<PAGE> 1
As filed with the Securities and Exchange Commission on February 27, 1998
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] 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 Number: 0-17089
BOSTON PRIVATE BANCORP, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2976299
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 912-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
For fiscal year ended December 31, 1997, the registrant's revenues
were $25,178,000.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of its common stock on the Nasdaq
Smallcap Market on February 23, 1998, was $51,710,610.
10,682,900 shares of the registrant's common stock were outstanding on
February 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the Company's 1998 Annual
Meeting of Shareholders are incorporated by reference in Items 10, 11, 12 and 13
of part III.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
- ------
ITEM 1 DESCRIPTION OF BUSINESS 2
ITEM 2 DESCRIPTION OF PROPERTY 14
ITEM 3 LEGAL PROCEEDINGS 15
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 OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 57
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 1998 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission.
ITEM 13 EXHIBITS, LISTS, AND REPORTS ON FORM 8-K 57
SIGNATURES 59
</TABLE>
<PAGE> 3
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, fluctuations in assets under management
and other sources of fee income, and changes in assumptions used in making such
forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
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").
On October 31, 1997, the Company acquired Westfield Capital Management
Company Inc. ("Westfield"), a Massachusetts corporation engaged in providing a
range of investment management services to individual and institutional clients,
in exchange for 3,918,367 newly issued shares of the Company's common stock. The
acquisition was accounted for as a "pooling of interests". Accordingly, the
current and prior period results of operations of the Company have been restated
to reflect the results of operations on a consolidated basis.
On July 31, 1995, the Company acquired substantially all of the assets and
assumed certain liabilities of an investment management business for a total
purchase price of approximately $4.2 million, of which $2.1 million, consisting
of $1.5 million in cash and 166,667 shares of the Company's common stock, was
paid at closing. In each of January and July 1996 and 1997, the Company made
additional scheduled payments consisting of $375,000 in cash and 41,667 shares
of the Company's common stock. The acquisition was accounted for as a purchase.
Accordingly, the results of operations of the acquired business have been
included with those of the Company subsequent to the date of acquisition.
The Company conducts substantially all of its business through its
wholly-owned subsidiaries, the Bank and Westfield. The Company's and the Bank's
principal office is located at Ten Post Office Square, Boston, Massachusetts,
and Westfield is located at One Financial Center, Boston, Massachusetts.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products and services to
high net worth individuals, their families and businesses in the greater Boston
area and New England and, to a lesser extent, Europe and Latin America. The Bank
seeks to anticipate and respond to the financial needs of its client base by
offering high quality products, dedicated personal service and long-term banking
relationships. The Bank offers its clients a broad range of basic deposit
services, including checking and savings accounts, with automated teller machine
("ATM") access, and cash management services 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, all of which was subsequently invested in the Bank.
Westfield is an investment management firm serving the investment needs of
high net worth individuals and institutions with endowments, pensions and
profit-sharing or 401(k) plans. The investment management team seeks out
opportunities to purchase growth equities at a reasonable price by applying
fundamental research techniques combined with an evaluation of a proprietary
data base of securities to identify prospective investments which have broad
market opportunities, accelerating earnings growth, low financial leverage and
sufficient cash flow. They often visit companies to interview management of
prospective investments, seeking to find those situations where there is a
diversity of current investment opinion and where fundamental research can
identify company specific events that create a competitive edge. After making an
investment, Westfield monitors performance against a systematic set of sell
disciplines including: downside price limits, an alteration of the investment
case, changes in relative price momentum, valuation relative to its peer group
and attractiveness versus alternative investments. Westfield primarily manages
individually invested accounts and also acts as managing general partner for two
limited partnerships, one of which invests primarily in technology stocks, and
the other of which invests primarily in small capitalization equities.
2
<PAGE> 4
The Company's operating results depend primarily on the operating results
of the Bank and Westfield. 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 Bank also earns fees and other income from its lending and cash
management services, and the Company generates a significant amount of fees from
providing investment management and trust services to its clients through both
the Bank and Westfield. Fee income from investment management and trust services
is not directly dependent on market interest rates and provides the Company a
steady source of income in varying market interest rate environments. However,
this fee income is generally based upon the value of assets under management,
and therefore can be significantly affected by changes in the values of equities
and bonds, and by the investment performance of the Bank and Westfield.
INVESTMENT MANAGEMENT AND TRUST ADMINISTRATION
The Company provides a broad range of investment management services to
individuals, family groups, trusts, endowments and foundations, and retirement
plans. These services include management of equity, fixed income, balanced and
strategic cash management portfolios. Portfolios are managed based on the
investment objectives of each client, and each portfolio is positioned to
benefit from long-term market trends. Acting as fiduciary, the Company also
provides trust services to both individuals and institutions. For the year ended
December 31, 1997, the asset management business accounted for 95.8% of the
Company's total fees and other income and 52.4% of the Company's total revenues,
which is defined as net interest income plus fees and other income.
At December 31, 1997, the Company had approximately $2.2 billion in assets
under management. Of this total, $2.1 billion was in investment advisory
accounts, $50.3 million was invested and administered under trust arrangements,
and $30.4 million was in custody or safekeeping.
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. 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.
Commercial loans over $750,000 and residential mortgage loans over $1 million
are required to be reviewed by the Loan Committee, which includes three outside
Directors of the Bank.
At December 31, 1997, the Company had loans outstanding of $276.8 million,
which represented approximately 75% 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, 1997,
approximately 80.3% 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 -- Asset Liability
Management." At December 31, 1997, approximately 98.9% of the Company's
outstanding loans were secured and approximately 80.2% were secured in whole or
in part by real estate. Within the commercial loan portfolio, $81.1 million or
60.2% of the portfolio was secured in whole or in part by real estate.
