<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee required) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No fee required) FOR THE TRANSITION PERIOD FROM _______ TO
_______.
COMMISSION FILE NO. 0-17089
BOSTON PRIVATE BANCORP, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
COMMONWEALTH OF MASSACHUSETTS 04-2976299
- --------------------------------- ----------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
TEN POST OFFICE SQUARE, BOSTON, MA 02109
- --------------------------------------- --------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 912-1900
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
----------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(TITLE OF CLASS)
CHECK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 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
----- -----
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF
REGULATION S-B CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL 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-KSB OR ANY
AMENDMENT TO THIS FORM 10-KSB. | |
FOR FISCAL YEAR ENDED DECEMBER 31, 1996, THE REGISTRANT'S REVENUES WERE
$22,534,000.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED ON THE CLOSING SALE PRICE ON THE NASDAQ
SMALLCAP MARKET ON MARCH 21, 1997, WAS $33,655,494
6,634,441 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING ON
MARCH 21, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE IN ITEMS 10, 11, 12 AND 13 OF PART
III.
<PAGE> 2
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, changes in loan defaults and charge-off rates,
reduction in deposit levels necessitating increased borrowing to fund loans and
investments, changes in interest rates, and changes in assumptions used in
making such forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
GENERAL
Boston Private Bancorp, 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"). The Company conducts substantially all of its business
through its wholly-owned subsidiary, the Bank. The Company's principal office is
located at Ten Post Office Square, Boston, Massachusetts 02109 and its telephone
number is (617) 912-1900.
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.
In December 1996, the Company received $3.4 million of additional equity
capital from a Common Stock Offering. Substantially all of the proceeds were
subsequently invested in the Bank. 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 January 1997, the Company made additional scheduled payments consisting of
$375,000 in cash and 41,667 shares of the Company's common stock. The balance of
the purchase price is payable in one remaining installment of $375,000 in cash
and 41,667 shares of the Company's common stock in July 1997. 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.
INVESTMENT MANAGEMENT AND TRUST ADMINISTRATION
General. The Company provides asset management services to a broad range of
individual and institutional clients from several states and foreign countries.
For the year ended December 31, 1996, the asset management business accounted
for 82.6% of the Company's total fees and other income and 14.4% of the
Company's total revenues.
At December 31, 1996, the Company had $687 million in assets under
management. Of this total, $641.2 million was in investment advisory accounts,
$31.8 million was invested and administered under trust arrangements, and $13.5
million was in custody or safekeeping.
Investment Management and Trust Services. The Company provides a range of
investment management services to individuals, family groups, trusts, endowments
and foundations, and retirement plans. These services include management of
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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 Company also provides trust services to both individuals and
institutions.
LENDING ACTIVITIES
GENERAL. The Company specializes in lending to individuals and small
businesses, including corporations, partnerships, associations and non-profit
organizations. Loans made by the Company 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 Company to businesses include
commercial mortgage loans, revolving lines of credit, working capital loans,
equipment financing and letters of credit. All commercial loans over $100,000,
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. All
commercial loans over $500,000 and all residential mortgage loans over $1
million are required to be reviewed by the Loan Committee, which includes three
outside Directors.
At December 31, 1996, the Company had loans outstanding of $206.1 million,
which represented approximately 71.3% 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,
1996, approximately 85% of the Company's outstanding loans had interest rates
that were either floating or adjustable in nature. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Asset Liability Management." At December 31, 1996, approximately
98.5% of the Company's outstanding loans were secured and approximately 76.0%
were secured in whole or in part by real estate. Within the commercial loan
portfolio, $48.6 million or 49.8% of the portfolio was secured in whole or in
part by real estate.
At December 31, 1996, the Bank's statutory lending limit to any single
borrower was approximately $3.8 million, subject to certain exceptions provided
under applicable law. At December 31, 1996, the Bank had no outstanding lending
relationships in excess of the legal lending limit. The Bank also has a policy
of extending only secured loans to directors of the Bank and the Company, and
the aggregate principal amount of loans to all directors of the Bank and the
Company is limited by law to 100% of capital. At December 31, 1996, the
aggregate principal amount of all loans to directors and related entities
(including commitments under lines of credit) was $1,348,000.
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.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- ---------------------- --------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 97,740 47.4% $ 72,729 46.8% $ 50,527 45.4% $35,113 46.4% $27,860 47.1%
Residential 96,578 46.9 74,447 48.0 54,373 48.9 34,909 46.1 25,472 43.1
mortgage
Home equity 11,481 5.6 7,783 5.0 6,045 5.4 5,421 7.2 5,586 9.5
Other 308 .1 297 .2 281 .3 234 .3 171 .3
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
206,107 100.0% 155,256 100.0% 111,226 100.0% 75,677 100.0% 59,089 100.0%
Allowance for loan
losses (2,566) (1,942) (1,232) (1,006) (812)
-------- -------- -------- ------- -------
Net loans $203,541 $153,314 $109,994 $74,671 $58,277
======== ======== ======== ======= =======
</TABLE>
The following table sets forth scheduled contractual maturities of loans in
the Company's portfolio at December 31, 1996. Loans having no stated maturity
are reported as due in one year or less. The following table also sets forth the
dollar amount of loans which are scheduled to mature after one year which have
fixed or adjustable interest rates.
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<TABLE>
<CAPTION>
RESIDENTIAL HOME
COMMERCIAL MORTGAGE EQUITY OTHER TOTAL
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less $43,958 $ -- $ 70 $308 $ 44,336
After one year through five years 43,211 4 -- -- 43,215
Beyond five years 10,571 96,574 11,411 -- 118,556
------- ------- ------- ---- --------
Total $97,740 $96,578 $11,481 $308 $206,107
Interest rate terms on amount due after one year:
Fixed $17,360 $10,704 $ -- $ -- $ 28,064
Adjustable 36,422 85,874 11,411 -- 133,707
------- ------- ------- ---- --------
Total $53,782 $96,578 $11,411 $ -- $161,771
</TABLE>
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
Company 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 Company 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 Company 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, 1996, $303,000 of loans
scheduled to mature within one year were non-performing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition--Non-performing Assets."
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, 1996, the Company had outstanding 550 commercial loans
totaling $97.7 million, which represented 47.4% of total loans and 33.8% of
total assets. Commercial loans, consisting primarily of loans to businesses,
increased by $25.0 million, or 34.4%, during the year ended December 31, 1996,
compared to an increase of $22.2 million, or 43.9%, during the year ended
December 31, 1995. The growth in 1996 and 1995 reflects both an increase in
market demand and initiatives by the Company to increase originations. Of the
Company's total commercial loan portfolio, $44.0 million or 45.0% is due within
one year and $53.8 million or 55.0% is due after one year. Loans are typically
priced on a floating rate basis or at a margin over the Bank's base rate.
Floating rate loans accounted for 78.7% of the Company's commercial loan
portfolio as of December 31, 1996. The average commercial loan balance at
December 31, 1996 was approximately $178,000.
The Company has an independent loan review process under which all loan
originations are reviewed for adherence to internal policies and underwriting
guidelines. The Company also reviews all outstanding commercial loans at least
annually. Such credit reviews are first performed by the loan review function
and then presented to the Credit Committee with further review, in certain
situations, by the Loan Committee. In addition, the Credit Committee reviews
loans on the Company's internal "watch list" and classified loan report on a
periodic 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, 1996, the
Company had outstanding residential mortgage loans and home equity loans of
$96.6 million and $11.5 million, respectively, together representing 52.4% of
the Company's total loan portfolio. Residential mortgage loans and home equity
loans increased by $25.8 million, or 31.4%, during the year ended December 31,
1996, and increased by $21.8 million, or 36.1%, during 1995. The increases in
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both 1996 and 1995 were primarily due to the relatively low level of adjustable
mortgage loan interest rates, as well as promotional activities designed
specifically to increase the Company's volume of mortgage loan originations.
While the Company 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 $207,000 at December 31, 1996.
At December 31, 1996, the average residential loan balance was $267,000. In
1996, the Company sold $13.5 million of residential mortgage loans on a
non-recourse basis without retaining servicing. The Company generally holds
adjustable rate mortgage loans ("ARM's") in its own portfolio and sells fixed
rate mortgage loans to outside investors. At December 31, 1996, $85.9 million,
or 88.9%, of loans in the Company's residential mortgage portfolio were ARM's.
Other Loans. The category "Other loans" consists of loan balances
outstanding on credit cards and loans arising from overdraft protection extended
to individual customers. Other loans increased by $11,000, or 3.7%, during the
year ended December 31, 1996, and increased by $16,000, or 5.7%, during 1995. At
December 31, 1996, aggregate outstanding balances were $308,000 compared to
$297,000 at December 31, 1995.
Allowance for Loan Losses and OREO Activity. The following table is an
analysis of the Company's allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1994 1994 1993 1992
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding $175,332 $131,928 $95,400 $64,371 $63,127
======== ======== ======= ======= =======
Allowance for loan losses, beginning of period $ 1,942 $ 1,232 $ 1,006 $ 812 $ 2,202
Charged-off loans:
Commercial 6 54 166 314 2,701
Residential Mortgage 52 3 64 -- --
Home Equity 8 -- -- -- --
Other 0 4 -- -- 1
-------- -------- ------- ------- -------
Total charged-off loans 66 61 230 314 2,702
-------- -------- ------- ------- -------
Recoveries on loans previously charged-off:
Commercial 71 153 101 235 174
Residential Mortgage -- -- -- -- --
Home Equity -- -- -- -- --
Other -- -- -- -- 1
-------- -------- ------- ------- -------
Total recoveries 71 153 101 235 175
-------- -------- ------- ------- -------
Net loans charged-off (recovered) (5) (92) 129 79 2,527
Provision for loan losses 619 618 355 273 1,137
-------- -------- ------- ------- -------
Allowance for loan losses, end of period $ 2,566 $ 1,942 $ 1,232 $ 1,006 $ 812
======== ======== ======= ======= =======
Net loans charged-off (recovered) to average loans (.01%) (.07%) .14% .12% 4.00%
Allowance for loan losses to ending gross loans 1.25% 1.25% 1.11% 1.33% 1.37%
Allowance for loan losses to non-performing loans 262.91% 304.87% 247.39% 92.21% 98.42%
Net loans charged-off (recovered) to allowance for
loan losses (0.19%) (4.74%) 10.47% 7.85% 311.21%
Recoveries to charge-offs 107.58% 250.82% 43.91% 74.84% 6.48%
</TABLE>
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The following table represents the allocation of the Company's allowance
for loan losses and the percent of loans in each category to total loans for the
periods ending as indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ---------- --------- -------------------- ---------- ---------
(DOLLARS IN THOUSANDS)
Loan category:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $2,296 47.4% $1,686 46.8% $1,062 45.4% $ 841 46.4% $734 47.1%
Residential mortgage 241 46.9 237 48.0 154 48.9 150 46.1 63 43.1
Home equity and other 29 5.7 19 5.2 16 5.7 15 7.5 15 9.8
------ ----- ------ ----- ------ ----- ------ ----- ---- -----
$2,566 100.0% $1,942 100.0% $1,232 100.0% $1,006 100.0% $812 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ==== =====
</TABLE>
This allocation of the allowance for loan losses reflects management's
judgment of the relative risks of the various categories of the Company's loan
portfolio. This allocation should not be considered an indication of the future
amounts or types of possible loan charge-offs.
The following table summarizes the gross activity in OREO during the
periods indicated:
<TABLE>
<CAPTION>
ACTIVITY AMOUNT
-------- ------
(IN THOUSANDS)
<S> <C>
Balance at December 31, 1994 $265
Write-downs (20)
----
Balance at December 31, 1995 $245
Property acquired 200
Sales and rental proceeds (360)
----
Balance at December 31, 1996 $ 85
====
</TABLE>
The balance of OREO at December 31, 1996 consisted of one parcel of
commercial land. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Asset Quality" and
Note 7 to the Consolidated Financial Statements for further information.
INVESTMENT ACTIVITIES
The investment activity of the Company is an integral part of the overall
asset/liability management of the Company. The Bank's investment policy is to
establish a portfolio 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
Asset/Liability Management Committee. See Notes 3 and 4 to the Consolidated
Financial Statements for further information.
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<TABLE>
The following table summarizes the book value of investments at the dates
indicated:
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Available for sale:
U.S. Government and related obligations $14,565 $22,284 $19,667
Municipal bonds 12,072 -- --
Mortgage-backed obligations -- 119 --
Other equity securities -- 8 8
------- ------- -------
Total available for sale $26,637 $22,411 $19,675
======= ======= =======
Held to maturity:
U.S. Government and related obligations $ 5,005 $12,019 $16,020
Municipal bonds 1,382 -- --
Mortgage-backed obligations 25,289 31,933 35,304
Corporate notes & bonds -- 790 5,543
------- ------- -------
Total held to maturity $31,676 $44,742 $56,867
======= ======= =======
</TABLE>
SOURCES OF FUNDS
Deposits. Deposits have traditionally been the principal source of the
Company's funds for use in lending and for other general business purposes. At
December 31, 1996, the Company had a total of approximately 2,100 checking
accounts consisting of demand deposit and NOW accounts with an average account
balance of approximately $26,000; 450 savings accounts with an average account
balance of approximately $10,000; and 1,700 money market accounts with an
average account balance of approximately $53,000. Certificates of deposit of
$100,000 or greater represented approximately 18.9% of total deposits at
December 31, 1996. See Note 9 to the Consolidated Financial Statements for
further information.
