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As filed with the Securities and Exchange Commission on February 25, 1999
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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, 1999, was $64,531,979.
10,802,513 shares of the registrant's common stock were outstanding on
February 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the Company's 1999
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 15
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 31
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 34
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 63
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 1999 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 63
SIGNATURES 65
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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 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") 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 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 on a consolidated basis.
On July 31, 1995, the Company acquired substantially all of the assets and
assumed certain liabilities of an investment management business for a total
purchase price of approximately $4.2 million, of which $2.1 million, consisting
of $1.5 million in cash and 166,667 shares of the Company's common stock, was
paid at closing. In each of January and July 1996 and 1997, the Company made
additional scheduled payments consisting of $375,000 in cash and 41,667 shares
of the Company's common stock. The acquisition was accounted for as a purchase.
Accordingly, the results of operations of the acquired business have been
included with those of the Company subsequent to the date of acquisition.
The Company conducts substantially all of its business through its
wholly-owned subsidiaries, the Bank and Westfield. The Company's and the Bank's
principal offices are located at Ten Post Office Square, Boston, Massachusetts,
and Westfield's principal office is located at One Financial Center, Boston,
Massachusetts. The Bank also has a branch located in Wellesley, 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.
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 a proprietary
database 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
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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 managing general partner for three limited
partnerships, one of which invests primarily in technology stocks, another
invests primarily in small capitalization equities and a third that was started
in June 1998, which invests primarily in midcap equities.
The Company's operating results depend primarily on the operating results
of the Bank and Westfield. 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 general
partner for investment 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 a general partner for
investment 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.
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 general partner of
three limited partnerships, also earns fees based on the performance of these
limited partnerships. For the year ended December 31, 1998, the asset management
business accounted for 93.2% of the Company's total fees and other income and
52.5% of the Company's total revenues, which is defined as net interest income
plus fees and other income.
At December 31, 1998, the Company had approximately $2.6 billion in assets
under management. Of this total, $2.5 billion was in investment advisory
accounts, and $55.0 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 required to be reviewed by the
Credit Committee, consisting of members of the Bank's senior management.
Commercial and residential mortgage loans over $1.5 million are required to be
reviewed by the Loan Committee, which consists of four outside Directors of the
Bank.
At December 31, 1998, the Bank had loans outstanding of $348.9 million,
which represented approximately 76% 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, 1998,
approximately 80% of the Bank's outstanding loans had interest rates that were
either floating or adjustable in nature. See Part II, Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Sensitivity and Market Risk." At December 31, 1998, approximately
98.8% of the Bank's outstanding loans were secured, and approximately 82.4% were
secured, in whole or in part, by real estate. Within the commercial loan
portfolio, $96.5 million, or 62.3% of the portfolio was secured, in whole or in
part by real estate.
At December 31, 1998, the Bank's statutory lending limit to any single
borrower was approximately $5.8 million, subject to certain exceptions provided
under applicable law. At December 31, 1998, 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
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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, 1998, the aggregate principal amount of all loans to
Directors and related entities (including unused commitments under lines of
credit) was $3.6 million, or 11.1% 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,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- ------------------- -------------------- ------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- -------- ---------- -------- ----------- -------- --------- -------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial $159,940 44.4% $134,685 48.7% $ 97,740 47.4% $ 72,729 46.8% $ 50,527 45.4%
Residential mortgage 173,810 49.8 124,865 45.1 96,578 46.9 74,447 48.0 54,373 48.9
Home equity 19,866 5.7 16,969 6.1 11,481 5.6 7,783 5.0 6,045 5.4
Other 335 .1 306 .1 308 .1 297 .2 281 .3
-------- ------- -------- ------ -------- ------ -------- ------ -------- ------
348,951 100.0% 276,825 100.0% 206,107 100.0% 155,256 100.0% 111,226 100.0%
Allowance for
loan losses (4,386) (3,645) (2,566) (1,942) (1,232)
-------- -------- -------- -------- --------
Net loans $344,565 $273,180 $203,541 $153,314 $109,994
======== ======== ======== ======== ========
The following table sets forth scheduled contractual maturities of loans in
the Company's portfolio at December 31, 1998. 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 $ 70,181 $ -- $ 1,665 $335 $ 72,181
After one year through five years 60,383 49 815 -- 61,247
Beyond five years 24,376 173,761 17,386 -- 215,523
---------------------------------------------------
Total $154,940 $173,810 $19,866 $335 $348,951
===================================================
Interest rate terms on amounts due after one year:
Fixed $ 46,633 $ 17,780 $ -- $ -- $ 64,413
Adjustable 38,126 156,030 18,201 -- 212,357
---------------------------------------------------
Total $ 84,759 $173,810 $18,201 $ -- $276,770
===================================================
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
rates on existing mortgages are substantially lower than current market rates
(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. At
December 31, 1998, $629,000 of loans scheduled to mature within one year were
non-performing. See Part II, Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset Quality."
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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, 1998, the Bank had outstanding commercial loans totaling
$154.9 million, which represented 44.4% of total loans and 33.9% of total assets
of the Company. Commercial loans, consisting primarily of loans to businesses,
increased $20.3 million, or 15.0 %, during the year ended December 31, 1998,
compared to an increase of $36.9 million, or 37.8%, during the year ended
December 31, 1997. The growth in 1998 and 1997 reflects both an increase in
market demand and initiatives by the Bank to increase market share. Of the
Bank's total commercial loan portfolio, $70.2 million or 45.3% is due within one
year and $84.8 million or 54.7% 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 67.9% of the Bank's commercial loan portfolio as of
December 31, 1998. The average balance of the Bank's outstanding commercial
loans was approximately $282,000 at year end 1998.
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 Loan Committee. In addition, the 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 which is
developed by the lending officer in charge of the credit.
Residential Mortgage and Home Equity Loans. At December 31, 1998, the Bank
had outstanding residential mortgage loans and home equity loans of $173.8
million and $19.9 million, respectively, together representing 55.5% of the
Bank's total loan portfolio. Residential mortgage loans and home equity loans
increased $51.8 million, or 36.6%, during the year ended December 31, 1998, and
increased $33.8 million, or 31.3%, during 1997. The increases in both 1998 and
1997 were primarily due to the relatively low level of adjustable mortgage loan
interest rates, as well as promotional activities designed specifically to
increase the Bank's volume of mortgage loan originations. 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 $227,150 at December
31, 1998. The average balance of the Bank's outstanding residential mortgage
loans was approximately $340,000 at year end 1998.
In 1998, the Bank sold $23.7 million of residential mortgage loans on a
non-recourse basis without retaining servicing. 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, 1998, $153.4
million, or 88.3%, 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, 1998, aggregate outstanding balances on such loans were $335,000
compared to $306,000 at December 31, 1997. Other loans increased $29,000, or
9.5%, during the year ended December 31, 1998, and decreased $2,000, or 0.6%,
during 1997. The balance of other loans is primarily dependent on client demand.
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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,
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Average loans outstanding $308,978 $224,670 $175,332 $131,928 $95,400
======== ======== ======== ======== =======
Allowance for loan losses, beginning of period $ 3,645 $ 2,566 $ 1,942 $ 1,232 $ 1,006
Charged-off loans:
Commercial 385 40 6 54 166
Residential Mortgage -- -- 52 3 64
Home Equity -- -- 8 -- --
Other -- -- -- 4 --
-------- -------- -------- -------- -------
Total charged-off loans 385 40 66 61 230
-------- -------- -------- -------- -------
Recoveries on loans previously charged-off:
Commercial 122 308 71 153 101
Residential Mortgage -- 1 -- -- --
-------- -------- -------- -------- -------
Total recoveries 122 309 71 153 101
-------- -------- -------- -------- -------
Net loans charged-off (recovered) 263 (269) (5) (92) 129
Provision for loan losses 1,004 810 619 618 355
-------- -------- -------- -------- -------
Allowance for loan losses, end of period $ 4,386 $ 3,645 $ 2,566 $ 1,942 $ 1,232
======== ======== ======== ======== =======
Net loans charged-off (recovered) to average loans .09% (.12%) (.01%) (.07%) .14%
Allowance for loan losses to ending gross loans 1.26% 1.32% 1.25% 1.25% 1.11%
Allowance for loan losses to non-performing loans 776.28% 487.95% 262.91% 304.87% 247.39%
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 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. 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.
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,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Loan category:
Commercial $3,763 44.4% $3,143 48.7% $2,296 47.4% $1,686 46.8% $1,062 45.4%
Residential mortgage 429 49.8 312 45.1 241 46.9 237 48.0 154 48.9
Home equity and other 194 5.8 190 6.2 29 5.7 19 5.2 16 5.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$4,386 100.0% $3,645 100.0% $2,566 100.0% $1,942 100.0% $1,232 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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.
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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 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 closely monitored and reviewed by the
portfolio manager and by the Asset/Liability Management Committee. See Notes 5
and 6 to the Consolidated Financial Statements.
The following table summarizes the book value of investments at the dates
indicated:
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Available for sale:
U.S. Government and related obligations $35,050 $17,583 $14,565
Municipal bonds 19,052 19,193 12,072
Mortgage-backed obligations 11,909 -- --
------- ------- -------
Total available for sale $66,011 $36,776 $26,637
======= ======= =======
Held to maturity:
U.S. Government and related obligations $ -- $ 4,654 $ 5,005
Municipal bonds -- 5,000 1,382
Mortgage-backed obligations -- 18,123 25,289
------- ------- -------
Total held to maturity $ -- $27,777 $31,676
======= ======= =======
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, 1998, the Bank
had a total of approximately 3,120 checking accounts consisting of demand
deposit and NOW accounts with an average account balance of approximately
$26,000; 670 savings accounts with an average account balance of approximately
$6,000; and 3,860 money market accounts with an average account balance of
approximately $45,000. Certificates of deposit of $100,000 or greater and
certificates of deposit under $100,000 represented approximately 15.7% and 8.9%
of total deposits at December 31, 1998 and 1997, respectively. See 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, 1998
----------------------
AVERAGE AVERAGE
BALANCE RATE
-------- --------
(DOLLARS IN THOUSANDS)
Non interest-bearing deposits:
Checking accounts $ 34,774 --%
Interest-bearing deposits:
Savings and NOW accounts 32,647 1.27
Money market accounts 142,440 3.87
Certificates of deposit under $100,000 26,747 5.72
Certificates of deposit of $100,000 or greater 53,552 5.32
--------
Total $290,160 3.55%
========
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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,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Less than 3 months remaining $40,776 $35,371
3 to 6 months remaining 4,562 8,243
6 to 12 months remaining 7,178 5,824
More than 12 months remaining 100 350
------- -------
Total $52,616 $49,788
======= =======
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
$135.3 million at December 31, 1998. At December 31, 1998, the Bank had $76.3
million in FHLB advances outstanding with a weighted average interest rate of
5.74%. At December 31, 1997, there were $60.2 million in FHLB advances
outstanding with a weighted average interest rate of 6.03%. Of the advances
outstanding at December 31, 1998, $18.0 million have variable rates which
reprice at least annually to market rates. The Bank has the opportunity to repay
variable rate advances on their respective anniversary dates. See Note 12 to the
Company's Consolidated Financial Statements for further information.
The Bank also obtains funds from the sales of securities to institutional
investors 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) 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 are 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 only deals
with large, established investment brokerage firms when entering into such
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, 1998, the total amount of
outstanding repurchase agreements was $6.2 million with a weighted average
interest rate of 4.16%. See Note 11 to the Company's Consolidated Financial
Statements for additional information.
From time to time the Bank purchases federal funds from the FHLB and other
banking institutions to supplement its liquidity position. The Company has
negotiated federal fund lines of credit totaling $35.4 million with
correspondent institutions to provide the Bank with immediate access to
overnight borrowings. At December 31, 1998, the Bank did not have any borrowings
outstanding under these federal funds lines. The Bank has also negotiated
brokered deposit agreements with two institutions that have nationwide
distribution capabilities. At December 31, 1998, the Bank did not have any
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.
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.
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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.
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.