At December 31, 1997, the Bank's statutory lending limit to any single
borrower was approximately $4.9 million, subject to certain exceptions provided
under applicable law. At December 31, 1997, the Bank had no outstanding lending
relationships in excess of the legal lending limit. The Bank also has a policy
of extending only secured loans to Directors of the Company and its
subsidiaries, and the aggregate principal amount of loans to all Directors of
the Company and its subsidiaries is limited by law to 100% of capital. At
December 31, 1997, the aggregate principal amount of all loans to Directors and
related entities (including commitments under lines of credit) was $1.5 million.
3
<PAGE> 5
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,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
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 $134,685 48.7% $ 97,740 47.4% $72,729 46.8% $50,527 45.4% $35,113 46.4%
Residential mortgage 124,865 45.1 96,578 46.9 74,447 48.0 54,373 48.9 34,909 46.1
Home equity 16,969 6.1 11,481 5.6 7,783 5.0 6,045 5.4 5,421 7.2
Other 306 .1 308 .1 297 .2 281 .3 234 .3
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
276,825 100.0% 206,107 100.0% 155,256 100.0% 111,226 100.0% 75,677 100.0%
Allowance for loan
losses (3,645) (2,566) (1,942) (1,232) (1,006)
-------- -------- -------- -------- -------
Net loans $273,180 $203,541 $153,314 $109,994 $74,671
======== ======== ======== ======== =======
</TABLE>
The following table sets forth scheduled contractual maturities of loans in
the Company's portfolio at December 31, 1997. 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.
<TABLE>
<CAPTION>
RESIDENTIAL HOME
COMMERCIAL MORTGAGE EQUITY OTHER TOTAL
---------- ----------- ------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less $ 44,713 $ 162 $ 153 $306 $ 45,334
After one year through five years 71,347 248 224 -- 71,819
Beyond five years 18,625 124,455 16,592 -- 159,672
-----------------------------------------------------
Total $134,685 $124,865 $16,969 $306 $276,825
=====================================================
Interest rate terms on amounts due
after one year:
Fixed $ 37,995 $ 14,650 $ -- $ -- $ 52,645
Adjustable 51,977 110,053 16,816 -- 178,846
-----------------------------------------------------
Total $ 89,972 $124,703 $16,816 $ -- $231,491
=====================================================
</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, 1997, $447,000 of loans
scheduled to mature within one year were non-performing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset Quality."
4
<PAGE> 6
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, 1997, the Bank had outstanding commercial loans totaling
$134.7 million, which represented 48.7% of total loans and 36.5% of total
assets. Commercial loans, consisting primarily of loans to businesses, increased
$36.9 million, or 37.8%, during the year ended December 31, 1997, compared to an
increase of $25.0 million, or 34.4%, during the year ended December 31, 1996.
The growth in 1997 and 1996 reflects both an increase in market demand and
initiatives by the Company to increase market share. Of the Bank's total
commercial loan portfolio, $44.7 million or 33.2% is due within one year and
$90.0 million or 66.8% 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 70.6% of the Bank's commercial loan portfolio as of December
31, 1997. The average balance of the Bank's outstanding commercial loans was
approximately $300,000 at year end 1997.
The Bank has an independent loan review process under which all loan
originations are reviewed for adherence to internal policies and underwriting
guidelines. The Bank also reviews a large percentage of outstanding commercial
loans at least annually. Such credit reviews are first performed by the loan
review function and, if necessary, are presented to the Credit Committee with
further review in certain situations by the Loan Committee. In addition, the
Loan Committee reviews loans on the Bank's internal "watch list" and classified
loan report on a monthly basis. Each of these loans is required to have an
action plan which is developed by the lending officer in charge of the credit.
Residential Mortgage and Home Equity Loans. At December 31, 1997, the Bank
had outstanding residential mortgage loans and home equity loans of $124.9
million and $16.9 million, respectively, together representing 51.2% of the
Bank's total loan portfolio. Residential mortgage loans and home equity loans
increased $33.8 million, or 23.8%, during the year ended December 31, 1997, and
increased $25.8 million, or 31.4%, during 1996. The increases in both 1997 and
1996 were primarily due to the relatively low level of adjustable mortgage loan
interest rates, as well as promotional activities designed specifically to
increase the Bank's volume of mortgage loan originations. While the Bank has no
minimum size for its mortgage loans, it concentrates its origination activities
in the "Jumbo" segment of the market. This segment consists of loans secured by
single family properties in excess of the amount eligible for purchase by the
Federal National Mortgage Association ("FNMA"), which was $214,000 at December
31, 1997. The average balance of the Bank's outstanding residential mortgage
loans was approximately $270,000 at year end 1997.
In 1997, the Bank sold $8.4 million of residential mortgage loans on a
non-recourse basis without retaining servicing. The Bank generally holds
adjustable rate mortgage loans ("ARM's") in its own portfolio and sells fixed
rate mortgage loans to outside investors. At December 31, 1997, $110.1 million,
or 88.2%, of loans in the Bank's residential mortgage portfolio were ARM's.
Other Loans. Other loans consist of balances outstanding on credit cards
and loans arising from overdraft protection extended to individual customers. At
December 31, 1997, aggregate outstanding balances were $306,000 compared to
$308,000 at December 31, 1996. Other loans decreased $2,000, or 0.6%, during the
year ended December 31, 1997, and increased $11,000, or 3.7%, during 1996. The
balance of other loans is primarily dependent on client demand.