<TABLE>
The following table sets forth the average balances and rates of the
Company's deposits:
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------------
AVERAGE AVERAGE
BALANCE RATE
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Noninterest-bearing deposits:
Checking accounts $ 24,073 --%
Interest-bearing deposits:
NOW and savings accounts 22,895 1.50
Money market accounts 80,760 3.70
Certificates of deposit under $100,000 16,902 5.32
Certificates of deposit of $100,000 or greater 40,489 5.36
-------- ----
Total $185,119 3.46%
======== ====
</TABLE>
Historically, the Company has had a higher percentage of its time deposits
in denominations of $100,000 or greater than commercial banking averages. Within
the banking industry, these deposits are generally considered to be volatile.
However, a significant portion of the Company's deposits in denominations of
$100,000 or greater are maintained by individuals or entities with other
relationships with the Company or with whom directors, officers or stockholders
of the Company have personal relationships.
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<TABLE>
Time certificates of deposit in denominations of $100,000 or greater had
the following schedule of maturities:
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1994
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Less than 3 months remaining $32,526 $34,324
3 to 6 months remaining 3,742 4,928
6 to 12 months remaining 2,727 2,385
More than 12 months remaining 624 500
------- -------
Total $39,619 $42,137
======= =======
</TABLE>
Borrowings. The Company has established various borrowing arrangements in
order to provide additional sources of liquidity and funding, thereby increasing
flexibility. Management believes that the Company currently has adequate
liquidity available to respond to current demands. At December 31, 1996, the
Company had $45.5 million in FHLB advances outstanding with a weighted average
interest rate of 5.96%. At December 31, 1995, there were $38.1 million in FHLB
advances outstanding with a weighted average interest rate of 6.37%. Of the
advances outstanding at December 31, 1996, $21.0 million have variable rates
which reprice at least annually to market rates. The Company has the opportunity
to repay variable rate advances on their respective anniversary dates. See Note
11 to the Consolidated Financial Statements for further information.
The Company also obtains funds from the sales of securities to
institutional investors under repurchase agreements. In a repurchase agreement
transaction, the Company 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 the securities dealers who arrange these
transactions as collateral for the repurchase obligation. Repurchase agreements
represent a cost competitive funding source for the Company. However, the
Company is subject to the risk that the lender may default at maturity and not
return the collateral. In order to minimize this potential risk, the Company
only deals with large, established investment brokerage firms when entering into
these 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 Consolidated
Financial Statements. At December 31, 1996, the total amount of outstanding
repurchase agreements was $8.1 million with a weighted average interest rate of
4.52%. See Note 10 to the Consolidated Financial Statements for additional
information.
From time to time the Company purchases Federal Funds from other banking
institutions to supplement its liquidity position. The Company has negotiated
federal fund lines of credit totaling $12.3 million with correspondent
institutions to provide the Company with immediate access to overnight
borrowings. At December 31, 1996, the Company had no borrowings outstanding
under these federal funds lines.
COMPETITION
In attracting deposits and making loans, the Company 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 methods of competition include
the level of loan interest rates, interest rates paid on deposits, range of
services provided and the quality of these services.
In offering investment management and trust services the Company competes
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 this area because Boston has a
well-established and well-respected investment management industry.
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<PAGE> 9
In addition to offering competitive rates for its banking products and
services, the Company's strategy for meeting competition has been to concentrate
on discrete segments of the market for financial services, particularly
professionals and small businesses, by offering customized and personalized
banking services. Although there are several small banks offering personalized
banking services in the Company's primary service area, the Company is one of a
few also offering investment management and trust services.
The Company believes that its active participation in civic and community
affairs is an important factor in building its reputation and, thereby,
attracting additional customers.
EMPLOYEES
At December 31, 1996, the Company had 77 full-time and 2 part-time
employees. The Company's employees are not represented by any collective
bargaining unit, and the Company believes its employee relations are good. The
Company maintains a benefit program which includes health and dental insurance,
life and long-term disability insurance, an incentive stock option plan, and a
401(k) plan.
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 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
by Massachusetts corporate law. As a bank holding company, the Company is
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (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.
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 stocks 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 holding company, 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
9
<PAGE> 10
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, operation,
earnings and capital generally evaluates "primary capital" and "total capital,"
with the ratios 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 outstanding Common Stock
of, 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. Beginning with the first
semiannual assessment period of 1997, rates under these classifications will
range from 0.013% for well capitalized, healthy institutions to 0.283% for
undercapitalized institutions with substantial supervisory concerns. At December
31, 1996, the Bank was considered "well capitalized" with regard to these
regulations.
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 regarding bank holding companies, 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)
10
<PAGE> 11
"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.
11
<PAGE> 12
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 have jointly issued amendments to the
regulations implementing the CRA that have substantially revised the current CRA
framework effective January 1, 1996. The amended CRA regulations rely more than
prior CRA regulations 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 December 1994, 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 the new 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
will be permissible on July 1, 1997, unless a state passes legislation either to
permit the earlier occurrence of interstate mergers or prevent such mergers.
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 new law 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.
12
<PAGE> 13
TAXATION
FEDERAL TAXATION
The Company and the Bank are subject to those rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code of
1986, as amended (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
and the Bank, as members of an affiliated group of corporations within the
meaning of Section 1504 of the Code, 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.
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 from 11.72% to 10.50% by 1999 on net
income apportioned to Massachusetts. The rate will be 11.32% for 1997, 10.91%
for 1998 and 10.50% for 1999. Net income for years beginning before January 1,
1999, includes gross income as defined under the provisions of the Internal
Revenue 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 Internal Revenue 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.
13
<PAGE> 14
ITEM 2. DESCRIPTION OF PROPERTY
In October 1994, the Company executed a lease for new premises at Ten Post
Office Square, Boston, MA. 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 Ten
Post Office Square.
In connection with an acquisition, the Company assumed liability for lease
payments on 5,079 square feet of space through December 1998. This space is
currently subleased to a non-affiliated third party.
The Company has from time to time also acquired properties through
foreclosure, which are marketed by local real estate brokers or by its lending
staff.
ITEM 3. LEGAL PROCEEDINGS
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 principal underlying claims
against the Bank and its denial of the plaintiff's motion for reconsideration,
litigation continues among other parties, and the Bank has been named as
third-party defendant by another party defendant to the original case. The Bank
continues to believe it has valid defenses to, and is vigorously defending, all
claims and allegations of wrongdoing in connection with the transaction. The
Company has previously incurred legal expenses of approximately $300,000, a
portion of which is recoverable under an insurance policy. No further estimate
of any loss can be made at this time.
On December 6, 1995, Robert S. Lappin, Esq., a depositor, filed a complaint
in Suffolk Superior Court (Civil Action No. 95-6207-B). As part of the
complaint, Mr. Lappin included counts against the Bank (and five other financial
institutions) alleging that he had sustained losses from his client funds
account at the Bank and from other funds of clients maintained in separate
deposit accounts by him as Trustee, due to the misappropriation of these funds
by a former secretary. Mr. Lappin alleged that the Bank was liable for these
misappropriated funds due to the fact that the Bank had cleared numerous checks
on Mr. Lappin's various accounts at the Bank which had unauthorized signatures
and /or endorsements.
On January 19, 1996, Dorothy Wallace and others filed a separate action in
the Suffolk Superior Court, (Civil Action No. 96-0330-B). In this action, the
Wallaces alleged that most of the misappropriated funds referred to by Mr.
Lappin in his complaint were in fact funds belonging to the Wallaces. The
Wallaces allege that Mr. Lappin was responsible for all of the misappropriated
funds due to his breach of fiduciary responsibilities as attorney and trustee to
the Wallaces. The Wallaces allege that the Bank was also liable for the
misappropriations due to the fact that the Bank cleared numerous instruments
bearing unauthorized endorsements and in some cases accepted deposits without
proper endorsements. The Wallaces included similar counts against two other
Boston banks.
In September, 1996, Suffolk Superior Court entered an Order consolidating
the two civil actions referred to above. The Wallaces filed an Amended
Consolidated Complaint, on October 1, 1996, in which they reiterated their
allegations made in Civil Action No. 96-0330-B and added another count against
the three banks alleging that the banks aided and abetted Mr. Lappin in
14
<PAGE> 15
the breach of his fiduciary responsibilities by clearing instruments and
accepting deposits without proper authorization.
On October 29, 1996, the Bank answered the Wallace's Amended Consolidated
Complaint denying all claims and allegations of wrongdoing against it, setting
forth substantial defenses in connection with the matter and filing claims
against Mr. Lappin for negligence and breach of duty, and seeking funds owed to
it as a result of an overdraft and related costs. The Bank believes it has valid
defenses to, and is vigorously defending, all claims and allegations of
wrongdoing in connection with this matter. This matter is in the early stages of
discovery and therefore it is not possible to estimate any loss 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 during the fourth quarter of the fiscal
year ended December 31, 1996.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Boston Private Bancorp, Inc.'s Common Stock is traded on the Nasdaq
SmallCap Market under the symbol "BPBC". At March 21,1997, there were
6,634,441 shares of Common Stock outstanding, which were held by approximately
625 holders of record.
<TABLE>
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:
<CAPTION>
1996 HIGH LOW
---- -------- --------
<S> <C> <C>
Fourth Quarter $5.88 $3.75
Third Quarter 4.25 3.63
Second Quarter 4.38 3.50
First Quarter 4.06 3.38
1995
----
Fourth Quarter $4.25 $3.63
Third Quarter 4.25 3.38
Second Quarter 3.63 2.75
First Quarter 3.00 2.50
</TABLE>
DIVIDENDS
Neither the Company, nor the Bank prior to the implementation of the
holding company structure, has ever 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. As the principal asset of
the Company, the Bank currently provides 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.
RECENT SALES OF UNREGISTERED SECURITIES
The information contained in the Company's Current Report on Form 8-K,
filed as of January 14, 1997, regarding recent sales of unregisterd securities
is incorporated herein by reference thereto.
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<PAGE> 17
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table represents selected financial data for the five fiscal
years ended December 31, 1996. 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 Consolidated Financial
Statements and related Notes, appearing elsewhere herein.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31:
Total assets $288,906 $241,551 $205,259 $105,545 $82,961
Total loans 206,107 155,256 111,226 75,677 59,089
Investment securities 33,024 35,101 41,238 16,123 4,248
Mortgage-backed securities 25,289 32,052 35,304 1,172 3,066
Cash and cash equivalents 14,596 9,195 11,781 11,105 14,910
Excess of costs over net assets acquired 4,068 4,390 273 310 347
Deposits 209,302 178,885 144,915 77,675 68,518
Borrowed funds 53,659 41,941 44,624 13,627 8,101
Stockholders' equity 22,936 17,404 14,804 13,738 5,957
Non-performing assets (1) 1,061 882 763 1,309 1,618
FOR THE YEAR ENDED DECEMBER 31:
Interest income 18,598 15,906 10,136 5,337 5,731
Interest expense 9,377 8,451 4,559 2,129 2,617
-------- -------- -------- -------- -------
Net interest income 9,221 7,455 5,577 3,208 3,114
Provision for loan losses 619 618 355 273 1,137
-------- -------- -------- -------- -------
Net interest income after provision for
loan losses 8,602 6,837 5,222 2,935 1,977
-------- -------- -------- -------- -------
Fees & other income 3,936 2,172 789 533 731
Operating expense 9,183 7,165 5,108 3,367 3,087
-------- -------- -------- -------- -------
Income (loss) before income taxes 3,355 1,844 903 101 (379)
Income tax expense (benefit) 1,115 104 (300) (355) --
-------- -------- -------- -------- -------
Net income (loss) $ 2,240 $ 1,740 $ 1,203 $ 456 $ (379)
======== ======== ======== ======== =======
PER SHARE DATA:
Net income (loss) $ 0.36 $ 0.30 $ 0.22 $ 0.15 $ (0.14)
Book value $ 3.48 $ 3.03 $ 2.65 $ 2.46 $ 2.28
Average common and common equivalent
shares outstanding 6,241,000 5,843,000 5,567,000 3,040,000 2,615,000
SELECTED OPERATING RATIOS:
Return (loss) on average assets .88% .79% .76% .51% (0.46%)
Return (loss) on average equity 12.82% 10.92% 8.65% 7.00% (6.22%)
Interest rate spread (2) 3.18% 2.92% 3.14% 3.42% 3.57%
Net interest margin 3.78% 3.51% 3.61% 3.81% 4.00%
ASSET QUALITY RATIOS:
Non-performing loans to gross loans (1) .47% .41% .45% 1.44% 1.40%
Non-performing assets to total assets (1) .37% .37% .37% 1.24% 1.95%
Allowance for loan losses to gross loans 1.25% 1.25% 1.11% 1.33% 1.37%
Allowance for loan losses to non-
performing loans 262.10% 304.87% 247.39% 92.21% 98.42%
Loans charged-off to average net loans .04% .05% .24% .49% 4.23%
CAPITAL RATIOS:
Average equity to average assets 7.27% 7.22% 8.67% 7.31% 7.44%
Tier I leverage capital ratio 6.65% 5.54% 7.15% 12.76% 6.75%
Tier I risk-based capital ratio 11.00% 10.31% 14.45% 21.31% 11.40%
Total risk-based capital ratio 12.25% 11.54% 15.70% 22.57% 12.66%
<FN>
(1) Non-performing assets consist of non-performing loans and real estate acquired by the Bank through foreclosure
proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure (collectively, "OREO").