EMPLOYEES
At December 31, 1998, the Company had 138 full-time and 3 part-time
employees. The Company's employees are not represented by any 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. Legislation enacted in recent years, as well as recent changes in
regulatory policy, has substantially increased the level of competition among
commercial banks, thrift institutions and nonbanking institutions, including
insurance companies, brokerage firms, mutual funds and investment banks. In
addition, the enactment of banking legislation such as the Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Act") has affected the
banking industry by, among other things, enabling banks and bank holding
companies to expand the geographic area in which they may provide banking
services. The following summary is qualified in its entirety by the text of the
relevant statutes and regulations.
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.
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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.
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. FDIC insurance rates under
these classifications range from 0.013% of deposits for well capitalized,
healthy institutions to 0.283% of deposits for undercapitalized institutions
with substantial supervisory concerns. At December 31, 1998, the Bank was
considered "well capitalized" with regard to these regulations.
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Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, 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.
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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 Community Reinvestment Act of 1977, as amended (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."
INTERSTATE BANKING LEGISLATION
Under the Interstate Act, different types of interstate transactions
and activities will be permitted under federal law, each with different
effective dates. Interstate transactions and activities provided for under this
law include: (i) bank holding company acquisitions of separately held banks in a
state other than a bank holding company's home state; (ii) mergers between
insured banks with different home states, including consolidations of affiliated
insured banks; (iii) establishment of interstate branches by branch acquisition;
and (iv) affiliated banks acting as agents for one another for certain banking
functions without regard to state law prohibitions on interstate branching or
unauthorized banking. In general, nationwide interstate bank acquisitions are
now permissible, irrespective of most state law limitations. Interstate mergers
became permissible on July 1, 1997. States may at any time enact legislation
permitting interstate branching. Banks are now permitted to act as agents for
affiliated depository institutions. Each of the transactions and activities must
be approved by the appropriate federal bank regulator, with separate and
specific criteria established for each category.
Subject to applicable state law "opt-out" or "opt-in" provisions in the
case of interstate mergers and de novo branching, the appropriate federal bank
regulator may approve the respective interstate transactions only if certain
criteria are met. First, in order for a banking institution (a bank or bank
holding company) to receive approval for an interstate transaction, it must be
"adequately capitalized" and "adequately managed." The phrase "adequately
capitalized" is generally defined as meeting or exceeding all applicable federal
regulatory capital standards, while the phrase "adequately managed" is left
undefined. Second, the appropriate federal bank regulator must consider the
applicant's and its affiliated institutions' records under the CRA, as well as
the applicant's record under applicable state community reinvestment laws.
The Interstate Act also applies deposit "concentration limits" to
interstate acquisition and merger transactions. Specifically, a banking
institution may not receive federal approval for interstate expansion if it and
its affiliates would control (i) more than 10% of the deposits held by all
insured depository institutions in the United States, or (ii) 30% or more of the
deposits of all insured depository institutions in any state in which the banks
or branches involved in the transactions (or any affiliated depository
institution) overlap.
In 1996, Massachusetts enacted interstate banking laws in response to
the Interstate Act. The laws permit, subject to certain deposit and other
limitations, interstate acquisitions, mergers and banking on a reciprocal basis.
The new interstate banking law is likely to make it easier for out-of-state
institutions to attempt to purchase or otherwise acquire or to compete with the
Bank in Massachusetts and similarly make it easier for Massachusetts banks to
compete outside the state.
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GOVERNMENT REGULATION
Virtually all aspects of the Company's investment management business
are subject to extensive regulation. Westfield 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. 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 and
BPAM are investment advisers 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, 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. Westfield is also subject to
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 Investment Company Act, each contract with a registered
investment company must provide that it terminates upon its assignment. Under
both the Investment Advisers Act and the Investment Company 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.
The foregoing laws and regulations generally grant supervisory agencies
and bodies broad administrative powers, including the power to limit or restrict
either Westfield 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 and Westfield.
FEDERAL TAXATION
The Company, the Bank and Westfield 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 and Westfield, 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.
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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, will be reduced to 10.50% by 1999 on net income
apportioned to Massachusetts. The rate was 11.72% for 1996, 11.32% for 1997,
10.91% for 1998 and will be 10.50% for 1999. 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 will be 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.
ITEM 2. PROPERTIES
In October 1994, the Company executed a lease for the banking premises
located at Ten Post Office Square, Boston, Massachusetts, which is the
headquarters of the Bank. The lease for this space, which expires in February
2005, initially provided for 19,661 square feet, two five-year options to renew
and a number of options for future expansion. In December, 1996, the Company
executed a lease amendment for an additional 7,308 square feet of space at this
location.
In January 1996, Westfield executed a lease for 11,320 square feet of
office space at One Financial Center. This lease expires in August 2001 and is
renewable for an additional five years. Approximately 13% of this space is
subleased to a tenant under a noncancellable operating lease, which expires in
August 2001.
In November 1997, the Bank executed a lease for a 6,216 square foot
building at 336 Washington Street, Wellesley, Massachusetts. The lease for this
office expires in October 2012 and provides for three five year options for
renewal.
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.
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ITEM 3. LEGAL PROCEEDINGS
In January 1994, the Bank became aware of a dispute among various parties
involved in a transaction in which it served as bank of deposit for certain
certificates stated to reflect debt obligations of a foreign bank. In December
1994, the party which allegedly purchased the certificates filed a complaint in
the United States District Court for the District of Massachusetts alleging
certain claims arising out of the transaction against numerous individuals and
entities, including the Bank and one of its former officers. The plaintiff
sought to recover compensatory damages of approximately $4 million.
In August 1995, the Bank filed for summary judgment against the plaintiff's
claims. The plaintiff also filed a motion for partial summary judgment on one of
its claims. On March 19, 1996, the court granted the Bank's summary judgment
motion and denied the plaintiff's motion, resulting in the dismissal of all
claims against the Bank. The plaintiff sought reconsideration of its motion, and
on November 26, 1996, the court denied plaintiff's motion for reconsideration of
the summary judgment previously granted in favor of the Bank.
Notwithstanding the Court's dismissal of the underlying claims against the
Bank and its denial of the plaintiff's motion for reconsideration, litigation
continues among other parties. On December 31, 1998, the plaintiff filed another
motion asking the Court to reconsider the legal basis for its decision granting
summary judgment to the Bank. Among other things, plaintiff alleged that it had
new evidence which it asserts supports its claims against the Bank. The Bank
filed its opposition to plaintiff's motion on February 2, 1999. The Bank
continues to believe it has valid defenses to, and will vigorously defend all
claims and allegations of wrongdoing in connection with the transaction. The
Company incurred legal expenses of approximately $4,000 net of recoveries under
an insurance policy during 1998. Legal expenses incurred to date in 1999 net of
recoveries under and insurance policy are estimated to be approximately $4,000.
No further estimate of any loss can be made at this time.
The Company is also 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, 1998.
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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 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 ("Nasdaq") under the symbol "BPFH". At
February 22, 1999 there were 10,802,513 shares of Common Stock outstanding,
which were held by approximately 400 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
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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
FISCAL YEAR ENDED DECEMBER 31, 1997
Fourth Quarter $ 8.63 $7.13
Third Quarter 8.88 6.75
Second Quarter 7.25 5.75
First Quarter 6.38 4.88
DIVIDENDS
The Company has never paid any dividends in respect to its Common Stock.
The Company does not presently have any specific plans to pay cash dividends on
its Common Stock. 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 and Westfield 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 ability to pay dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On December 9, 1996 the Company issued 730,000 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, for an aggregate
offering price of approximately $3.2 million.
The information contained in the Company's Current Report on Form 8-K,
filed with the Commission on August 21, 1997, as amended by Form 8-K/A filed
with the Commission on November 14, 1997, regarding the issuance of 3,918,367
shares of the Company's Common Stock in connection with the acquisition of
Westfield is incorporated herein by reference thereto.
17
18
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data for the five
fiscal years ended December 31, 1998. 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.
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
AT DECEMBER 31:
Total balance sheet assets $ 457,247 $ 368,942 $ 293,879 $ 245,419 $ 207,119
Total loans 348,951 276,825 206,107 155,256 111,226
Allowance for loan losses 4,386 3,645 2,566 1,942 1,232
Investment securities 54,102 46,430 33,024 35,101 41,238
Mortgage-backed securities 11,909 18,123 25,289 32,052 35,304
Cash and cash equivalents 23,924 13,561 15,659 9,918 11,781
Excess of cost over net assets acquired 3,424 3,746 4,068 4,390 273
Deposits 334,852 258,301 209,302 178,885 144,915
Borrowed funds 82,570 79,684 54,694 41,941 44,624
Stockholders' equity 32,291 25,935 25,801 18,900 14,882
Non-performing assets 565 832 1,061 882 763
Client assets under management $ 2,630,000 $ 2,200,000 $1,900,000 $1,536,000 $ 706,000
FOR THE YEAR ENDED DECEMBER 31:
Interest and dividend income $ 29,285 $ 22,728 $ 18,688 $ 15,949 $ 10,136
Interest expense 15,137 11,334 9,377 8,451 4,562
----------- ----------- ---------- ---------- ----------
Net interest income 14,148 11,394 9,311 7,498 5,574
Provision for loan losses 1,004 810 619 618 355
----------- ----------- ---------- ---------- ----------
Net interest income after provision for loan 13,144 10,584 8,692 6,880 5,219
losses
Fees and other income 18,224 13,784 12,831 9,030 4,922
Operating expense 22,971 18,951 14,829 11,404 8,052
----------- ----------- ---------- ---------- ----------
Income before income taxes 8,397 5,417 6,694 4,506 2,089
Income tax expense (benefit) 2,890 1,909 1,216 104 (300)
----------- ----------- ---------- ---------- ----------
Net income $ 5,507 $ 3,508(2) $ 5,478 $ 4,402 $ 2,389
=========== =========== ========== ========== ==========
PER SHARE DATA:
Basic earnings per share $ 0.51 $ 0.33 $ 0.57 $ 0.48 $ 0.26
Diluted earnings per share $ 0.50 $ 0.32(2) $ 0.55 $ 0.47 $ 0.26
Average common shares outstanding 10,718,117 10,590,000 9,597,000 9,191,000 9,118,000
Average diluted shares outstanding 11,122,660 10,960,000 9,880,000 9,394,000 9,118,000
Book value $ 3.00 $ 2.44 $ 2.50 $ 2.03 $ 1.63
SELECTED OPERATING RATIOS:
Return on average assets 1.35% 1.13%(2) 2.11% 1.97% 1.47%
Return on average equity 18.92% 13.50%(2) 26.37% 26.32% 16.48%
Interest rate spread (1) 3.20% 3.33% 3.24% 2.90% 3.14%
Net interest margin (1) 3.78% 3.99% 3.85% 3.52% 3.61%
Total Fees and Other Income/Total Revenue (3) 56.30% 54.75% 57.95% 54.64% 46.89%
ASSET QUALITY RATIOS:
Non-performing loans to gross loans .16% .27% .47% .41% .45%
Non-performing assets to total assets .12% .23% .36% .36% .37%
Allowance for loan losses to gross loans 1.26% 1.32% 1.25% 1.25% 1.11%
Allowance for loan losses to non-performing loans 776.28% 487.95% 262.10% 304.87% 247.39%
Loans charged-off to average loans .13% .02% .04% .05% .24%
CAPITAL RATIOS:
Average equity to average assets 7.13% 8.37% 7.99% 7.48% 8.94%
Tier I leverage capital ratio 6.57% 6.54% 7.83% 6.14% 7.12%
Tier I risk-based capital ratio 10.52% 9.81% 12.85% 11.28% 14.39%
Total risk-based capital ratio 11.77% 11.07% 14.10% 12.53% 15.64%
(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 $0.43 per share,
return on average assets was 1.52%, and return on average equity was
18.21%.
(3) Total revenue is defined as net interest income plus fees and other income.
18
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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 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
high degree of liquidity. At December 31, 1998, cash, federal funds sold and
securities available for sale amounted to $89.9 million, or 19.7% of total
assets of the Company. This compares to $50.3 million, or 13.6% of total assets,
at December 31, 1997.