5
<PAGE> 7
Allowance for Loan Loss Activity. The following table is an analysis of the
Bank's allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding $224,670 $175,332 $131,928 $95,400 $64,371
======== ======== ======== ======= =======
Allowance for loan losses, beginning of period $ 2,566 $ 1,942 $ 1,232 $ 1,006 $ 812
Charged-off loans:
Commercial 40 6 54 166 314
Residential Mortgage -- 52 3 64 --
Home Equity -- 8 -- -- --
Other -- 0 4 -- --
-------- -------- -------- ------- -------
Total charged-off loans 40 66 61 230 314
-------- -------- -------- ------- -------
Recoveries on loans previously charged-off:
Commercial 308 71 153 101 235
Residential Mortgage 1 -- -- -- --
Home Equity -- -- -- -- --
Other -- -- -- -- --
-------- -------- -------- ------- -------
Total recoveries 309 71 153 101 235
-------- -------- -------- ------- -------
Net loans charged-off (recovered) (269) (5) (92) 129 79
Provision for loan losses 810 619 618 355 273
-------- -------- -------- ------- -------
Allowance for loan losses, end of period $ 3,645 $ 2,566 $ 1,942 $ 1,232 $ 1,006
======== ======== ======== ======= =======
Net loans charged-off (recovered) to average loans (.12)% (.01)% (.07)% .14% .12%
Allowance for loan losses to ending gross loans 1.32 % 1.25 % 1.25 % 1.11% 1.33%
Allowance for loan losses to non-performing loans 487.95 % 262.91 % 304.87 % 247.39% 92.21%
Net loans charged-off (recovered) to allowance for
loan losses (7.38)% (0.19)% (4.74)% 10.47% 7.85%
Recoveries to charge-offs 772.50 % 107.58 % 250.82 % 43.91% 74.84%
</TABLE>
The following table represents the allocation of the Bank's allowance for
loan losses and the percent of loans in each category to total loans for the
periods ending as indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan category:
Commercial $3,143 86.2% $2,296 47.4% $1,686 46.8% $1,062 45.4% $ 841 46.4%
Residential mortgage 312 8.6 241 46.9 237 48.0 154 48.9 150 46.1
Home equity and other 190 5.2 29 5.7 19 5.2 16 5.7 15 7.5
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
$3,645 100.0% $2,566 100.0% $1,942 100.0% $1,232 100.0% $1,006 100.0%
</TABLE>
This allocation of the allowance for loan losses reflects management's
judgment of the relative risks of the various categories of the Bank's loan
portfolio. This allocation should not be considered an indication of the future
amounts or types of possible loan charge-offs.
6
<PAGE> 8
INVESTMENT ACTIVITIES
The investment activity of the Bank is an integral part of the overall
asset/liability management of the Company. The Bank's investment policy is to
establish a portfolio 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.
The following table summarizes the book value of investments at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Available for sale:
U.S. Government and related obligations $17,583 $14,565 $22,284
Municipal bonds 19,193 12,072 --
Mortgage-backed obligations -- -- 119
Other equity securities -- -- 8
------- ------- -------
Total available for sale $36,776 $26,637 $22,411
======= ======= =======
Held to maturity:
U.S. Government and related obligations $ 4,654 $ 5,005 $12,019
Municipal bonds 5,000 1,382 --
Mortgage-backed obligations 18,123 25,289 31,933
Corporate notes & bonds -- -- 790
------- ------- -------
Total held to maturity $27,777 $31,676 $44,742
======= ======= =======
</TABLE>
SOURCES OF FUNDS
Deposits. Deposits have traditionally been the principal source of the
Bank's funds for use in lending and for other general business purposes. At
December 31, 1997, the Bank had a total of approximately 2,220 checking accounts
consisting of demand deposit and NOW accounts with an average account balance of
approximately $28,000; 420 savings accounts with an average account balance of
approximately $14,000; and 1,640 money market accounts with an average account
balance of approximately $72,000. Certificates of deposit of $100,000 or greater
represented approximately 19.3% of total deposits at December 31, 1997. See Note
9 to the Consolidated Financial Statements for further information.
The following table sets forth the average balances and rates of the Bank's
deposits:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
---------------------------
AVERAGE AVERAGE
BALANCE RATE
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Noninterest-bearing deposits:
Checking accounts $ 28,042 --%
Interest-bearing deposits:
Savings and NOW accounts 24,552 1.44
Money market accounts 99,660 3.79
Certificates of deposit under $100,000 23,700 5.65
Certificates of deposit of $100,000 or greater 44,259 5.35
--------
Total $220,213 3.56%
======== ====
</TABLE>
7
<PAGE> 9
Historically, the Bank has had a higher percentage of its time deposits in
denominations of $100,000 or more than commercial banking averages. Within the
banking industry, these deposits are generally considered to be volatile.
However, a significant portion of the Bank's deposits in denominations of
$100,000 or greater are maintained by individuals or entities with other
relationships with the Company.
Time certificates of deposit in denominations of $100,000 or greater had
the following schedule of maturities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Less than 3 months remaining $35,371 $32,526
3 to 6 months remaining 8,243 3,742
6 to 12 months remaining 5,824 2,727
More than 12 months remaining 350 624
------- -------
Total $49,788 $39,619
======= =======
</TABLE>
Borrowings. The Bank has established various borrowing arrangements in
order to provide additional sources of liquidity and funding, thereby increasing
flexibility. Management believes that the Bank currently has adequate liquidity
available to respond to current demands. The Bank is a member of the FHLB of
Boston, and as such has access to both short and long-term borrowings of up to
$93.6 million at the current time. At December 31, 1997, the Bank had $60.2
million in FHLB advances outstanding with a weighted average interest rate of
6.03%. At December 31, 1996, there were $45.5 million in FHLB advances
outstanding with a weighted average interest rate of 5.96%. Of the advances
outstanding at December 31, 1997, $13.0 million have variable rates which
reprice at least annually to market rates. The Bank has the opportunity to repay
variable rate advances on their respective anniversary dates. See Note 11 to the
Consolidated Financial Statements for further information.