Non-performing assets and non-performing loans do not include restructured loans.
(2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities (which do not include non-interest bearing demand accounts), and
net interest margin represents net interest income as a percent of average interest earning assets, in each case
calculated on a fully-taxable equivalent basis.
</TABLE>
17
<PAGE> 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included herein. 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,
changes in loan defaults and charge-off rates, reduction in deposit levels
necessitating increased borrowing to fund loans and investments, changes in
interest rates, 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.
FINANCIAL CONDITION
Total Assets. Total assets increased $47.4 million, or 19.6%, to $288.9
million at December 31, 1996 from $241.6 at December 31, 1995, reflecting an
increase in portfolio loan originations. This increase was funded by growth in
deposits and borrowings.
Loans. Total loans were $206.1 million, or 71.3% of total assets, at
December 31, 1996, compared with $155.3 million, or 64.3% of total assets, at
December 31, 1995. This increase of $50.8 million, or 32.8%, was primarily
attributable to the Company having increased its efforts during the past two
years to identify lending opportunities and having initiated advertising and
promotional campaigns which are designed to increase loan originations. During
1996, commercial loans increased $25.0 million, or 34.4%, residential mortgage
loans increased $22.1 million, or 29.7%, and home equity and other loans
increased $3.7 million, or 45.9%.
Asset Quality. 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. 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. Such restructured loans are not
included in non-performing loans unless they become delinquent or are placed on
nonaccrual status.
The following table sets forth information regarding non-performing
assets, 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.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis $ 976 $443 $323 $ 964 $ 454
Loans past due 90 days or more, but still accruing - 194 175 127 371
------ ---- ---- ------ ------
Total non-performing loans 976 637 498 1,091 825
Other real estate owned 85 245 265 218 793
------ ---- ---- ------ ------
Total non-performing assets $1,061 $882 $763 $1,309 $1,618
====== ==== ==== ====== ======
Delinquent loans 30-89 days past due 3,066 304 1,010 807 185
Non-performing loans as a percent of gross loans .47% .41% .45% 1.44% 1.40%
Non-performing assets as a percent of total assets .37% .37% .37% 1.24% 1.95%
Delinquent loans 30-89 days past due as a percent of gross loans 1.49% .20% .91% 1.07% .31%
</TABLE>
18
<PAGE> 19
-- Non-Performing Assets. At December 31, 1996, the Company had
non-performing assets of $1.1 million, which represented .37% of total assets.
The Company's non-performing assets consisted of twelve nonaccruing loans
aggregating $976,000, and one OREO property with a fair value of $85,000.
Non-performing assets increased by $179,000, or 20.3%, from $882,000 at December
31, 1995. The Company continues to evaluate the underlying collateral of each
non-performing loan and pursues the collection of interest and principal. Also
see Notes 5 and 7 to the Consolidated Financial Statements for further
information on non-performing assets.
-- Delinquencies. At December 31, 1996, $3.1 million of loans were 30 to 89
days past due, an increase of $2.8 million, or 908.6%, from the $304,000 million
reported at December 31, 1995. Most of these loans are adequately secured and
management's success in keeping these borrowers current varies from month to
month. In addition to the loans reported in the category of loans past due 30-89
days as of December 31, 1996, there were $2.3 million of loans that were in the
process of being renewed at December 31, 1996 and have since been renewed.
Management does not consider these loans to be includable in the past due
category.
-- Adversely Classified Loans. The Company's management adversely
classifies certain loans using an internal rating system based on criteria
established by the 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, 1996, the Company had
classified $244,000 of loans as substandard or doubtful based on the rating
system adopted by the Company. In addition, the Company had designated $130,000
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 possible 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 possible 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.
Investments. Total investments (consisting of federal funds sold,
investment securities, and mortgage-backed securities) totaled $65.3 million, or
22.6% of total assets, at December 31, 1996, compared to $67.7 million, or 28.0%
of total assets, at December 31, 1995. This decrease of $2.4 million, or 3.5%,
was primarily attributable to redeployment of these funds in the loan portfolio.
Of total investments at December 31, 1996, $26.6 million are securities
available for sale. The available for sale portfolio carried a total of $101,000
in unrealized losses at December 31, 1996.
Deposits and Borrowings. The Company has devoted considerable time and
resources to gathering deposits and experienced an increase of $30.4 million, or
17.0%, in deposits during 1996, from $178.9 million, or 74.1% of total assets,
at December 31, 1995, to $209.3 million, or 72.4% of total assets, at December
31, 1996. Total borrowings (consisting of securities sold under agreements to
repurchase ("repurchase agreements") and FHLB borrowings) increased $11.7
million, or 27.9%, during 1996. The increase was attributable to an increase in
sweep repurchase agreements with cash management customers of the Company, and
an increase in FHLB borrowings to help fund loan growth. Management will from
time to time take 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 core deposits.
19
<PAGE> 20
RESULTS OF OPERATIONS
General. The Company's operating results depend primarily on the operating
results of the Bank. The net income of the Bank depends primarily on the
difference between interest income and its cost of money, or "net interest
income", 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. The Company also generates a significant amount of fees and other
income from providing investment management and trust services to its clients.
This 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.
Average Balances, Interest and Average Rates. The following table sets
forth certain information relating to the Company's average balance sheet and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities. Average balances are
derived from daily balances.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- --------------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
--------- -------- -------- --------- ---------- --------- --------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest bearing deposits in banks $ 1,655 $ 69 4.17% $ 1,029 $ 28 2.72% $ 90 $ 5 5.56%
Federal funds sold 2,154 110 5.11% 3,531 204 5.78% 2,383 92 3.86%
Investments 64,998 3,769 5.80% 75,657 4,394 5.81% 56,508 3,062 5.42%
Loans: (1)
Commercial 78,486 7,482 9.53% 60,036 5,871 9.78% 42,324 3,633 8.58%
Residential mortgage 86,988 6,358 7.31% 64,973 4,730 7.28% 47,464 2,876 6.06%
Home equity and other 9,858 810 8.22% 6,919 679 9.81% 5,612 468 8.34%
-------- ------- -------- ------- -------- -------
Total earning assets 244,139 18,598 7.62% 212,145 15,906 7.50% 154,381 10,136 6.57%
------- ------- -------
Allowance for possible loan losses (2,177) (1,516) (1,152)
Cash and due from banks 5,068 4,255 4,344
Premises and equipment 1,146 1,078 534
Other assets 7,447 4,792 2,088
-------- -------- --------
TOTAL ASSETS $255,623 $220,754 $160,195
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Savings and NOW $ 22,895 343 1.50% $ 20,894 407 1.95% $ 22,739 498 2.19%
Money market 80,760 2,990 3.70% 61,515 2,046 3.33% 40,489 957 2.36%
Certificates of deposit 57,391 3,070 5.35% 54,718 3,102 5.67% 31,941 1,379 4.32%
Borrowed funds 50,364 2,974 5.91% 47,090 2,896 6.15% 37,564 1,725 4.59%
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities 211,410 9,377 4.44% 184,217 8,451 4.59% 132,733 4,559 3.43%
------- ------- -------
Non-interest bearing demand deposits 24,073 19,032 12,836
Payables and other liabilities 1,545 1,564 729
-------- -------- --------
TOTAL LIABILITIES 237,028 204,813 146,298
Stockholders' equity 18,595 15,941 13,897
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $255,623 $220,754 $160,195
======== ======== ========
Net interest income $ 9,221 $ 7,455 $ 5,577
======= ======= =======
Interest rate spread 3.18% 2.91% 3.14%
Net interest margin 3.78% 3.51% 3.61%
<FN>
(1) Nonaccrual loans are included in average loan balances.
</TABLE>
20
<PAGE> 21
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.
<TABLE>
<CAPTION>
1996 VS 1995 1995 VS 1994
------------------------------------ --------------------------------
CHANGE DUE TO CHANGE DUE TO
------------------------------------ --------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
------ -------- ------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON
INTEREST-EARNING ASSETS:
Interest-bearing deposits in banks $ 19 $ 22 $ 41 $ (3) $ 26 $ 23
Federal funds sold (22) (73) (95) 57 55 112
Investments (11) (615) (626) 232 1,100 1,332
Loans:
Commercial (151) 1,762 1,611 559 1,679 2,238
Residential mortgage 19 1,609 1,628 655 1,199 1,854
Home equity and other (123) 254 131 91 120 211
----- ------ ------ ------ ------ ------
Total interest income (269) 2,959 2,690 1,591 4,179 5,770
----- ------ ------ ------ ------ ------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES:
Deposits:
Savings and NOW (68) 4 (64) (53) (38) (91)
Money market 693 943 479 610 1,089
250
Certificates of deposit (180) 148 (32) 526 1,197 1,723
Borrowed funds (118) 196 78 671 500 1,171
----- ------ ------ ------ ------ ------
Total interest expense (116) 1,041 925 1,623 2,269 3,892
----- ------ ------ ------ ------ ------
NET INTEREST INCOME $(153) $1,918 $1,765 $ (32) $1,910 $1,878
===== ====== ====== ====== ====== ======
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. The Company's results of operations improved in 1996, primarily
as a result of higher volumes of loans and an increase in net interest margin.
For the year ended December 31, 1996, the Company's net income increased
$500,000, or 28.7%, to $2.2 million, or $.36 per share, from $1.7 million, or
$.30 per share for the year ended December 31, 1995. The overall increase in the
Company's volume of earning assets has resulted in higher net interest income.
Net Interest Income. For the year ended December 31, 1996, net interest
income was $9.2 million, an increase of $1.8 million, or 23.7%, over the same
period in 1995. This increase was primarily attributable to higher loan volumes
and an increase in the net interest margin. Average earning assets were $32.0
million, or 15.1%, higher, and average interest-bearing liabilities were $27.2
million, or 14.8%, higher than the comparable period a year earlier. The net
interest margin increased 27 basis points, or 7.7% from 3.51% in 1995 to 3.78%
in 1996 due to a shift in assets from lower-yielding investments to
higher-yielding loans.
Interest Income. Loans. Income on commercial loans was $7.5 million for
1996 compared to $5.9 million for 1995, an increase of $1.6 million, or 27.4%.
Income from residential mortgage loans was $6.4 million compared to $4.7
million, an increase of $1.6 million, or 34.4%, and home equity and other loans
was $810,000 compared to $679,000, an increase of $131,000, or 19.3%, for the
same periods, respectively. The average balances of commercial and residential
mortgage loans during 1996 increased $18.5 million, or 30.7%, and $22.0 million,
or 33.9%, respectively, compared to 1995. The average balance of home equity
21
<PAGE> 22
and other loans increased $2.9 million, or 42.5%. Meanwhile, the yield on
commercial loans decreased 25 basis points, to 9.53%, and the yield on
residential mortgage loans increased 3 basis points, to 7.31%, and the yield on
home equity loans decreased 159 basis points to 8.22% compared to the prior
year.
Interest Income. Investments. Total investment income decreased to $3.8
million during 1996 compared to $4.4 million during 1995. This decrease in total
investment income of $625,000, or 14.2%, was primarily attributable to a
decrease in the average balance of investments of $10.7 million, or 14.1%.
Interest Expense. Interest paid on deposits and borrowings increased
$926,000, or 11.0%, to $9.4 million for 1996, from $8.5 million for 1995. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $27.2 million, or 14.8%,
between the two periods, and higher rates paid on money market accounts during
1996. The overall cost of interest-bearing liabilities decreased 15 basis points
from 4.59% for 1995 to 4.44% for 1996.
Provision for Loan Losses. The provision for loan losses was $619,000 for
1996 compared to $618,000 for 1995. 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
1.25% at December 31, 1996 and 1995. Also see discussion under "Financial
Condition - Allowance for Loan Losses."