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 $135.3 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 with several 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 which are collected on a quarterly basis. At December 31, 1998, Westfield
had working capital of approximately $2.0 million. Management believes that
Westfield 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. 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, 1998 was $32.3
million, compared to $25.9 million at December 31, 1997. This increase of $6.4
million was primarily the result of the Company's net income for 1998 of $5.5
million combined with the proceeds of Common Stock issued and options exercised.
As a bank holding company, the Company is subject to a number of regulatory
capital requirements which have been adopted by the Federal Reserve Board. At
December 31, 1998, the Company's Tier I leverage capital ratio stood at 6.57%,
compared to 6.54% at December 31, 1997. 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 10.52% and a Total risk-based capital ratio of 11.77% at
December 31, 1998. This compares to a Tier I risk-based capital ratio of 9.81%
and a Total risk-based capital ratio of 11.07% at December 31, 1997. The minimum
Tier I leverage, Tier I risk-based, and Total risk-based capital ratios
necessary to enable the Company to be
19
20
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, 1998.
The Bank is also subject to a number of regulatory capital measures. At
December 31, 1998, the Bank's Tier I leverage capital ratio stood at 5.96%, as
compared to 6.28% at December 31, 1997. 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
9.62% and a Total risk-based capital ratio of 10.87% at December 31, 1998. This
compares to a Tier I risk-based capital ratio of 9.43% and a Total risk-based
capital ratio of 10.68% at December 31, 1997. 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, 1998.
FINANCIAL CONDITION
Total Assets. Total assets increased $88.3 million, or 23.9%, to $457.2
million at December 31, 1998 from $368.9 at December 31, 1997. This increase was
attributed primarily to an increase in portfolio loan originations and was
primarily funded by an increase in deposits.
Investments. Total investments (consisting of federal funds sold,
investment securities and mortgage-backed securities) were $77.0 million, or
16.8% of total assets, at December 31, 1998, compared to $65.8 million, or 17.8%
of total assets, at December 31, 1997. This increase of $11.3 million, or 17.1%,
was primarily due to an inflow of cash deposits at year-end which was invested
in overnight federal funds sold, and reinvestment of interest income within the
investment portfolio. As of December 31, 1998, all investments are classified as
available for sale. The investment portfolio carried a total of $175,000 in net
unrealized gains at December 31, 1998.
Loans. Loans totaled $349.0 million, or 76.3% of total assets, at December
31, 1998, compared with $276.8 million, or 75.0% of total assets, at December
31, 1997. This increase of $72.1 million, or 26.1%, was due to a larger
allocation of resources devoted to loan originations, as well as the combination
of a healthy local economy and low interest rates which helped fuel loan demand.
During 1998, commercial loans increased $20.3 million, or 15.0%, to $154.9
million from $134.7 million at December 31, 1997; residential mortgage loans
increased $48.9 million, or 39.2%, to $173.8 million from $124.9 million at
December 31, 1997; and home equity and other loans increased $2.9 million, or
17.1%, to $20.2 million from $17.3 million at December 31, 1997.
Deposits. The Company experienced an increase of $76.6 million, or 29.6%,
in deposits during 1998, from $258.3 million, or 70.0% of total assets at
December 31, 1997, to $334.9 million, or 73.2% of total assets, at December 31,
1998. The Company opened a new banking office in Wellesley, Massachusetts in
April 1998, which contributed approximately $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 $2.9 million, or
3.6%, during 1998 to $82.6 million from $79.7 million at December 31, 1997. 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.
ASSET QUALITY
The Company's non-performing assets include non-performing loans and other
real estate owned ("OREO"). Non-performing loans include both nonaccrual loans
and loans past due 90 days or more but still accruing.
20
21
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,
----------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ---- ------
(DOLLARS IN THOUSANDS)
Loans accounted for on a nonaccrual basis $ 565 $ 722 $ 976 $443 $ 323
Loans past due 90 days or more, but still accruing -- 25 -- 194 175
------ ------ ------ ---- ------
Total non-performing loans 565 747 976 637 498
Other real estate owned -- 85 85 245 265
------ ====== ====== ==== ------
Total non-performing assets $ 565 $ 832 $1,061 $882 $ 763
====== ====== ====== ==== ======
Delinquent loans 30-89 days past due $3,307 $1,632 $3,066 $304 $1,010
Non-performing loans as a % of gross loans .16% .27% .47% .41% .45%
Non-performing assets as a % of total assets .12% .23% .37% .37% .37%
Delinquent loans 30-89 days past due as a % of gross loans .95% .59% 1.49% .20% .91%
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, 1998, the Company had non-performing
assets of $565,000, which were 0.12% of total assets, representing a decrease of
$267,000, or 32.1%, from $832,000 at December 31, 1997. As of December 31, 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 Notes 7 and
8 to the Company's Consolidated Financial Statements for further information on
non-performing assets.
Delinquencies. At December 31, 1998, $3.3 million of loans were 30 to 89
days past due, an increase of $1.7 million, or 102.6%, from the $1.6 million
reported at December 31, 1997. Most of these loans are adequately secured and
management's success in keeping these borrowers current 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, 1998, the Company had classified $2.9 million of loans as
substandard or doubtful based on the rating system adopted by the Company. In
addition, at December 31, 1998, the Company had designated $210,000 of loans as
special mention.
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.
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.
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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, 1998, 1997, and 1996.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ----------------------------
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 $ 2,840 $ 140 4.93% $ 3,441 $ 194 5.64% $ 2,548 $ 159 6.24%
banks
Federal funds sold 6,875 351 5.11% 4,132 220 5.32% 2,154 110 5.11%
Investments (1) 70,038 4,187 5.98% 62,356 3,746 6.01% 64,998 3,884 5.98%
Loans: (2)
Commercial 140,296 13,083 9.33% 99,640 9,567 9.60% 78,486 7,482 9.53%
Residential mortgage 151,684 10,665 7.03% 110,750 8,168 7.38% 86,988 6,358 7.31%
Home equity and other 16,998 1,396 8.21% 14,280 1,179 8.26% 9,858 810 8.22%
-------- ------- ------- ------- -------- -------
Total earning assets 388,731 29,822 7.67% 294,599 23,074 7.83% 245,032 18,803 7.67%
------- ------- -------
Allowance for loan losses (3,901) (2,861) (2,177)
Cash and due from banks 7,226 5,182 5,068
Other assets 16,314 13,823 12,120
-------- -------- --------
Total assets $408,370 $310,743 $260,043
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Savings and NOW $ 32,647 414 1.27% $ 24,552 353 1.44% $ 22,895 343 1.50%
Money market 142,440 5,514 3.87% 99,660 3,776 3.79% 80,760 2,990 3.70%
Certificates of deposit 80,299 4,379 5.45% 67,959 3,705 5.45% 57,391 3,070 5.35%
Borrowed funds 83,174 4,830 5.81% 59,532 3,500 5.88% 50,364 2,974 5.91%
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 338,560 15,137 4.47% 251,703 11,334 4.50% 211,410 9,377 4.44%
------- ------- -------
Non-interest bearing demand deposits 34,774 28,042 24,073
Payables and other liabilities 5,921 5,004 3,785
-------- -------- --------
Total liabilities 379,255 284,749 239,268
Stockholders' equity 29,115 25,994 20,775
-------- -------- --------
Total liabilities and
stockholders' equity $408,370 $310,743 $260,043
======== ======== ========
Net interest income $14,685 $11,740 $9,426
======= ======= =======
Interest rate spread 3.20% 3.33% 3.24%
Net interest margin 3.78% 3.99% 3.85%
(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 $537,000, $346,000, and $115,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
(2) Nonaccrual loans are included in average loan balances.
(3) Average balances are derived from daily balances.
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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.
1998 VS. 1997 1997 VS. 1996
---------------------------- ----------------------------
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 $ (22) $ (32) $ (54) $ (16) $ 51 $ 35
Federal funds sold (9) 140 131 4 106 110
Investments (44) 294 250 (160) (209) (369)
Loans:
Commercial (282) 3,798 3,516 54 2,031 2,085
Residential mortgage (397) 2,894 2,497 59 1,751 1,810
Home equity and other (6) 223 217 4 365 369
----- ------ ------ ----- ------ ------
Total interest income (760) 7,317 6,557 (55) 4,095 4,040
----- ------ ------ ----- ------ ------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES:
Deposits:
Savings and NOW (31) 92 61 (1) 11 10
Money market 84 1,654 1,738 71 715 786
Certificates of deposit 1 673 674 60 575 635
Borrowed funds (44) 1,374 1,330 (13) 539 526
----- ------ ------ ----- ------ ------
Total interest expense 10 3,793 3,803 117 1,840 1,957
----- ------ ------ ----- ------ ------
NET INTEREST INCOME $(770) $3,524 $2,754 $(172) $2,255 $2,083
===== ====== ====== ===== ====== ======
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COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Income. The Company reported net income of $5.5 million, or $0.50
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 $0.32 per
diluted share after deducting $1.2 million of non-recurring acquisition
expenses, net of tax. The 57.0% increase of $2.0 million 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 acquisition expenses and the tax-exempt,
S-Corporation status of Westfield prior to the acquisition in 1997. Not
including non-recurring acquisition expenses, and had Westfield been fully
taxable in 1997, the Company would have reported proforma net income of $4.5
million, or $0.42 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 same
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. Loans. 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 Income. Cash and Investments. Total cash and investment income
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 0.6%, 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 was $18.2 million for
1998 compared to $13.8 million for 1997. Investment management and trust fees
increased $2.0 million, or 14.8%, primarily as the result of a 14.3% increase in
the Company's average assets under management from $2.1 billion for 1997 to $2.4
billion for 1998. Westfield earned performance fees of $1.8 million in 1998 as
general partner for the limited partnerships it manages. In 1997, no such fees
were earned.
Operating Expense. Total operating expense for 1998 was $23.0 million
compared to $19.0 million for 1997. This represents an increase of $4.0 million,
or 21.2%, as compared to 1997. The increase in salary expense of $4.5 million,
or 37.3%, is primarily due to bonuses to employees of Westfield of $1.1 million
related to performance fees earned on the limited partnerships Westfield
manages, a 22.1% increase in the number of employees during 1998, and normal
salary increases. The increase of $1.1 million, or 19.6%, in the remainder of
operating expense, not including non-recurring merger expenses of $1.5 million
in 1997, was primarily the result of the Company's growth, continuing
investments in technology and expansion of leased premises.
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 35.2% 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%.
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COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Income. The Company reported net income of $3.5 million, or $0.32
per diluted share, for the year ended December 31, 1997 after deducting $1.2
million of non-recurring acquisition expenses, net of tax. For the year ended
December 31, 1996 the Company's net income was $5.5 million, or $0.55 per
diluted share. The 35.9% decrease of $2.0 million in reported net income is the
result of the $1.2 million of non-recurring acquisition expenses and the
tax-exempt, S-Corporation status of Westfield prior to the acquisition, which
provided $1.2 million of tax savings in 1996. Not including non-recurring
acquisition expenses, and had Westfield been fully taxable in 1997 and 1996, the
Company would have reported proforma net income of $4.5 million, or $0.42 per
diluted share, and $4.2 million, or $0.43 per diluted share, for the years ended
December 31, 1997 and 1996, respectively.
Net Interest Income. For the year ended December 31, 1997, net interest
income was $11.4 million, an increase of $2.1 million, or 22.4%, over the same
period in 1996. This increase was primarily attributable to higher loan volumes.
Average earning assets were $50.5 million, or 20.1% higher, and average
interest-bearing liabilities were $40.3 million, or 19.1%, higher than the
comparable period a year earlier. The net interest margin increased 7 basis
points, or 1.8% from 3.80% in 1996 to 3.87% in 1997 due mainly to higher yields
earned on the loan portfolio.
Interest Income. Loans. Income on commercial loans was $9.6 million for
1997 compared to $7.5 million for 1996, an increase of $2.1 million, or 27.9%.