The Bank also obtains funds from the sales of securities to institutional
investors under repurchase agreements. In a repurchase agreement transaction,
the Bank will generally sell an investment security, agreeing to repurchase
either the same or a substantially identical security on a specified later date
(generally not more than 90 days) at a price slightly greater than the original
sales price. The difference in the sale price and repurchase price is the cost
of the use of the proceeds. The investment securities underlying these
agreements are delivered to the securities dealers who arrange these
transactions as collateral for the repurchase obligation. Repurchase agreements
represent a cost competitive funding source for the Bank. However, the Bank is
subject to the risk that the lender may default at maturity and not return the
collateral. In order to minimize this potential risk, the Bank only deals with
large, established investment brokerage firms when entering into such
transactions. Repurchase transactions are accounted for as financing
arrangements rather than as sales of such securities, and the obligation to
repurchase such securities is reflected as a liability in the Consolidated
Financial Statements. At December 31, 1997, the total amount of outstanding
repurchase agreements was $5.4 million with a weighted average interest rate of
4.45%. See Note 10 to the Consolidated Financial Statements for additional
information.
From time to time the Bank purchases federal funds from the FHLB and other
banking institutions to supplement its liquidity position. The Company has
negotiated federal fund lines of credit totaling $23.2 million with
correspondent institutions to provide the Bank with immediate access to
overnight borrowings. At December 31, 1997, the Bank had $13.3 million of
borrowings outstanding under these federal funds lines. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity."
Other Sources of Funds. Other sources of funds include investment management
fees, loan repayments, maturities of investment securities, and sales of
securities from the available for sale portfolio.
COMPETITION
The ability of the Bank to attract loans and deposits may be limited by its
small size relative to its competitors. The Bank maintains a smaller staff and
has fewer financial and other resources than larger institutions with which it
competes in its market area.
8
<PAGE> 10
In particular, in attempting to attract deposits and originate loans, the
Bank encounters competition from other institutions, including larger downtown
Boston and suburban-based commercial banking organizations, savings banks,
credit unions, and other financial institutions and non-bank financial service
companies serving Eastern Massachusetts and adjoining areas. The principal
methods of competition include the level of loan interest rates, interest rates
paid on deposits, range of services provided, and the quality of these services.
In this competitive environment, the Bank may be unable to attract
sufficient and high-quality loans in order to continue its loan growth, which
may materially adversely affect the Bank's results of operations and financial
condition, including the level of its non-performing assets. The Bank's
competitors include several major financial companies whose greater resources
may afford them a marketplace advantage by enabling them to maintain numerous
banking locations and mount extensive promotional and advertising campaigns. In
particular, the Bank's current commercial borrowing customers may develop needs
for credit facilities larger than it can accommodate.
In addition, the ability of the Bank and Westfield to attract investment
management and trust business may be inhibited by their relatively short history
and limited record of performance. With respect to their investment management
and trust services, the Bank and Westfield compete primarily with commercial
banks and trust companies, mutual fund companies, investment advisory firms,
stock brokerage firms, law firms, and other financial companies. Competition is
especially keen in the Bank's and Westfield's market area, because Boston has a
well-established investment management industry. Many of the Bank's and
Westfield's competitors have greater resources than the Company on a
consolidated basis. In addition to competing directly for clients, competition
can impact the fee structures of the Bank and Westfield. The Company believes
that the ability of the Bank and Westfield to compete effectively with other
firms is dependent upon their products, level of investment performance and
client service, as well as the marketing and distribution of their investment
products. There can be no assurance that the Bank and Westfield will be able to
achieve favorable investment performance and retain their existing clients.
EMPLOYEES
At December 31, 1997, the Company had 113 full-time and 3 part-time
employees. The Company's employees are not represented by any collective
bargaining unit, and the Company believes its employee relations are good. The
Company maintains a benefit program which includes health and dental insurance,
life and long-term disability insurance and a 401(k) or profit sharing 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, as well as recent changes in
regulatory policy, have 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 Bank
Holding Company Act of 1996, as amended ("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.
9
<PAGE> 11
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines that generally require bank holding companies to maintain
total capital equal to 8% of total risk-weighted assets, with at least one-half
of that amount consisting of Tier 1 capital. Tier 1 capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such 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 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. Rates under these
classifications range from 0.013% for well capitalized, healthy institutions to
0.283% for undercapitalized institutions with substantial supervisory concerns.
At December 31, 1997, the Bank was considered "well capitalized" with regard to
these regulations.
10
<PAGE> 12
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)
"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.
11
<PAGE> 13
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.
Safety and Soundness Guidelines. The federal banking agencies have
adopted safety and soundness guidelines for all insured depository institutions
and depository institution holding companies, prescribing in a general manner
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, and other
operational and managerial standards.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended (the "CRA"), was
enacted to encourage every financial institution to help meet the credit needs
of its entire community, including low-and-moderate-income neighborhoods,
consistent with its safe and sound operation. The CRA does not establish
specific lending requirements or programs for financial institutions, nor does
it limit an institution's discretion to develop the type of products and
services that it believes are best suited to its particular community,
consistent with the purposes of the CRA.
The federal bank regulatory agencies jointly issued amendments to the
regulations implementing the CRA that substantially revised the applicable CRA
framework effective January 1, 1996. The amended CRA regulations are based upon
objective criteria of the performance of institutions under three key assessment
tests: (i) a lending test, to evaluate the institution's record of making loans
in its service areas; (ii) an investment test, to evaluate the institution's
record of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and (iii)
a service test, to evaluate the institution's delivery of services through its
branches, ATMs, and other offices. As of the date of the most recent regulatory
exam in September 1997, the Bank's CRA rating was "satisfactory."
