Interest bearing deposits in banks $ 3,690 $ 146 3.96% $2,840 $140 4.93% $3,441 $194 5.64%
Federal funds sold 9,812 476 4.85% 6,875 351 5.11% 4,132 220 5.32%
Investments (1) 73,809 4,256 5.77% 70,038 4,187 5.98% 62,356 3,746 6.01%
Loans: (2)
Commercial 170,132 15,075 8.86% 140,296 13,083 9.33% 99,640 9,567 9.60%
Residential mortgage 203,543 13,804 6.78% 151,684 10,665 7.03% 110,750 8,168 7.38%
Home equity and other 22,970 1,835 7.99% 16,998 1,396 8.21% 14,280 1,179 8.26%
-------- ------- -------- ------- -------- -------
Total earning assets 483,956 35,592 7.35% 388,731 29,822 7.67% 294,599 23,074 7.83%
---- ----- -----
Allowance for loan losses (4,806) (3,901) (2,861)
Cash and due from banks 10,732 7,226 5,182
Other assets 19,292 16,947 14,408
-------- -------- --------
Total assets $509,174 $409,003 $311,328
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Savings and NOW $ 42,968 467 1.09% $ 32,647 414 1.27% $ 24,552 353 1.44%
Money market 194,209 7,165 3.69% 142,440 5,514 3.87% 99,660 3,776 3.79%
Certificates of deposit 90,843 4,581 5.04% 80,299 4,379 5.45% 67,959 3,705 5.45%
Borrowed funds 92,600 5,194 5.61% 83,174 4,830 5.81% 59,532 3,500 5.88%
-------- ------- ---- -------- ------- ---- --------- -------
Total interest bearing
liabilities 420,620 17,407 4.14% 338,560 15,137 4.47% 251,703 11,334 4.50%
------- ------- -------- -------
Non-interest bearing demand
deposits 44,687 34,774 28,042
Payables and other liabilities 7,975 6,155 5,249
-------- -------- --------
Total liabilities 473,282 379,489 284,994
Stockholders' equity 35,892 29,514 26,334
-------- -------- --------
Total liabilities and
stockholders' equity $509,174 $409,003 $311,328
======== ======== ========
Net interest income $18,185 $14,685 $11,740
======= ======= =======
Interest rate spread 3.21% 3.20% 3.33%
Net interest margin 3.76% 3.78% 3.99%
(1) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 34% for each year
presented. These adjustments were $650,000, $537,000, and $346,000 for the years
ended December 31, 1999, 1998, and 1997, respectively.
(2) Nonaccrual loans are included in average loan balances.
(3) Average balances are derived from daily balances.
22
RATE/VOLUME ANALYSIS
The following table describes 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 volumes (changes in volume
multiplied by prior rate) and (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume). Changes attributable to the
combined impact of volumes and rates have been allocated proportionately to
separate volume and rate categories.
1999 VS. 1998 1998 VS. 1997
----------------------------------- -----------------------------------
CHANGE DUE TO CHANGE DUE TO
----------------------------------- -----------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
----------- ----------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
INTEREST INCOME ON
INTEREST-EARNING ASSETS:
Interest-bearing deposits in banks $ (34) $ 40 $ 6 $ (22) $ (32) $ (54)
Federal funds sold (18) 143 125 (9) 140 131
Investments (145) 101 (44) (44) 294 250
Loans:
Commercial (678) 2,670 1,992 (282) 3,798 3,516
Residential mortgage (390) 3,529 3,139 (397) 2,894 2,497
Home equity and other (39) 478 439 (6) 223 217
------ ------ ------ ----- ------ ------
Total interest income (1,304) 6,961 5,657 (760) 7,317 6,557
------ ------ ------ ----- ------ ------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES:
Deposits:
Savings and NOW (79) 132 53 (31) 92 61
Money market (228) 1,879 1,651 84 1,654 1,738
Certificates of deposit (346) 548 202 1 673 674
Borrowed funds (171) 535 364 (44) 1,374 1,330
------ ------ ------ ----- ------ ------
Total interest expense (824) 3,094 2,270 10 3,793 3,803
------ ------ ------ ----- ------ ------
NET INTEREST INCOME $ (480) $3,867 $3,387 $(770) $3,524 $2,754
====== ====== ====== ===== ====== ======
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
NET INCOME. The Company reported net income of $7.2 million, or $0.60
per diluted share, for the year ended December 31, 1999, an increase of 31.5%
compared to net income for the year ended December 31, 1998 of $5.5 million, or
$0.46 per diluted share. Not including non-recurring RINET acquisition expenses
of $180,000, net of tax, and a one-time charge of $125,000 to reflect the
cumulative effect of a change in accounting principle, the Company would have
reported net income of $7.5 million, or $0.63 per diluted share, for the year
ended December 31, 1999.
NET INTEREST INCOME. For the year ended December 31, 1999, net interest
income was $17.5 million, an increase of $3.4 million, or 23.9%, over the same
period in 1998. This increase was primarily attributable to higher loan volumes.
Average earning assets were $95.2 million, or 24.5% higher, and average
interest-bearing liabilities were $82.1 million, or 24.2%, higher than the
comparable period a year earlier. The net interest margin decreased 2 basis
points, or 1.0%, from 3.78% in 1998 to 3.76% in 1999 due mainly to lower yields
earned on the loan portfolio.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income was $34.9
million for 1999 compared to $29.3 million for 1998, an increase of $5.7
million, or 19.3%. Income on commercial loans was $15.1 million for 1999
compared to $13.1 million for 1998, an increase of $2.0 million, or 15.2%.
Income from residential mortgage loans was $13.8 million compared to $10.7
million, an increase of $3.1 million, or 29.4%, and income from home equity and
other loans was $1.8 million compared to $1.4 million, an increase of $439,000,
or 31.4%, for the same periods, respectively. These increases in interest income
are due to higher average balances, partially offset by lower yields. The
average balances of commercial and residential mortgage loans during 1999
increased $29.8 million, or 21.3%, and $51.9 million, or 34.2%, respectively,
compared to 1998. The average balance of home equity and other loans increased
$6.0 million, or 35.1%. The yield on commercial loans decreased 47 basis points,
or 5.0%, the yield on residential mortgage loans decreased 25 basis points, or
3.6%, and the yield on home equity loans decreased 22 basis points, or 2.7%,
compared to the prior year.
23
Interest and dividend income on cash and investments increased to $4.2
million during 1999 compared to $4.1 million during 1998. This increase in cash
and investment income of $87,000, or 2.1%, was primarily attributable to a 9.5%
increase in the average balance of interest-bearing cash and investments,
partially offset by a 35 basis point, or 6.7% decrease in the yield earned.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $2.3
million, or 15.0%, to $17.4 million for 1999, from $15.1 million for 1998. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $82.1 million, or 24.2%,
between the two periods. The overall cost of interest-bearing liabilities
decreased 33 basis points, or 7.4%, compared to the prior year.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.0 million
for both 1999 and 1998. Management evaluates several factors, including the risk
characteristics of the loan portfolio, actual and estimated charge-offs, and new
loan originations, when determining the provision for loan losses. The Company's
ratio of loan loss allowance to total loans was 1.18% at December 31, 1999 and
1.26% at December 31, 1998.
FEES AND OTHER INCOME. Total fees and other income increased $5.1 million,
or 25.5% to $25.0 million for 1999, from $19.9 million for 1998. Investment
management and trust fees increased $2.8 million, or 18.6%, primarily as the
result of a 28.9% increase in the Company's assets under management from $2.8
billion as of December 31, 1998 to $3.7 billion as of December 31, 1999.
Financial planning fees increased $338,000, or 12.5% due to increased services
provided as well as annual fee increases. Westfield earned performance fees and
partnership income of $2.9 million in 1999 on the limited partnerships it
manages, compared to $732,000 in 1998.
Deposit account service charges increased $43,000, or 18.1%, to $280,000
for 1999 as a result of an increase in the number of deposit accounts and
transactions. Gain on sale of loans decreased $156,000, or 51.5%, due to the
fact that fewer loans were sold in the secondary market as a result of lower
demand for fixed rate loans. Other fee income increased $30,000, or 5.5%, to
$574,000 for 1999 due to an increase in non-amortized loan fees.
OPERATING EXPENSE. Total operating expense for 1999 was $30.5 million
compared to $24.7 million for 1998, an increase of $5.8 million, or 23.6%. This
increase in total operating expense was primarily attributable to the Company's
continued growth and expansion, non-recurring charges for RINET acquisition
expenses, Year 2000 readiness expenses, and expanded image advertising. The
Company has experienced a 23.9% increase in total assets, and an 8.7% increase
in the number of employees from December 31, 1998 to December 31, 1999.
Salaries and benefits, the largest component of operating expense,
increased $3.2 million, or 18.2%, to $20.8 million for the year ended December
31, 1999, from $17.6 million for the corresponding period in 1998. This increase
was primarily due to an 8.7% increase in the number of employees, salary
increases, and increases in business driven variable compensation such as sales
commissions and bonuses.
Occupancy and equipment expense increased $660,000, or 28.1%, to $3.0
million for 1999, from $2.4 million in 1998. Of this increase $444,000, or 67.3%
is primarily due to the Bank's expansion at its headquarters during 1999, and
the opening of the Wellesley, Massachusetts banking office in April 1998. The
remaining increase was mainly attributable to expenses related to the Company's
continued investments in technology.
Professional services, which include such expenses as legal and consulting
fees, audit and compliance services and other fees paid to external service
providers, increased $455,000, or 36.8% to $1.7 million for 1999. Of this
increase, $141,000, or 31.0% is due to expenses incurred for the Year 2000
Readiness Program, and $100,000, or 22.0%, is due to expenses associated with
establishing an ongoing tax saving strategy. The remaining increase is primarily
due to legal and consulting expenses related to special projects during 1999.
Marketing and business development expenses increased $562,000, or 57.1%,
to $1.5 million for 1999. Of this increase, $456,000, or 81.1% is due to
expanded image advertising designed to increase the visibility of the Company
and its products and services. The remaining increase is a result of an increase
in the number of employees and new business generating activities.
Contract services and processing, which represent fees paid to outside
service providers for data processing, custody, and systems, increased $391,000,
or 57.2% to $1.1 million for 1999. Of this increase, approximately $100,000, or
25.6%, is due to an increase in custody expense for client assets under
management at the Bank. The remaining increase is a result of an increase in
volume related charges for data processing and service charges related to new
products offered to the Bank's clients.
24
In 1999, the Company incurred acquisition expenses of $225,000 related to
the pooling acquisition of RINET. There were no such expenses in 1998. Other
expenses include supplies, telephone, postage, publications and subscriptions,
employee training, and other miscellaneous business expenses. These expenses
have increased $386,000, or 24.8%, to $1.9 million for 1999 as a result of the
Company's continued growth and expansion.
INCOME TAX EXPENSE. The Company recorded income tax expense of $3.6 million
in 1999 as compared to $2.9 million in 1998. The effective tax rate was 33.2%
and 34.4% in 1999 and 1998, respectively. The decrease in the Company's
effective tax rate is a result of a tax saving strategy implemented during 1999.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME. The Company reported net income of $5.5 million, or $0.46
per diluted share, for the year ended December 31, 1998. For the year ended
December 31, 1997 the Company's net income was $3.5 million, or $0.30 per
diluted share after deducting $1.2 million of non-recurring acquisition
expenses, net of tax. The $1.9 million, or 55.2% increase in reported net income
is primarily the result of the effect on the Company's 1997 net income of the
$1.2 million of non-recurring Westfield acquisition expenses and the tax-exempt,
S-Corporation status of Westfield prior to the acquisition in 1997. Not
including the non-recurring acquisition expenses, and had Westfield been fully
taxable in 1997, the Company would have reported net income of $4.7 million, or
$0.40 per diluted share, for the year ended December 31, 1997.
NET INTEREST INCOME. For the year ended December 31, 1998, net interest
income was $14.1 million, an increase of $2.8 million, or 24.2%, over the
corresponding period in 1997. This increase was primarily attributable to higher
loan volumes. Average earning assets were $94.1 million, or 32.0% higher, and
average interest-bearing liabilities were $86.9 million, or 34.5%, higher than
the comparable period a year earlier. The net interest margin decreased 21 basis
points, or 5.3%, from 3.99% in 1997 to 3.78% in 1998 due mainly to lower yields
earned on the loan portfolio.
INTEREST INCOME. Income on commercial loans was $13.1 million for 1998
compared to $9.6 million for 1997, an increase of $3.5 million, or 36.8%. Income
from residential mortgage loans was $10.7 million compared to $8.2 million, an
increase of $2.5 million, or 30.6%, and income from home equity and other loans
was $1.4 million compared to $1.2 million, an increase of $217,000, or 18.4%,
for the same periods, respectively. These increases in interest income are due
to higher average balances, partially offset by lower yields. The average
balances of commercial and residential mortgage loans during 1998 increased
$40.7 million, or 40.8%, and $40.9 million, or 37.0%, respectively, compared to
1997. The average balance of home equity and other loans increased $2.7 million,
or 19.0%. The yield on commercial loans decreased 27 basis points, or 2.8%, the
yield on residential mortgage loans decreased 35 basis points, or 4.7%, and the
yield on home equity loans decreased 5 basis points, or 0.6%, compared to the
prior year.