Income from residential mortgage loans was $8.2 million compared to $6.4
million, an increase of $1.8 million, or 28.5%, and income from home equity and
other loans was $1.2 million compared to $810,000, an increase of $369,000, or
45.6%, for the same periods, respectively. These increases in interest income
are due to higher average balances, and, to a lesser extent, higher yields. The
average balances of commercial and residential mortgage loans during 1997
increased $21.2 million, or 26.9%, and $23.8 million, or 27.3%, respectively,
compared to 1996. The average balance of home equity and other loans increased
$4.7 million, or 47.6%. The yield on commercial loans increased 7 basis points,
or 0.7%, the yield on residential mortgage loans increased 7 basis points, or
1.0%, and the yield on home equity loans increased 4 basis points, or 0.5%
compared to the prior year.
Interest Income. Cash and Investments. Total cash and investment income
decreased to $3.8 million during 1997 compared to $4.0 million during 1996. This
decrease in cash and investment income of $224,000, or 5.5%, was primarily
attributable to a 5.9% decrease in the average yield from 5.79% for 1996 to
5.45% for 1997.
Interest Expense. Interest paid on deposits and borrowings increased $2.0
million, or 20.9%, to $11.3 million for 1997, from $9.4 million for 1996. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $40.3 million, or 19.1%,
between the two periods. The overall cost of interest-bearing liabilities
increased 6 basis points, or 1.4% from 4.44% for 1996 to 4.50% for 1997.
Provision for Loan Losses. The provision for loan losses was $810,000 for
1997 compared to $619,000 for 1996. 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
1.32% at December 31, 1997 and 1.25% at December 31, 1996. Also see discussion
under "Risk Elements of the Loan Portfolio."
Fees and Other Income. Total fees and other income was $13.8 million for
1997 compared to $12.8 million for 1996. Investment management and trust fees
increased $2.2 million, or 19.8%, primarily as the result of an 18.9% increase
in the Company's average assets under management from $1.7 billion for 1996 to
$2.1 billion for 1997. In 1997, Westfield earned no performance fees as general
partner from the limited partnerships it manages, compared to $1.1 million of
fee income in 1996.
Operating Expense. Total operating expense for 1997 was $18.9 million. This
represents an increase of $4.1 million, or 27.8% as compared to 1996, however,
the 1997 expense includes a non-recurring charge of $1.5 million related to the
Westfield acquisition. An increase in salary expense of $1.8 million, or 18.2%,
and an increase in the remainder of operating expenses of $774,000, or 16.4%,
were primarily the result of the Company's growth, continuing investments in
technology and expansion of leased premises.
Income Tax Expense. The Company recorded income tax expense of $1.9 million
in 1997 as compared to $1.2 million in 1996. The effective tax rate was 35.2%
and 18.2% in 1997 and 1996, respectively. The increase in tax expense is 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 diluted share, and $1.2
million, or $0.12 per diluted share, of additional income tax expense in 1997
and 1996, respectively.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 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.
Those methods must be consistent with the entity's approach to managing risk.
This Statement is effective for fiscal years beginning after June 15, 1999, and
is not expected to have a material impact on the Company's consolidated
financial statements.
In October, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." This Statement requires that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This Statement was adopted
on January 1, 1999, and did not have a material effect on the Company's
consolidated financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes thereto, presented
in Item 8 - Financial Statements, 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 or will be 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 contains 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. Awareness and Assessment, Project Planning for all
aspects and User Acceptance Test Plans for mission critical systems have been
completed. Mission critical systems are defined by the Company as those vital to
the successful continuance of core business activities. Contingency Planning for
all mission critical information technology systems and for Business
Continuation has been completed and will be updated periodically during 1999.
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The Company relies on several third party service providers for key
business processes. It continues to work closely with these companies to monitor
the progress of their Year 2000 efforts. 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 is seeking 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 plans to complete
testing by June 30, 1999. This schedule continues to track in line with the
Company's overall Year 2000 project plan.
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 is presently scheduled to be substantially
completed by March 31, 1999 for non-mission critical applications. The Company
has yet to identify any operating system which appears unlikely to be Year 2000
compliant or for which a suitable alternative cannot be implemented. The Company
expects to complete User Acceptance Testing for mission critical information
technology and non-information technology systems by June 30, 1999. Test Plans
for non-critical applications are in process of development and are expected to
be 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. The Company believes that, with modifications to
existing systems and conversions to new systems, the Year 2000 problem will not
pose significant operational problems for the Company's systems as so modified
and converted. The Company expects that the necessary modifications will be
implemented prior to the Year 2000, although there can be no assurance that this
will be the case. In the event that modifications are not completed prior to the
Year 2000, the Company has developed contingency plans. 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.
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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, 1998, have been accelerated due to the Year 2000 Readiness
Program. Management currently estimates that out-of-pocket costs related to the
Year 2000 Readiness Program will be less than $100,000. 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 Company currently expects that the total aggregate expenses to
address the Year 2000 issue will not be material to the Company's consolidated
results of operations, although as the Company proceeds with its implementation
plan, there may be additional unforeseen costs, which may be significant.
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 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.
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 making loans, the Bank
encounters competition from other institutions, including larger downtown Boston
and suburban-based commercial banking organizations, savings banks, credit
unions, other financial institutions and non-bank financial service companies
serving eastern Massachusetts and adjoining areas. The principal modes of
competition include the interest rates charged on loans, the interest rates paid
on deposits, efforts to obtain deposits, the range of services provided and the
quality of those 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 materially 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.
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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 limited 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, law firms and other financial companies. 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 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.
ASSET QUALITY
The success of bank holding companies, such as the Company, depends to a
significant extent upon the quality of their assets. Non-performing assets of
the Company, which include non-performing loans and real estate acquired through
foreclosure proceedings and through acceptance of a deed in lieu of foreclosure
(collectively, other real estate owned or "OREO"), can lead to charge-offs and
an increase in the Bank's allowance for possible loan losses. Other adverse
effects of non-performing assets include, but are not limited to, foregone
interest income and increased operating expenses as a result of the allocation
of management time and resources to the collection and work-out of these
non-performing assets.
Management of the Bank determines the Bank's allowance for possible loan
losses based on the facts and circumstances available to it at the time of
determination. The net carrying value of OREO is determined by Management to
equal the lower of (i) the assets' balances when transferred to OREO or (ii) the
estimated net fair value, after reduction for estimated selling costs, of the
property acquired. The allowance for possible loan losses, however, can only be
estimated by the Company, based upon, among other things, the quality of the
loan portfolio, economic conditions, the value of the underlying collateral and
the level of non-accruing loans held by the Bank. Future provisions to the
allowance for possible loan losses or provisions in carrying values of OREO
could become necessary as a result of deterioration in the real estate market
and/or the economy in the Company's primary market area, future increases in
non-performing assets or for other reasons. Such provisions could adversely
affect the Company's financial condition and results of operations.
In addition, bank regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible loan
losses and the carrying value of its OREO. Such agencies could require the Bank
to make further provisions to the allowance for possible loan losses and
adjustments to the carrying values of OREO based on their judgments at the time
of examination.
LOAN CONCENTRATIONS
The Bank's loans are concentrated with respect to geography, type of
customer and type of collateral. 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
Bank's asset quality is affected by the economic conditions in these areas. The
Bank's commercial loans are generally concentrated in the following customer
groups: (i) real estate developers and investors, (ii) financial services, (iii)
technology, manufacturing and communications, (iv) professional services and (v)
general commercial, industrial and personal loans. The Bank's commercial loans,
with limited exceptions, are secured by either real estate (income producing
residential and commercial properties), marketable securities or corporate
assets (accounts receivable, equipment and inventory). Substantially all of the
Bank's residential mortgage and home equity loans are secured by residential
property in eastern Massachusetts. Conditions in the real estate market
specifically, and the Massachusetts economy generally, could impact the ability
of these borrowers to service their loans in the future and/or the value of the
collateral securing these loans. In addition, this loan concentration coupled
with adverse economic conditions in the area could negatively impact the asset
quality of the Company in future periods. See "--Asset Quality."
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INTEREST RATE ENVIRONMENT
The general interest rate environment affects the Company's financial
results. The Bank's main source of income from banking operations is its net
interest income, which is defined as the difference between the interest income
received on its interest-bearing assets, including loans and investment
securities, and the interest expense incurred in connection with its
interest-bearing liabilities, including deposits and borrowings. The Bank's net
interest income can be affected significantly by changes in market interest
rates. In particular, decreasing interest rates may reduce the Bank's net
interest income as the spread between interest income and interest expense
decreases. The Bank has adopted asset and liability management policies to
minimize the potential adverse effects of changes in interest rates on its net
interest income, primarily by altering the mix and maturity of the Bank's loans,
investments and funding sources.
An increase in interest rates could also have a material adverse effect on
the Company's results of operations by reducing the ability of its borrowers to
service their current indebtedness, thereby increasing the Bank's delinquent and
non-performing loans and necessitating further provisions to the Bank's
allowance for possible loan losses.
SOURCES OF FUNDS
The Bank has traditionally obtained funds principally through deposits and
through borrowings. The Bank's ability to obtain deposits depends upon general
economic conditions, market interest rates and competitive pressures. Thus, in
order to provide liquidity and flexibility to its operations, the Bank may have
to rely more heavily on borrowings as a source of funds in the future.
Moreover, the volatility of the Bank's deposits may impact the Bank's
overall liquidity. 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, these deposits
are generally considered to be volatile.
THE PERFORMANCE OF THE COMPANY MAY BE ADVERSELY AFFECTED BY CHANGES IN ECONOMIC
AND MARKET CONDITIONS
The Company offers a broad range of investment management services and
styles to institutional and retail investors. Consequently, the Company's
performance 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 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 the control of the Company. There can be no assurance that
broader 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 performance by the Company and may adversely affect assets under
management and/or fees earned by the Company.
THE COMPANY'S INVESTMENT MANAGEMENT CONTRACTS ARE SUBJECT TO TERMINATION ON
SHORT NOTICE
Following the acquisition of Westfield in October 1997, the Company expects
that more than 50% of its revenues will be derived from investment management
contracts which are typically terminable upon less than 30 days' notice. Because
of this, clients of the Company may withdraw funds from accounts under
management generally in their sole discretion. In addition, the Company's
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 an adverse effect on the Company's consolidated
results of operations and financial condition. Changes in the investment
patterns of clients will also affect the total assets under management. In
addition, in the case of contracts which provide for the payment of
performance-based fees, the investment performance of the Company will affect
the Company's results of operations and financial condition.
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EXISTENCE OF REGISTRATION RIGHTS
The holders of 3,140,367 shares of Common Stock have the right in certain
circumstances to require the Company to register up to 800,000 of their shares
annually under the Securities Act for resale to the public, and the holders of
3,140,367 shares have the right to include their shares in a registration
statement filed by the Company. These registration rights may enable such
holders to publicly sell shares which would otherwise be ineligible for sale in
the public market. The sale of a substantial number of shares of Common Stock
into the public market, or the availability of such shares for future sale,
could adversely affect the market price for the Common Stock and could impair
the Company's ability to obtain additional capital in the future through an
offering of equity securities should it desire to do so.
THE COMPANY'S INVESTMENT MANAGEMENT BUSINESS IS HIGHLY REGULATED
Each direct or indirect subsidiary of the Company which provides investment
management services is highly regulated, primarily at the federal level. The
failure of any such subsidiary 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.
Both Westfield and Boston Private Asset Management, Inc., a wholly-owned
subsidiary of the Bank ("BPAM"), are registered with the United States
Securities and Exchange Commission (the "Commission") as investment advisers
under the Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"), and are 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, record keeping, operational and disclosure obligations. Both
Westfield and BPAM as investment advisers are also subject to regulation under
the securities laws and fiduciary laws of certain states. Westfield acts as a
subadviser to a mutual fund which is registered with the Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a subadviser to
a registered investment company, Westfield is subject to requirements under the
1940 Act and the Commission's regulations promulgated thereunder. In addition,
the Company is 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 clients. 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 involving the assets of each ERISA plan which is a
client of the Company, as well as certain transactions by the fiduciaries (and
certain other related parties) to such plans.