INTERSTATE BANKING LEGISLATION
Under the Interstate Act, different types of interstate transactions
and activities will be permitted under federal law, each with different
effective dates. Interstate transactions and activities provided for under 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
became permissible on July 1, 1997. States may at any time enact legislation
permitting interstate branching. Banks are now permitted to act as agents for
affiliated depository institutions. Each of the transactions and activities must
be approved by the appropriate federal bank regulator, with separate and
specific criteria established for each category.
Subject to applicable state law "opt-out" or "opt-in" provisions in the
case of interstate mergers and de novo branching, the appropriate federal bank
regulator may approve the respective interstate transactions only if certain
criteria are met. First, in order for a banking institution (a bank or bank
holding company) to receive approval for an interstate transaction, it must be
"adequately capitalized" and "adequately managed." The phrase "adequately
capitalized" is generally defined as meeting or exceeding all applicable federal
regulatory capital standards, while the phrase "adequately managed" is left
undefined. Second, the appropriate federal bank regulator must consider the
applicant's and its affiliated institutions' records under the CRA, as well as
the applicant's record under applicable state community reinvestment laws.
The 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> 14
GOVERNMENT REGULATION
Virtually all aspects of the Company's investment management business
are subject to extensive regulation. Westfield and Boston Private Asset
Management ("BPAM"), an investment management subsidiary of the Bank, are
registered with the Securities and Exchange Commission (the "Commission") as
investment advisers under the Investment Advisers Act. As an investment adviser,
each is subject to the provisions of the Investment Advisers Act and the
Commission's regulations promulgated thereunder. The Investment Act imposes
numerous obligations on registered investment advisers, including fiduciary,
recordkeeping, operational, and disclosure obligations. Westfield and BPAM are
investment advisers also subject to regulation under the securities laws and
fiduciary laws of certain states. Each of the mutual funds for which Westfield
acts as adviser, or subadviser, is registered with the Commission under the
Investment Company Act, shares of each such fund are registered with the
Commission under the Securities Act, and the shares of each fund are qualified
for sale (or exempt from such qualification) under the laws of each state and
the District of Columbia to the extent such shares are sold in any of such
jurisdictions. As an adviser or subadviser to a registered investment company,
Westfield is subject to requirements under the 1940 Act and the Commission's
regulations promulgated thereunder. Westfield is also subject to ERISA, and to
regulations promulgated thereunder, insofar as it is a "fiduciary" under ERISA
with respect to certain of its client. ERISA and the applicable provisions of
the Code impose certain duties on persons who are fiduciaries under ERISA, and
prohibit certain transactions by the fiduciaries (and certain other related
parties) to such plans.
Under the Investment Advisers Act, every investment advisory contract
between a registered investment adviser and its clients must provide that it may
not be assigned by the investment adviser without the consent of the client. In
addition, under the Investment Company Act, each contract with a registered
investment company must provide that it terminates upon its assignment. Under
both the Investment Advisers Act and the Investment Company Act, an investment
advisory contract is deemed to have been assigned in the case of a direct
"assignment" of the contract as well as in the case of a sale, directly or
indirectly, of a "controlling block" of the adviser's voting securities. Such an
assignment may be deemed to take place when a firm is acquired by the Company.
The foregoing laws and regulations generally grant supervisory agencies
and bodies broad administrative powers, including the power to limit or restrict
either Westfield or BPAM from conducting their business in the event that they
fail to comply with such laws and regulations. Possible sanctions that may be
imposed in the event of such noncompliance include the suspension of individual
employees, limitations on the business activities for specified periods of time,
revocation of registration as an investment adviser, commodity trading adviser
and/or other registrations, and other censures and fines. Changes in these laws
or regulations could have a material adverse impact on the profitability and
mode of operations of the Company and Westfield.
FEDERAL TAXATION
The Company, the Bank, and Westfield are subject to those rules of
federal income taxation generally applicable to corporations under the 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, the Bank, and Westfield, as members of an affiliated group
of corporations within the meaning of Section 1504 of the Code, will file a
consolidated federal income tax return, which has the effect of eliminating or
deferring the tax consequences of inter-company distributions, including
dividends, in the computation of consolidated taxable income.
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.
13
<PAGE> 15
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 is 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 Code, plus interest
from bonds, notes and evidences of indebtedness of any state, including
Massachusetts, less the deductions, excluding the deductions for dividends
received, state taxes, and net operating losses, but not the credits as defined
under the provisions of the Code. For taxable years beginning on or after
January 1, 1999, the definition of Massachusetts net income is modified to allow
a deduction for 95% of dividends received from stock where the Bank owns 15% or
more of the voting stock of the institution paying the dividend and to allow
deductions from certain expenses allocated to federally tax exempt obligations.
Finally, affiliated financial institutions are not permitted to file a combined
tax return in Massachusetts under the new legislation.
Bank holding companies and certain non-bank subsidiaries are subject to
the Massachusetts corporate excise tax on business corporations provided they
were subject to such tax in taxable years before 1995. Under the corporate
excise tax, a corporation is taxed on its net income apportioned to
Massachusetts at the rate of 9.5% plus a tax of .26% on either its apportioned
net worth or tangible property. These grandfathered corporations may elect to
file a combined Massachusetts excise tax return through 1998. For taxable years
beginning in 1999, these corporations will be taxed as a financial institution
and taxed at a rate of 10.5% on their net income apportioned to Massachusetts.
Certain of the Bank's subsidiaries meeting certain definitional tests relating
to investments are not subject to either the corporate excise tax or the tax on
financial institutions, but instead are taxed on their gross income at the rate
of 1.32%.
The Bank and certain of its affiliates are subject to local property taxes.