Interest and dividend income on cash and investments increased to $4.1
million during 1998 compared to $3.8 million during 1997. This increase in cash
and investment income of $327,000, or 8.6%, was primarily attributable to a
14.1% increase in the average balance of interest-bearing cash and investments,
partially offset by a decrease in the yield earned.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $3.8
million, or 33.6%, to $15.1 million for 1998, from $11.3 million for 1997. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $86.9 million, or 34.5%,
between the two periods. The overall cost of interest-bearing liabilities
decreased 3 basis points, or 0.7%, compared to the prior year.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.0 million
for 1998 compared to $810,000 for 1997. Management frequently evaluates several
factors, including the risk characteristics of the loan portfolio, actual and
estimated charge-offs, and new loan originations, when determining the provision
for loan losses. The Company's ratio of loan loss allowance to total loans was
1.26% at December 31, 1998 and 1.32% at December 31, 1997.
FEES AND OTHER INCOME. Total fees and other income were $19.9 million for
1998 compared to $16.2 million for 1997. Investment management and trust fees
increased $2.0 million, or 14.8%, primarily as the result of a 17.8% increase in
the Company's assets under management from $2.4 billion for 1997 to $2.8 billion
for 1998. Financial planning fees increased $359,000, or 15.4% due to a
combination of new clients, increased services to existing clients, and annual
fee increases. In 1998, Westfield earned net performance fees of $732,000 on the
limited partnerships it manages. In 1997, no such fees were earned.
25
Deposit account service charges increased $12,000, or 5.3%, to $237,000 for
1998 as a result of an increase in the number of deposit accounts and
transactions. Gain on sale of loans increased $208,000 due to the fact that more
loans were sold in the secondary market as a result of strong demand for fixed
rate loans. Other fee income increased $212,000, or 63.9% to $544,000 for 1998
due mainly to an increase in non-amortized loan fees.
OPERATING EXPENSE. Total operating expense for 1998 was $24.7 million
compared to $21.3 million for 1997, an increase of $3.4 million, or 15.8%, as
compared to 1997. This increase in total operating expense was primarily the
result of the Company's growth, continuing investments in technology and
expansion of leased premises. The Company experienced a 23.9% increase in total
assets, and an 18.8% increase in the number of employees from December 31, 1997
to December 31, 1998.
Salaries and benefits, the largest component of operating expense,
increased $3.7 million, or 26.9%, to $17.6 million for the year ended December
31, 1998, from $13.8 million for the corresponding period in 1997. This increase
was primarily due to an 18.8% increase in the number of employees, salary
increases, and increases in business driven variable compensation such as sales
commissions and bonuses.
Occupancy and equipment expense increased $464,000, or 24.6%, to $2.4
million for 1998, from $1.9 million in 1997. This increase is primarily due to
the Bank's improvements at its headquarters during 1998, the opening of the
Wellesley, Massachusetts banking office in April 1998, and expenses related to
the Company's continued investments in technology.
Professional services, which include such expenses as legal and consulting
fees, audit and compliance services and other fees paid to external service
providers, increased $359,000, or 41.0%, to $1.2 million for 1998. This increase
is primarily due to the fact that in 1998, the Company outsourced internal audit
and compliance functions which had previously been done internally. The Company
also incurred a higher level of legal and consulting expenses related to special
projects during 1998 than during 1997.
Marketing and business development expenses increased $128,000, or 14.9%,
to $985,000 for 1998. This increase is primarily due to expanded image
advertising designed to increase the visibility of the Company and its products
and services, as well as an increase in the number of employees and new business
generating activities.
Contract services and processing, which represent fees paid to outside
service providers for data processing, custody, and systems, increased $157,000,
or 29.8%, to $684,000 for 1998. This increase is primarily due to an increase in
custody expense for assets under management at the Bank and volume related
charges for data processing and service charges related to new products offered
to the Bank's clients.
In 1997, the Company incurred merger expenses of $1.5 million related to
the pooling acquisition of Westfield. There were no such expenses in 1998. Other
expenses include supplies, telephone, postage, publications and subscriptions,
employee training, and other miscellaneous business expenses. These expenses
were relatively flat during 1998 as compared to 1997.
INCOME TAX EXPENSE. The Company recorded income tax expense of $2.9 million
in 1998 as compared to $1.9 million in 1997. The effective tax rate was 34.4%
and 35.3% in 1998 and 1997, respectively. The increase in tax expense is
partially due to the fact that Westfield was a tax-exempt S-Corporation prior to
the date of acquisition. If Westfield had been a fully taxable entity, the
Company would have incurred approximately $186,000, or $0.02 per share, of
additional income tax expense in 1997. Under these circumstances, the effective
tax rate in 1997 would have been 38.7%.
26
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Position ("SOP") 98-5, "Accounting for Costs of a Start-Up Entity".
SOP 98-5 requires organizational costs which were being amortized to be expensed
as of the effective date of this statement, January 1, 1999, and accounted for
as a cumulative effect of a change in accounting principle. On January 1, 1999,
the Bank expensed $125, 000 of unamortized organizational costs, net of tax.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. 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". The Statements are effective for fiscal years beginning
after June 15, 2000, and are not expected to have a material impact on the
Company's consolidated financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes thereto,
presented in Part II, Item 8, "Financial Statements and Supplementary Data,"
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
YEAR 2000 READINESS DISCLOSURE
SCOPE AND OVERVIEW. In 1996, the Company formed a Year 2000 project team to
identify information technology and non-information technology systems,
procedures, and practices that require modification or replacement. The Year
2000 problem concerns the inability of computer-based systems, including among
others, computer hardware, embedded chips, and computer software programs, to
recognize properly and process date-sensitive information involving 20th and
21st century dates. Data processing for the Company's major operating systems
(investment management, custody, loans and deposits) is conducted through third
party vendors using on-site computer interfaces. Inventory and Year 2000
readiness assessment of all information technology and non-information
technology systems and applications have been completed and all third party
vendors who service the Company have been contacted. Efforts to bring the major
operating systems, and certain outsourced applications, into compliance with
Year 2000 requirements have been accomplished primarily through the installation
of updated or replacement hardware or programs developed by third parties. In
addition the status of all Company facilities and all significant third-party
providers of goods and services to the Company has been assessed.
STATE OF READINESS. The Company's Year 2000 Readiness Program contained
a number of discrete segments, including Awareness and Assessment, Project
Planning, Remediation, User Acceptance Test Plans, Unit Testing, Commercial,
Personal, Contingency Plans for Information Systems and Contingency Plans for
Business Continuation. Each segment of the Company's Year 2000 Readiness Program
has been completed. Contingency Planning for all mission critical information
technology systems (i.e. those vital to the successful continuation of core
business activities) and for Business Continuation has been completed and will
be updated periodically during 2000.
The Company relies on several third party service providers for key
business processes. It continues to work closely with these companies to monitor
the effects of Year 2000 on these providers. The Company's Year 2000 project
team has contacted all material service providers to discuss and assess their
Year 2000 readiness. In addition, the Company sought verbal and written
verification from its material third party service providers as to their Year
2000 readiness. The Company began Year 2000 testing with material third party
service providers during the third quarter of 1998, and completed testing by
June 30, 1999.
27
The Remediation phase, wherein non-compliant software and hardware are
either modified or replaced, was substantially completed by December 31, 1998
for mission critical applications and by March 31, 1999 for non-mission critical
applications. The Company also completed User Acceptance Testing for mission
critical information technology and non-information technology systems by June
30, 1999. Test Plans for non-critical applications were completed during the
third quarter of 1999.
The initial portion of the Commercial phase, which includes the
evaluation of credit risk stemming from problems borrowers may have in resolving
their own Year 2000 issues, has been completed; however, monitoring of the
remediation efforts of high risk customers will be ongoing. During the
monitoring stage the Company is taking steps designed to reduce any increased
potential credit risk as a result of borrowers' Year 2000 issues. Assessment of
Year 2000 risk has been incorporated into the loan underwriting process. During
this phase the Company is also evaluating investments made on behalf of
investment management and trust clients and in the Company's own investment
portfolio to determine risk stemming from problems securities issuers may have
in resolving their own Year 2000 issues. Also encompassed in this phase, are
in-process evaluation, assessment and monitoring of the state of readiness of
the Company's funds providers and the capital markets. The Personal phase is
largely focused on customer communications as to the state of the Company's Year
2000 readiness. Initial communications have been distributed and the process is
ongoing.
RISKS OF YEAR 2000 ISSUES. The Company's businesses are substantially
dependent upon its data processing software and hardware systems, and on its
ability to process information. If the Company failed to be Year 2000 compliant,
as compared to its competitors, there could be an adverse effect on the
Company's business. In addition, since the Company is regulated by various
regulatory agencies of state and federal banking authorities, failure to be Year
2000 compliant could subject the Company to formal supervisory or enforcement
actions, which could have an adverse impact on the Company's business.
Since the Company relies on third parties for software and other
support, there are risks that the Company's operations could be disrupted by
adverse developments affecting the operations of these third parties. Such risks
include, among others, an inability to process and underwrite loan applications,
to credit deposits and withdrawals from deposit accounts, to credit loan
payments or track delinquencies, to properly reconcile and record daily activity
or to engage in normal banking activities. The Company continues to discuss
these matters with, obtain written certification from, and test the systems of
third party service providers as to Year 2000 compliance. However, there can be
no assurance that any potential impact associated with incompatible systems
after December 31, 1999 would not have a material adverse effect on the
Company's business, financial condition or results of operation.
Additionally, if those commercial borrowers whose operations depend
heavily on automated systems experience Year 2000 compliance problems affecting
their ability to repay, the Company's financial condition and results of
operations could be adversely affected by requirements to record additional loan
loss provision. Furthermore, the Company faces financial risk from its fund
providers as the Year 2000 problem may produce some deposit contraction forcing
a change to alternative and higher costing funding sources. Finally, to the
extent that certain utility and communication services utilized by the Company
face Year 2000 problems, the Company's operations could be disrupted.
CONTINGENCY PLANS. To date, the Company has not experienced any
significant Year 2000 problems. The Company has developed contingency plans in
the event of a Year 2000 problem, however there can be no assurance that these
plans will fully mitigate any failures or problems. Furthermore, there may be
certain mission critical third party services where alternative arrangements are
limited or unavailable.
EXPENSES. Year 2000 Readiness Program expenses are absorbed within
normal spending levels. The Company upgrades its hardware and associated
software and invests in new information technology systems as part of its
ongoing operations. Neither the upgrades, nor new investments made to date
through December 31, 1999, have been accelerated due to the Year 2000 Readiness
Program. The out-of-pocket costs related to the Year 2000 Readiness Program were
$141,000 for the year ended December 31, 1999. The Company's credit risk
associated with borrowers may increase to the extent that borrowers fail to
adequately address Year 2000 issues. As part of the Company's Year 2000 project,
existing loans have been evaluated to identify and monitor those loans with the
highest exposure to Year 2000 risk.
The preceding "Year 2000 Readiness Disclosure" discussion contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1933. These forward-looking statements represent the Company's
beliefs or expectations regarding future events. When used in the "Year 2000
Readiness Disclosure" discussion, the words "believes," "expects," "estimates,"
and similar expressions are intended to identify forward-looking statements.
Forward-looking statements include, without limitation, the Company's
expectations as to when it will complete the modification and testing phases of
its Year 2000 project plan as well as its Year 2000 contingency plans; its
estimated cost of
28
achieving Year 2000 readiness; and the Company's belief that its internal
systems will be Year 2000 compliant in a timely manner. All forward-looking
statements involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors that may
cause these differences include, but are not limited to, the availability of
qualified personnel and other information technology resources; the ability to
identify and remediate all date sensitive lines of computer code or to replace
embedded computer chips in affected systems or equipment; and the actions of
governmental agencies or other third parties with respect to Year 2000 problems.
RISK FACTORS AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT, INCLUDING THE INFORMATION INCORPORATED HEREIN BY
REFERENCE, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS SET FORTH IN THIS ANNUAL REPORT INCLUDING THE INFORMATION
INCORPORATED HEREIN BY REFERENCE. FACTORS WHICH MAY CAUSE SUCH A MATERIAL
DIFFERENCE INCLUDE THOSE SET FORTH BELOW. INVESTORS IN THE COMPANY'S COMMON
STOCK SHOULD CAREFULLY CONSIDER THE DISCUSSION OF RISK FACTORS BELOW, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN BANKING CUSTOMERS AT CURRENT LEVELS
Competition in the local banking industry coupled with our relatively small
size may limit the ability of the Bank to attract and retain banking
customers. The Bank faces competition from the following:
o other banking institutions (including larger Boston and suburban
commercial banking organizations);
o savings banks;
o credit unions;
o other financial institutions; and
o non-bank financial service companies serving eastern Massachusetts
and adjoining areas.
In particular, the Bank's competitors include several major financial
companies whose greater resources may afford them a marketplace advantage by
enabling them to maintain numerous banking locations and mount extensive
promotional and advertising campaigns. Areas of competition include interest
rates for loans and deposits, efforts to obtain deposits and range and
quality of services provided.
Because the Bank maintains a smaller staff and has fewer financial and
other resources than larger institutions with which it competes, it may be
limited in its ability to attract customers. In addition, some of the Bank's
current commercial banking customers may seek alternative banking sources as
they develop needs for credit facilities larger than the Bank can accommodate.