In addition, applicable law provides that the investment management
contracts under which the Company manages assets for other parties either
terminate automatically if assigned, or are not assignable unless the applicable
client consents to the assignment. Assignment, as generally defined, includes
direct assignments as well as assignments which may be deemed to occur, under
certain circumstances, upon the direct or indirect transfer of a "controlling
block" of the voting securities of the Company. Moreover, applicable law
provides that all investment contracts with mutual fund clients may be
terminated by such 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.
The Company itself does not manage investments for clients, does not
provide any investment management services and, therefore, is not registered as
an investment adviser under federal or state law.
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 provides the Company a steady 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 earned by Westfield as the general partner of
limited partnerships are directly dependent upon short-term investment
performance which can fluctuate significantly with changes in the capital
markets.
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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; however, no off-balance sheet hedging
activities have been used to date.
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, 1998, 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 1/1/99
------------------------------
DOLLAR PERCENT
CHANGE CHANGE
---------- -----------
(DOLLARS IN THOUSANDS)
Up 200 basis point shock $(459) (2.90%)
Down 200 basis point shock (290) (1.83%)
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.
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 its principal funding decisions, such as with
respect to the Bank's one year adjustable rate mortgage loan portfolio.
The repricing schedule for the Bank's interest-earning assets and
interest-bearing liabilities 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 schedule also includes senior management projections for
activity levels in product lines offered by the Bank. Assumptions based on the
historical behavior of deposit rates and
32
33
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. 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, 1998:
WITHIN OVER THREE OVER SIX OVER ONE
THREE TO SIX TO TWELVE YEAR TO OVER FIVE
MONTHS MONTHS MONTHS FIVE YEARS YEARS TOTAL
-------- ---------- --------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
Interest earning assets(1):
Cash and due from banks $ 3,849 $ -- $ -- $ -- $ -- $ 3,849
Federal funds sold 11,000 -- -- -- -- 11,000
Investment securities 29,214 752 7,442 16,049 645 54,102
Mortgage-backed securities 796 5,130 2,316 3,490 177 11,909
FHLB Stock 4,718 -- -- -- -- 4,718
Loans-fixed rate 3,040 2,040 3,665 40,413 19,039 68,197
Loans-variable rate 134,679 18,815 32,114 90,150 4,996 280,754
-------- -------- -------- -------- -------- --------
Total interest earning assets 187,296 26,737 45,537 150,102 24,857 434,529
-------- -------- -------- -------- -------- --------
Interest bearing liabilities (2):
Savings and NOW accounts (3) 3,588 3,588 -- -- 32,794 39,970
Money market accounts 123,545 41,081 -- -- -- 164,626
Time certificates under $100,000 10,197 7,522 4,926 7,026 203 29,874
Time certificates $100,000 or more 40,776 4,563 7,277 -- -- 52,616
Reverse repurchase agreements 6,241 -- -- -- -- 6,241
FHLB borrowings 10,675 677 20,362 36,671 7,944 76,329
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities 195,022 57,431 32,565 43,697 40,941 369,656
-------- -------- -------- -------- -------- --------
Net interest sensitivity gap during
the period $ (7,726) $(30,694) $ 12,972 $106,405 $(16,084) $ 64,873
======== ======== ======== ======== ======== ========
Cumulative gap $ (7,726) $(38,420) $(25,448) $ 80,957 $ 64,873
======== ======== ======== ======== ========
Interest-sensitive assets as a percent
of interest-sensitive liabilities
(cumulative) 96.04% 84.78% 91.07% 124.63% 117.55%
Cumulative gap as a percent of total
assets (1.69)% (8.40%) (5.57%) 17.71% 14.19%
(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 $47.8 million of demand accounts because they are
non-interest bearing.
(3) While Savings and NOW accounts can be withdrawn at any time, management
believes they contain characteristics which 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
rate levels.
33
34
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, 1998 and
1997, 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, 1998. 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 at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 19, 1999
34
35
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1998 1997
--------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS:
Cash and due from banks $ 12,924 $ 12,361
Federal funds sold 11,000 1,200
Investment securities available for sale (amortized cost of $53,996
and $36,740, respectively, Notes 5, 11 and 12) 54,102 36,776
Investment securities held to maturity (market value of $0
and $9,678, respectively, Notes 5, 11 and 12) -- 9,654
Mortgage-backed securities available for sale (amortized cost of $11,840
and $0, respectively, Notes 6 and 12) 11,909 --
Mortgage-backed securities held to maturity (market value of $0
and $18,141, respectively, Notes 6 and 12) -- 18,123
Loans receivable (Notes 7 and 12):
Commercial 154,940 134,685
Residential mortgage 173,810 124,865
Home equity 19,866 16,969
Other 335 306
--------- ---------
Total loans 348,951 276,825
Less allowance for loan losses (Note 8) (4,386) (3,645)
--------- ---------
Net loans 344,565 273,180
Stock in the Federal Home Loan Bank of Boston (Note 12) 4,718 3,511
Premises and equipment, net (Note 9) 3,627 2,857
Excess of cost over net assets acquired, net 3,424 3,746
Management fees receivable 3,288 2,750
Accrued interest receivable 2,405 2,169
Other assets 5,285 2,615
--------- ---------
Total assets $ 457,247 $ 368,942
========= =========
LIABILITIES:
Deposits (Note 10) $ 334,852 $ 258,301
Securities sold under agreements to repurchase (Note 11) 6,241 5,366
Federal funds purchased -- 13,255
FHLB borrowings (Note 12) 76,329 60,226
Other short-term borrowings -- 837
Accrued interest payable 651 609
Other liabilities 6,883 4,413
--------- ---------
Total liabilities 424,956 343,007
--------- ---------
Commitments and contingencies (Notes 6, 9, 16, 19 and 20)
STOCKHOLDERS' EQUITY (NOTES 3, 14 AND 19):
Common stock, $1.00 par value per share;
authorized: 18,000,000 shares issued: 10,747,744
shares in 1998 and 10,641,100 shares in 1997 10,748 10,641
Additional paid-in capital 12,680 12,140
Retained earnings 9,246 3,800
Stock subscriptions receivable (495) (669)
Accumulated other comprehensive income 112 23
--------- ---------
Total stockholders' equity 32,291 25,935
--------- ---------
Total liabilities and stockholders' equity $ 457,247 $ 368,942
========= =========
See accompanying notes to consolidated financial statements.
35
36
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and dividend income:
Commercial loans $ 13,083 $ 9,567 $ 7,482
Residential mortgage loans 10,665 8,168 6,358
Home equity and other loans 1,396 1,179 810
Investment securities 2,497 1,834 1,799
Mortgage-backed securities 896 1,351 1,758
FHLB stock dividends 257 215 212
Federal funds sold 351 220 110
Deposits in banks 140 194 159
----------- ----------- ----------
Total interest and dividend income 29,285 22,728 18,688
----------- ----------- ----------
Interest expense:
Savings and NOW 414 353 343
Money market 5,514 3,776 2,990
Certificates of deposit 4,379 3,705 3,070
Federal funds purchased 191 293 146
Securities sold under agreements to repurchase 181 322 336
FHLB borrowings 4,439 2,852 2,426
Other short-term borrowings 19 33 66
----------- ----------- ----------
Total interest expense 15,137 11,334 9,377
----------- ----------- ----------
Net interest income 14,148 11,394 9,311
Provision for loan losses (Note 8) 1,004 810 619
----------- ----------- ----------
Net interest income after provision for loan losses 13,144 10,584 8,692
----------- ----------- ----------
Fees and other income:
Investment management and trust 15,156 13,199 11,022
Equity in earnings of partnerships 1,828 -- 1,139
Deposit account service charges 237 225 156
Gain on sale of loans 303 95 112
Gain on sale of investment securities (Note 5) 218 10 33
Other 482 255 369
----------- ----------- ----------
Total fees and other income 18,224 13,784 12,831
----------- ----------- ----------
Operating expense:
Salaries and employee benefits (Note 14) 16,387 11,935 10,097
Occupancy (Note 9) 1,392 1,014 661
Equipment 681 604 469
Professional services 1,828 1,378 1,418
Marketing 403 346 375
Business development 549 477 434
Amortization of intangibles (Note 2) 322 322 322
Merger expenses -- 1,510 --
Other (Note 15) 1,409 1,365 1,053
----------- ----------- ----------
Total operating expense 22,971 18,951 14,829
----------- ----------- ----------
Income before income taxes 8,397 5,417 6,694
Income tax expense (Note 13) 2,890 1,909 1,216
----------- ----------- ----------
Net income $ 5,507 $ 3,508 $ 5,478
=========== =========== ==========
Per share data (Note 2):
=========== =========== ==========
Basic earnings per share $ 0.51 $ 0.33 $ 0.57
=========== =========== ==========
Diluted earnings per share $ 0.50 $ 0.32 $ 0.55
=========== =========== ==========
Average common shares outstanding 10,718,117 10,590,000 9,597,000
=========== =========== ==========
Average diluted shares outstanding 11,122,660 10,960,000 9,880,000
=========== =========== ==========
Proforma information:
Net income $ 5,507 $ 3,508 $ 5,478
Proforma adjustment for income taxes of acquired entity
previously filing as an S Corporation -- 186 1,233
----------- ----------- ----------
Proforma net income after adjustment for income taxes $ 5,507 $ 3,322 $ 4,245
=========== =========== ==========
Proforma basic earnings per share $ 0.51 $ 0.31 $ 0.44
=========== =========== ==========
Proforma diluted earnings per share $ 0.50 $ 0.30 $ 0.43
=========== =========== ==========
See accompanying notes to consolidated financial statements.
36
37
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL STOCK OTHER
COMMON PAID-IN RETAINED TREASURY SUBSCRIPTIONS COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK RECEIVABLE INCOME (LOSS) TOTAL
------- ------- ------- -------- ------------ ------------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 1995 $ 9,308 $ 8,787 $ 816 $ (45) $ (85) $ 119 18,900
Net income -- -- 5,478 -- -- -- 5,478
Other comprehensive income, net:
Change in unrealized gain
(loss) on securities -- -- -- -- -- (183) (183)
available for sale, net
Total comprehensive income, net -- -- -- -- -- -- 5,295
Proceeds from issuance of
990,904 shares of common stock 991 2,372 -- -- -- -- 3,363
Stock options exercised 22 45 -- 45 -- -- 112
Issuance of stock subscriptions -- 787 -- -- (762) -- 25
S-Corporation dividends paid -- -- (1,894) -- -- -- (1,894)
------- ------- ------- -------- ----- ----- ------
Balance at December 31, 1996 10,321 11,991 4,400 -- (847) (64) 25,801
Net income -- -- 3,508 -- -- -- 3,508
Other comprehensive income, net:
Change in unrealized gain
(loss) on securities
available for sale, net -- -- -- -- -- 87 87
Total comprehensive income, net -- -- -- -- -- -- 3,595
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 10,641 12,140 3,800 -- (669) 23 25,935
Net income -- -- 5,507 -- -- -- 5,507
Other comprehensive income, net:
Change in unrealized gain
(loss) on sale, net -- -- -- -- -- 89 89
Total comprehensive income, net -- -- -- -- -- -- 5,596
Proceeds from issuance of
106,644 shares of common stock 57 452 -- -- -- -- 509
Stock options exercised 50 88 -- -- -- -- 138
Stock subscription payments -- -- -- -- 174 -- 174
S-Corporation dividends paid -- -- (61) -- -- -- (61)
------- ------- ------- -------- ----- ----- ------
Balance at December 31, 1998 $10,748 $12,680 $ 9,246 $ -- $(495) $ 112 $32,291
======= ======= ======= ======== ===== ===== ======
See accompanying notes to consolidated financial statements.