Massachusetts excise or local property taxes paid by the Bank or its affiliates
are generally deductible for federal income tax purposes.
ITEM 2. DESCRIPTION OF PROPERTY
In October 1994, the Company executed a lease for new banking premises at
Ten Post Office Square, Boston, Massachusetts. 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 January 1996, Westfield executed a lease for 11,320 square feet of
office space at One Financial Center which expires in August 2001, and is
renewable for an additional five years. Approximately 13% of this space is
subleased to a tenant under a noncancellable operating lease which expires in
August 2001.
In November 1997, the Bank executed a lease for a 6,216 square foot
building at 336 Washington Street, Wellesley, Massachusetts. The lease for this
office expires in October 2012, and contains three five year options for
renewal.
The Company has from time to time also acquired properties through
foreclosure, which are marketed by local real estate brokers or by its lending
staff.
14
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
In January 1994, the Bank became aware of a dispute among various parties
involved in a transaction in which it served as bank of deposit for certain
certificates stated to reflect debt obligations of a foreign bank. In December
1994, the party which allegedly purchased the certificates filed a complaint in
the United States District Court for the District of Massachusetts alleging
certain claims arising out of the transaction against numerous individuals and
entities, including the Bank and one of its former officers. The plaintiff
sought to recover compensatory damages of approximately $4 million.
In August 1995, the Bank filed for summary judgment against the plaintiff's
claims. The plaintiff also filed a motion for partial summary judgment on one of
its claims. On March 19, 1996, the court granted the Bank's summary judgment
motion and denied the plaintiff's motion, resulting in the dismissal of all
claims against the Bank. The plaintiff sought reconsideration of its motion, and
on November 26, 1996, the court denied plaintiff's motion for reconsideration of
the summary judgment previously granted in favor of the Bank.
Notwithstanding the Court's dismissal of the underlying claims against the
Bank and its denial of the plaintiff's motion for reconsideration, litigation
continues among other parties. The time for an appeal by plaintiff has not yet
run because no judgment has been obtained for or against the other defendants
remaining in the case. The Bank continues to believe it has valid defenses to,
and will vigorously defend, all claims and allegations of wrongdoing in
connection with the transaction. The Company has previously incurred legal
expenses of approximately $15,000 net of recoveries under an insurance policy.
No further estimate of any loss can be made at this time.
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote during the fourth quarter of the fiscal
year ended December 31, 1997.
15
<PAGE> 17
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 ("Nasdaq") under the symbol "BPBC". At February 23, 1998 there
were 10,682,900 shares of Common Stock outstanding, which were held by 374
holders of record.
The following table sets forth the high and low closing sale prices for the
Company's Common Stock for the periods indicated, as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1997
----
Fourth Quarter $8.63 $7.13
Third Quarter 8.88 6.75
Second Quarter 7.25 5.75
First Quarter 6.38 4.88
1996
----
Fourth Quarter $5.88 $3.75
Third Quarter 4.25 3.63
Second Quarter 4.38 3.50
First Quarter 4.06 3.38
</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. The Bank and Westfield are
the principal assets of the Company, and as such, provide the only source of
payment of dividends by the Company. Under Massachusetts law, trust companies
such as the Bank may pay dividends only out of "net profits" and only to the
extent that such payments will not impair the Bank's capital stock and surplus
account. These restrictions on the ability of the Bank to pay dividends to the
Company restrict the ability of the Company to pay dividends to the holders of
the Common Stock. Although Massachusetts law does not define what constitutes
"net profits", it is generally assumed that the term includes a bank's retained
earnings and does not include its additional paid-in capital account. There are
no such comparable statutory restrictions on Westfield's ability to pay
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
The information contained in the Company's Current Report on Form 8-K,
filed as of November 14, 1997, regarding recent sales of unregistered securities
is incorporated herein by reference thereto.
16
<PAGE> 18
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, 1997. 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>
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31:
Total assets $ 368,942 $ 293,879 $ 245,419 $ 207,119 $ 107,572
Total loans 276,825 206,107 155,256 111,226 75,677
Allowance for loan losses 3,645 2,566 1,942 1,232 1,006
Investment securities 46,430 33,024 35,101 41,238 16,123
Mortgage-backed securities 18,123 25,289 32,052 35,304 1,172
Cash and cash equivalents 13,561 15,659 9,918 11,781 11,182
Excess of costs over net assets acquired 3,746 4,068 4,390 273 310
Deposits 258,301 209,302 178,885 144,915 77,675
Borrowed funds 79,684 54,694 41,941 44,624 13,627
Stockholders' equity 25,935 25,801 18,900 14,882 14,863
Non-performing assets(1) 832 1,061 882 763 1,309
FOR THE YEAR ENDED DECEMBER 31:
Interest income 22,728 18,688 15,949 10,136 5,366
Interest expense 11,334 9,377 8,451 4,562 2,129
----------- ---------- ---------- ---------- ----------
Net interest income 11,394 9,311 7,498 5,574 3,237
Provision for loan losses 810 619 618 355 273
----------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses 10,584 8,692 6,880 5,219 2,964
Fees & other income 13,784 12,831 9,030 4,922 5,322
Operating expense 18,951 14,829 11,404 8,052 7,684
----------- ---------- ---------- ---------- ----------
Income before income taxes 5,417 6,694 4,506 2,089 602
Income tax expense (benefit) 1,909 1,216 104 (300) (355)
----------- ---------- ---------- ---------- ----------
Net income(3) $ 3,508 $ 5,478 $ 4,402 $ 2,389 $ 957
=========== ========== ========== ========== ==========
PER SHARE DATA:
Basic earnings per share $ 0.33 $ 0.57 $ 0.48 $ 0.26 $ 0.15
Diluted earnings per share(3) $ 0.32 $ 0.55 $ 0.47 $ 0.26 $ 0.15
Average common shares outstanding 10,590,000 9,597,000 9,191,000 9,118,000 6,591,000
Average diluted shares outstanding 10,960,000 9,880,000 9,394,000 9,118,000 6,591,000
Book value $ 2.44 $ 2.50 $ 2.03 $ 1.63 $ 1.63
SELECTED OPERATING RATIOS:
Return on average assets(3) 1.13% 2.11% 1.97% 1.47% 1.05%
Return on average equity(3) 13.50% 26.37% 26.32% 16.48% 12.86%
Interest rate spread(2) 3.21% 3.19% 2.90% 3.14% 3.42%
Net interest margin(2) 3.87% 3.80% 3.52% 3.61% 3.81%
ASSET QUALITY RATIOS:
Non-performing loans to gross loans(1) .27% .47% .41% .45% 1.44%
Non-performing assets to total assets(1) .23% .36% .36% .37% 1.22%
Allowance for loan losses to gross loans 1.32% 1.25% 1.25% 1.11% 1.33%
Allowance for loan losses to non-performing 487.95% 262.10% 304.87% 247.39% 92.21%
loans
Loans charged-off to average net loans .01% .04% .05% .24% .49%
CAPITAL RATIOS:
Average equity to average assets 8.37% 7.99% 7.48% 8.94% 8.20%
Tier I leverage capital ratio 6.54% 7.83% 6.14% 7.12% 13.62%
Tier I risk-based capital ratio 9.81% 12.85% 11.28% 14.39% 22.40%
Total risk-based capital ratio 11.07% 14.10% 12.53% 15.64% 23.65%
</TABLE>
(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").