If the Bank is unable to attract and retain banking customers, it may be
unable to continue its loan growth and its results of operations and
financial condition may otherwise be negatively impacted. In as much as the
Bank is our sole banking subsidiary, its financial performance is very
significant to our overall results of operations and financial condition.
Also see Part I, Item 1, "Business--Competition" for further information.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN INVESTMENT MANAGEMENT CLIENTS
AT CURRENT LEVELS
Due to the intense local competition and our relatively short history
and limited record of performance in the investment management business, the
Bank and our investment management subsidiaries, Westfield and RINET, may not
be able to attract and retain investment management clients at current levels.
In the investment management industry, we compete primarily with the
following:
o commercial banks and trust companies;
o mutual fund companies;
o investment advisory firms;
o stock brokerage firms;
o law firms; and
o other financial services companies.
29
Competition is especially keen in our geographic market area, because there
are numerous well-established and successful investment management firms in
Boston. Many of our competitors have greater resources than we have.
Our ability to successfully attract and retain investment management
clients is dependent upon the ability of each to compete with its competitors'
investment products, level of investment performance, client services and
marketing and distribution capabilities. If we are not successful, our results
from operations and financial position may be negatively impacted.
In addition, our ability to retain investment management clients may be
impaired by the fact that our investment management contracts are typically
short-term in nature. Approximately 47% of our revenues are derived from
investment management contracts which are typically terminable upon less than 30
days' notice. Most of our clients may withdraw funds from accounts under
management generally in their sole discretion.
Moreover, Westfield receives performance-based fees resulting from its
status as general partner or investment manager of three limited partnership
investment funds. The amount of these fees is impacted directly by the
investment performance of Westfield. As a result, the future revenues from
such fees may fluctuate and may be affected by conditions in the capital
markets and other general economic conditions. Westfield is our major
investment management subsidiary, and its financial performance is a
significant factor in our overall results of operations and financial
condition. Also see Part I, Item 1, "Business--Competition" for further
information.
DEFAULTS IN THE REPAYMENT OF LOANS MAY NEGATIVELY IMPACT OUR BUSINESS
Defaults in the repayment of loans by the Bank's customers may
negatively impact its business. A borrower's default on its obligations under
one or more of the Bank's loans may result in lost principal and interest
income and increased operating expenses as a result of the allocation of
management time and resources to the collection and work-out of the loan.
In certain situations, where collection efforts are unsuccessful or
acceptable work-out arrangements cannot be reached, the Bank may have to
write-off the loan in whole or in part. In such situations, the Bank may
acquire any real estate or other assets, if any, which secure the loan
through foreclosure or other similar available remedies. In such cases, the
amount owed under the defaulted loan often exceeds the value of the assets
acquired.
The Bank's management periodically makes a determination of an allowance
for loan losses based on available information, including the quality of its
loan portfolio, certain economic conditions, the value of the underlying
collateral and the level of its non-accruing loans. Provisions to this
allowance result in an expense for the period. If, as a result of general
economic conditions or an increase in defaulted loans, management determines
that additional increases in the allowance for loan losses are necessary,
the Bank will incur additional expenses.
In addition, bank regulatory agencies periodically review the Bank's
allowance for loan losses and the values it attributes to real estate
acquired through foreclosure or other similar remedies. Such regulatory
agencies may require the Bank to adjust its determination of the value for
these items. These adjustments could negatively impact the Bank's results of
operations or financial position.
A DOWNTURN IN THE LOCAL ECONOMY OR REAL ESTATE MARKET COULD NEGATIVELY
IMPACT OUR BANKING BUSINESS
A downturn in the local economy or real estate market could negatively
impact our banking business. Because the Bank serves primarily individuals
and smaller businesses located in eastern Massachusetts and adjoining areas,
with a particular concentration in the Greater Boston Metropolitan Area, the
ability of the Bank's customers to repay their loans is impacted by the
economic conditions in these areas. The Bank's commercial loans are generally
concentrated in the following customer groups:
o real estate developers and investors;
o financial service providers;
o technology companies;
o manufacturing and communications companies;
o professional service providers;
o general commercial and industrial companies; and
o individuals.
30
The Bank's commercial loans, with limited exceptions, are secured by
either real estate (usually, income producing residential and commercial
properties), marketable securities or corporate assets (usually, accounts
receivable, equipment or inventory). Substantially all of the Bank's
residential mortgage and home equity loans are secured by residential
property in eastern Massachusetts. As a result, conditions in the real estate
market specifically, and the Massachusetts economy generally, can materially
impact the ability of the Bank's borrowers to repay their loans and affect
the value of the collateral securing these loans.
FLUCTUATIONS IN INTEREST RATES MAY NEGATIVELY IMPACT OUR BANKING BUSINESS
Fluctuations in interest rates may negatively impact the business of the
Bank. The Bank's main source of income from operations is net interest
income, which is equal to the difference between the interest income received
on interest-bearing assets (usually, loans and investment securities) and the
interest expense incurred in connection with interest-bearing liabilities
(usually, deposits and borrowings). The Bank's net interest income can be
affected significantly by changes in market interest rates. In particular,
changes in relative interest rates may reduce the Bank's net interest income
as the difference between interest income and interest expense decreases. As
a result, the Bank has adopted asset and liability management policies to
minimize the potential adverse effects of changes in interest rates on net
interest income, primarily by altering the mix and maturity of loans,
investments and funding sources. However, we cannot assure you that a
decrease in interest rates will not negatively impact the Bank's results from
operations or financial position.
An increase in interest rates could also have a negative impact on the
Bank's results of operations by reducing the ability of borrowers to repay
their current loan obligations, which could not only result in increased loan
defaults, foreclosures and write-offs, but also necessitate further increases
to the Bank's allowance for loan losses.
OUR COST OF FUNDS FOR BANKING OPERATIONS MAY INCREASE AS A RESULT OF GENERAL
ECONOMIC CONDITIONS, INTEREST RATES AND COMPETITIVE PRESSURES
Our cost of funds for banking operations may increase as a result of
general economic conditions, interest rates and competitive pressures. The
Bank has traditionally obtained funds principally through deposits and
through borrowings. As a general matter, deposits are a cheaper source of
funds than borrowings, because interest rates paid for deposits are typically
less than interest rates charged for borrowings. Historically and in
comparison to commercial banking averages, the Bank has had a higher
percentage of its time deposits in denominations of $100,000 or more. Within
the banking industry, the amounts of such deposits are generally considered
more likely to fluctuate than deposits of smaller denominations. If as a
result of general economic conditions, market interest rates, competitive
pressures or otherwise, the value of deposits at the Bank decreases relative
to its overall banking operations, the Bank may have to rely more heavily on
borrowings as a source of funds in the future.
OUR INVESTMENT MANAGEMENT BUSINESS MAY BE NEGATIVELY IMPACTED BY CHANGES IN
ECONOMIC AND MARKET CONDITIONS
Our investment management business may be negatively impacted by changes in
general economic and market conditions because the performance of such business
is directly affected by conditions in the financial and securities markets.
The financial markets and the investment management industry in general
have experienced record performance and record growth in recent years. The
financial markets and businesses operating in the securities industry, however,
are highly volatile (meaning that performance results can vary greatly within
short periods of time) and are directly affected by, among other factors,
domestic and foreign economic conditions and general trends in business and
finance, all of which are beyond our control. We cannot assure you that broad
market performance will be favorable in the future. Any decline in the financial
markets or a lack of sustained growth may result in a corresponding decline in
our performance and may adversely affect the assets which we manage.
In addition, Westfield's management contracts generally provide for fees
payable for investment management services based on the market value of
assets under management, although a portion also provide for the payment of
fees based on investment performance. Because most contracts provide for a
fee based on market values of securities, fluctuations in securities prices
may have a material adverse effect on our results of operations and financial
condition.
31
OUR INVESTMENT MANAGEMENT BUSINESS IS HIGHLY REGULATED
Our investment management business is highly regulated, primarily at the
federal level. The failure of any of our subsidiaries that provide investment
management services to comply with applicable laws or regulations could result
in fines, suspensions of individual employees or other sanctions, including
revocation of such subsidiary's registration as an investment adviser.
Specifically, three of our subsidiaries, including Westfield and RINET
are registered investment advisers under the Investment Advisers Act. The
Investment Advisers Act imposes numerous obligations on registered investment
advisers, including fiduciary, record keeping, operational and disclosure
obligations. These subsidiaries, as investment advisers, are also subject to
regulation under the federal and state securities laws and the fiduciary laws
of certain states. In addition, Westfield acts as a sub-adviser to a mutual
fund which is registered under the 1940 Act and is subject to that act's
provisions and regulations.
We are also subject to the provisions and regulations of ERISA to the
extent we act as a "fiduciary" under ERISA with respect to certain of our
clients. ERISA and the applicable provisions of the federal tax laws, impose a
number of duties on persons who are fiduciaries under ERISA and prohibit certain
transactions involving the assets of each ERISA plan which is a client of ours,
as well as certain transactions by the fiduciaries (and certain other related
parties) to such plans.
In addition, applicable law provides that all investment contracts with
mutual fund clients may be terminated by the clients, without penalty, upon no
later than 60 days' notice. Investment contracts with institutional and other
clients are typically terminable by the client, also without penalty, upon 30
days' notice.
Boston Private Financial Holdings itself does not manage investments for
clients, does not provide any investment management services and, therefore,
is not a registered investment adviser. The Bank is exempt from the
regulatory requirements of the Investment Advisors Act, but is subject to
extensive regulation by the FDIC and the Commissioner of Banks of The
Commonwealth of Massachusetts.
OUR BANKING BUSINESS IS HIGHLY REGULATED
Bank holding companies and state chartered banks operate in a highly
regulated environment and are subject to supervision and examination by
federal and state regulatory agencies. Boston Private Financial Holdings is
subject to the BHCA, and to regulation and supervision by the Federal Reserve
Board. The Bank, as a Massachusetts chartered trust company the deposits of
which are insured by the FDIC, is subject to regulation and supervision by
the Massachusetts Commissioner of Banks and the FDIC.
Federal and state laws and regulations govern numerous matters including
changes in the ownership or control of banks and bank holding companies,
maintenance of adequate capital and the financial condition of a financial
institution, permissible types, amounts and terms of extensions of credit and
investments, permissible non-banking activities, the level of reserves
against deposits and restrictions on dividend payments. The FDIC and the
Massachusetts Commissioner of Banks possess cease and desist powers to
prevent or remedy unsafe or unsound practices or violations of law by banks
subject to their regulation, and the Federal Reserve Board possesses similar
powers with respect to bank holding companies. These and other restrictions
limit the manner in which Boston Private Financial Holdings and the Bank
may conduct business and obtain financing.
Furthermore, our banking business is affected not only by general
economic conditions, but also by the monetary policies of the Federal Reserve
Board. Changes in monetary or legislative policies may affect the interest
rates the Bank must offer to attract deposits and the interest rates it must
charge on its loans, as well as the manner in which it offers deposits and
makes loans. These monetary policies have had, and are expected to continue
to have, significant effects on the operating results of depository
institutions generally including the Bank.
TO THE EXTENT THAT WE ACQUIRE OTHER COMPANIES IN THE FUTURE, OUR BUSINESS MAY
BE NEGATIVELY IMPACTED BY CERTAIN RISKS INHERENT WITH SUCH ACQUISITIONS
Although we do not have an aggressive acquisition strategy, we have in the
past considered, and will in the future continue to consider, the acquisition of
other banking and investment management companies. To the extent that we acquire
other companies in the future, our business may be negatively impacted by
certain risks inherent with such acquisitions.
32
These risks include the following:
o the risk that the acquired business will not perform in accordance
with management's expectations;
o the risk that difficulties will arise in connection with the
integration of the operations of the acquired business with the
operations of our banking or investment management businesses;
o the risk that management will divert its attention from other aspects
of our business;
o the risk that we may lose key employees of the acquired business; and
o the risks associated with entering into geographic and product markets
in which we have limited or no direct prior experience.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY
NEGATIVELY AFFECT THE MARKET VALUE OF OUR COMMON STOCK AND COULD IMPACT OUR
ABILITY TO OBTAIN ADDITIONAL EQUITY FINANCING
On February 4, 2000, the Commission declared a registration statement on
Form S-3 effective, pursuant to which 3,094,589 shares of common stock of the
Company were registered to enable the holders to publicly sell shares which
would otherwise be ineligible for sale in the public market. The registration
of these shares discharged our obligations under the terms of registration
rights agreements with the former stockholders of Westfield and RINET. The
sale of substantial number of shares of common stock into the public market,
or the availability of these shares for future sale, could adversely affect
the market price for our common stock and could impair our ability to obtain
additional capital in the future through an offering of equity securities
should we desire to do so.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY AND MARKET RISK
Management considers interest rate risk to be a significant market risk for
the Company. Interest rate risk is the exposure to adverse changes in the net
income of the Company as a result of changes in interest rates. Consistency in
the Company's earnings is related to the effective management of interest rate
sensitive assets and liabilities, and on the degree of fluctuation of investment
management fee income due to changes in interest rates.
Fee income from investment management and trust services is not directly
dependent on market interest rates and may provide the Company a relatively
stable source of income in varying market interest rate environments. However,
this fee income is generally based upon the value of assets under management
and, therefore, can be significantly affected by changes in the values of
equities and bonds. Furthermore, performance fees and partnership income earned
by Westfield as manager of limited partnerships are directly dependent upon
short-term investment performance that can fluctuate significantly with changes
in the capital markets.