37
38
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,507 $ 3,508 $ 5,478
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,092 1,034 694
Deferred compensation -- (1,466) 193
(Gain) loss on sale of securities (218) (10) (33)
Gain on sale of loans (303) (95) (112)
Loss on disposal of property and equipment -- 10 14
Provision for loan losses 1,004 810 619
Loans originated for sale (23,709) (8,419) (12,976)
Proceeds from sale of loans 24,012 8,514 13,088
(Increase) decrease in accrued interest receivable (236) (424) (51)
(Increase) decrease in deferred income tax asset (50) (37) 25
(Increase) decrease in other assets (1,500) (1,052) (1,115)
Increase (decrease) in accrued interest payable 42 261 (160)
Increase (decrease) in other liabilities 2,470 2,145 1,148
-------- -------- --------
Net cash provided by operating activities 8,111 4,779 6,812
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold (9,800) 5,750 (6,450)
Investment securities available for sale:
Purchases (85,661) (25,283) (38,371)
Sales 58,378 650 18,702
Maturities 14,730 14,440 15,200
Investment securities held to maturity:
Purchases (874) (8,252) (3,384)
Sales 794 -- --
Maturities 4,900 5,000 9,775
Mortgage-backed securities available for sale:
Principal payments 1,216 -- --
Mortgage-backed securities held to maturity:
Principal payments 5,034 7,130 6,622
Purchase of FHLB stock (1,207) (194) --
Distributed (undistributed) earnings of partnership investments (1,793) 1,089 (687)
Capital contribution for partnership investment -- (94) --
Net increase in loans (72,260) (70,631) (50,964)
Recoveries on loans previously charged-off 122 309 71
Sales of other real estate owned 124 -- 360
Capital expenditures, net of sale proceeds (1,448) (1,553) (1,088)
Acquisition of investment management business -- (1,051) (1,048)
-------- -------- --------
Net cash used in investing activities (87,745) (72,690) (51,262)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 76,551 48,999 30,417
Net increase (decrease) in repurchase agreements 875 (2,760) 4,328
Net increase (decrease) in federal funds purchased (13,255) 13,255 --
Net increase (decrease) in other short-term debt (837) 837 --
Proceeds from FHLB borrowings 48,011 52,125 79,800
Repayments of FHLB borrowings (31,908) (37,432) (72,410)
S-corporation dividends paid (61) (4,108) (1,894)
Proceeds from stock subscriptions receivable 174 178 25
Proceeds from issuance of common stock, net 647 469 3,475
-------- -------- --------
Net cash provided by financing activities 80,197 71,563 43,741
-------- -------- --------
(Continued)
38
39
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
Net increase (decrease) in cash and due from banks 563 3,652 (709)
Cash and due from banks at beginning of year 12,361 8,709 9,418
======= ======= =======
Cash and due from banks at end of year $12,924 $12,361 $ 8,709
======= ======= =======
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest $15,450 $11,051 $ 9,471
Cash paid for income taxes 3,859 1,224 934
Non-cash transactions:
Transfers to other real estate owned 42 -- 200
Change in unrealized gain (loss) on securities available for sale, net
of estimated income taxes 89 87 (183)
Transfer of investments to investment securities available for sale 17,865 -- --
See accompanying notes to consolidated financial statements.
39
40
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, and Westfield Capital Management Company Inc. ("Westfield"), a
registered investment advisor. 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. The
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 on a consolidated basis. On July 31, 1995, the Company acquired
substantially all of the assets and assumed certain liabilities of an investment
management business for a total purchase price of approximately $4.2 million, of
which $2.1 million, consisting of $1.5 million in cash and 166,667 shares of the
Company's common stock, was paid at closing. In each of January and July 1996
and 1997, the Company made additional scheduled payments consisting of $375,000
in cash and 41,667 shares of the Company's common stock. The acquisition was
accounted for as a purchase. Accordingly, the results of operations of the
acquired business have been included with those of the Company subsequent to the
date of acquisition. The Company conducts substantially all of its business
through its wholly-owned subsidiaries, the Bank and Westfield.
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
("ATM") 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. It also acts as the
managing general partner for three limited partnerships that invest according to
the mandates in the partnership agreements.
(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 and Westfield. The Bank's
consolidated financial statements include the accounts of its wholly-owned
subsidiaries, BPB Securities 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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
40
41
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1998, the daily amount required to be held was $1.2
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, 1998, 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 which 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 writedown 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, 1998 and 1997,
the amount of impaired loans was 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.
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.
41
42
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Allowance for Loan Losses
The allowance for loan losses is established through a charge to
operations. When management believes that the collectibility 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 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. 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. During 1995, the acquisition of an investment management company
generated additions to intangible assets of $4.3 million. Accumulated
amortization amounted to $1.4 million, $1.1 million, and $763,000 at December
31, 1998, 1997 and 1996, respectively.
Investment Management and Trust Assets
Investment management and trust assets amounted to $2.6 billion and $2.2
billion at December 31, 1998 and 1997, 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 (the "401(k) 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's
contributions are charged against current operations in the year they are made.
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.
42
43
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 their 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.
1998 1997 1996
--------------------------- --------------------------- --------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
--------------------------- --------------------------- --------------------------
(In thousands, except per share amounts)
BASIC EPS
Net Income $5,507 10,718 $0.51 $3,508 10,590 $0.33 $5,478 9,597 $0.57
===== ===== =====
EFFECT OF DILUTIVE
SECURITIES
Stock Payable -- -- -- 23 -- 106
Stock Options -- 405 -- 347 -- 177
DILUTED EPS
--------------------------- --------------------------- --------------------------
Net Income $5,507 11,123 $0.50 $3,508 10,960 $0.32 $5,478 9,880 $0.55
=========================== =========================== ==========================
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. Those methods must be consistent with the entity's approach to managing
risk. This Statement is effective for fiscal years beginning after June 15,
1999, and is not expected to have a material impact on the Company's
consolidated financial statements.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." This Statement requires that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This Statement was adopted
on January 1, 1999, and did not have a material effect on the Company's
consolidated financial statements.
43
44
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. Comprehensive income is
defined by the Statement as net income plus revenues, expenses, gains, and
losses that under generally accepted accounting principles are excluded from net
income. This Statement requires that an entity classify items of comprehensive
income by their nature in the financial statements, and display the accumulated
balance of comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. This
Statement only affects presentation in the financial statements, it has no
impact on the Company's results of operations.
The Company's other comprehensive income (loss) and related tax effects for
the years ended December 31, 1998, 1997, and 1996 is as follows:
1998
-----------------------------
TAX EXPENSE
PRE-TAX (BENEFIT) NET
------- ----------- ------
(IN THOUSANDS)
UNREALIZED GAINS ON SECURITIES:
Unrealized holding gains arising during period $ 357 $ 137 $ 220
Less: adjustment for realized gains (218) (87) (131)
----- ----- -----
Net unrealized gains 139 50 89
===== ===== =====
Other comprehensive income $ 139 $ 50 $ 89
===== ===== =====
1997
-----------------------------
TAX EXPENSE
PRE-TAX (BENEFIT) NET
------- ----------- ------
(IN THOUSANDS)
UNREALIZED GAINS ON SECURITIES:
Unrealized holding gains arising during period $ 147 $ 54 $ 93
Less: adjustment for realized gains (10) (4) (6)
----- ----- -----
Net unrealized gains 137 50 87
===== ===== =====
Other comprehensive income $ 137 $ 50 $ 87
===== ===== =====
1996
-----------------------------
TAX EXPENSE
PRE-TAX (BENEFIT) NET
------- ----------- ------
(IN THOUSANDS)
UNREALIZED LOSSES ON SECURITIES:
Unrealized holding losses arising during period $(252) $ (89) $(163)
Less: adjustment for realized gains (33) (13) (20)
----- ----- -----
Net unrealized gains (285) (102) (183)
===== ===== =====
Other comprehensive income $(285) $(102) $(183)
===== ===== =====
44
45
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) BUSINESS SEGMENTS
Management Reporting
The Company has two reportable segments, the Bank and Westfield. The
financial performance of the Company is managed and evaluated by business
segment. The segments are managed separately because each business is a company
with different clients, employees, systems, risks, and marketing strategies.
Description of Business Segments
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 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 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. The Bank's investment management emphasis is on
large-cap equity and actively managed fixed income portfolios.
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
growth equity portfolios with a particular focus on identifying and managing
small and mid-cap equity positions. It also acts as the managing general partner
for three limited partnerships, one invests primarily in technology stocks,
another invests primarily in small capitalization equities and a third that was
started in June 1998, invests primarily in midcap equities.
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.
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, 1998, 1997, and 1996.
1998
----------------------------------------------------------
BANK WESTFIELD 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 11,406 -- -- 18,224
----------------------------------------------------------
Total Revenues 20,984 11,471 9 (92) 32,372
Provision for Loan Losses 1,004 -- -- -- 1,004
Non-Interest Expense 14,889 8,082 -- -- 22,971
Income Taxes 1,503 1,387 -- -- 2,890
----------------------------------------------------------
Segment Profit $ 3,588 $ 2,002 $ 9 $ (92) $ 5,507
----------------------------------------------------------
BALANCE SHEET DATA:
Total Segment Assets $452,045 $ 6,903 $ 1,269 $(2,970) $457,247
======== ======= ======= ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,415 $ 33 $ -- $ -- $ 1,448
======== ======= ======= ======= ========
Depreciation and Amortization $ 960 $ 132 $ -- $ -- $ 1,092
======== ======= ======= ======= ========
45
46
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1997
----------------------------------------------------------
BANK WESTFIELD 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 -- -- 13,784
----------------------------------------------------------
Total Revenues 16,169 9,009 11 (11) 25,178
Provision for Loan Losses 810 -- -- -- 810
Non-Interest Expense 11,959 5,845 1,147 -- 18,951
Income Taxes 981 1,157 (229) -- 1,909
----------------------------------------------------------
Segment Profit $ 2,419 $ 2,007 $ (907) $ (11) $ 3,508
----------------------------------------------------------
BALANCE SHEET DATA:
Total Segment Assets $365,651 $ 3,586 $ 120 $ (115) $368,942
======== ======= ======= ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,333 $ 220 $ -- $ -- $ 1,553
======== ======= ======= ======= ========
Depreciation and Amortization $ 873 $ 161 $ -- $ -- $ 1,034
======== ======= ======= ======= ========
1996
----------------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
------- --------- ----- ------------ -------
(in thousands)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 9,221 $ 90 $ 11 $ (11) $ 9,311
Non-Interest Income 3,936 8,895 -- -- 12,831
----------------------------------------------------------
Total Revenues 13,157 8,985 11 (11) 22,142
Provision for Loan Losses 619 -- -- -- 619
Non-Interest Expense 9,159 5,646 24 -- 14,829
Income Taxes 1,121 101 (6) -- 1,216
----------------------------------------------------------
Segment Profit $ 2,258 $ 3,238 $ (7) $ (11) $ 5,478
----------------------------------------------------------
BALANCE SHEET DATA:
Total Segment Assets $288,608 $ 4,973 $ 764 $ (466) $293,879
======== ======= ======= ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 567 $ 521 $ -- $ -- $ 1,088
======== ======= ======= ======= ========
Depreciation and Amortization $ 591 $ 103 $ -- $ -- $ 694
======== ======= ======= ======= ========
46
47
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) INVESTMENT SECURITIES
A summary of investment securities follows:
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------- --------------------------------
Unrealized Unrealized
Amortized ------------- Market Amortized ------------- Market
Cost Gains Losses Value Cost Gains Losses Value
--------------------------------- --------------------------------
(In thousands)
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 $ -- $-- $ -- $ --
================================ ==============================
AT DECEMBER 31, 1997
U.S. Government and agencies $17,589 $ 12 $(18) $17,583 $4,654 $ 2 $ -- $4,656
Municipal bonds 19,151 42 -- 19,193 5,000 22 -- 5,022
-------------------------------- ------------------------------
Total $36,740 $ 54 $(18) $36,776 $9,654 $24 $ -- $9,678
================================ ==============================
The following table sets forth the maturities of investment securities
available for sale at December 31, 1998 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 $26,558 $26,558 4.47% $ 6,476 $ 6,516 3.08% $33,034 $33,074 4.20%
After One, But Within Five Years 3,030 3,036 4.89 10,808 10,889 3.37 13,838 13,925 3.71
After Five, But Within Ten Years 3,486 3,458 6.24 1,399 1,407 3.31 4,885 4,865 5.44
After Ten Years 2,000 1,998 6.81 239 240 2.94 2,239 2,238 6.41
----------------- ----------------- -----------------
Total $35,074 $35,050 4.82% $18,922 $19,052 3.26% $53,996 $54,102 4.28%
================= ================= =================
The weighted average remaining life of investment securities available
for sale at December 31, 1998 was 2.0 years. As of December 31, 1998,
approximately $6.5 million of investment securities available for sale were
callable before maturity.