(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, and net interest margin represents net interest
income as a percent of average interest-earning assets.
(3) After deducting $1.2 million of non-recurring merger expenses, operating
income for the year ended December 31, 1997 was $4.7 million, or $0.43 per
share, return on average assets was 1.52%, and return on average equity was
18.21%
17
<PAGE> 19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, their notes, and other statistical information included in this
annual report. The discussions set forth below and elsewhere herein contain
certain statements that may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company's actual
results could differ materially from those projected in the forward-looking
statements as a result of, among other factors, changes in loan defaults and
charge-off rates, reduction in deposit levels necessitating increased borrowing
to fund loans and investments, changes in interest rates, fluctuations in assets
under management and other sources of fee income, and changes in assumptions
used in making such forward-looking statements. In addition, prevailing economic
conditions, as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, could significantly affect the
operations of financial institutions such as the Company.
LIQUIDITY
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity as the
ability to respond to the needs of depositors and borrowers as well as to
earnings enhancement opportunities in a changing marketplace. Primary sources of
liquidity consist of investment management fees, deposit inflows, loan
repayments, borrowed funds, maturity of investment securities and sales of
securities from the available for sale investment 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, 1997, cash, federal funds
sold and securities available for sale amounted to $50.3 million, or 13.6% of
total assets. This compares to $42.3 million, or 14.4% of total assets at
December 31, 1996.
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 $93.6 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.
Westfield's primary source of liquidity consists of investment management
fees which are collected on a quarterly basis. At December 31, 1997, Westfield
had working capital of approximately $900,000. Management believes that
Westfield has adequate liquidity to meet its commitments.
The Company's primary sources of funds are dividends from subsidiaries,
issuance of common stock, and borrowings. Management believes that the Company
has adequate liquidity to meet its commitments.
CAPITAL RESOURCES
Total stockholders' equity of the Company at December 31, 1997 was $25.9
million, as compared to $25.8 million at December 31, 1996. The increase of
$134,000 was primarily the result of the Company's net income for 1997 of $3.5
million combined with the proceeds of Common Stock issued and options exercised,
less payment of $4.1 million of S-Corporation dividends to the shareholders of
Westfield based upon Westfield's 1996 and 1997 earnings prior to the
acquisition.
As a bank holding company, the Company is subject to a number of regulatory
capital requirements which have been adopted by the Federal Reserve Board. At
December 31, 1997, the Company's Tier I leverage capital ratio stood at 6.54%,
compared to 7.83% at December 31, 1996. The Company is also subject to a
risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning
18
<PAGE> 20
balance sheet assets and off-balance sheet items to broad risk categories.
According to these standards, the Company had a Tier I risk adjusted capital
ratio of 9.81% and a Total risk adjusted capital ratio of 11.07% at December 31,
1997. This compares to a Tier I risk adjusted capital ratio of 12.85% and a
Total risk adjusted capital ratio of 14.10% at December 31, 1996. 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 Company is therefore considered to be "well capitalized."
The Bank is also subject to a number of regulatory capital measures. At
December 31, 1997, the Bank's Tier I leverage capital ratio stood at 6.28%,
compared to 6.59% at December 31, 1996. 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 9.43% and a Total risk adjusted capital ratio of 10.68% at December 31, 1997.
This compares to a Tier I risk adjusted capital ratio of 10.92% and a Total risk
adjusted capital ratio of 12.17% at December 31, 1996. 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."
INTEREST RATE SENSITIVITY AND MARKET RISK
Management considers interest rate risk to be the Company's most
significant market risk. Interest rate risk is the exposure to adverse changes
in the net income of the Company as a result of changes in interest rates.
Consistency in the Company's earnings is dependent on the degree of fluctuation
of investment management fee income due to changes in interest rates, and on the
effective management of interest rate sensitive assets and liabilities.
Fee income from investment management and trust services is not directly
dependent on market interest rates and provides the Company a steady source of
income in varying market interest rate environments. However, this fee income is
generally based upon the value of assets under management, and therefore can be
significantly affected by changes in the values of equities and bonds.