The principal objective of the Bank's asset and liability management is to
maximize profit potential while minimizing the vulnerability of its operations
to changes in interest rates by means of managing the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Bank's actions in this regard are taken under
the guidance of its Asset/Liability Committee ("ALCO"), which is comprised of
members of senior management. This committee is actively involved in formulating
the economic assumptions that the Bank uses in its financial planning and
budgeting process and establishes policies which control and monitor the
sources, uses and pricing of funds. The Bank evaluates hedging techniques to
reduce interest rate risk where possible.
The ALCO uses both interest rate "gap" sensitivity and simulation analysis
to measure inherent risk in the bank's balance sheet at a specific point in
time. The simulations look forward at one and two year increments with
instantaneous and sustained interest rate shocks of up to 200 basis points, and
take into account the repricing, maturity, and prepayment characteristics of
individual products and investments. The simulation results are reviewed to
determine whether the exposure to net interest income and to the fair value of
the available for sale investment portfolio is within the guidelines which are
set and monitored at both the ALCO and Board levels. The ALCO committee reviews
the results with regard to the established tolerance levels and recommends
appropriate strategies to manage this exposure. As of December 31, 1999, net
interest income simulation and fair market value simulation indicated that the
Bank's exposure to changing interest rates was within the established tolerance
levels. While the ALCO reviews simulation assumptions to ensure that they
reflect historical experience, it should be noted that income simulation may not
always prove to be an accurate indicator of interest rate risk because the
actual repricing, maturity, and prepayment characteristics of individual
products may differ from the estimates used in the simulations. The following
table presents the impact of instantaneous and sustained interest rate shocks on
pro forma net interest income over a twelve month period:
TWELVE MONTHS BEGINNING 1/1/00
-----------------------------------
DOLLAR PERCENT
CHANGE CHANGE
---------------- ---------------
(DOLLARS IN THOUSANDS)
Up 200 basis point shock ............ $ (255) (1.25%)
Down 200 basis point shock........... 37 0.18%
The Bank also uses interest rate sensitivity "gap" analysis to provide a
general overview of the Bank's interest rate risk profile. The effect of
interest rate changes on the assets and liabilities of a financial institution
may be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution'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
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. 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 interest rate sensitive assets. During a period of
falling interest rates, a positive gap would tend to adversely affect net
interest income, while a negative gap would tend to result in an increase in net
income. During a period of rising interest rates, a positive gap would tend to
result in an increase in net interest income while a negative gap would tend to
affect net interest income adversely.
34
The Bank has historically sought to maintain a relatively narrow gap
position and has, in some instances, foregone investment in higher yielding
assets when such investment, in management's opinion, exposed the Bank to undue
interest rate risk. However, the Bank does not attempt to perfectly match
interest rate sensitive assets and liabilities and will indeed selectively
mismatch its assets and liabilities to a controlled degree when it considers it
both appropriate and prudent to do so. There are a number of relevant time
periods in which to measure the gap position, such as at the 30, 60, 90, or 180
day points in the maturity schedule. Management monitors the Bank's gap position
at each of these maturity points, and also tends to focus closely on the gap at
the one year point in making funding decisions, such as with respect to the
Bank's adjustable rate mortgage loan portfolio. Assumptions based on the
historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the repricing schedule. These
assumptions are inherently uncertain and, as a result, the repricing schedule
cannot precisely measure net interest income or predict the impact of
fluctuations in interest rates on net interest income.
The repricing schedule for the Bank's interest-earning assets and
interest-bearing liabilities is measured on a cumulative basis. The simulation
analysis is based on actual cash flows and repricing characteristics, and
incorporates market-based assumptions regarding the impact of changing interest
rates on the prepayment speeds of certain assets and liabilities. The model also
includes senior management projections for activity levels in product lines
offered by the Bank. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes as well as changes in
market conditions and management strategies. The following table presents the
repricing schedule for the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1999:
OVER THREE
WITHIN TO SIX OVER SIX OVER ONE
THREE MONTHS TO TWELVE YEAR TO OVER FIVE
MONTHS MONTHS FIVE YEARS YEARS TOTAL
------------- ------------ ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Interest earning assets(1):
Cash and due from banks $ 1,817 $ -- $ -- $ -- $ -- $ 1,817
Federal funds sold -- -- -- -- -- --
Investment securities 1,406 8,097 10,849 30,634 22,619 73,605
Mortgage-backed securities 402 3,726 351 1,030 1 5,510
FHLB stock 4,830 -- -- -- -- 4,830
Loans-fixed rate 2,953 3,322 8,149 48,485 15,601 78,510
Loans-variable rate 166,479 17,356 36,552 140,931 10,560 371,878
-------- --------- -------- -------- -------- --------
Total interest earning assets 177,887 32,501 55,901 221,080 48,781 536,150
-------- --------- -------- -------- -------- --------
Interest bearing liabilities (2):
Savings and NOW accounts (3) 4,598 4,602 -- -- 36,282 45,482
Money market accounts 189,275 29,543 -- -- 19,696 238,514
Time certificates under $100,000 12,045 4,144 3,407 2,691 106 22,393
Time certificates $100,000 or more 39,791 4,010 11,278 6,009 -- 61,088
Reverse repurchase agreements 16,551 -- -- -- -- 16,551
Borrowings 6,036 3,085 15,174 49,006 7,407 80,708
-------- --------- -------- -------- -------- --------
Total interest bearing liabilities 268,296 45,384 29,859 57,706 63,491 464,736
-------- --------- -------- -------- -------- --------
Net interest sensitivity gap
during the period $( 90,409) $ (12,883) $ 26,042 $163,374 $(14,710) $ 71,414
========= ========= ======== ======== ======== ========
Cumulative gap $( 90,409) $(103,292) $(77,250) $ 86,124 $71,414
========= ======== ======== ======== =======
Interest-sensitive assets as a
percent of interest-sensitive
liabilities (cumulative) 66.30% 67.07% 77.51% 121.46% 115.37%
Cumulative gap as a percent of total (15.93)% (18.21)% (13.62)% 15.18% 12.59%
assets
- -------------------------------------------------------------------------------------------------------------
(1) Adjustable and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in which
they are due, and fixed rate loans are included in the periods in which they are
scheduled to mature.
(2) Does not include $53.1 million of demand accounts because they are
non-interest bearing.
(3) While Savings and NOW accounts can be withdrawn any time, management
believes they have characteristics that make their effective maturity longer.
The preceding table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest income because the repricing
of various assets and liabilities is discretionary and is subject to competitive
and other factors. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rates.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Boston Private Financial Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Boston
Private Financial Holdings, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Boston
Private Financial Holdings, 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 19, 2000
36
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------------
1999 1998
---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS:
Cash and due from banks $ 11,190 $ 12,949
Federal funds sold -- 11,000
Investment securities available for sale (amortized cost of $75,424
and $53,996, respectively, Notes 5, 11 and 12) 73,605 54,102
Mortgage-backed securities available for sale (amortized cost of $5,627
and $11,840, respectively, Notes 6 and 11) 5,510 11,909
Loans receivable (Notes 7 and 11):
Commercial 190,817 154,940
Residential mortgage 234,185 173,810
Home equity 25,039 19,866
Other 347 335
-------- --------
Total loans 450,388 348,951
Less allowance for loan losses (Note 8) (5,336) (4,386)
-------- --------
Net loans 445,052 344,565
Stock in the Federal Home Loan Bank of Boston (Note 11) 4,830 4,718
Premises and equipment, net (Note 9) 4,739 3,790
Excess of cost over net assets acquired, net 3,015 3,424
Fees receivable 6,320 3,614
Accrued interest receivable 3,597 2,405
Other assets 9,515 5,339
-------- --------
Total assets $567,373 $457,815
======== ========
LIABILITIES:
Deposits (Note 10) $420,535 $334,852
FHLB borrowings (Note 11) 80,672 76,329
Securities sold under agreements to repurchase (Note 12) 16,551 6,241
Other borrowings 36 73
Accrued interest payable 1,281 651
Other liabilities 9,153 7,056
-------- --------
Total liabilities 528,228 425,202
-------- --------
Commitments and contingencies (Notes 9, 16, 19 and 20)
STOCKHOLDERS' EQUITY (NOTES 3, 14 AND 19):
Common stock, $1.00 par value per share;
authorized: 30,000,000 shares
issued: 11,616,070 shares in 1999 and 11,513,441 shares in 1998 11,616 11,513
Additional paid-in capital 12,341 11,932
Retained earnings 16,747 9,551
Stock subscriptions receivable (320) (495)
Accumulated other comprehensive (loss) income (1,239) 112
-------- --------
Total stockholders' equity 39,145 32,613
-------- --------
Total liabilities and stockholders' equity $567,373 $457,815
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and dividend income:
Loans $30,714 $25,144 $18,914
Taxable investment securities 1,575 1,454 1,116
Non-taxable investment securities 1,262 1,043 718
Mortgage-backed securities 451 896 1,351
FHLB stock dividends 318 257 215
Federal funds sold 476 351 220
Deposits in banks 146 140 194
------- ------- -------
Total interest and dividend income 34,942 29,285 22,728
------- ------- -------
Interest expense:
Deposits 12,213 10,307 7,834
FHLB borrowings 4,532 4,439 2,852
Securities sold under agreements to repurchase 529 181 322
Federal funds purchased and other 133 210 326
------- ------- -------
Total interest expense 17,407 15,137 11,334
------- ------- -------
Net interest income 17,535 14,148 11,394
Provision for loan losses (Note 8) 999 1,004 810
------- ------- -------
Net interest income after provision for loan losses 16,536 13,144 10,584
------- ------- -------
Fees and other income:
Investment management and trust fees 17,982 15,156 13,199
Financial planning fees 3,034 2,696 2,337
Equity in earnings of partnerships 2,895 732 --
Deposit account service charges 280 237 225
Gain on sale of loans, net 147 303 95
Gain on sale of investment securities, net (Note 5) 48 218 10
Other 574 544 332
------- ------- -------
Total fees and other income 24,960 19,886 16,198
------- ------- -------
Operating expense:
Salaries and employee benefits (Note 14) 20,758 17,561 13,843
Occupancy and equipment (Note 9) 3,010 2,350 1,886
Professional services 1,690 1,235 876
Marketing and business development 1,547 985 857
Contract services and processing 1,075 684 527
Amortization of intangibles (Note 2) 284 322 322
Merger expenses 225 -- 1,510
Other (Note 15) 1,943 1,557 1,513
------- ------- -------
Total operating expense 30,532 24,694 21,334
------- ------- -------
Income before income taxes 10,964 8,336 5,448
Income tax expense (Note 13) 3,643 2,865 1,922
------- ------- -------
Income before cumulative effect of a change in accounting principle 7,321 5,471 3,526
Cumulative effect of a change in accounting principle, net of tax (Note 2) 125 -- --
------- ------- -------
Net income $ 7,196 $ 5,471 $ 3,526
======= ======= =======
Per share data (Note 2):
Basic earnings per share:
Income before cumulative effect of change in accounting principle $ 0.63 $ 0.48 $ 0.31
Cumulative effect of change in accounting principle $ (0.01) $ 0.00 $ 0.00
------- ------- -------
Net Income $ 0.62 $ 0.48 $ 0.31
======= ======= =======
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.61 $ 0.46 $ 0.30
Cumulative effect of change in accounting principle $ (0.01) $ 0.00 $ 0.00
------- ------- -------
Net Income $ 0.60 $ 0.46 $ 0.30
======= ======= =======
Average basic common shares outstanding 11,590,757 11,483,814 11,355,697
========== ========== ==========
Average diluted common shares outstanding 11,910,444 11,888,357 11,725,697
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL STOCK OTHER
COMMON PAID-IN RETAINED SUBSCRIPTIONS COMPREHENSIVE
STOCK CAPITAL EARNINGS RECEIVABLE INCOME (LOSS) TOTAL
------------ ------------ --------------- ------------- --------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 1996 $11,087 $11,242 $ 4,723 $(847) $(64) $26,141
Net income -- -- 3,526 -- -- 3,526
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- 87 87
-------
Total comprehensive income, net 3,613
Proceeds from issuance of
290,691 shares of common stock 291 107 -- -- -- 398
Stock options exercised 29 42 -- -- -- 71
Stock subscription payments -- -- -- 178 -- 178
S-Corporation dividends paid -- -- (4,108) -- -- (4,108)
------- ------- ------- ----- ------- -------
Balance at December 31, 1997 11,407 11,391 4,141 (669) 23 26,293
Net income -- -- 5,471 -- -- 5,471
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- 89 89
-------
Total comprehensive income, net 5,560
Proceeds from issuance of
56,469 shares of common stock 56 453 -- -- -- 509
Stock options exercised 50 88 -- -- -- 138
Stock subscription payments -- -- -- 174 -- 174
S-Corporation dividends paid -- -- (61) -- -- (61)
------- ------- ------- ----- ------- -------
Balance at December 31, 1998 11,513 11,932 9,551 (495) 112 32,613
Net income -- -- 7,196 -- -- 7,196
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- (1,351) (1,351)
-------
Total comprehensive income, net 5,845
Proceeds from issuance of 44,579
shares of common stock 45 308 -- -- -- 353
Stock options exercised 58 101 -- -- -- 159
Stock subscription payments -- -- -- 175 -- 175
------- ------- ------- ----- ------- -------
Balance at December 31, 1999 $11,616 $12,341 $16,747 $(320) $(1,239) $39,145
======= ======= ======= ===== ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,196 $ 5,471 $ 3,526
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,447 1,142 1,090
Deferred compensation -- -- (1,466)
Gain on sale of securities (48) (218) (10)
Gain on sale of loans (147) (303) (95)
Loss on disposal of property and equipment -- -- 10
Provision for loan losses 999 1,004 810
Deferred income tax (benefit) expense (307) (693) 285
Loans originated for sale (22,583) (23,709) (8,419)
Proceeds from sale of loans 22,730 24,012 8,514
(Increase) decrease in accrued interest receivable (1,192) (236) (424)
(Increase) decrease in other assets (4,825) (826) (1,442)
Increase (decrease) in accrued interest payable 630 42 261
Increase (decrease) in other liabilities 2,097 2,468 2,177
-------- -------- -------
Net cash provided by operating activities 5,997 8,154 4,817
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold 11,000 (9,800) 5,750
Investment securities available for sale:
Purchases (70,150) (85,661) (25,283)
Sales 7,300 58,378 650
Maturities 41,007 14,730 14,440
Investment securities held to maturity:
Purchases -- (874) (8,252)
Sales -- 794 --
Maturities -- 4,900 5,000
Mortgage-backed securities available for sale:
Principal payments 2,830 1,216 --
Sales 3,387 -- --
Mortgage-backed securities held to maturity:
Principal payments -- 5,034 7,130
Purchase of FHLB stock (112) (1,207) (194)