The following table presents the sale of investment securities with the
resulting realized gains, losses, and net proceeds from such sales:
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------ ---- ------
(IN THOUSANDS)
Amortized cost of securities sold $58,954 $640 $18,669
Gains realized on sales 222 10 38
Losses realized on sales (4) -- (5)
------- ---- -------
Net proceeds from sales $59,172 $650 $18,702
======= ==== =======
47
48
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities follows:
AVAILABLE FOR SALE
---------------------------------------
Unrealized
Amortized ----------------- Market
Cost Gains Losses Value
--------- ----- ------ ------
(In thousands)
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
========================================
HELD TO MATURITY
----------------------------------------
Unrealized
Amortized ----------------- Market
Cost Gains Losses Value
--------- ----- ------ ------
AT DECEMBER 31, 1997
FIXED RATE:
FHLMC $ 5,646 $ -- $(84) $ 5,562
FNMA 2,616 1 (55) 2,562
ADJUSTABLE RATE:
FNMA 379 1 -- 380
GNMA 9,482 155 -- 9,637
----------------------------------------
Total $18,123 $157 $(139) $18,141
========================================
The following table sets forth the maturities of mortgage-backed securities
at December 31, 1998 and the weighted average yields of such securities:
AFTER ONE, BUT AFTER FIVE, BUT
WITHIN FIVE YEARS WITHIN TEN 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 $2,608 $2,599 5.61% $ 566 $ 574 5.66% $ -- $ -- --%
FNMA -- -- -- 1,512 1,512 5.69% -- -- --
ADJUSTABLE RATE:
FNMA -- -- -- -- -- -- 277 274 5.85
GNMA -- -- -- -- -- -- 6,877 6,950 5.77
---------------- ----------------- -----------------
Total $2,608 $2,599 5.61% $2,078 $2,086 5.68% $7,154 $7,224 5.77%
================ ================= =================
These securities have final maturities ranging from 1.25 to 25.3 years. The
weighted average remaining life of mortgage-backed securities was 16.3 years as
of December 31, 1998. Expected maturities will differ from contractual
maturities because borrowers may repay obligations without prepayment penalties.
48
49
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LOANS
The Company's lending activities are conducted principally in the Boston
Metropolitan Area and, to a lesser extent, elsewhere in Massachusetts and New
England. The Company 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 Company'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 Company's loan portfolio is
susceptible to changing conditions in the New England economy. As of December
31, 1998, the Company had $68.2 million of fixed rate loans and $280.8 million
of variable rate loans outstanding.
The Company's lending limit to any single borrower is limited by regulation
to approximately $5.8 million. The Bank had no relationships with an individual
borrower at December 31, 1998 which were in excess of the legal lending limit
established for Massachusetts state-chartered banks. Mortgage loans serviced for
others totaled $1.3 million and $2.6 million at December 31, 1998 and 1997,
respectively.
Loans outstanding to executive officers and directors of the Company
aggregated $3.6 million and $293,000 at December 31, 1998 and 1997,
respectively. An analysis of the activity of these loans is as follows:
YEARS ENDED DECEMBER 31,
-----------------------
1998 1997
------ ------
(IN THOUSANDS)
Balance at beginning of year $ 293 $293
Originations 3,643 --
Repayments (293) --
------ ----
Balance at end of year $3,643 $293
====== ====
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,
----------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Nonaccrual loans $ 565 $ 722 $ 976
Loans past due 90 days or more, but still accruing -- 25 --
------ ------ ------
Total nonperforming loans $ 565 $ 747 $ 976
====== ====== ======
Loans past due 30-89 days $3,307 $1,632 $3,066
====== ====== ======
(8) ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Balance at beginning of year $3,645 $2,566 $1,942
Provision for loan losses 1,004 810 619
Charge-offs (385) (40) (66)
Recoveries 122 309 71
------ ------ ------
Balance at end of year $4,386 $3,645 $2,566
====== ====== ======
49
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 1998 1997
----------- -------- -------
(IN THOUSANDS)
Leasehold improvements 5-10 Years $ 2,391 $ 1,988
Computer equipment 3-5 Years 1,217 1,016
Furniture and fixtures 5-7 Years 1,341 1,245
Office equipment 5-7 Years 440 292
------- -------
Subtotal 5,389 4,541
Less accumulated depreciation and amortization (1,762) (1,684)
------- -------
Total premises and equipment $ 3,627 $ 2,857
======= =======
Depreciation and amortization expense was $678,000, $624,000, and $417,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $1.1
million, $848,000, and $594,000 respectively. In October 1994, the Company
executed a lease for the premises located at Ten Post Office Square, Boston,
Massachusetts, which is the headquarters of the Bank. The lease for this space,
which expires in February 2005, initially provided for 19,661 square feet, two
five-year options to renew and a number of options for future expansion. In
December, 1996, the Company executed a lease amendment for an additional 7,308
square feet of space at this location.
In January 1996, Westfield executed a lease for 11,320 square feet of
office space at One Financial Center which expires in August 2001 and is
renewable for an additional five years. Approximately 13% of this space is
subleased to a tenant under a noncancellable operating lease, which expires in
August 2001. Rental income from this sublease agreement was $47,000 for the
years ended December 31, 1998, 1997 and 1996.
In November 1997, the Bank executed a lease for a 6,216 square foot
building at 336 Washington Street, Wellesley, Massachusetts. This lease for this
office expires in October 2012, and contains three five year options for
renewal.
The Company is obligated for minimum rental payments under these
noncancellable 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)
1999 $1,055
2000 1,060
2001 961
2002 737
2003 760
Thereafter 2,647
------
Total $7,220
======
50
51
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) DEPOSITS
Deposits are summarized as follows:
DECEMBER 31,
---------------------
1998 1997
-------- ---------
(IN THOUSANDS)
Demand deposits $ 47,766 $ 36,848
NOW 35,735 24,938
Savings 4,235 5,787
Money market 164,626 117,984
Certificates of deposit under $100,000 29,874 22,956
Certificates of deposit $100,000 or greater 52,616 49,788
-------- --------
Total $334,852 $258,301
======== ========
Certificates of deposit had the following schedule of maturities:
DECEMBER 31,
---------------------
1998 1997
------- -------
(IN THOUSANDS)
Less than 3 months remaining $51,075 $43,166
3 to 6 months remaining 11,998 10,406
6 to 12 months remaining 12,188 10,084
More than 12 months remaining 7,229 9,088
------- -------
Total $82,490 $72,744
======= =======
Interest expense on certificates of deposit greater than $100,000 was $2.8
million, $2.4 million, and $2.2 million for the years ended December 31, 1998,
1997, and 1996, respectively.
(11) 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
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,
-----------------------------------
1998 1997 1996
------- ---------- ----------
(DOLLARS IN THOUSANDS)
Outstanding $6,241 $ 5,366 $ 8,126
Maturity date 1/99 1/98-3/98 1/97-3/97
Outstanding collateralized by U.S. Treasury
and related agency securities with:
Book value 6,315 5,400 8,173
Market value 6,297 5,402 8,182
Average outstanding for the year 5,962 7,032 7,120
Maximum outstanding at any month end 7,613 10,685 11,544
Weighted average rate at end of period 4.16% 4.45% 4.52%
Weighted average rate paid for the period 4.43% 4.57% 4.72%
51
52
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) FEDERAL HOME LOAN BANK BORROWINGS
A summary of borrowings from the Federal Home Loan Bank of Boston ("FHLB")
is as follows:
DECEMBER 31,
-------------------------------------------
1998 1997
-------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Within 1 year $21,000 5.75% $18,000 5.87%
Over 1 year to 2 years 16,916 5.66 16,000 6.01
Over 2 years to 3 years 10,286 5.53 7,000 6.19
Over 3 years to 5 years 15,653 5.90 12,770 6.04
Over 5 years 12,474 5.78 6,456 6.31
------- -------
Total $76,329 5.74% $60,226 6.03%
======= =======
Borrowings from the Federal Home Loan Bank of Boston 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, 1998 were $58.4 million. The
Bank had additional short-term federal fund lines with the FHLB and
correspondent banks of $35.5 million at December 31, 1998. As of December 31,
1998, there were no federal funds purchased.
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, 1998, the Bank's FHLB
stock holdings totaled $4.7 million. The Bank's investment in FHLB stock is
recorded at cost, and is redeemable at par.
(13) INCOME TAXES
The components of income tax expense (benefit) are as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Current expense:
Federal $2,742 $1,254 $ 946
State 841 370 245
------ ------ -----
Total current expense 3,583 1,624 1,191
------ ------ ------
Deferred expense (benefit):
Federal (543) 202 11
State (122) 23 14
Change in valuation reserve (28) 60 --
------ ------ ------
Total deferred expense (benefit) (693) 285 25
------ ------ ------
Total income tax expense $2,890 $1,909 $1,216
====== ====== ======
52
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,
-----------------------
1998 1997 1996
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Benefit of S-Corporation status -- (4.2) (17.0)
State income tax, net of Federal tax benefit 5.7 4.8 2.6
Amortization of intangibles .2 .2 .2
Tax exempt interest, net (4.2) (5.8) (1.2)
Merger expense -- 4.0 --
Other, net (1.3) 2.2 (.4)
---- ---- ----
Effective federal income tax rate 34.4% 35.2% 18.2%
==== ==== ====
The components of gross deferred tax assets and gross deferred tax
liabilities are as follows:
DECEMBER 31,
--------------------
1998 1997
------ ------
(IN THOUSANDS)
Gross deferred tax assets:
Allowance for losses on loans and real estate $1,358 $ 964
Depreciation 90 62
Organization costs 123 152
Pre-operating costs 103 104
Investment in partnerships 27 --
Other 52 46
------ ------
Gross deferred tax assets 1,753 1,328
Valuation allowance (32) (60)
------ ------
Total deferred tax assets 1,721 1,268
Gross deferred tax liabilities:
Cash to accrual adjustment 424 602
Investment in partnerships -- 62
Unrealized gain on securities available for sale 63 13
------ ------
Total gross deferred tax liabilities 487 677
------ ------
Net deferred tax asset $1,234 $ 591
====== ======
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
$3.2 million of future net taxable income to realize the net deferred tax asset
at December 31, 1998. 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.
53
54
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) EMPLOYEE BENEFITS
Employee 401(k) Plan
The Company maintains the 401(k) Plan for the benefit of employees at 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 and have completed one year of service are
eligible to participate in the 401(k) Plan. Expenses associated with the 401(k)
Plan were $153,000, $100,000, and $93,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Profit Sharing Plan
The Company maintains the Profit Sharing Plan for the benefit of employees
of Westfield which 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 $288,000, $288,000, and $258,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Stock Option Plans
The Company offers options on its common stock to officers, key employees,
and directors under an Incentive Stock Option Plan and a Directors' 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. 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,
------------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income:
As reported $5,507 $3,508 $5,478
Proforma 4,924 3,141 5,335
Basic earnings per share:
As reported $ 0.51 $ 0.33 $ 0.57
Proforma 0.46 0.30 0.56
Diluted earnings per share:
As reported $ 0.50 $ 0.32 $ 0.55
Proforma 0.44 0.29 0.54
Under the 1997 Incentive 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 up
to 200,000 shares of common stock. 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 1997 Incentive Stock
Option Plan. Under the Directors' Stock Option Plan, options generally vest one
year after the grant date.