Fees and Other Income. Total fees and other income was $3.9 million for
1996 compared to $2.2 million for 1995. Investment management and trust fees
increased $1.7 million, or 108.2%, as the result of growth in the Company's
investment management and trust business and the acquisition of an investment
management business on July 31, 1995 which contributed a full year of fee income
in 1996.
Operating Expense. Total operating expense for 1996 was $9.2 million,
compared to $7.2 million for 1995. An increase in salary expense of $1.4
million, or 34.7%, and an increase in the remainder of operating expenses of
$613,000, or 19.7%, were primarily the result of the acquisition of an
investment management business on July 31, 1995, and the Company's growth and
expansion of leased premises at Ten Post Office Square, Boston. Partially
offsetting the increases in salary and occupancy expenses, FDIC insurance
premiums decreased from $159,000 in 1995 to $2,000 in 1996.
Income Tax Expense. The Company recorded Federal income tax expense of
$957,000. During 1995, the Company utilized the remainder of the deferred tax
asset valuation reserve to offset the majority of its current Federal tax
expense for financial statement purposes, and became fully taxable for financial
statement purposes during 1996. Additionally, the Company recorded State income
tax expense of $158,000 as a result of taxable income being generated for State
purposes from the Company's investment and mortgage-backed securities
portfolios.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Income. The Company's results of operations improved in 1995, primarily
as a result of higher volumes of loans and assets under management. For the year
ended December 31, 1995, the Company's net income increased $537,000, or 44.6%,
to $1.7 million, or $.30 per share, from $1.2 million, or $.22 per share for the
year ended December 31, 1994. The overall increase in the Company's volume of
earning assets has resulted in higher net interest income. The increase in
assets under management, due principally to the acquisition of an investment
management business, resulted in an increase of $1.1 million, or 242.5%, in fees
earned from investment management and trust services, from $456,000 during 1994
to $1.6 million during 1995.
Net Interest Income. For the year ended December 31, 1995, net interest
income was $7.5 million, an increase of $1.9 million, or 33.7%, over the same
period in 1994. This increase was primarily attributable to higher volumes of
business. Average earning assets were $57.8 million, or 37.4%, higher, and
average interest-bearing liabilities were $51.5 million, or 38.8%, higher than
the comparable period a year earlier.
22
<PAGE> 23
Interest Income. Loans. Income on commercial loans was $5.9 million for
1995 compared to $3.6 million for 1994, an increase of $2.2 million, or 61.6%.
Income from residential mortgage loans was $4.7 million compared to $2.9
million, an increase of $1.9 million, or 64.5%, and home equity and other loans
was $679,000 compared to $468,000, an increase of $211,000, or 45.1%, for the
same periods, respectively. The average balances of commercial and residential
mortgage loans during 1995 increased $17.7 million, or 41.8%, and $17.5 million,
or 36.9%, respectively, compared to 1994. Meanwhile, the yields on commercial
and residential mortgage loans increased 120 basis points, to 9.78%, and 122
basis points, to 7.28%, respectively, compared to the prior year.
Interest Income. Investments. Total investment income increased to $4.4
million during 1995 compared to $3.1 million during 1994. This increase in total
investment income of $1.3 million, or 43.5%, was primarily attributable to an
increase in the average balance of investments of $19.1 million, or 33.9%, and
to a lesser extent, to an increase of 39 basis points, to 5.81%, in the overall
yield on investments.
Interest Expense. Interest paid on deposits and borrowings increased $3.9
million, or 85.4%, to $8.5 million for 1995, from $4.6 million for 1994. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $51.5 million, or 38.8%,
between the two periods and higher rates paid on money markets, certificates of
deposit, and borrowed funds during 1995. The overall cost of interest-bearing
liabilities increased 116 basis points from 3.43% for 1994 to 4.59% for 1995.
Provision for Loan Losses. The provision for loan losses was $618,000 for
1995 compared to $355,000 for 1994. 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
increased during 1995 and was 1.25% at December 31, 1995, compared to 1.11% at
December 31, 1994. Also see discussion under "Financial Condition - Allowance
for Loan Losses."
Fees and Other Income. Total fees and other income was $2.2 million for
1995 compared to $789,000 for 1994. Investment management and trust fees
increased $1.1 million, or 242.5%, as the result of growth in the Company's
investment management and trust business and the acquisition of an investment
management firm, which added $774,000 in fees during the months of August
through December 1995. Additionally, gains from sales of securities and loans
were $237,000 during 1995, compared to a loss of $8,000 during 1994.
Operating Expense. Total operating expense for 1995 was $7.2 million,
compared to $5.1 million for 1994. An increase in salary expense of $1.2
million, or 44.0%, and an increase in the remainder of operating expenses of
$818,000, or 35.6%, were primarily the result of the acquisition of an
investment management firm and the Company's growth and relocation to Ten Post
Office Square, Boston. Partially offsetting the increases in salary and
occupancy expenses, FDIC insurance premiums decreased $56,000 from $215,000 in
1994 to $159,000 in 1995.
Income Tax Expense. The Company recorded Federal income tax expense of
$75,000. During 1995, the Company utilized the remainder of the deferred tax
asset valuation reserve to offset the majority of its current Federal tax
expense for financial statement purposes, and currently anticipates being fully
taxable for financial statement purposes during 1996. Additionally, the Company
recorded State income tax expense of $29,000 as a result of taxable income being
generated for State purposes from the Company's investment and mortgage-backed
securities portfolios.
23
<PAGE> 24
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company'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 Company's actions in this regard
are taken under the guidance of the Asset and Liability Management Committee
which is comprised of members of senior management. This committee is actively
involved in formulating the economic assumptions that the Company uses in its
financial planning and budgeting process and establishes policies which control
and monitor the sources, uses and pricing of funds. The Company has not engaged
in any hedging activities.
The effect of interest rate changes on the assets and liabilities of a
financial institution such as the Company 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 Company 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 Company to
undue interest rate risk. However, the Company 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. See "Business -- Lending Activities --
Residential Mortgage and Home Equity Loans."
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 Company'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 Company's one year
adjustable rate mortgage loan portfolio.
24
<PAGE> 25
The following table presents the repricing schedule for the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1996:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets(1):
Cash and due from banks $ 7,646 $ -- $ -- $ -- $ -- $ 7,646
Federal funds sold 6,950 -- -- -- -- 6,950
Investment securities 3,999 1,206 8,453 17,315 2,051 33,024
Mortgage-backed securities 9,424 5,153 2,359 7,575 778 25,289
FHLB Stock 3,317 -- -- -- -- 3,317
Loans-fixed rate 817 2,024 1,646 16,264 11,270 32,021
Loans-variable rate 101,900 20,619 27,444 24,123 -- 174,086
-------- -------- ------- ------- ------- --------
Total interest earning assets 134,053 29,002 39,902 65,277 14,099 282,333
-------- -------- ------- ------- ------- --------
Interest bearing liabilities(2):
Savings and NOW accounts (3) 2,735 2,735 -- -- 14,886 20,356
Money market accounts 64,758 26,182 -- -- -- 90,940
Time certificates under $100,000 7,301 3,748 2,128 6,987 -- 20,164
Time certificates $100,000 or more 32,526 3,742 2,727 624 -- 39,619
Securities sold under agreements to 8,126 -- -- -- -- 8,126
repurchase
FHLB of Boston advances 13,578 6,414 12,430 11,556 1,555 45,533
Payable due to acquisition (4) 375 -- 375 -- -- 750
-------- -------- ------- ------- ------- --------
Total interest bearing liabilities 129,399 42,821 17,660 19,167 16,441 225,488
-------- -------- ------- ------- ------- --------
Net interest sensitivity gap during
the period $ 4,654 $(13,819) $22,242 $46,110 $(2,342) $ 56,845
======== ======== ======= ======= ======= ========
Cumulative gap $ 4,654 $ (9,165) $13,077 $59,187 $56,845
======== ======== ======= ======= =======
Interest-sensitive assets as a percent of
interest-sensitive liabilities (cumulative) 103.60% 94.68% 106.89% 128.31% 125.21%
Interest-sensitive assets as a percent of
total assets (cumulative) 46.40% 56.44% 70.25% 92.84% 97.72%
Net interest sensitivity gap as a percent 1.61% (4.78%) 7.70% 15.96% (0.81%)
of total assets
Cumulative gap as a percent of total assets 1.61% (3.17%) 4.53% 20.49% 19.68%
- ------------
<FN>
(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 $38.2 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.
(4) Approximately 25% of the Payable Due to Acquisition is in the form of the Company's common stock and therefore is not
included as an interest-bearing liability for purposes of the above table.
</TABLE>
The preceding table does not necessarily indicate the impact of general
interest rate movements on the Company'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.
25
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
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 deposit inflows, loan repayments, borrowed
funds, maturity of investment securities and sales of securities from the
available for sale portfolio. These sources fund the Company's lending and
investment activities.
Management is responsible for establishing and monitoring liquidity targets
as well as strategies and tactics to meet these targets. In general, the Company
maintains a high degree of liquidity. At December 31, 1996, cash, federal funds
sold and securities available for sale amounted to $41.2 million, or 14.3% of
total assets. This compares to $31.6 million, or 13.1% of total assets at
December 31, 1995. 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 $72.3 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. There
have been no adverse trends in the Bank's liquidity or capital reserves.
Management believes that the Bank has adequate liquidity to meet its
commitments.
In contrast to the Bank, the holding company maintains minimal liquidity
because substantially all of its assets consist of the stock of the Bank. The
holding company's primary sources of funds are issuance of common stock and
borrowings.
Capital Resources. Total stockholders' equity of the Company at December
31, 1996 was $22.9 million, as compared to $17.4 million at December 31, 1995.
This increase was primarily the result of the Company's net income for the year
of $2.2 million plus the proceeds from issuance of common stock of $3.4 million.
The Bank is subject to a number of regulatory capital measures. At December
31, 1996, the Bank's Tier I leverage capital ratio stood at 6.59%, compared to
5.54% at December 31, 1995. 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 adjusted capital ratio of 10.92% and a
Total risk adjusted capital ratio of 12.17% at December 31, 1996. This compares
to a Tier I risk adjusted capital ratio of 10.31% and a Total risk adjusted
capital ratio of 11.54% at December 31, 1995. The minimum Tier I leverage, Tier
I risk adjusted, and Total risk adjusted 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 is therefore considered to be
"well capitalized."
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes thereto, presented
in Item 7 - 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.
RECENT ACCOUNTING DEVELOPMENTS
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have
26
<PAGE> 27
been extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If the
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with a pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and will be applied prospectively. Earlier or
retroactive application of this Statement is not permitted. The Company has
determined that the adoption of this Statement will not have a material impact
on its consolidated financial statements.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," which was adopted by the Company effective January 1, 1996. This
Statement establishes a fair value based method of accounting for stock-based
compensation plans under which compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period. It
also permits a company to continue to measure compensation cost for such plans
under Accounting Principles Board ("APB") 25, "Accounting for Stock Issued to
Employees." Under APB 25, no compensation cost is recorded if, at the grant
date, the exercise price of the options is equal to the fair market value of the
Company's common stock. The Company has elected to continue to follow the
accounting in APB 25. Under SFAS 123, companies which elect to follow the
accounting in APB 25 must disclose in the notes to their financial statements
pro forma net income and earnings per share as if the fair value based method of
accounting had been applied.
27
<PAGE> 28
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
- ----
29 Independent Auditors' Report
30 Consolidated Balance Sheets at December 31, 1996 and 1995
31 Consolidated Statements of Operations for each of the years in
the three-year period ended December 31, 1996
32 Consolidated Statement of Changes in Stockholders' Equity for
each of the years in the three-year period ended
December 31, 1996
33 Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1996.