Distributed (undistributed) earnings of partnership investments (990) (1,793) 995
Net increase in loans (101,197) (72,260) (70,631)
Recoveries on loans previously charged-off 86 122 309
Sales of other real estate owned -- 124 --
Capital expenditures, net of sale proceeds (1,903) (1,487) (1,623)
Acquisition of investment management business -- -- (1,051)
-------- -------- -------
Net cash used in investing activities (108,742) (87,784) (72,760)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 85,683 76,551 48,999
Net increase (decrease) in repurchase agreements 10,310 875 (2,760)
Net increase (decrease) in federal funds purchased -- (13,255) 13,255
Net increase (decrease) in other short-term debt (37) (833) 843
Proceeds from FHLB borrowings 116,770 48,011 52,125
Repayments of FHLB borrowings (112,427) (31,908) (37,432)
S-corporation dividends paid -- (61) (4,108)
Proceeds from stock subscriptions receivable 175 174 178
Proceeds from issuance of common stock, net 512 647 469
-------- -------- -------
Net cash provided by financing activities 100,986 80,201 71,569
-------- -------- -------
(Continued)
40
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------- ------------
(IN THOUSANDS)
Net increase (decrease) in cash and due from banks (1,759) 571 3,626
Cash and due from banks at beginning of year 12,949 12,378 8,752
-------- -------- -------
Cash and due from banks at end of year $ 11,190 $ 12,949 $ 12,378
======== ======== ========
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest $ 16,777 $ 15,455 $ 11,051
Cash paid for income taxes 3,460 3,859 1,224
Non-cash transactions:
Transfers to other real estate owned -- 42 --
Change in unrealized gain (loss) on securities available for sale, net
of estimated income taxes (1,351) 89 87
Transfer of investments to investment securities available for sale -- 17,865 --
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION
Boston Private Financial Holdings, Inc. (the "Company") is a holding
company which owns all of the issued and outstanding shares of common stock of
Boston Private Bank & Trust Company (the "Bank"), a Massachusetts chartered
trust company, Westfield Capital Management Company, Inc. ("Westfield"), a
registered investment advisor, and RINET Company, Inc. ("RINET"), a financial
planning firm. On October 31, 1997, the Company acquired Westfield, a
Massachusetts corporation engaged in providing a range of investment management
services to individual and institutional clients, in exchange for 3,918,367
newly issued shares of the Company's common stock. On October 15, 1999, the
Company acquired RINET, a Massachusetts corporation engaged in providing
financial planning and asset allocation services to high net worth individuals
and families, in exchange for 765,697 newly issued shares of the Company's
common stock. Each acquisition was accounted for as a "pooling of interests".
Accordingly, the results of operations of the Company reflect the financial
position and results of operations including Westfield and RINET on a
consolidated basis for all periods presented. The Company conducts substantially
all of its business through its wholly-owned subsidiaries, the Bank, Westfield
and RINET.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products to high net
worth individuals, their families and businesses in the greater Boston area and
New England and, to a lesser extent, Europe and Latin America. The Bank seeks to
anticipate and respond to the financial needs of its client base by offering
high quality products, dedicated personal service and long-term banking
relationships. The Bank offers its clients a broad range of basic deposit
services, including checking and savings accounts, with automated teller machine
access, and cash management services through sweep accounts and repurchase
agreements. The Bank also offers commercial, residential mortgage, home equity
and consumer loans. In addition, it provides investment advisory and asset
management services, securities custody and safekeeping services, trust and
estate administration and IRA and Keogh accounts.
Westfield serves the investment management needs of high net worth
individuals and institutions with endowments or retirement plans in the greater
Boston area, New England, and other areas of the U.S. Westfield specializes in
separately managed growth equity portfolios, and also acts as the investment
manager of five limited partnerships. Its investment services include a
particular focus on identifying and managing small and mid cap equity positions
as well as balanced growth accounts.
RINET provides fee-only financial planning, tax planning and investment
management services to high net worth individuals and their families in the
greater Boston area, New England, and other areas of the U.S. Its capabilities
include tax planning and preparation, asset allocation, estate planning,
charitable planning, planning for employment benefits, including 401(k) plans,
alternative investment analysis and mutual fund investing.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to prevailing industry practices. The
following is a summary of the significant accounting and reporting policies used
by management in preparing and presenting the consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Bank, Westfield and RINET. The Bank's
consolidated financial statements include the accounts of its wholly-owned
subsidiaries, BPB Securities Corporation, Boston Private Preferred Capital
Corporation, and Boston Private Asset Management Corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from those estimates. Material estimates
related to the determination of the allowance for loan losses are particularly
susceptible to change. In connection with the determination of the allowance for
loan losses, management obtains independent appraisals for significant
properties.
42
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, the Company considers cash and due
from banks to be cash equivalents. Cash flows relating to short term investments
with original maturities of less than 90 days, loans, and deposits are presented
net in the statements of cash flows.
CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances in a non-interest
bearing account with the Federal Reserve Bank based upon a percentage of certain
deposits. As of December 31, 1999, the daily amount required to be held was $5.6
million.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are classified as held to
maturity, available for sale, or trading. Securities classified as held to
maturity are carried at amortized cost only if the Company has a positive intent
and the ability to hold these securities to maturity. Securities classified as
trading are carried at fair value, with unrealized gains and losses included in
earnings, if they are bought and held principally for the purpose of selling in
the near term. 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 other comprehensive
income, net of estimated income taxes.
During the quarter ended September 30, 1998, the Bank reconsidered its
intent to hold investments until maturity. As a result, investment and
mortgage-backed securities classified as held to maturity with an amortized cost
of $17.9 million and an unrealized gain of $170,000 at September 30, 1998 were
reclassified as available for sale. As of December 31, 1999, all of the
Company's investment and mortgage-backed securities were classified as available
for sale.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income by a method that approximates the level-yield
method. Actual prepayment experience is reviewed periodically and the timing of
the accretion and amortization is adjusted accordingly. 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. The amount of the write down is included as a
charge against gain on sale of investment and mortgage-backed securities. Gains
and losses on the sale of investment and mortgage-backed securities are
recognized at the time of sale on a specific identification basis.
LOANS
Impaired loans are loans for which it is probable that the Company will not
be able to collect all amounts due according to the contractual terms of the
loan agreements. Impaired loans are accounted for at the present value of the
expected future cash flows discounted at the loan's effective interest rate,
except those loans that are accounted for at fair value or at the lower of cost
or fair value. Accrual of interest income is discontinued and all interest
previously accrued but not collected is reversed against current period income
when a loan is classified as impaired. Interest received on impaired loans is
either applied against principal or reported as income according to management's
judgment as to the collectibility of principal. At December 31, 1999 and 1998,
the amounts of impaired loans were immaterial.
Loans on which the accrual of interest has been discontinued are designated
nonaccrual loans. Accrual of interest income on loans is discontinued when
concern exists as to the collectibility of principal or interest. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period income. Loans are removed from nonaccrual
status when they become less than ninety days past due and when concern no
longer exists as to the collectibility of principal or interest. Interest
received on nonaccruing loans is either applied against principal or reported as
income according to management's judgment as to the collectibility of principal.
43
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Loan origination fees, net of related direct incremental loan origination
costs, are deferred and recognized into income over the contractual lives of the
related loans as an adjustment to the loan yield, using a method which
approximates the level-yield method. When a loan is sold or paid off, the
unamortized portion of net fees is recognized into income.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a charge to
operations. When management believes that the collection of a loan's principal
balance is unlikely, the principal amount is charged against the allowance.
Recoveries on loans which have been previously charged off are credited to the
allowance as received.
The allowance for loan losses is determined using a systematic analysis and
procedural discipline based on historical experience, product types, and
industry benchmarks. The allowance is segregated into three components;
"general," "specific" and "unallocated". The general component is determined by
applying coverage percentages to groups of loans based on risk ratings and
product types. A system of periodic loan reviews is performed to assess the
inherent risk and assign risk ratings to each loan individually. Coverage
percentages applied are determined based on industry practice and management's
judgement. The specific component is established by allocating a portion of the
allowance for loan losses to individual classified loans on the basis of
specific circumstances and assessments. The unallocated component supplements
the first two components based on management's judgement of the effect of
current and forecasted economic conditions on borrowers' abilities to repay, an
evaluation of the allowance for loan losses in relation to the size of the
overall loan portfolio, and consideration of the relationship of the allowance
for loan losses to nonperforming loans, net charge-off trends, and other
factors. While this evaluation process utilizes historical and other objective
information, the classification of loans and the establishment of the allowance
for loan losses relies to a great extent on the judgement and experience of
management.
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review a financial
institution's allowance for loan losses. Such agencies may require the financial
institution to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization is computed primarily by the
straight-line method over the estimated useful lives of the assets, or the terms
of the leases if shorter.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired is being amortized to expense
using the straight-line method over 15 years. On an ongoing basis, management
reviews the valuation and amortization of its intangible assets, taking into
consideration any events and circumstances that might have diminished their
value. Accumulated amortization amounted to $1.8 million, $1.4 million, and $1.1
million at December 31, 1999, 1998 and 1997, respectively.
INVESTMENT MANAGEMENT AND TRUST ASSETS
Investment management and trust assets amounted to $3.7 billion and $2.8
billion at December 31, 1999 and 1998, respectively. These assets are not
included in the consolidated financial statements because they are held in a
fiduciary or agency capacity and are not assets of the Company.
EMPLOYEE BENEFITS
The Company maintains a Section 401(k) savings plan for employees of the Company
and the Bank. Under the plan, the Company makes a matching contribution of
one-half of the amount contributed by each participating employee, up to 6% of
the employee's yearly salary. The Company also maintains a Section 401(k)
savings plan for the employees of RINET. The annual contribution to this plan is
determined by the Board of Directors of RINET. Contributions to both plans are
charged against current operations in the year they are made.
44
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company maintains a defined contribution profit-sharing plan (the
"Profit Sharing Plan") for the employees of Westfield. The annual contribution
to the plan is determined by the Board of Directors of Westfield. Contributions
to the Profit Sharing Plan are charged against current operations in the year
they are made.
The Company measures compensation cost for stock-based compensation plans
as the difference between the exercise price of options granted and the fair
market value of the Company's stock at the grant date. The Company discloses
proforma net income and earnings per share in the notes to its consolidated
financial statements as if compensation cost was measured at the grant date
based on the value of the award and recognized over the service period.
INCOME TAXES
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
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 recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income during
the period that includes the enactment date.
EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
The following table is a reconciliation of the numerators and denominators
of basic and diluted EPS computations for the years ended December 31.
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Per Per Per
Net Share Net Share Net Share
Income Shares Amount Income Shares Amount Income Shares Amount
------------------------------ ------------------------------ -------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS $7,196 11,591 $0.62 $5,471 11,484 $0.48 $3,526 11,356 $0.31
Effect of Dilutive
Securities
Stock Payable -- -- -- -- -- 23
Stock Options -- 319 -- 404 -- 347
------ ------ ------ ------ ------ ------
Diluted EPS $7,196 11,910 $0.60 $5,471 11,888 $0.46 $3,526 11,726 $0.30
====== ====== ===== ====== ====== ===== ====== ====== =====
For the year ended December 31, 1997, the proforma adjustment for income
taxes of an acquired entity previously filing as an S-Corporation was $186,000,
resulting in proforma net income of $3.3 million, proforma basic earnings per
share of $0.29, and proforma diluted earnings per share of $0.28.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. 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". The Statements are effective for fiscal years beginning
after June 15, 2000, and are not expected to have a material impact on the
Company's consolidated financial statements.
45
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) COMPREHENSIVE INCOME
Comprehensive income represents the change in equity of the Company during
a period from transactions and other events and circumstances from
non-shareholder sources. It includes all changes in equity during a period
except those resulting from investments by shareholders and distributions to
shareholders.