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 1998, 1997 and 1996: expected life of 7 years;
expected volatility of 37% in 1998, 40% in 1997, and 40% in 1996, and risk-free
interest rates of 5.7% in 1998, 5.3% in 1997, and 6.1% in 1996.
54
55
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1998, 1997, and 1996, and changes during the years then ended is
presented below.
1998 1997 1996
------------------------- ------------------------- -------------------------
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 797,452 $4.21 550,202 $2.82 494,152 $2.58
Granted 229,494 9.43 277,300 6.75 148,050 3.82
Exercised (50,175) 2.75 (29,250) 2.39 (40,075) 2.66
Canceled (12,875) 7.46 (800) 3.46 (51,925) 3.43
------- ----- ------- ----- -------
Options at end of year 963,896 $5.48 797,452 $4.21 550,202 $2.82
======= ===== ======= ===== ======= =====
Options exercisable at year end 655,438 $4.26 481,727 $2.91 390,215 $2.53
======= ===== ======= ===== ======= =====
Weighted average fair value of
options granted during the year $4.71 $3.62 $2.03
===== ===== =====
The following table summarizes information about fixed stock options
outstanding at December 31, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------------------------------- ----------------------------
$ 2.00 to $3.00 331,952 5.1 $ 2.47 331,952 $ 2.47
$ 3.50 to $4.00 90,950 7.1 3.64 71,113 3.65
$ 4.13 to $6.00 188,800 8.0 5.12 130,300 5.11
$ 7.00 to $8.84 265,194 9.0 8.53 111,573 8.45
$9.13 to $10.75 87,000 9.4 10.40 10,500 10.23
------- -------
$2.00 to $10.75 963,896 7.3 $ 5.48 655,438 $ 4.26
====================================== ======================
(15) OTHER OPERATING EXPENSE
Major components of other operating expense are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------ -------
(IN THOUSANDS)
Forms and supplies $ 279 $ 293 $ 255
Telephone 150 143 136
Training and education 89 116 83
Publications and subscriptions 72 66 57
Postage 100 85 99
Insurance 94 87 77
Other 625 575 346
------ ------ ------
Total $1,409 $1,365 $1,053
====== ====== ======
55
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,
---------------------
1998 1997
------- -------
(IN THOUSANDS)
Commitments to originate loans $48,467 $16,472
Unused lines of credit 83,609 54,101
Standby letters of credit 6,241 4,807
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.
56
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,
-----------------------------------------------
1998 1997
------------------- ----------------------
(IN THOUSANDS)
BOOK BOOK
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
ASSETS:
Cash and due from banks $12,924 $ 12,924 $ 12,361 $ 12,361
Federal funds sold 11,000 11,000 1,200 1,200
Investment securities 54,102 54,102 46,430 46,454
Mortgage-backed securities 11,909 11,909 18,123 18,141
Stock in the Federal Home Loan Bank of Boston 4,718 4,718 3,511 3,511
Loans receivable (net of allowance for loan losses):
Commercial 151,177 151,593 131,542 134,642
Residential mortgage 173,382 174,030 124,553 125,263
Home equity and other 20,006 20,006 17,085 17,085
Accrued interest receivable 2,405 2,405 2,169 2,169
LIABILITIES:
Deposits:
Demand deposits 47,766 47,766 36,848 36,848
NOW 35,735 35,735 24,938 24,938
Savings 4,235 4,235 5,787 5,787
Money market 164,626 164,626 117,984 117,984
Certificates of deposit under $100,000 29,874 30,078 22,956 23,114
Certificates of deposit $100,000 or more 52,616 52,655 49,788 49,845
Securities sold under agreements to repurchase 6,241 6,241 5,366 5,366
FHLB borrowings 76,329 76,823 60,226 60,046
Other short-term borrowings -- -- 837 837
Accrued interest payable 651 651 609 609
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.
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.
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.
57
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.
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.
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.
Other short-term borrowings
The fair value reported for other short-term 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 debt of
similar maturities.
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.
58
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,
--------------------------
1998 1997
----------- -------
(IN THOUSANDS)
ASSETS:
Cash $ 930 $ 115
Investment in subsidiaries 32,386 25,677
Other assets 339 241
----------- -------
Total assets $ 33,655 $26,033
=========== =======
LIABILITIES:
Due to Westfield $ 1,000 $ --
Accounts payable 364 98
----------- -------
Total liabilities 1,364 98
----------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share; authorized: 18,000,000
issued: 10,747,744 shares in 1998 and 10,641,100 shares in 1997 10,748 10,641
Additional paid-in capital 12,680 12,140
Retained earnings 9,246 3,800
Stock subscriptions receivable (495) (669)
Accumulated other comprehensive income 112 23
----------- -------
Total stockholders' equity 32,291 25,935
----------- -------
Total liabilities and stockholders' equity $ 33,655 $26,033
=========== =======
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
INCOME:
Interest on cash in banks $ 9 $ 11 $ 11
Management fees from subsidiaries 1,854 -- --
Dividends from subsidiaries -- 600 --
------ ------ ------
Total income 1,863 611 11
------ ------ ------
EXPENSES:
Other expenses 1,863 126 24
Merger expenses -- 1,021 --
------ ------ ------
Total expenses 1,863 1,147 24
------ ------ ------
Loss before income taxes -- (536) (13)
Income tax benefit -- (229) (6)
------ ------ ------
Loss before equity in undistributed earnings of subsidiaries -- (307) (7)
Equity in undistributed earnings of subsidiaries 5,507 3,815 5,485
------ ------ ------
NET INCOME $5,507 $3,508 $5,478
====== ====== ======
59
60
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,507 $ 3,508 $ 5,478
Adjustments to reconcile net income to net cash provided by
(used) in operating activities:
Equity in undistributed earnings of subsidiaries (5,507) (3,815) (5,485)
(Increase) decrease in other assets (98) (235) (6)
Increase (decrease) in other liabilities 266 98 --
------- ------- -------
Total adjustments (5,339) (3,952) (5,491)
------- ------- -------
Net cash provided by (used) in operating activities 168 (444) (13)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investment in subsidiary Bank (1,000) (78) (3,063)
------- ------- -------
Net cash used in investing activities (1,000) (78) (3,063)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 509 322 3,363
Proceeds from exercise of stock options 138 147 112
Proceeds from short-term borrowings 1,000 -- --
Increase (decrease) in common stock payable -- (298) (299)
------- ------- -------
Net cash provided by financing activities 1,647 171 3,176
------- ------- -------
Net increase (decrease) in cash 815 (351) 100
Cash at beginning of year 115 466 366
======= ======= =======
Cash at end of year $ 930 $ 115 $ 466
======= ======= =======
(19) REGULATORY MATTERS
The Company and its subsidiaries are subject to extensive regulation and
examination by the Massachusetts Commissioner of Banks and by the Federal
Deposit Insurance Corporation ("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 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 January of 1997 and by
the Massachusetts Commissioner of Banks in March 1998. The Company was examined
by the Federal Reserve Bank of Boston in September 1997.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. 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.
60
61
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Current Federal Deposit Insurance Corporation 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, 1998,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank 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 category.
Actual capital amounts and regulatory capital requirements as of December
31, 1998 and 1997 are presented in the tables below.
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDERPROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ -------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1998:
Total risk-based capital
Company $32,185 11.77% $21,873 >8.0% $27,341 >10.0%
Bank 29,157 10.87 21,452 8.0 26,815 10.0
Tier I risk-based
Company 28,755 10.52 10,936 4.0 16,405 6.0
Bank 25,792 9.62 10,726 4.0 16,089 6.0
Tier I leverage capital
Company 28,755 6.57 17,509 4.0 21,886 5.0
Bank 25,792 5.96 17,318 4.0 21,647 5.0
AS OF DECEMBER 31, 1997:
Total risk-based capital
Company $25,000 11.07% $18,073 >8.0% $22,590 >10.0%
Bank 23,756 10.68 17,788 8.0 22,235 10.0
Tier I risk-based
Company 22,166 9.81 9,036 4.0 13,554 6.0
Bank 20,966 9.43 8,894 4.0 13,341 6.0
Tier I leverage capital
Company 22,166 6.54 13,554 4.0 16,943 5.0
Bank 20,966 6.28 13,354 4.0 16,693 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.
61
62
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(20) LITIGATION
In January 1994, the Bank became aware of a dispute among various parties
involved in a transaction in which it served as bank of deposit for certain
certificates stated to reflect debt obligations of a foreign bank. In December
1994, the party which allegedly purchased the certificates filed a complaint in
the United States District Court for the District of Massachusetts alleging
certain claims arising out of the transaction against numerous individuals and
entities, including the Bank and one of its former officers. The plaintiff
sought to recover compensatory damages of approximately $4 million.
In August 1995, the Bank filed for summary judgment against the plaintiff's
claims. The plaintiff also filed a motion for partial summary judgment on one of
its claims. On March 19, 1996, the court granted the Bank's summary judgment
motion and denied the plaintiff's motion, resulting in the dismissal of all
claims against the Bank. The plaintiff sought reconsideration of its motion, and
on November 26, 1996, the court denied plaintiff's motion for reconsideration of
the summary judgment previously granted in favor of the Bank.
Notwithstanding the Court's dismissal of the underlying claims against the
Bank and its denial of the plaintiff's motion for reconsideration, litigation
continues among other parties. The deadline for an appeal by plaintiff has not
yet expired because no judgment has been obtained for or against the other
defendants remaining in the case. The Bank continues to believe it has valid
defenses to, and will vigorously defend, all claims and allegations of
wrongdoing in connection with the transaction. The Company incurred legal
expenses of approximately $4,000 net of recoveries under an insurance policy
during 1998. No further estimate of any loss can be made at this time.
The Company is also 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.
62
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 1999 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after December 31, 1998.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
PAGE NO.
a) Consolidated Balance Sheets 35
b) Consolidated Statements of Operations 36
c) Consolidated Statements of Changes in Stockholders' Equity 37
d) Consolidated Statements of Cash Flows 38
e) Notes to Consolidated Financial Statements 40
(2) FINANCIAL SCHEDULES
None.
(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1(i) Articles of Organization are incorporated herein by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed
with the Commission on May 27, 1994 (the "Form 8-K").
3.1(ii) By-Laws of the Company are incorporated herein by reference to
Exhibit 3.2 to Form 8-K.
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 Form 8-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.
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.
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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.
21 Subsidiaries of the Company are incorporated herein by reference
to Exhibit 22.0 to Form S-1.
23.1 Independent Auditors' Consent.* 67
27 Financial Data Schedule.* 68
- -----------------
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter ended December 31, 1998.
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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 25th day of
February, 1999.
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 on the date indicated.
/s/ Timothy L. Vaill Chairman of the Board, February 25, 1999
- ----------------------------- President and Chief
Timothy L. Vaill Executive Officer
/s/ Walter M. Pressey Executive Vice President February 25, 1999
- ----------------------------- and Chief Financial
Walter M. Pressey Officer
(Principal Financial
Officer)
/s/ Charles O. Wood, III Lead Director February 25, 1999
- -----------------------------
Charles O. Wood, III
/s/ Herbert S. Alexander Director February 25, 1999
- -----------------------------
Herbert S. Alexander
/s/ Arthur J. Bauernfeind Director February 25, 1999
- -----------------------------
Arthur J. Bauernfeind
/s/ Eugene S. Colangelo Director February 25, 1999
- -----------------------------
Eugene S. Colangelo
65
66
/s/ C. Michael Hazard Director February 25, 1999
- -----------------------------
C. Michael Hazard
/s/ Lynn Thompson Hoffman Director February 25, 1999
- -----------------------------
Lynn Thompson Hoffman
/s/ E. Christopher Palmer Director February 25, 1999
- -----------------------------
E. Christopher Palmer
/s/ Robert A. Radloff Director February 25, 1999
- -----------------------------
Robert A. Radloff
/s/ Dr. Allen Sinai Director February 25, 1999
- -----------------------------
Dr. Allen Sinai
66