35 Notes to Consolidated Financial Statements
28
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Boston Private Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Boston
Private Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995, 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,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Boston
Private Bancorp, Inc. and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 15, 1997
29
<PAGE> 30
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks (Note 2) $ 7,646 $ 8,695
Federal funds sold 6,950 500
Investment securities available for sale (amortized cost of $26,738
and $22,106, respectively, Notes 3 and 11) 26,637 22,292
Investment securities held to maturity (market value of $6,384
and $12,783, respectively, Notes 3, 10 and 11) 6,387 12,809
Mortgage-backed securities available for sale (amortized cost of $119
in 1995, Note 4) -- 119
Mortgage-backed securities held to maturity (market value of $25,258
and $31,967, respectively, Note 4) 25,289 31,933
Loans receivable (Notes 5 and 11):
Commercial 97,740 72,729
Residential mortgage 96,578 74,447
Home equity 11,481 7,783
Other 308 297
-------- --------
Total loans 206,107 155,256
Less allowance for loan losses (Note 6) (2,566) (1,942)
Net loans 203,541 153,314
Stock in the Federal Home Loan Bank of Boston (Note 11) 3,317 3,317
Other real estate owned (Note 7) 85 245
Premises and equipment, net (Note 8) 1,437 1,174
Excess of cost over net assets acquired, net (Note 2) 4,068 4,390
Accrued interest receivable 1,745 1,694
Other assets 1,804 1,069
-------- --------
Total assets $288,906 $241,551
======== ========
LIABILITIES:
Deposits (Note 9) $209,302 $178,885
Securities sold under agreements to repurchase (Note 10) 8,126 3,798
FHLB borrowings (Note 11) 45,533 38,143
Payable due to acquisition 1,035 2,017
Accrued interest payable 348 508
Other liabilities 1,626 796
-------- --------
Total liabilities 265,970 224,147
-------- --------
Commitments and contingencies (Notes 8, 15, 18 and 19)
STOCKHOLDERS' EQUITY (NOTES 13 AND 18):
Common stock, $1.00 par value per share;
authorized: 18,000,000 shares
issued: 6,592,496 shares in 1996 and 5,756,704 shares in 1995 6,592 5,757
Additional paid-in capital 14,709 12,114
Retained earnings (accumulated deficit) 1,699 (541)
Treasury stock, at cost: 20,017 shares in 1995 -- (45)
Unrealized gain (loss) on securities available for sale, net (Notes 3 and 4) (64) 119
-------- --------
Total stockholders' equity 22,936 17,404
-------- --------
Total liabilities and stockholders' equity $288,906 $241,551
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest and dividend income:
Commercial loans $ 7,482 $ 5,871 $ 3,633
Residential mortgage loans 6,358 4,730 2,876
Home equity and other loans 810 679 468
Investment securities 1,799 2,148 1,341
Mortgage-backed securities 1,758 2,012 1,509
FHLB stock dividends 212 234 212
Federal funds sold 110 204 92
Deposits in banks 69 28 5
------- ------- -------
Total interest and dividend income 18,598 15,906 10,136
------- ------- -------
Interest expense:
NOW 212 210 203
Savings 131 197 295
Money market 2,990 2,046 957
Certificates of deposit under $100,000 899 620 382
Certificates of deposit $100,000 or greater 2,171 2,482 997
Federal funds purchased 146 91 --
Securities sold under agreements to repurchase 336 324 220
FHLB borrowings 2,426 2,430 1,505
Payable due to acquisition 66 51 --
------- ------- -------
Total interest expense 9,377 8,451 4,559
------- ------- -------
Net interest income 9,221 7,455 5,577
Provision for loan losses (Note 6) 619 618 355
------- ------- -------
Net interest income after provision for loan losses 8,602 6,837 5,222
------- ------- -------
Fees and other income:
Investment management and trust 3,252 1,562 456
Deposit account service charges 156 134 164
Gain on sale of loans 112 80 55
Gain (loss) on sale of securities (Note 3) 33 237 (8)
Other 383 159 122
------- ------- -------
Total fees and other income 3,936 2,172 789
------- ------- -------
Operating expense:
Salaries and employee benefits (Note 13) 5,457 4,052 2,813
Occupancy (Note 8) 458 414 253
Equipment 349 294 83
Data processing 139 98 30
FDIC insurance premiums 2 159 215
Legal expense 200 251 299
Marketing 362 263 149
Amortization of intangibles (Note 2) 322 156 37
Foreclosure expense 11 1 60
Other (Note 14) 1,883 1,477 1,169
------- ------- -------
Total operating expense 9,183 7,165 5,108
------- ------- -------
Income before income taxes 3,355 1,844 903
Income tax expense (benefit) (Note 12) 1,115 104 (300)
------- ------- -------
Net income $ 2,240 $ 1,740 $ 1,203
======= ======= =======
Per share data (Note 2):
Earnings per common and common equivalent share $ 0.36 $ 0.30 $ 0.22
Average common and common equivalent shares outstanding 6,241,000 5,843,000 5,567,000
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAIN
RETAINED (LOSS) ON
ADDITIONAL EARNINGS SECURITIES
COMMON PAID-IN (ACCUMULATED) TREASURY AVAILABLE FOR
STOCK CAPITAL DEFICIT STOCK SALE, NET TOTAL
-------- ----------- --------------- ---------- ----------------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $5,590 $11,684 $(3,484) $(52) $ -- $13,738
Net income -- -- 1,203 -- -- 1,203
Treasury stock issued -- -- -- 7 -- 7
Change in unrealized loss on
securities available for sale, net -- -- -- -- (144) (144)
------ ------- ------- ---- ----- -------
Balance at December 31, 1994 5,590 11,684 (2,281) (45) (144) 14,804
Net income -- -- 1,740 -- -- 1,740
Proceeds from issuance of
166,667 shares of common stock 167 430 -- -- -- 597
Change in unrealized loss on
securities available for sale, net -- -- -- -- 263 263
------ ------- ------- ---- ----- -------
Balance at December 31, 1995 5,757 12,114 (541) (45) 119 17,404
Net income -- -- 2,240 -- -- 2,240
Proceeds from issuance of
813,334 shares of common stock 813 2,550 -- -- -- 3,363
Stock options exercised 22 45 -- 45 -- 112
Change in unrealized loss on
securities available for sale, net -- -- -- -- (183) (183)
------ ------- ------- -- ----- -------
Balance at December 31, 1996 $6,592 $14,709 $ 1,699 $ -- $ (64) $22,936
====== ======= ======= ==== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,240 $ 1,740 $ 1,203
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 591 542 315
(Gain) loss on sale of securities (33) (237) 8
Gain on sale of loans (112) (80) (55)
Provision for loan losses 619 618 355
Writedown of other real estate owned -- -- 20
Payments received on other real estate owned -- 20 --
Loss on sale of other real estate owned -- -- 13
Loans originated for sale (12,976) (2,584) (1,465)
Proceeds from sale of loans 13,088 2,664 1,520
(Increase) decrease in:
Accrued interest receivable (51) (242) (941)
Deferred income tax asset, net 25 (259) (300)
Other assets (656) (54) (53)
Increase (decrease) in:
Accrued interest payable (160) 166 219
Other liabilities 830 222 192
------- ------ ------
Net cash provided by operating activities 3,405 2,516 1,031
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold (6,450) 6,700 1,043
Investment securities available for sale:
Purchases (38,371) (47,503) (13,002)
Sales 18,702 33,654 2,500
Maturities 15,200 13,900 --
Investment securities held to maturity:
Purchases (3,384) -- (15,940)
Maturities 9,775 6,750 1,000
Mortgage-backed securities held to maturity:
Purchases -- -- (36,474)
Principal payments 6,622 3,235 2,265
Purchase of FHLB stock -- -- (2,812)
Net increase in loans (50,964) (44,193) (36,447)
Recoveries on loans previously charged-off 71 153 101
Sales of other real estate owned 360 -- 321
Capital expenditures, net of sale proceeds (577) (610) (112)
Acquisition of investment management business (1,048) (2,372) --
------- ------ ------
Net cash used in investing activities (50,064) (30,286) (97,557)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 30,417 33,970 67,240
Net increase (decrease) in repurchase agreements 4,328 (2,543) 1,202
Proceeds from FHLB borrowings 157,300 39,078 81,497
Repayments of FHLB borrowings (149,910) (39,218) (51,701)
Proceeds from issuance of common stock, net 3,475 597 7
------- ------ ------
Net cash provided by financing activities 45,610 31,884 98,245
------- ------ ------
(Continued)
</TABLE>
33
<PAGE> 34
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Continued)
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net increase (decrease) in cash and due from banks (1,049) 4,114 1,719
Cash and due from banks at beginning of year 8,695 4,581 2,862
------ ------ ------
Cash and due from banks at end of year $7,646 $8,695 $4,581
====== ====== ======
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest $9,471 $8,234 $4,340
Cash paid for income taxes 874 264 --
Non-cash transactions:
Transfers to other real estate owned 200 -- 406
Change in unrealized gain (loss) on securities available for sale, net
of estimated income taxes (183) 263 (144)
Transfer to securities available for sale upon adoption of SFAS 115 -- -- 9,440
Transfer to securities available for sale during SFAS 115 `open window' -- 2,117 --
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Boston Private Bancorp, Inc. (the "Company") is a one-bank holding company
which holds all of the issued and outstanding shares of common stock of Boston
Private Bank & Trust Company (the "Bank"), a Massachusetts chartered trust
company. In December 1996, the Company received $3.4 million of additional
equity capital from a Common Stock Offering. Substantially all of the proceeds
were subsequently invested in the Bank.
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.
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 January 1997, the Company
made additional scheduled payments consisting of $375,000 in cash and 41,667
shares of the Company's common stock. The balance of the purchase price is
payable in one remaining installment of $375,000 in cash and 41,667 shares of
the Company's common stock in July 1997. 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to prevailing practices within the banking
industry. 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 Boston
Private Bancorp, Inc. (the "Company"), its wholly-owned subsidiary, Boston
Private Bank & Trust Company (the "Bank"), and the Bank's 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 that are particularly susceptible to change relate to
the determination of the allowance for loan losses. In connection with the
determination of the allowance for loan losses, management obtains independent
appraisals for significant properties.
Reclassifications
Certain amounts in the prior year's consolidated financial statements have
been reclassified to conform with the current year's presentation.
35
<PAGE> 36
BOSTON PRIVATE BANCORP, 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, 1996, the daily amount required to be held was $1.4
million.
Investment and Mortgage-Backed Securities
Effective January 1, 1994, the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
115, "Accounting for Certain Investments in Debt and Equity Securities." Under
SFAS 115, debt securities are classified as held to maturity, available for
sale, or trading. Securities are classified as held to maturity and carried at
amortized cost only if the Company has a positive intent and the ability to hold
these securities to maturity. Securities are classified as trading and 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 a separate component of
stockholders' equity, net of estimated income taxes. The Company classified its
investment and mortgage-backed securities into two categories: held to maturity
and available for sale; the Company has no securities held for trading.
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
Effective January 1, 1995, the Company adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure." 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. These
Statements generally require all creditors to account for impaired loans, except
those loans that are accounted for at fair value, or at the lower of cost or
fair value, at the present value of the expected future cash flows discounted at
the loan's effective interest rate. In addition, criteria for classification of
a loan as in-substance foreclosure were modified in such a way that such
classification need be made only when the lender is in possession of the
collateral. The adoption of SFAS 114 and SFAS 118 did not have a material impact
on the Company's consolidated financial statements. At December 31, 1996 and
1995 the amount of loans which were considered "impaired" in accordance with
SFAS 114 and SFAS 118 were immaterial.
Loans on which the accrual of interest has been discontinued are designated
nonaccrual loans. Accrual of interest income on loans is discontinued when
concern exists as to the collectibility of principal or interest. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period income. Loans are removed from nonaccrual
status when they become less than ninety days past due and when concern no
longer exists as to the collectibility of principal or interest. Interest
received on nonaccruing loans is either applied against principal or reported as
income according to management's judgment as to the collectibility of principal.
36
<PAGE> 37
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Loan origination fees, net of related direct incremental loan origination
costs, are deferred and recognized into income over the contractual lives of the
related loans as an adjustment to the loan yield, using a method which
approximates the level-yield method. When a loan is sold or paid-off, the
unamortized portion of net fees is recognized into income.
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights," which was adopted by the Company effective January 1, 1996. This
Statement requires the Company to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. The Statement
also requires the assessment of capitalized servicing rights for impairment
based on fair value of the rights. The adoption of SFAS 122 did not have a
material impact on the Company's consolidated financial statements.
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If the transfer does not
meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with a pledge of collateral. The Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, and will be applied prospectively. Earlier or
retroactive application of this Statement is not permitted. The Company has
determined that the adoption of this Statement will not have a material impact
on its consolidated financial statements.
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.
Material estimates that are particularly susceptible to change relate to
the determination of the allowance for loan losses. The allowance for loan
losses is maintained at a level which reflects management's assessment of many
factors including the quality of the loan portfolio, historical loss experience,
and general economic conditions. 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. 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.
Other Real Estate Owned
Real estate acquired in settlement of loans is carried at the lower of cost
or fair value minus anticipated selling costs. Losses realized subsequent to
foreclosure are charged to operations as incurred or when it is determined that
the initial value recorded exceeds the current fair value less anticipated
selling costs. Related direct expenses, net of rental income, are reflected in
operations when incurred. Gains are realized in the consolidated statement of
operations upon final disposition of the respective properties.
37
<PAGE> 38
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The recognition of gains from the sale of other real estate owned is
dependent on a number of factors relating to the nature of the property sold and
the terms of the sale. If a real estate transaction does not meet established
financial criteria, income recognition is deferred and recognized under the
installment method or is deferred until such time as the criteria are met.
Premises and Equipment
Leasehold improvements 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 Costs Over Net Assets Acquired
The excess of costs 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 which might have diminished their
value. During 1995, the acquisition of An investment management firm generated
additions to intangible assets of $4.3 million. Accumulated amortization
amounted to $763,000, $441,000, and $285,000 at December 31, 1996, 1995 and
1994, respectively.