The Company's other comprehensive income (loss) and related tax effects for
the years ended December 31, 1999, 1998, and 1997 is as follows:
TAX EXPENSE
PRE-TAX (BENEFIT) NET
----------------- ---------------- ----------------
(IN THOUSANDS)
1999
UNREALIZED LOSSES ON SECURITIES:
Unrealized holding losses arising during period $(2,063) $(744) $(1,319)
Less: adjustment for realized gains (48) (16) (32)
------- ----- -------
Other comprehensive loss $(2,111) $(760) $(1,351)
======= ===== =======
1998
UNREALIZED GAINS ON SECURITIES:
Unrealized holding gains arising during period $ 357 $ 137 $ 220
Less: adjustment for realized gains (218) (87) (131)
------- ----- -------
Other comprehensive income $ 139 $ 50 $ 89
======= ===== =======
1997
UNREALIZED GAINS ON SECURITIES:
Unrealized holding gains arising during period $ 147 $ 54 $ 93
Less: adjustment for realized gains (10) (4) (6)
------- ----- -------
Other comprehensive income $ 137 $ 50 $ 87
======= ===== =======
(4) BUSINESS SEGMENTS
MANAGEMENT REPORTING
The Company has three reportable segments, the Bank, Westfield and RINET.
The financial performance of the Company is managed and evaluated by business
segment. The segments are managed separately as each business is a company with
different clients, employees, systems, risks, and marketing strategies.
DESCRIPTION OF BUSINESS SEGMENTS
A description of each business segment is provided in Note 1 to the
Consolidated Financial Statements.
MEASUREMENT OF SEGMENT PROFIT AND ASSETS
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Revenues, expenses and assets
are recorded by each segment, and separate financial statements are reviewed by
management. In addition to direct expenses, each business segment is allocated a
share of holding company expenses based on the segment's percentage of
consolidated net income.
46
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RECONCILIATION OF REPORTABLE SEGMENT ITEMS
The following tables are a reconciliation of the revenues, net income,
assets, and other significant items of reportable segments as of and for the
years ended December 31, 1999, 1998, and 1997.
1999
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 17,535 $ 92 $ -- $ -- $ (92) $ 17,535
Non-Interest Income 8,766 13,088 3,106 -- -- 24,960
-------- ------- ------ ------ ------- --------
Total Revenues 26,301 13,180 3,106 -- (92) 42,495
Provision for Loan Losses 999 -- -- -- -- 999
Non-Interest Expense 19,308 8,203 3,033 113 -- 30,657
Income Taxes 1,576 2,037 30 -- -- 3,643
-------- ------- ------ ------ ------- --------
Segment Profit $ 4,418 $ 2,940 $ 43 $ (113) $ (92) $ 7,196
======== ======= ====== ====== ======= ========
BALANCE SHEET DATA:
Total Segment Assets $557,734 $ 8,802 $ 699 $1,340 $(1,202) $567,373
======== ======= ====== ====== ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,754 $ 61 $ 88 $ -- $ -- 1,903
======== ======= ====== ====== ======= ========
Depreciation and Amortization $ 1,215 $ 155 $ 77 $ -- $ -- $ 1,447
======== ======= ====== ====== ======= ========
1998
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 14,166 $ 65 $ -- $ 9 $ (92) $ 14,148
Non-Interest Income 6,818 10,310 2,758 -- -- 19,886
-------- ------- ------ ------ ------- --------
Total Revenues 20,984 10,375 2,758 9 (92) 34,034
Provision for Loan Losses 1,004 -- -- -- -- 1,004
Non-Interest Expense 14,889 6,986 2,819 -- -- 24,694
Income Taxes 1,503 1,387 (25) -- -- 2,865
-------- ------- ------ ------ ------- --------
Segment Profit $ 3,588 $ 2,002 $ (36) $ 9 $ (92) $ 5,471
======== ======= ====== ====== ======= ========
BALANCE SHEET DATA:
Total Segment Assets $452,045 $ 6,903 $ 568 $1,269 $(2,970) $457,815
======== ======= ====== ====== ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,415 $ 33 $ 39 $ -- $ -- $ 1,487
======== ======= ====== ====== ======= ========
Depreciation and Amortization $ 960 $ 132 $ 50 $ -- $ -- $ 1,142
======== ======= ====== ====== ======= ========
1997
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 11,325 $ 69 $ -- $ 11 $ (11) $ 11,394
Non-Interest Income 4,844 8,940 2,414 -- -- 16,198
-------- ------- ------ ------ ------- --------
Total Revenues 16,169 9,009 2,414 11 (11) 27,592
Provision for Loan Losses 810 -- -- -- -- 810
Non-Interest Expense 11,959 5,845 2,383 1,147 -- 21,334
Income Taxes 981 1,157 13 (229) -- 1,922
-------- ------- ------ ------ ------- --------
Segment Profit $ 2,419 $ 2,007 $ 18 $ (907) $ (11) $ 3,526
======== ======= ====== ====== ======= ========
BALANCE SHEET DATA:
Total Segment Assets $365,351 $ 3,586 $ 601 $ 120 $ (115) $369,543
======== ======= ====== ====== ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,333 $ 220 $ 70 $ -- $ -- $ 1,623
======== ======= ====== ====== ======= ========
Depreciation and Amortization $ 873 $ 161 $ 56 $ -- $ -- $ 1,090
======== ======= ====== ====== ======= ========
47
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) INVESTMENT SECURITIES
A summary of investment securities available for sale follows:
Unrealized
Amortized -------------------- Market
Cost Gains Losses Value
----------- --------- ---------- -----------
(IN THOUSANDS)
AT DECEMBER 31, 1999
U.S. Government and agencies $36,174 $ -- $(1,362) $34,812
Municipal bonds 39,250 2 (459) 38,793
------- ---- ------- -------
Total $75,424 $ 2 $(1,821) $73,605
======= ==== ======= =======
AT DECEMBER 31, 1998
U.S. Government and agencies $35,074 $ 10 $ (34) $35,050
Municipal bonds 18,922 132 (2) 19,052
------- ---- ------- -------
Total $53,996 $142 $ (36) $54,102
======= ==== ======= =======
The following table sets forth the maturities of investment securities available
for sale at December 31, 1999 and the weighted average yields of such
securities:
U.S. GOVERNMENT
AND AGENCIES MUNICIPAL BONDS TOTAL
------------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
Amortized Market Average Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield Cost Value Yield
------------------------------- ------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
Within One Year $ 8,708 $ 8,656 5.90% $11,708 $11,683 4.03% $20,416 $20,339 4.83%
After One, But Within Five Years 9,000 8,933 6.26 22,061 21,699 4.36 31,061 30,632 4.92
After Five, But Within Ten Years 8,466 8,182 7.82 2,763 2,745 4.21 11,229 10,927 6.96
After Ten Years 10,000 9,041 7.82 2,718 2,666 5.32 12,718 11,707 7.31
------- ------- ------- ------- ------- -------
Total $36,174 $34,812 6.97% $39,250 $38,793 4.31% $75,424 $73,605 5.60%
======= ======= ======= ======= ======= =======
The weighted average remaining life of investment securities available for
sale at December 31, 1999 was 4.8 years. As of December 31, 1999, approximately
$19.3 million of investment securities available for sale were callable before
maturity.
The following table presents the sale of investment securities and
mortgage-backed securities with the resulting realized gains, losses, and net
proceeds from such sales:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
Amortized cost of securities sold $10,639 $58,954 $640
Gains realized on sales 48 222 10
Losses realized on sales -- (4) --
------- ------- ----
Net proceeds from sales $10,687 $59,172 $650
======= ======= ====
48
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities available for sale follows:
Unrealized
Amortized ---------------------- Market
Cost Gains Losses Value
-------------- --------- ------------ -----------
(IN THOUSANDS)
AT DECEMBER 31, 1999
FIXED RATE:
FHLMC $ 1,762 $-- $ (79) $ 1,683
FNMA 1,112 -- (22) 1,090
ADJUSTABLE RATE:
FNMA 233 -- (5) 228
GNMA 2,520 -- (11) 2,509
------- --- ----- -------
Total $ 5,627 $-- $(117) $ 5,510
======= === ===== =======
AT DECEMBER 31, 1998
FIXED RATE:
FHLMC $ 3,174 $10 $ (11) $ 3,173
FNMA 1,512 -- -- 1,512
ADJUSTABLE RATE:
FNMA 277 -- (3) 274
GNMA 6,877 73 -- 6,950
------- --- ----- -------
Total $11,840 $83 $ (14) $11,909
======= === ===== =======
The following table sets forth the maturities of mortgage-backed securities
at December 31, 1999 and the weighted average yields of such securities:
AFTER ONE, BUT
WITHIN ONE YEAR WITHIN FIVE YEARS AFTER TEN YEARS
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Amortized Market Average Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield Cost Value Yield
------------------------------ ------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
FIXED RATE:
FHLMC $1,391 $1,326 6.13% $ 371 $ 357 6.01% $ -- $ -- --%
FNMA -- -- -- 1,112 1,090 5.97 -- -- --
ADJUSTABLE RATE:
FNMA -- -- -- -- -- -- 233 228 5.59
GNMA -- -- -- -- -- -- 2,520 2,509 5.78
------ ------ ------ ------ ------ ------
Total $1,391 $1,326 6.13% $1,483 $1,447 5.98% $2,753 $2,737 5.76%
====== ====== ====== ====== ====== ======
These securities have final maturities ranging from 0.25 to 24.2 years. The
weighted average remaining life of mortgage-backed securities was 12.7 years as
of December 31, 1999. Expected maturities will differ from contractual
maturities because borrowers may repay obligations without prepayment penalties.
49
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LOANS RECEIVABLE
The Bank's lending activities are conducted principally in the Boston
metropolitan area and, to a lesser extent, elsewhere in Massachusetts and New
England. The Bank originates single and multi-family residential loans,
commercial real estate loans, commercial loans and consumer loans (principally
home equity loans). Most loans made are secured by borrowers' personal or
business assets. The ability of the Bank's single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity within the lending area. Commercial
borrowers' ability to repay is generally dependent upon the health of the
economy and the real estate sector in particular. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio is
susceptible to changing conditions in the New England economy. As of December
31, 1999, the Bank had $78.5 million of fixed rate loans and $371.9 million of
variable rate loans outstanding.
The Bank's lending limit to any single borrower is limited by regulation to
approximately $7.1 million. The Bank had no relationships with an individual
borrower at December 31, 1999 that were in excess of the legal lending limit
established for Massachusetts state-chartered banks. Mortgage loans serviced for
others totaled $10.5 million and $1.3 million at December 31, 1999 and 1998,
respectively.
Loans outstanding to executive officers and directors of the Company
aggregated $3.7 million and $3.6 million at December 31, 1999 and 1998,
respectively. An analysis of the activity of these loans is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998
------------ -------------
(IN THOUSANDS)
Balance at beginning of year $ 3,643 $ 293
Originations 2,982 3,643
Repayments (2,974) (293)
------- ------
Balance at end of year $ 3,651 $3,643
======= ======
All loans included above were made in the ordinary course of business under
normal credit terms, including interest rates and collateral, prevailing at the
time of origination for comparable transactions with other persons, and do not
represent more than normal credit risk.
The following table presents a summary of risk elements within the loan
portfolio:
DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------ ------------
(IN THOUSANDS)
Nonaccrual loans $1,317 $ 565 $ 722
Loans past due 90 days or more, but still accruing -- -- 25
------ ------ ------
Total non-performing loans $1,317 $ 565 $ 747
====== ====== ======
Loans past due 30-89 days $2,042 $3,307 $1,632
====== ====== ======
(8) ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------ -----------
(IN THOUSANDS)
Balance at beginning of year $4,386 $3,645 $2,566
Provision for loan losses 999 1,004 810
Charge-offs (135) (385) (40)
Recoveries 86 122 309
------ ------ ------
Balance at end of year $5,336 $4,386 $3,645
====== ====== ======
50
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DECEMBER 31,
ESTIMATED --------------------------------
USEFUL LIFE 1999 1998
-------------- ------------- -------------
(IN THOUSANDS)
Leasehold improvements 5-20 Years $2,904 $2,550
Computer equipment 3-5 Years 2,025 1,372
Furniture and fixtures 5-7 Years 2,175 1,519
Automobiles 5 Years 125 106
Office equipment 5-7 Years 685 478
------- -------
Subtotal 7,914 6,025
Less accumulated depreciation and amortization (3,175) (2,235)
------- -------
Premises and equipment, net $ 4,739 $ 3,790
======= =======
Depreciation and amortization expense related to premises and equipment
was $954,000, $727,000, and $680,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
The Company and its subsidiaries conduct operations in leased premises. The
Company's and the Bank's headquarters are located at Ten Post Office Square,
Boston, Massachusetts, with a branch office in Wellesley, Massachusetts. The
Bank has also signed a lease for a second branch office in the Back Bay area of
Boston, Massachusetts. Westfield is located at One Financial Center, Boston,
Massachusetts, and RINET is located at 213 Union Wharf, Boston, Massachusetts.
Generally, the initial terms of the leases for these properties range from five
to fifteen years. Most of the leases also include options to renew at fair
market value for periods of five to ten years. In addition to minimum rentals,
certain leases include escalation clauses based upon various price indices and
include provisions for additional payments to cover taxes.
The Company is obligated for minimum rental payments under these
noncancelable operating leases. In accordance with the terms of these leases,
the Company is currently committed to minimum annual rent as follows:
MINIMUM
LEASE PAYMENTS
--------------------
(IN THOUSANDS)
2000 $ 2,516
2001 2,515
2002 2,307
2003 2,211
2004 2,263
Thereafter 3,067
-------
Total $14,879
=======
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$1.5 million, $1.3 million, and $1.0 million respectively.
51
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) DEPOSITS
Deposits are summarized as follows:
DECEMBER 31,
--------------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
Demand deposits $ 53,058 $ 47,766
NOW 40,875 35,735
Savings 4,607 4,235
Money market 238,513 164,626
Certificates of deposit under $100,000 22,394 29,874
Certificates of deposit $100,000 or greater 61,088 52,616
-------- --------
Total $420,535 $334,852
======== ========
Certificates of deposit had the following schedule of maturities:
DECEMBER 31,
--------------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
Less than 3 months remaining $51,915 $51,075
3 to 6 months remaining 8,103 11,998
6 to 12 months remaining 14,688 12,188
More than 12 months remaining 8,776 7,229
------- -------
Total $83,482 $82,490
======= =======
Interest expense on certificates of deposit greater than $100,000 was $3.2
million, $2.8 million, and $2.4 million for the years ended December 31, 1999,
1998, and 1997, respectively.
(11) FEDERAL HOME LOAN BANK BORROWINGS
A summary of borrowings from the Federal Home Loan Bank of Boston ("FHLB")
is as follows:
DECEMBER 31,
-------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Within 1 year $16,916 5.66% $21,000 5.75%
Over 1 year to 2 years 20,193 5.82 16,916 5.66
Over 2 years to 3 years 13,120 6.23 10,286 5.53
Over 3 years to 5 years 14,556 5.89 15,653 5.90
Over 5 years 15,887 5.74 12,474 5.78
------- -------
Total $80,672 5.85% $76,329 5.74%
======= =======
Borrowings from the FHLB are secured by the Bank's stock in the FHLB and a
blanket lien on "qualified collateral" defined principally as 90% of the market
value of U.S. Government and federal agency obligations and 75% of the carrying
value of certain residential mortgage loans. Unused borrowings with the FHLB at
December 31, 1999 were $114.7 million. The Bank had additional short-term
federal fund lines with the FHLB and correspondent banks of $79.0 million at
December 31, 1999. As of December 31, 1999, there were no federal funds
purchased.
52
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As a member of the FHLB, the Bank is required to invest in the common
stock of the FHLB in the amount of one percent of its outstanding loans secured
by residential housing, or three tenths of one percent of total assets, or five
percent of its outstanding advances from the FHLB, whichever is highest. As and
when such stock is redeemed, the Bank would receive from the FHLB an amount
equal to the par value of the stock. As of December 31, 1999, the Bank's FHLB
stock holdings totaled $4.8 million. The Bank's investment in FHLB stock is
recorded at cost, and is redeemable at par.
(12) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to
repurchase with clients and brokers. These agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the Company's consolidated balance sheets. The securities underlying the
agreements remain under the Company's control. Information concerning securities
sold under agreements to repurchase is as follows:
DECEMBER 31,
--------------------------------
1999 1998 1997
----------- --------- --------
(DOLLARS IN THOUSANDS)
Outstanding $16,551 $6,241 $ 5,366
Maturity date 1/00 1/99 1/98-3/98
Outstanding collateralized by U.S. Treasury
and related agency securities with:
Book value 17,760 6,315 5,400
Market value 16,640 6,297 5,402
Average outstanding for the year 12,126 5,962 7,032
Maximum outstanding at any month end 19,936 7,613 10,685
Weighted average rate at end of period 4.22% 4.16% 4.45%
Weighted average rate paid for the period 4.37% 4.43% 4.57%
(13) INCOME TAXES
The components of income tax expense (benefit) are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------ ------------
(IN THOUSANDS)
Current expense:
Federal $3,374 $2,723 $1,264
State 576 835 373
------ ------ ------
Total current expense 3,950 3,558 1,637
------ ------ ------
Deferred expense (benefit):
Federal (208) (543) 202
State (91) (122) 23
Change in valuation reserve (8) (28) 60
------ ------ ------
Total deferred expense (benefit) (307) (693) 285
------ ------ ------
Income tax expense $3,643 $2,865 $1,922
====== ====== ======
53
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The difference between the statutory federal income tax rate and the
effective federal income tax rate is as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------ ------------
Statutory federal income tax rate 35.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of Federal tax benefit 2.9 5.7 4.8
Tax exempt interest, net (4.0) (4.2) (5.8)
Benefit of S-Corporation status -- -- (4.2)
Merger expense -- -- 4.0
Other, net (0.7) (1.1) 2.5
---- ---- ----
Effective federal income tax rate 33.2% 34.4% 35.3%
==== ==== ====
The components of gross deferred tax assets and gross deferred tax
liabilities are as follows:
DECEMBER 31,
-----------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
Gross deferred tax assets:
Allowance for losses on loans and real estate $1,767 $1,358
Depreciation 37 90
Organization costs 91 123
Pre-operating costs 103 103
Investment in partnerships -- 27
Unrealized loss on securities available for sale 697 --
Other 9 52
------ ------
Gross deferred tax assets 2,704 1,753
Valuation allowance (23) (32)
------ ------
Total deferred tax assets 2,681 1,721
Gross deferred tax liabilities:
Cash to accrual adjustment 339 551
Investment in partnerships 168 --
Unrealized gain on securities available for sale -- 63
------ ------
Total gross deferred tax liabilities 507 614
------ ------
Net deferred tax asset $2,174 $1,107
====== ======
Management believes the existing net deductible temporary differences that
give rise to the net deferred tax asset will reverse in periods the Company
generates net taxable income. The Company would need to generate approximately
$5.6 million of future net taxable income to realize the net deferred tax asset
at December 31, 1999. Management believes that it is more likely than not that
the net deferred tax asset will be realized based on the generation of future
taxable income.
54
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) EMPLOYEE BENEFITS
EMPLOYEE 401(k) PLANS
The Company maintains a 401(k) plan for the benefit of the employees of the
Company and the Bank which qualifies as a tax exempt plan and trust under
Sections 401 and 501 of the Internal Revenue Code. Generally, employees who are
at least twenty-one (21) years of age are immediately enrolled and are eligible
to participate in this 401(k) plan. Expenses associated with this 401(k) plan
were $250,000, $153,000, and $100,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company also maintains a 401(k) plan for the benefit of the employees
of RINET which qualifies as a tax exempt plan and trust under Sections 401 and
501 of the Internal Revenue Code. Generally, employees who are at least
twenty-one (21) years of age and have completed one year of service are eligible
to participate in this 401(k) plan. Expenses associated with this 401(k) plan
were $33,000, $32,000, and $31,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
PROFIT SHARING PLAN
The Company maintains the Profit Sharing Plan for the benefit of the
employees of Westfield that qualifies as a tax exempt plan under Section 401 of
the Internal Revenue Code. Generally, employees who are at least twenty-one (21)
years of age and have completed one year of service are eligible to participate
in the Profit Sharing Plan. Expenses associated with the Profit Sharing Plan
were $306,000, $294,000, and $288,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
STOCK OPTION PLANS
The Company offers options on its common stock to officers, key employees,
and directors under an employee stock option plan and a director stock option
plan. The Company accounts for these plans by measuring compensation at the
grant date as the difference between the fair market value of the Company's
stock and the exercise price of the options granted. Generally, the Company
grants options at the fair market value of the stock on the date of grant.
Accordingly, no compensation cost has been charged against income. Had
compensation cost been determined consistent with a fair value based approach,
the Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income:
As reported $7,196 $5,471 $3,526
Proforma 6,460 4,888 3,159
Basic earnings per share:
As reported $ 0.62 $ 0.48 $ 0.31
Proforma 0.56 0.43 0.28
Diluted earnings per share:
As reported $ 0.60 $ 0.46 $ 0.30
Proforma 0.54 0.41 0.27
Under the employee stock option plan, the Company may grant options to its
employees for an amount not to exceed 4% of the number of shares of common stock
outstanding as of the previous year-end. Under the directors stock option plan,
the Company may grant options to its non-employee directors for an amount not to
exceed 1% of the number of shares of common stock outstanding as of the previous
year-end. Under both plans, the exercise price of each option equals the market
value of the stock on the date the options are granted, and all options expire
ten years from the date granted. Generally, options vest over a three year
period after the grant date under the employee stock option plan. Under the
directors stock option plan, options generally vest one year after the grant
date.
55
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997: expected life of 7 years;
expected volatility of 21% in 1999, 37% in 1998, and 40% in 1997, and risk-free
interest rates of 6.7% in 1999, 5.7% in 1998, and 5.3% in 1997.
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1999, 1998, and 1997, and changes during the years then ended is
presented below.
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
UNEXERCISED AVERAGE UNEXERCISED AVERAGE UNEXERCISED AVERAGE
OPTIONS OPTION PRICE OPTIONS OPTION PRICE OPTIONS OPTION PRICE
------------- ---------------- --------------- -------------- ------------- ----------------
Options at beginning of year 963,896 $5.48 797,452 $4.21 550,202 $2.82
Granted 322,269 7.83 229,494 9.43 277,300 6.75
Exercised (58,050) 2.75 (50,175) 2.75 (29,250) 2.39
Canceled (48,150) 8.33 (12,875) 7.46 (800) 3.46
--------- ------- -------
Options at end of year 1,179,965 $6.13 963,896 $5.48 797,452 $4.21
========= ===== ======= ===== ======= =====
Options exercisable at year end 877,207 $5.39 655,438 $4.26 481,727 $2.91
========= ===== ======= ===== ======= =====
Weighted average fair value of
options granted during the year $3.25 $4.71 $3.62
===== ===== =====
The following table summarizes information about fixed stock options
outstanding at December 31, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------------------------------- ---------------------------------
$2.00 to $3.00 287,552 4.2 $ 2.52 287,552 $ 2.52
$3.83 to $5.25 234,250 6.6 4.45 234,250 4.45
$6.00 to $7.50 83,100 8.5 6.89 36,100 6.11
$7.72 to $8.84 495,963 8.7 8.21 279,755 8.32
$9.13 to $10.75 79,100 8.4 10.42 39,550 10.42
--------- -------
$2.00 to $10.75 1,179,965 7.1 $ 6.13 877,207 $ 5.39
========= =======
(15) OTHER OPERATING EXPENSE
Major components of other operating expense are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------ ------------
(IN THOUSANDS)
Forms and supplies $ 364 $ 304 $ 311
Telephone 186 166 161
Training and education 132 99 127
Postage 113 110 95
Insurance 133 117 111
Other 1,015 761 708
------ ------ ------
Total $1,943 $1,557 $1,513
====== ====== ======
56
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate loans, unused lines
of credit and standby letters of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments 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.
Financial instruments with off-balance sheet risk are summarized as
follows:
DECEMBER 31,
-----------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
Commitments to originate loans:
Fixed rate $ 588 $12,406
Variable rate 20,084 36,061
Unused lines of credit 87,000 83,609
Standby letters of credit 5,895 6,241
Commitments to originate loans and unused lines of credit are
agreements to lend to a customer provided there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since certain
commitments may expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's 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 loan facilities to customers.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available
quoted market information or other appropriate valuation methodologies. The
aggregate fair value amounts presented do not represent the underlying value of
the Company taken as a whole.
The fair value estimates provided are made at a specific point in time,
based on relevant market information and the characteristics of the financial
instrument. The estimates do not provide for any premiums or discounts that
could result from concentrations of ownership of a financial instrument. Because
no active market exists for some of the Company's financial instruments, certain
fair value estimates are based on subjective judgments regarding current
economic conditions, risk characteristics of the financial instruments, future
expected loss experience, prepayment assumptions, and other factors. The
resulting estimates involve uncertainties and therefore cannot be determined
with precision. Changes made to any of the underlying assumptions could
significantly affect the estimates.
57
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The book values and fair values for the Company's financial instruments are
as follows:
DECEMBER 31,
---------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
(IN THOUSANDS)
BOOK BOOK
VALUE FAIR VALUE VALUE FAIR VALUE
------------- ------------ ------------ ------------
ASSETS:
Cash and due from banks $ 11,190 $ 11,190 $ 12,949 $ 12,949
Federal funds sold -- -- 11,000 11,000
Investment securities 73,605 73,605 54,102 54,102
Mortgage-backed securities 5,510 5,510 11,909 11,909
Stock in the Federal Home Loan Bank of Boston 4,830 4,830 4,718 4,718
Loans receivable (net of allowance for loan losses):
Commercial 186,258 188,834 151,177 151,593
Residential mortgage 233,599 229,013 173,382 174,030
Home equity and other 25,195 25,195 20,006 20,006
Accrued interest receivable 3,597 3,597 2,405 2,405
LIABILITIES:
Deposits:
Demand deposits 53,058 53,058 47,766 47,766
NOW 40,875 40,875 35,735 35,735
Savings 4,607 4,607 4,235 4,235
Money market 238,513 238,513 164,626 164,626
Certificates of deposit under $100,000 22,394 22,447 29,874 30,078
Certificates of deposit $100,000 or more 61,088 61,173 52,616 52,655
Securities sold under agreements to repurchase 16,551 16,551 6,241 6,241
FHLB borrowings 80,672 77,648 76,329 76,823
Other borrowings 36 36 73 73
Accrued interest payable 1,281 1,281 651 651
CASH AND DUE FROM BANKS
The carrying values reported in the balance sheet for cash and due from
banks approximate the fair value because of the short maturity of these
instruments.