Investment Management and Trust Assets
Investment management and trust assets amounted to $687 million and $577
million at December 31, 1996 and 1995, respectively. These assets are not
included in the consolidated financial statements because they are held in a
fiduciary or agency capacity and are not assets of the Company.
Employee Benefits
The Company maintains a Section 401(k) savings plan for employees of the
Company and its subsidiaries. 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 made.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," which was adopted by the Company effective January 1, 1996. This
Statement establishes a fair value based method of accounting for stock-based
compensation plans under which compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period. It
also permits a company to continue to measure compensation cost for such plans
under Accounting Principles Board ("APB") 25, "Accounting for Stock Issued to
Employees." Under APB 25, no compensation cost is recorded if, at the grant
date, the exercise price of the options is equal to the fair market value of the
Company's common stock. The Company has elected to continue to follow the
accounting in APB 25. Under SFAS 123, companies which elect to follow the
accounting in APB 25 must disclose in the notes to their financial statements
pro forma net income and earnings per share as if the fair value based method of
accounting had been applied.
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
Earnings per share is computed using the weighted average number of common
and common equivalent shares outstanding. Stock options did not have a material
dilutive effect in 1994.
38
<PAGE> 39
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) INVESTMENT SECURITIES
A summary of investment securities follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------------------- ---------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
-------------------- -------------------
Cost Gains Losses Value Cost Gains Losses Value
-------------------------------------------- --------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1996
U.S. Government and
related obligations $14,635 $ 1 $ (71) $14,565 $ 5,005 $-- $(11) $ 4,994
Municipal bonds 12,103 9 (40) 12,072 1,382 8 -- 1,390
-------------------------------------------- --------------------------------------------
Total $26,738 $ 10 $(111) $26,637 $ 6,387 $ 8 $(11) $ 6,384
============================================ ============================================
AT DECEMBER 31, 1995
U.S. Government and
related obligations $22,098 $187 $ (1) $22,284 $12,019 $ 5 $(29) $11,995
Corporate notes & bonds -- -- -- -- 790 -- (2) 788
Other equity securities 8 -- -- 8 -- -- -- --
-------------------------------------------- --------------------------------------------
Total $22,106 $187 $ (1) $22,292 $12,809 $ 5 $(31) $12,783
============================================ ============================================
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1996 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
AFTER ONE, BUT AFTER FIVE, BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government and related
obligations $ 955 $ 955 5.49% $12,030 $11,961 6.04% $1,650 $1,649 7.31%
Municipal bonds 7,697 7,699 3.72 2,590 2,573 4.12 1,816 1,800 4.42
--------------------------- ------------------------- -------------------------
Total $8,652 $8,654 3.92% $14,620 $14,534 5.70% $3,466 $3,449 5.80%
=========================== ========================= =========================
HELD TO MATURITY:
U.S. Government and related
obligations $5,005 $4,994 5.91% $ -- $ -- -- $ -- $ -- --
Municipal bonds -- -- -- 1,130 1,136 4.14% 252 254 4.50%
--------------------------- ------------------------- -------------------------
Total $5,005 $4,994 5.91% $ 1,130 $ 1,136 4.14% $ 252 $ 254 4.50%
=========================== ========================= =========================
</TABLE>
The weighted average remaining life of investment securities available for
sale and held to maturity at December 31, 1996 is 2.6 years and .9 years,
respectively.
The following table presents the sale of investment securities with the
resulting realized gains, losses, and net proceeds from such sales:
<TABLE>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost of securities sold $18,669 $33,417 $2,508
Gains realized on sales 38 237 --
Losses realized on sales (5) -- (8)
------- ------- ------
Net proceeds from sales $18,702 $33,654 $2,500
======= ======= ======
</TABLE>
39
<PAGE> 40
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
------------------------------------------
Amortized Unrealized Market
----------------
Cost Gains Losses Value
------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1996
Fixed rate:
FHLMC $ 7,840 $ 4 $ (81) $ 7,763
FNMA 5,453 -- (67) 5,386
Adjustable rate:
FNMA 394 -- (1) 393
GNMA 11,602 114 -- 11,716
----------------------------------------
Total $25,289 $118 $(149) $25,258
========================================
AT DECEMBER 31, 1995
Fixed rate:
FHLMC $ 9,317 $ 24 $(33) $ 9,308
FNMA 8,646 -- (54) 8,592
Adjustable rate:
FNMA 422 7 -- 429
GNMA 13,548 90 -- 13,638
----------------------------------------
Total $31,933 $121 $(87) $31,967
========================================
</TABLE>
Mortgage-backed securities available for sale were $0 at December 31, 1996,
and consisted of a FNMA fixed rate security with an amortized cost and market
value of $119,000 at December 31, 1995.
The following table sets forth the maturities of mortgage-backed securities
at December 31, 1996 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY:
fixed rate:
- -----------
FHLMC $4,862 $4,787 6.67% $ 902 $ 898 6.94% $ 2,076 $ 2,078 6.38%
FNMA -- -- -- 3,957 3,895 6.62% 1,496 1,491 6.23
Adjustable rate:
- ----------------
FNMA -- -- -- -- -- -- 394 393 6.22
GNMA -- -- -- -- -- -- 11,602 11,716 7.11
------------------------ ------------------------- --------------------------
Total $4,862 $4,787 6.67% $4,859 $4,793 6.68% $15,568 $15,678 6.91%
======================== ========================= ==========================
</TABLE>
These securities have final maturities ranging from 2 to 27 years. The
weighted average remaining life of mortgage-backed securities is 17.3 years.
However, due to their contractual periodic amortization and prepayments,
management estimates their effective average life to be approximately 4 years.
Expected maturities will differ from contractual maturities because borrowers
may repay obligations without prepayment penalties.
40
<PAGE> 41
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) 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 general 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, 1996, the Company had $31.5 million of fixed rate loans and $174.6 million
of variable rate loans outstanding.
The Company's lending limit to any single borrower is limited by regulation
to approximately $3.8 million. The Bank had no relationships with an individual
borrower at December 31, 1996 which were in excess of the legal lending limit
established for Massachusetts state-chartered banks.
Loans serviced for others were $3.9 million and $6.5 million at December
31, 1996 and 1995, respectively.
<TABLE>
Loans outstanding to executive officers and directors of the Company
aggregated $293,000 and $303,000 at December 31, 1996 and 1995. An analysis of
the activity of these loans is as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year $303 $303
Repayments (10) --
==== ====
Balance at end of year $293 $303
==== ====
</TABLE>
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.
<TABLE>
The following table presents a summary of risk elements within the loan
portfolio:
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans $ 976 $443 $ 323
Loans past due 90 days or more, but still accruing - 194 175
------ ---- ------
Total nonperforming loans $ 976 $637 $ 498
====== ==== ======
Loans past due 30-89 days $3,066 $304 $1,010
</TABLE>
In addition to the loans reported in the category of Loans past due 30-89
days as of December 31, 1996, there were $2.3 million of loans that were in the
process of being renewed at December 31, 1996 and have since been renewed.
Management does not consider these loans to be includable in the past due
category.
41
<PAGE> 42
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
The reduction in interest income associated with nonaccrual loans was as
follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income in accordance with original terms $81 $42 $154
Income recognized 44 -- 100
--- --- ----
Foregone interest income $37 $42 $ 54
=== === ====
</TABLE>
<TABLE>
6) ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,942 $1,232 $1,006
Provision for loan losses 619 618 355
Charge-offs (66) (61) (230)
Recoveries 71 153 101
------ ------ ------
Balance at end of year $2,566 $1,942 $1,232
====== ====== ======
</TABLE>
<TABLE>
The following table represents the allocation of the allowance for loan
losses as of the dates indicated:
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan category:
Commercial $2,296 $1,686 $1,062
Residential mortgage 241 237 154
Home equity and other 29 19 16
------ ------ ------
Total $2,566 $1,942 $1,232
====== ====== ======
</TABLE>
(7) OTHER REAL ESTATE OWNED
<TABLE>
The components of other real estate owned are as follows:
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Land $ 85 $ 85
Residential real estate -- 160
---- ----
Total $ 85 $245
==== ====
</TABLE>
42
<PAGE> 43
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment consisted of the following:
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements $1,175 $ 754
Data processing equipment 593 557
Furniture, fixtures and equipment 626 552
------ ------
Subtotal 2,394 1,863
Less accumulated depreciation and amortization (957) (689)
====== ======
Total premises and equipment $1,437 $1,174
====== ======
</TABLE>
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Leasehold improvements are amortized over the remaining lease
term of nine years. Data processing equipment's useful life is three years and
furniture and equipment's useful life is six years. Depreciation expense was
$314,000, $208,000, and $135,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$363,000 $351,000 and $189,000, respectively. In October 1994, the Company
executed a lease for new premises at Ten Post Office Square, Boston, MA. 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 Ten Post Office Square.
In connection with an acquisition, the Company assumed liability for lease
payments on 5,079 square feet of space through December 1998. This space is
currently subleased to a non-affiliated third party.
<TABLE>
The Company is obligated for minimum rental payments under a noncancellable
operating lease for its banking offices and a noncancellable operating lease for
space acquired pursuant to an acquisition. In accordance with the terms of these
leases, the Company is currently committed to minimum annual rent as follows:
<CAPTION>
MINIMUM
LEASE PAYMENTS
--------------
(IN THOUSANDS)
<S> <C>
1997 $ 533
1998 563
1999 480
2000 485
2001 507
Thereafter 1,829
------
$4,397
======
</TABLE>
43
<PAGE> 44
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Demand deposits $ 38,223 $ 30,687
NOW 15,777 17,989
Savings 4,579 5,406
Money market 90,940 70,379
Certificates of deposit under $100,000 20,164 12,287
Certificates of deposit $100,000 or greater 39,619 42,137
======== ========
Total $209,302 $178,885
======== ========
</TABLE>
Certificates of deposit had the following schedule of maturities:
<TABLE>
DECEMBER 31,
----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Less than 3 months remaining $39,826 $41,471
3 to 6 months remaining 7,490 7,756
6 to 12 months remaining 4,855 3,404
More than 12 months remaining 7,612 1,793
======= =======
Total $59,783 $54,424
======= =======
</TABLE>
(10) 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 statements of financial condition. The securities underlying the
agreements remain under the Company's control. Information concerning securities
sold under agreements to repurchase are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Outstanding $ 8,126 $ 3,798 $ 6,341
Maturity date 1/97 - 3/97 1/96 1/95 - 2/95
Outstanding collateralized by U.S. Treasury and related
agency securities with:
Book value 8,173 3,825 11,033
Market value 8,182 3,834 10,602
Average outstanding for the year 7,120 6,893 6,045
Maximum outstanding at any month end 11,544 14,778 15,047
Weighted average rate at end of period 4.52% 4.62% 3.42%
Weighted average rate paid for the period 4.72% 4.70% 3.64%
</TABLE>
44
<PAGE> 45
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) FEDERAL HOME LOAN BANK BORROWINGS
A summary of borrowings from the Federal Home Loan Bank of Boston ("FHLB")
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1996 1995
------------------------ --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 year $14,000 5.74% $ 625 6.40%
Over 1 year to 2 years 11,000 5.81 8,000 5.88
Over 2 years to 3 years 10,500 6.23 3,000 6.39
Over 3 years to 5 years 6,479 6.07 23,500 6.55
Over 5 years 3,554 6.34 3,018 6.31
------- ---- ------- ----
$45,533 5.96% $38,143 6.37%
======= ==== ======= ====
</TABLE>
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, 1996 were $21.9 million. The
Bank had additional short-term federal fund lines with the FHLB and
correspondent banks of $12.3 million at December 31, 1996. As of December 31,
1996, there were no outstanding 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, 1996, the Bank's FHLB
stock holdings were $3.3 million. The Bank's investment in FHLB stock is
recorded at cost.
(12) INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal $ 946 $335 $ --
State 144 28 --
------ ---- -----
Total current expense 1,090 363 --
------ ---- -----
Deferred expense (benefit):
Federal 11 214 286
State 14 9 127
Change in valuation reserve -- (482) (713)
------ ---- -----
Total deferred expense (benefit) 25 (259) (300)
------ ---- -----
Total income tax expense (benefit) $1,115 $104 $(300)
====== ==== =====
</TABLE>
45
<PAGE> 46
BOSTON PRIVATE BANCORP, 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of Federal tax benefit 3.1 1.3 9.3
Amortization of intangibles 0.4 0.7 1.4
Change in valuation allowance -- (26.2) (79.0)
Tax exempt interest, net (2.3) (4.8) --
Other, net (2.0) 0.6 1.1
---- ---- ----
Effective federal income tax rate 33.2% 5.6% (33.2)%
==== ==== ====
</TABLE>
The components of gross deferred tax assets and gross deferred tax
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Allowance for losses on loans and real estate $665 $671
Depreciation 86 58
Pre-operating costs 104 105
Unrealized loss on securities available for sale 37 --
Other 34 80
---- ----
Total deferred tax assets 926 914
---- ----
Gross deferred tax liabilities:
Unrealized gain on securities available for sale -- 67
---- ----
Total gross deferred tax liabilities -- 67
---- ----
Net deferred tax asset $926 $847
==== ====
</TABLE>
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
$2.2 million of future net taxable income to realize the net deferred tax asset
at December 31, 1996. 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.