FEDERAL FUNDS SOLD
The carrying values reported in the balance sheet for federal funds sold
approximate the fair value because of the short maturity of these instruments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The fair values presented for investment and mortgage-backed securities are
based on quoted bid prices received from a third party pricing service.
STOCK IN THE FEDERAL HOME LOAN BANK OF BOSTON
The fair value of stock in the FHLB equals the carrying value reported in
the balance sheet. This stock is redeemable at full par value only by the FHLB.
58
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LOANS RECEIVABLE
Fair value estimates are based on loans with similar financial
characteristics. Loans have been segregated by homogenous groups into
commercial, residential mortgage, home equity and other loans. Fair values of
commercial and residential mortgage loans are estimated by discounting
contractual cash flows adjusted for prepayment estimates and using discount
rates approximately equal to current market rates on loans with similar
characteristics and maturities. The incremental credit risk for non-performing
loans has been considered in the determination of the fair value of loans. The
fair value estimated for home equity and other loans equals their carrying value
because of the floating rate nature of these loans.
DEPOSITS
The fair values reported for demand deposits, NOW, savings, and money
market accounts are equal to their respective book values reported on the
balance sheet. The fair values disclosed are, by definition, equal to the amount
payable on demand at the reporting date. The fair values reported for
certificates of deposit are based on the discounted value of contractual cash
flows. The discount rates used are representative of approximate rates currently
offered on certificates of deposit with similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The carrying values reported in the balance sheet for repurchase agreements
approximate fair value because of the short-term nature of these instruments.
FHLB BORROWINGS
The fair value reported for FHLB borrowings is estimated based on the
discounted value of contractual cash flows. The discount rate used is based on
the Company's estimated current incremental borrowing rate for FHLB borrowings
of similar maturities.
OTHER BORROWINGS
The carrying values reported in the balance sheet for other borrowings
approximate fair value because of the short-term nature of these instruments.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying values for accrued interest receivable and payable approximate
fair value because of the short-term nature of these financial instruments.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's commitments to originate loans, and for unused lines and
outstanding letters of credit are primarily at market interest rates and
therefore there is no fair value adjustment.
59
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(18) BOSTON PRIVATE FINANCIAL HOLDINGS, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
-------------------------------
1999 1998
------------- --------------
(IN THOUSANDS)
ASSETS:
Cash $ 956 $ 930
Investment in subsidiaries 38,252 32,708
Other assets 384 339
------- -------
Total assets $39,592 $33,977
======= =======
LIABILITIES:
Due to Westfield $ -- $ 1,000
Accounts payable 447 364
------- -------
Total liabilities 447 1,364
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share; authorized: 30,000,000
issued: 11,616,070 shares in 1999 and 11,513,441 shares in 1998 11,616 11,513
Additional paid-in capital 12,341 11,932
Retained earnings 16,747 9,551
Stock subscriptions receivable (320) (495)
Accumulated other comprehensive (loss) income (1,239) 112
------- -------
Total stockholders' equity 39,145 32,613
------- -------
Total liabilities and stockholders' equity $39,592 $33,977
======= =======
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
INCOME:
Interest on cash in subsidiary bank $ -- $ 9 $ 11
Management fees from subsidiaries 1,864 1,854 --
Dividends from subsidiaries 2,700 -- 600
------ ------ ------
Total income 4,564 1,863 611
------ ------ ------
EXPENSES:
Salaries and benefits 1,093 1,214 --
Professional fees 467 230 --
Other expenses 304 419 126
Merger expenses 113 -- 1,021
------ ------ ------
Total expenses 1,977 1,863 1,147
------ ------ ------
Income (loss) before income taxes 2,587 -- (536)
Income tax expense (benefit) -- -- (229)
------ ------ ------
Income (loss) before equity in undistributed earnings of subsidiaries 2,587 -- (307)
Equity in undistributed earnings of subsidiaries 4,609 5,471 3,833
------ ------ ------
NET INCOME $7,196 $5,471 $3,526
====== ====== ======
60
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,196 $ 5,471 $ 3,526
Adjustments to reconcile net income to net cash provided by
(used) in operating activities:
Equity in undistributed earnings of subsidiaries (7,309) (5,471) (4,433)
Dividends from subsidiaries 2,700 -- 600
(Increase) decrease in other assets (46) (98) (235)
Increase (decrease) in other liabilities 85 266 98
------- ------- ------
Total adjustments (4,570) (5,303) (3,970)
------- ------- ------
Net cash provided by (used) in operating activities 2,626 168 (444)
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investment in RINET (112) -- --
Capital investment in subsidiary Bank (2,000) (1,000) (78)
------- ------- ------
Net cash used in investing activities (2,112) (1,000) (78)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 353 509 322
Proceeds from exercise of stock options 159 138 147
Proceeds from short-term borrowings -- 1,000 --
Repayment of short-term borrowings (1,000) -- --
Increase (decrease) in common stock payable -- -- (298)
------- ------- ------
Net cash provided by financing activities (488) 1,647 171
------- ------- ------
Net increase (decrease) in cash 26 815 (351)
Cash at beginning of year 930 115 466
------- ------- ------
Cash at end of year $ 956 $ 930 $ 115
======= ======= ======
(19) REGULATORY MATTERS
The Company and its subsidiaries are subject to extensive regulation and
examination by the Federal Reserve Board, the Federal Deposit Insurance
Corporation ("FDIC"), which insures the Bank's deposits to the maximum extent
permitted by law, and by the Massachusetts Commissioner of Banks. The federal
and state laws and regulations which are applicable to banks regulate, among
other things, the scope of their business, their investments, their reserves
against deposits, the timing of the availability of deposited funds, and the
nature and amount of collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and not
for the purpose of protecting stockholders. The Bank was last examined by the
FDIC in December 1999 and by the Massachusetts Commissioner of Banks in March
1998. The Company was examined by the Federal Reserve Bank of Boston in January
2000.
The Company is subject to various regulatory capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory, and possibly additional discretionary actions
by regulators that, if undertaken, could have a material effect on the Company's
financial statements. For example, under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Similarly, the Company is also subject to capital
requirements administered by the Federal Reserve Bank with respect to certain
non-banking activities, including adjustments in connection with off-balance
sheet items.
61
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Current FDIC regulations regarding capital requirements of FDIC-insured
institutions require banks to maintain a leverage capital ratio of at least 3%
and a qualifying total capital to risk-weighted assets of at least 8%, of which
at least 4% must be Tier I capital. Tier I capital is defined as common equity
and retained earnings, less goodwill, and is compared to Total Risk Weighted
Assets. Assets and off-balance sheet items are assigned to four risk categories,
each with appropriate weights. The resulting capital ratio represents Tier I
capital as a percentage of risk-weighted assets and off-balance sheet items. The
risk-based capital rules are designed to make regulatory capital more sensitive
to differences in risk profiles among banks and bank holding companies, to
account for off-balance sheet exposure and to minimize disincentives for holding
liquid assets. As of December 31, 1999, management believes that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. Similarly, the most recent notification from the
Federal Reserve Bank categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank and the Company must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Bank's or the Company's category.
Actual capital amounts and regulatory capital requirements as of December
31, 1999 and 1998 are presented in the tables below.
TO BE WELL CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------------------------- ------------------------------ ------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------------- ------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Total risk-based capital
Company $45,717 10.84% $33,741 >8.0% $42,176 >10.0%
Bank 36,837 10.72 27,495 8.0 34,368 10.0
Tier I risk-based
Company 40,444 9.59 16,870 4.0 25,305 6.0
Bank 32,528 9.46 13,747 4.0 20,621 6.0
Tier I leverage capital
Company 40,444 6.57 24,607 4.0 30,759 5.0
Bank 32,528 5.99 21,720 4.0 27,150 5.0
AS OF DECEMBER 31, 1998:
Total risk-based capital
Company $32,514 11.87% $21,919 >8.0% $27,399 >10.0%
Bank 29,157 10.87 21,452 8.0 26,815 10.0
Tier I risk-based
Company 29,077 10.61 10,959 4.0 16,439 6.0
Bank 25,792 9.62 10,726 4.0 16,089 6.0
Tier I leverage capital
Company 29,077 6.54 17,792 4.0 22,240 5.0
Bank 25,792 5.96 17,318 4.0 21,647 5.0
Bank regulatory authorities restrict the Bank from lending or advancing
funds to, or investing in the securities of, the Company. Further, these
authorities restrict the amounts available for the payment of dividends by the
Bank to the Company.
62
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(20) LITIGATION
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10-13 of Part III of Form 10-K is
incorporated herein by reference to the Company's Definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND EXHIBITS PAGE NO.
(1) FINANCIAL STATEMENTS
a) Consolidated Balance Sheets 37
b) Consolidated Statements of Operations 38
c) Consolidated Statements of Changes in Stockholders' Equity 39
d) Consolidated Statements of Cash Flows 40
e) Notes to Consolidated Financial Statements 42
(2) FINANCIAL SCHEDULES
NONE
(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1(a) Articles of Organization of the Company.*
3.1(b) Articles of Amendment.*
3.2 By-Laws of the Company.*
4.1 Instruments Defining the Rights of Security Holders, including
Indentures are incorporated herein by reference to the
Articles of Organization and the By-Laws of the Company set
forth in Exhibits 3.1 and 3.2 to this Form 10-K.
10.1 Employee Incentive Stock Option Plan is incorporated herein by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S-1 filed with the Commission on
April 1, 1991 (33-39690) (the "Form S-1").
10.2 Employee Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.6 to
the Form S-1.
10.3 Directors' Stock Option Plan adopted May 26, 1993, as amended March 15, 1995, is
incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-KSB for the
fiscal year ended December 31, 1996 filed with the Commission on March 25, 1997.
64
10.4 Employment Agreement dated January 1, 1996 by and among the Company, the Bank and
Timothy L. Vaill is incorporated herein by reference to Exhibit 10.4 to the Company's
Form 10-KSB for the year ended December 31, 1996 filed with the Commission
on March 25, 1997.
10.5 Commercial Lease dated October 31, 1994, by and between the Company and Leggat
McCall Properties Management, Inc. incorporated herein by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994.
10.6 Asset Purchase Agreement dated as of June 16, 1995 by and among the Company and the
stockholders of CH&P, Inc., is incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Commission on June 28, 1995.
10.7 Agreement and Plan of Merger dated August 13, 1997, by and among the Company,
Boston Private Investment Management Inc., and the stockholders of Westfield,
is incorporated herein by reference to the Company's current report on Form 8-K filed with the
Commission on August 21, 1997.
10.8 Employment Agreement dated August 13, 1997 by and among the Company, Westfield, and
Arthur J. Bauernfeind is incorporated herein by reference to
Exhibit 10.8 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997 filed with
the Commission on February 27, 1998
("Form 10-KSB").
10.9 Employment Agreement dated August 13, 1997 by and among the
Company, Westfield, and C. Michael Hazard is incorporated
herein by reference to Exhibit 10.8 of Form 10-KSB.
10.10 Employment Agreement dated July 22, 1999 by and among the Company, RINET, and
Richard N. Thielen.*
21 Subsidiaries of the Company are incorporated herein by reference to Exhibit 22.0 to Form S-1.
23.1 Independent Auditors' Consent. *
27 Financial Data Schedule. *
- -------------
* Filed herewith.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
quarter ended December 31, 1999.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 on this 6th day of
March, 2000.
Boston Private Financial Holdings, Inc.
By: /s/ Timothy L. Vaill
-----------------------------------
Timothy L. Vaill
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated.
/s/ Timothy L. Vaill Chairman of the Board, President March 6, 2000
- ------------------------------------------------- and Chief Executive Officer
Timothy L. Vaill
/s/ Walter M. Pressey Executive Vice President, Treasurer March 6, 2000
- ------------------------------------------------- and Chief Financial Officer
Walter M. Pressey (Principal Financial Officer)
/s/ Charles O. Wood, III Lead Director March 6, 2000
- -------------------------------------------------
Charles O. Wood, III
/s/ Herbert S. Alexander Director March 6, 2000
- -------------------------------------------------
Herbert S. Alexander
/s/ Arthur J. Bauernfeind Director March 6, 2000
- -------------------------------------------------
Arthur J. Bauernfeind
/s/ Peter C. Bennett Director March 6, 2000
- -------------------------------------------------
Peter C. Bennett
66
/s/ Eugene S. Colangelo Director March 6, 2000
- -------------------------------------------------
Eugene S. Colangelo
/s/ C. Michael Hazard Director March 6, 2000
- -------------------------------------------------
C. Michael Hazard
s/ Lynn Thompson Hoffman Director March 6, 2000
- -------------------------------------------------
Lynn Thompson Hoffman
/s/ Dr. Allen Sinai Director March 6, 2000
- -------------------------------------------------
Dr. Allen Sinai
/s/ Richard N. Thielen Director March 6, 2000
- -------------------------------------------------
Richard N. Thielen
67