46
<PAGE> 47
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) EMPLOYEE BENEFITS
Employee 401(k) Plan
The Company maintains a 401(k) Plan (the "Plan") which became effective on
May 1, 1990 and which qualifies as a tax exempt plan and trust under Sections
401 and 501 of the Internal Revenue Code. Generally, Bank employees who are at
least twenty-one (21) years of age and have completed one year of service with
the Bank are eligible to participate in the Plan. Expenses associated with the
401(k) plan were $93,000, $71,000 and $41,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
Stock Option Plans
The Company offers options on its common stock to officers, key employees,
and directors under an Employee Incentive Stock Option Plan and a Directors'
Stock Option Plan. APB 25 and related interpretations have been applied to
account for these plans. Accordingly, no compensation cost has been charged
against income. Had compensation cost been determined consistent with SFAS 123,
the Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net income:
As reported $2,240 $1,740
Proforma 2,097 1,669
Primary earnings per share:
As reported $ 0.36 $ 0.30
Proforma 0.34 0.29
</TABLE>
Under the Employee Incentive Stock Option Plan, the Company may grant
options to its employees for up to 600,000 shares of common stock. Under the
Directors' Stock Option Plan, the Company may grant options to its 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. Twenty-five
percent of options granted are immediately vested on the grant date under the
Employee Incentive Stock Option Plan, and an additional twenty-five percent vest
each year thereafter. Options are fully vested three years after the grant date.
Under the Directors' Stock Option Plan, all options 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 1996 and 1995: expected volatility of 40% ;
expected life of 7 years; and risk-free interest rates of 6% in 1996 and 7% in
1995.
47
<PAGE> 48
BOSTON PRIVATE BANCORP, 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, 1996, 1995, and 1994, and changes during the years then ended are
presented below.
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ---------------------------- ------------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
UNEXERCISED AVERAGE UNEXERCISED AVERAGE UNEXERCISED AVERAGE
OPTIONS OPTION PRICE OPTIONS OPTION PRICE OPTIONS OPTION PRICE
------------ -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of year 494,152 $2.58 393,402 $2.48 232,752 $2.30
Granted 148,050 3.82 141,800 3.06 174,050 2.75
Exercised (42,475) 2.66 (187) 2.00 (3,186) 2.00
Canceled (51,925) 3.43 (40,863) 3.27 (10,214) 3.37
------- ----- ------- ----- ------- -----
Options at end of year 547,802 $2.82 494,152 $2.58 393,402 $2.48
------- ----- ------- ----- ------- -----
Options exercisable at year end 390,215 $2.53 277,777 $2.39 259,715 $2.43
======= ===== ======= ===== ======= =====
Weighted average fair value of
options granted during the year $2.03 $1.67
===== =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------------
WEIGHTED AVG WEIGHTED AVG WEIGHTED AVG
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 to $3.00 394,652 7.0 $2.41 345,777 $2.36
$3.50 to $4.00 99,850 9.1 3.64 35,838 3.71
$4.13 to $5.83 53,300 9.0 4.34 8,600 4.55
-------------------------------------- ----------------------
$2.00 to $5.83 547,802 7.6 $2.82 390,215 $2.53
====================================== ======================
</TABLE>
(14) OTHER OPERATING EXPENSE
Major components of other operating expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Professional and consulting $ 876 $ 573 $ 296
Business development 243 215 141
Forms and supplies 177 217 137
Telephone 84 76 44
Postage 91 66 52
Insurance 50 58 51
Other 362 272 448
------ ------ ------
Total $1,883 $1,477 $1,169
====== ====== ======
</TABLE>
48
<PAGE> 49
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(15) 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 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:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans $ 7,248 $ 5,098
Unused lines of credit 35,111 27,907
Standby letters of credit 2,425 2,815
</TABLE>
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.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS 107,
"Disclosures About 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 are in accordance with SFAS 107 guidelines but 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.
49
<PAGE> 50
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The book values and fair values for the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995
-------------------- --------------------
(IN THOUSANDS)
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 7,646 $ 7,646 $ 8,695 $ 8,695
Federal funds sold 6,950 6,950 500 500
Investment securities 33,024 33,021 35,101 35,075
Mortgage-backed securities 25,289 25,258 32,052 32,086
Stock in the Federal Home Loan Bank of Boston 3,317 3,317 3,317 3,317
Loans receivable (net of allowance for loan losses):
Commercial 95,444 95,926 71,043 71,170
Residential mortgage 96,337 95,355 74,210 73,714
Home equity and other 11,760 11,760 8,061 8,061
Accrued interest receivable 1,745 1,745 1,694 1,694
LIABILITIES:
Deposits:
Demand deposits 38,223 38,223 30,687 30,687
NOW 15,777 15,777 17,989 17,989
Savings 4,579 4,579 5,406 5,406
Money market 90,940 90,940 70,379 70,379
Certificates of deposit under $100,000 20,164 20,208 12,287 12,443
Certificates of deposit $100,000 or more 39,619 39,647 42,137 42,171
Securities sold under agreements to repurchase 8,126 8,126 3,798 3,798
FHLB borrowings 45,533 45,380 38,143 39,036
Payable due to acquisition 1,035 1,188 2,017 2,036
Accrued interest payable 348 348 508 508
</TABLE>
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 securities dealers.
50
<PAGE> 51
BOSTON PRIVATE BANCORP, 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.
Reverse repurchase agreements
The carrying values reported in the balance sheet for repurchase agreements
approximate fair value because of the short-term nature of these instruments.
Payable due to acquisition
The fair value reported for payable due to acquisition 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.
51
<PAGE> 52
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(17) BOSTON PRIVATE BANCORP, INC. (PARENT COMPANY ONLY)
The following are the condensed financial statements of Boston Private
Bancorp, Inc. only:
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash $ 466 $ 366
Investment in subsidiaries 22,464 17,038
Goodwill 298 597
------- -------
Total assets $23,228 $18,001
======= =======
LIABILITIES:
Stock payable $ 298 $ 597
Taxes payable (6) --
------- -------
Total liabilities 292 597
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 18,000,000 shares
issued: 6,592,496 shares in 1996 and 5,756,704 shares in 1995 6,592 5,757
Additional paid-in capital 14,709 12,114
Retained earnings (accumulated deficit) 1,699 (541)
Treasury stock, at cost: 20,017 shares in 1995 -- (45)
Unrealized gain (loss) on securities available for sale, net (64) 119
------- -------
Total stockholders' equity 22,936 17,404
------- -------
Total liabilities and stockholders' equity $23,228 $18,001
======= =======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME:
Interest on cash in banks $ 11 $ 10 $ 9
------ ------ ------
Total income 11 10 9
------ ------ ------
EXPENSES:
Other expenses 24 22 42
------ ------ ------
Total expenses 24 22 42
------ ------ ------
Loss before income taxes (13) (12) (33)
Income tax benefit (6) -- --
------ ------ ------
Loss before equity in undistributed earnings of subsidiaries (7) (12) (33)
Equity in undistributed earnings of subsidiaries 2,247 1,752 1,236
------ ------ ------
NET INCOME $2,240 $1,740 $1,203
====== ====== ======
</TABLE>
52
<PAGE> 53
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,240 $ 1,740 $ 1,203
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed earnings of subsidiaries (2,247) (1,752) (1,236)
Decrease in accounts payable (6) -- (45)
------- ------- -------
Total adjustments (2,253) (1,752) (1,281)
------- ------- -------
Net cash used in operating activities (13) (12) (78)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investment in subsidiary Bank (3,063) (597) --
------- ------- -------
Net cash used in investing activities (3,063) (597) --
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of common stock 3,363 -- --
Proceeds from exercise of stock options 112 -- 7
Increase (decrease) in common stock payable (299) 597 --
------- ------- -------
Net cash provided by financing activities 3,176 597 7
------- ------- -------
Net increase (decrease) in cash 100 (12) (71)
Cash at beginning of year 366 378 449
------- ------- -------
Cash at end of year $ 466 $ 366 $ 378
======= ======= =======
</TABLE>
(18) 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 November 1995.
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.
53
<PAGE> 54
BOSTON PRIVATE BANCORP, 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, 1996,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, 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.
<TABLE>
Actual capital amounts and regulatory capital requirements as of December
31, 1996 and 1995 are presented in the table below.
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------ ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total risk-based capital
Company $21,086 12.25% $13,770 > 8.0% $17,213 > 10.0%
Bank 20,911 12.17% 13,746 > 8.0% 17,183 > 10.0%
Tier I risk-based
Company 18,933 11.00% 6,885 > 4.0% 10,328 > 6.0%
Bank 18,758 10.92% 6,873 > 4.0% 10,310 > 6.0%
Tier I leverage capital
Company 18,933 6.65% 11,393 > 4.0% 14,242 > 5.0%
Bank 18,758 6.59% 11,393 > 4.0% 14,242 > 5.0%
</TABLE>
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.
(19) 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.
54
<PAGE> 55
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Notwithstanding the Court's dismissal of the principal underlying claims
against the Bank and its denial of the plaintiff's motion for reconsideration,
litigation continues among other parties, and the Bank has been named as
third-party defendant by another party defendant to the original case. The Bank
continues to believe it has valid defenses to, and is vigorously defending, all
claims and allegations of wrongdoing in connection with the transaction. The
Company has previously incurred legal expenses of approximately $300,000, a
portion of which is recoverable under an insurance policy. No further estimate
of any loss can be made at this time.
On December 6, 1995, Robert S. Lappin, Esq., a depositor, filed a Complaint
in Suffolk Superior Court (Civil Action No. 95-6207-B). As part of the
Complaint, Mr. Lappin included counts against the Bank (and five financial
institutions) alleging that he had sustained losses from his client funds
account at the Bank and from other funds of clients maintained in separate
deposit accounts by him as Trustee, due to the misappropriation of these funds
by a former secretary. Mr. Lappin alleged that the Bank was liable for these
misappropriated funds due to the fact that the Bank had cleared numerous checks
on Mr. Lappin's various accounts at the Bank which had unauthorized signatures
and /or endorsements.
On January 19, 1996, Dorothy Wallace and others filed a separate action in
the Suffolk Superior Court, (Civil Action No. 96-0330-B). In this action, the
Wallaces alleged that most of the misappropriated funds referred to by Mr.
Lappin in his Complaint were in fact funds belonging to the Wallaces. The
Wallaces allege that Mr. Lappin was responsible for all of the misappropriated
funds due to his breach of fiduciary responsibilities as attorney and trustee to
the Wallaces. The Wallaces allege that the Bank was also liable for the
misappropriations due to the fact that the Bank cleared numerous instruments
bearing unauthorized endorsements and in some cases accepted deposits without
proper endorsements. The Wallaces included similar counts against two other
Boston banks.
In September, 1996, Suffolk Superior Court entered an Order consolidating
the two civil actions referred to above. The Wallaces filed an Amended
Consolidated Complaint, on October 1, 1996, in which they reiterated their
allegations made in Civil Action No. 96-0330-B and added another count against
the three banks alleging that the banks aided and abetted Mr. Lappin in the
breach of his fiduciary responsibilities by clearing instruments and accepting
deposits without proper authorization.
On October 29, 1996, the Bank answered the Wallace's Amended Consolidated
Complaint denying all claims and allegations of wrongdoing against it, setting
forth substantial defenses in connection with the matter and filing claims
against Mr. Lappin for negligence and breach of duty, and seeking funds owed to
it as a result of an overdraft and related costs. The Bank believes it has valid
defenses to, and is vigorously defending, all claims and allegations of
wrongdoing in connection with this matter. This matter is in the early stages of
discovery and therefore it is not possible to estimate any loss 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 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
55
<PAGE> 56
FORM 10-KSB
CROSS REFERENCE INDEX
PART I
PAGE
----
ITEM 1 DESCRIPTION OF BUSINESS 2
ITEM 2 DESCRIPTION OF PROPERTY 14
ITEM 3 LEGAL PROCEEDINGS 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 15
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 16
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS 18
ITEM 7 FINANCIAL STATEMENTS 28
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 55
PART III
The information called for by Items 9-12 of Part III of Form 10-KSB is
incorporated herein by reference to the Company's Definitive Proxy Statement for
the 1997 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE
3.1(i) Articles of Organization 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 incorporated herein by
reference to Exhibit 3.2 to Form 8-K.
4.1 Instruments Defining the Rights of Security Holders,
including Indentures incorporated herein by reference
to the Articles of Incorporation 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 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"). +
56
<PAGE> 57
Page
----
10.2 Employee Incentive Compensation Plan incorporated herein
by reference to Exhibit 10.6 to Form S-1.+
10.3 Directors' Stock Option Plan adopted May 26, 1993 60
as amended March 15, 1995.*
10.4 Employment Agreement dated January 1, 1996 by and among
the Company, the Bank and Timothy L. Vaill.*+
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-K for the year ended
December 31, 1994.
10.6 Asset Purchase Agreement dated as of June 16, 1995 by and
among the Company and the stockholders of CH&P, Inc.,
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.
21 Subsidiaries of the Company incorporated herein by
reference to Exhibit 22.0 to Form S-1.
23.1 Consent of KPMG Peat Marwick LLP.* 65
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter
ended December 31, 1996.
- -----------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 13(a) of Form 10-KSB.
57
<PAGE> 58
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 19th day of March,
1997.
Boston Private Bancorp, Inc.
By: /s/ Timothy L. Vaill
------------------------------
Timothy L. Vaill
President and
Chief Executive Officer
By: /s/ Walter M. Pressey
-------------------------------
Walter M. Pressey
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting 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 and
in the capacities indicated on the date indicated.
/s/ Charles O. Wood, III Chairman of the Board March 19, 1997
- ----------------------------
Charles O. Wood, III
/s/ Herbert S. Alexander Director March 19, 1997
- ----------------------------
Herbert S. Alexander
/s/ John M. Barry Director March 19, 1997
- ----------------------------
John M. Barry
/s/ Peter C. Bennett Director March 19, 1997
- ----------------------------
Peter C. Bennett
/s/ Eugene S. Colangelo Director March 19, 1997
- ----------------------------
Eugene S. Colangelo
58
<PAGE> 59
/s/ Michael M. Davis, Esq. Director March 19, 1997
- ----------------------------
Michael M. Davis, Esq.
/s/ Kate S. Flather Director March 19, 1997
- ----------------------------
Kate S. Flather
/s/ Lynn Thompson Hoffman Director March 19, 1997
- ----------------------------
Lynn Thompson Hoffman
/s/ Axel J. Leblois Director March 19, 1997
- ----------------------------
Axel J. Leblois
/s/ E. Christopher Palmer Director March 19, 1997
- ----------------------------
E. Christopher Palmer
/s/ Robert A. Radloff Director March 19, 1997
- -----------------------------
Robert A. Radloff
/s/ Eugene F. Rivers, 3rd Director March 19, 1997
- -----------------------------
Eugene F. Rivers, 3rd
/s/ Dr. Allen Sinai Director March 19, 1997
- -----------------------------
Dr. Allen Sinai
/s/ Timothy L. Vaill Director March 19, 1997
- -----------------------------
Timothy L. Vaill
59
<PAGE> 1
BOSTON PRIVATE BANCORP, INC.
DIRECTORS' STOCK OPTION PLAN
AMENDMENT AND RESTATEMENT
1. Purpose. The Boston Private Bancorp, Inc. Directors' Stock
Option Plan (the "Plan") is intended to provide incentives which will attract,
retain and motivate highly competent persons as outside directors of Boston
Private Bancorp, Inc. (the "Company") by providing them opportunities to acquire
shares of Common Stock of the Company pursuant to the terms of this Plan. By
encouraging such stock ownership, the interests of the Company will be advanced
by aligning the interests of the outside directors, who are not full-time
employees, with those of shareholders of the Company.
2. Administration. The Plan will be administered by the
Executive Committee (the "Committee") of the Board of Directors of the Company.
The determinations of the Committee shall be made in accordance with their
judgment as to the best interests of the Company and its stockholders and in
accordance with the purpose of the Plan. Any determination of the Committee may
be made without notice or meeting of the Committee by a writing signed by the
Committee members. Subject to the provisions of this Plan, the Committee shall
have full power to construe and interpret the Plan and to establish, amend and
rescind rules and regulations for its administration. Any decisions made with
respect thereto shall be final and binding for the Company, the optionee and all
other persons.
Effective Date. This Plan became effective on March 31, 1993 (the
"Effective Date"), the date it was adopted by the Board of Directors of the
Company. The Plan was approved by the shareholders at the May 26, 1993 annual
meeting of shareholders of the Company. This Amendment and Restatement of the
Plan became effective on March 15, 1995, the date it was adopted by the Board of
Directors of the Company, provided that, if recommended by counsel or required
by law, the Amendment and Restatement is approved by the shareholders at the
next annual meeting of the shareholders of the Company following such adoption
of the Amendment and Restatement of the Plan by the Board of Directors of the
Company.
3. Shares Reserved under the Plan. There originally was
reserved for issuance under the Plan an aggregate of 90,000 shares of Common
Stock which may be authorized but unissued or treasury shares. Pursuant to the
Amendment and Restatement, there is hereby reserved for issuance under the Plan
an additional 110,000 shares of Common Stock which may be authorized but
unissued or treasury shares, bringing the aggregate total share of Common Stock
under the Plan, as amended and restated, to 200,000. All of such shares may, but
need not, be issued pursuant to the exercise of stock options. If there is a
lapse, expiration, termination or cancellation of any option prior to the
issuance of shares thereunder, or if shares are issued upon the exercise of a
stock option and thereafter are reacquired by the Company pursuant to rights
reserved upon issuance thereof, those shares may again be used for new benefits
under this Plan. If payment for shares upon the exercise of an option is made
in shares of Common Stock, the number of such shares delivered to the Company
in payment for the exercise shall be added back to the shares available for
issuance under the Plan.
60
<PAGE> 2
4. Participants. Participants will consist of all directors of
the Company who are not full-time employees of the Company or its subsidiaries.
5. Types of Benefits. Benefits under the Plan shall consist of
Non-qualified Stock Options, as hereinafter described.
6. Non-qualified Stock Options. All options granted under the
Plan shall be Non-Qualified Stock Options not entitled to special tax treatment
under Section 422 of the Internal Revenue Code of 1986, as amended.
Non-qualified stock options shall consist of options to purchase shares of
Common stock at purchase prices not less than 100% of the fair market value of
the shares on the date the option is granted. Non-qualified Stock Options will
be exercisable not earlier than one year and not later than ten years after the
date they are granted. In the event that the optionee ceases to be a director by
reason of permanent total disability, any outstanding Non-qualified Stock Option
may be exercised at any time within twelve months after such disability. If the
optionee should die while a director or during a period when the optionee is no
longer a director in which the option remains exercisable, then the right of the
optionee's successor in interest to exercise a Non-qualified Stock Option shall
terminate not later than twelve months after the date of death. However, in no
event shall any Non-qualified Stock Option be exercised more than ten years
after its grant.
7. Issuance of Grant Shares. Each non-qualified stock option
granted under this Plan shall be evidenced by a written agreement in the form
attached hereto as Exhibit A, or such other form as the Committee may approve
from time to time.
(a) Non-qualified Stock Options shall be granted on or about
June 1, 1993, and on or about June 1, 1994 to each Outside Director of the
Company who was elected at the immediately preceding meeting of the stockholders
to purchase 1,000 shares of Common Stock.
61
<PAGE> 3
(b) A one-time Non-qualified Stock Option to purchase 45,000
shares of Common stock of the Company shall be granted on or about June 1, 1993
to the former President and Chief Executive Officer of the Company in
recognition of his years of prior service and to partially compensate him for
the termination of the options previously granted to him as an employee of the
Company under the Company's Employee Incentive Stock Option Plan.
(c) Non-qualified Stock Options shall be granted on or about
June 1, 1995, and on or about each succeeding June 1, to each Outside Director
of the Company who was elected at the immediately preceding meeting of the
stockholders to purchase 2,400 shares of Common Stock.
(d) In addition to the options granted pursuant to paragraph
8(c) above, Non-qualified Stock Options shall be granted on or about June 1,
1995, and on or about each succeeding June 1, to the Chairman of the Board of
Directors of the Company who was elected at the immediately preceding meeting of
the stockholders to purchase 600 shares of Common Stock.
(e) In addition to the options granted pursuant to paragraph
8(c) above, Non-qualified Stock Options shall be granted on or about June 1,
1995, and on or about each succeeding June 1, to the Chairman of the Executive
Committee of the Board of Directors of the Company who was elected at the
immediately preceding meeting of the stockholders to purchase 300 shares of
Common Stock.
8. Adjustment Provisions.
(a) If the Company shall at any time change the number of
issued shares of Common Stock without new consideration to the Company (such as
by stock dividend, stock split, or similar transaction) the total number of
shares reserved for issuance under this Plan and the number of shares covered by
each outstanding benefit shall be adjusted so that the aggregate consideration
payable to the Company and the value of each benefit shall not be changed.
62
<PAGE> 4
(b) In the case of any reorganization, sale, merger,
consolidation or combination of the Company with or into another corporation
other than a reorganization, sale, merger, consolidation or combination in which
the Company is the continuing corporation and which does not result in the
outstanding Common Stock being converted or exchanged for different securities,
cash or other property, or any combination thereof (an "Acquisition"), any
participant to whom a stock option has been granted under the Plan shall have
the right (subject to the provisions of the Plan and any limitation applicable
to such option) thereafter and during the term of such option to receive upon
exercise thereof the Acquisition Consideration (as hereinafter defined)
receivable upon such Acquisition by a holder of the number of shares of Common
Stock which might have been obtained upon exercise of such option or portion
thereof, as the case may be, immediately prior to such Acquisition. The term
"Acquisition Consideration" shall mean the kind and amount of shares of the
surviving or new corporation, cash, securities, evidence of indebtedness, other
property or any combination thereof, receivable in respect of one share of
Common Stock of the Company upon consummation of an Acquisition.
9. Non-transferability. Each option granted under the Plan
shall not be transferable otherwise than by will, or the laws of descent and
distribution, and shall be exercisable during the participant's lifetime only by
the participant. In the event of the death of a participant, exercise shall be
made only by the executor or administrator of the estate of the deceased
participant or the person or persons to whom the deceased participant's rights
under the option shall pass by will or the laws of descent and distribution.
10. Limitation of Rights. The award of any benefit under the
Plan may also be subject to any other provisions (whether or not applicable to
the benefit awarded to any other participant) which the Committee determines
appropriate, including, without limitation, provisions for the installment
purchase of Common Stock under stock options, restrictions on resale or other
dispositions, or understandings or conditions as to the participant's employment
in addition to those specifically provided for under the Plan. Neither the Plan,
nor the granting of an option nor any other action taken pursuant to the Plan,
shall constitute or be evidence of any agreement or understanding, express or
implied, that the Company will retain a Director for any period of time, nor
compensate the Director at any particular rate, or at all. A Director shall have
no rights as a shareholder with respect to the shares covered by his options
until the date of issuance to said Director of a stock certificate evidencing
exercise thereof. No adjustment will be made for dividends or other rights for
which the record date is prior to the issue date of such stock certificate.
63
<PAGE> 5
11. Taxes. The Company shall be entitled to withhold the
amount of any tax attributable to any shares deliverable under the Plan after
giving the person entitled to receive the shares notice as far in advance as
practicable and the Company may defer making delivery as to any benefit if any
such tax is payable until indemnified to its satisfaction. The Committee may, in
its discretion and subject to rules which it may adopt, permit a participant to
pay all or a portion of the taxes arising in connection with the exercise of a
Non-qualified Stock Option by electing to have the Company withhold shares of
Common Stock from the shares otherwise deliverable to the participant, having a
fair market value equal to the amount to be withheld. The fair market value of
any fractional shares remaining after payment of withholding taxes shall be paid
to the participant in cash.
12. Duration, Amendment and Termination. No benefit shall be
granted more than ten years after the date of adoption of this Plan; provided,
however, that the terms and conditions applicable to any benefit granted within
such period may thereafter be amended or modified by mutual agreement between
the Company and the participant or such other persons as may then have an
interest therein. The Board of Directors may amend the Plan from time to time or
terminate the Plan at any time. However, no action authorized by this section
shall reduce the amount of any existing benefit or change the terms and
conditions thereof without the participant's consent.
13. Governing Law. The Plan and all determinations made and
action taken pursuant hereto shall be subject to and construed in accordance
with the law of the Commonwealth of Massachusetts.
64
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
Boston Private Bancorp, Inc.:
We consent to the incorporation by reference in Registration Statements (Nos.
33-93634, 33-2617, 33-26133 and 2-98875) on Forms S-8 and in Registration
Statement (No. 333-19823) on Form S-3 of Boston Private Bancorp, Inc. of our
report dated January 15, 1997 relating to the consolidated balance sheets of
Boston Private Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995,
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, 1996, which report appears in the December 31, 1996 annual report
on Form 10-KSB of Boston Private Bancorp, Inc.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 20, 1997
65
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