The principal objective of the Bank's asset and liability management is to
maximize profit potential while minimizing the vulnerability of its operations
to changes in interest rates by means of managing the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Bank's actions in this regard are taken under
the guidance of the Asset/Liability Committee ("ALCO") which is comprised of
members of senior management. This committee is actively involved in formulating
the economic assumptions that the Bank uses in its financial planning and
budgeting process and establishes policies which control and monitor the
sources, uses and pricing of funds. The Bank evaluates hedging techniques to
reduce interest rate risk where possible, however no off-balance sheet hedging
activities have been used to date.
The ALCO uses both interest rate "gap" sensitivity and simulation analysis
to measure inherent risk in the bank's balance sheet at a specific point in
time. The simulations look forward at one and two year increments with
instantaneous and sustained interest rate shocks of up to 200 basis points, and
take into account the repricing, maturity, and prepayment characteristics of
individual products and investments. The simulation results are reviewed to
determine whether the exposure to net interest income and to the fair value of
the available for sale investment portfolio is within the guidelines which are
set and monitored at both the ALCO and Board levels. The ALCO committee reviews
the results with regard to the established tolerance levels and recommends
appropriate strategies to manage this exposure. As of December 31, 1997, net
interest income simulation and fair market value simulation indicated that the
Bank's exposure to changing interest rates was within the established tolerance
levels. While the ALCO reviews simulation assumptions to ensure that they
reflect historical experience, it should be noted that income simulation may not
always prove to be an accurate indicator of interest rate risk because the
actual repricing, maturity, and prepayment characteristics of individual
products may differ from the estimates used in the simulations.
19
<PAGE> 21
The following table presents the impact of instantaneous and sustained
interest rate shocks on pro forma net interest income over a twelve month
period:
<TABLE>
<CAPTION>
TWELVE MONTHS BEGINNING 1/1/98
------------------------------
DOLLAR PERCENT
CHANGE CHANGE
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Up 200 basis point shock $ 27 0.20 %
Down 200 basis point shock (366) (2.67)%
</TABLE>
The following table presents the impact of instantaneous and sustained interest
rate shocks on the fair value of investment securities available for sale as of
December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
DOLLAR PERCENT
CHANGE CHANGE
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Up 100 basis point shock $(1,060) (2.86)%
Up 200 basis point shock (1,966) (5.30)%
</TABLE>
The Bank also uses interest rate sensitivity "gap" analysis to provide a
general overview of the Bank's interest rate risk profile. The effect of
interest rate changes on the assets and liabilities of a financial institution
may be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity gap. An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period of
falling interest rates, a positive gap would tend to adversely affect net
interest income, while a negative gap would tend to result in an increase in net
income. During a period of rising interest rates, a positive gap would tend to
result in an increase in net interest income while a negative gap would tend to
affect net interest income adversely.
The Bank has historically sought to maintain a relatively narrow gap
position and has, in some instances, foregone investment in higher yielding
assets when such investment, in management's opinion, exposed the Bank to undue
interest rate risk. However, the Bank does not attempt to perfectly match
interest rate sensitive assets and liabilities and will indeed selectively
mismatch its assets and liabilities to a controlled degree when it considers it
both appropriate and prudent to do so. There are a number of relevant time
periods in which to measure the gap position, such as at the 30, 60, 90, or 180
day points in the maturity schedule. Management monitors the Bank's gap position
at each of these maturity points, and also tends to focus closely on the gap at
the one year point in making its principal funding decisions, such as with
respect to the Bank's one year adjustable rate mortgage loan portfolio.
The repricing schedule for the Bank's interest-earning assets and
interest-bearing liabilities is based on actual cash flows and repricing
characteristics, and incorporates market-based assumptions regarding the impact
of changing interest rates on the prepayment speeds of certain assets and
liabilities. The schedule also includes senior management projections for
activity levels in product lines offered by the Bank. Assumptions based on the
historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the repricing schedule. These
assumptions are inherently uncertain and, as a result, the repricing schedule
cannot precisely measure net interest income or predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude, and frequency of
interest rate changes as well as changes in market conditions and management
strategies.
20
<PAGE> 22
The following table presents the repricing schedule for the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1997:
<TABLE>
<CAPTION>
OVER
WITHIN 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 $ 4,931 $ -- $ -- $ -- $ -- $ 4,931
Federal funds sold 1,200 -- -- -- -- 1,200
Investment securities 2,327 1,605 21,944 19,078 1,476 46,430
Mortgage-backed securities 1,866 7,482 3,302 4,820 653 18,123
FHLB Stock 3,511 -- -- -- -- 3,511
Loans-fixed rate 1,841 864 1,938 34,536 15,366 54,545
Loans-variable rate 130,771 28,611 31,931 30,121 846 222,280
--------- -------- ------- ------- -------- --------
Total interest earning assets 146,447 38,562 59,115 88,555 18,341 351,020
--------- -------- ------- ------- -------- --------
Interest bearing liabilities(2):
Savings and NOW accounts (3) 3,222 3,222 -- -- 24,281 30,725
Money market accounts 91,634 26,350 -- -- -- 117,984
Time certificates under $100,000 9,081 2,266 4,262 7,243 104 22,956
Time certificates $100,000 or more 35,624 8,243 4,491 1,430 -- 49,788
Reverse repurchase agreements 5,366 -- -- -- -- 5,366
Federal funds purchased 13,255 -- -- -- -- 13,255
FHLB borrowings 6,199 5,802 19,812 23,883 4,570 60,266
Other short-term borrowings 837 -- -- -- -- 837
--------- -------- ------- ------- -------- --------
Total interest bearing liabilities 165,218 45,883 28,940 32,556 28,955 301,552
--------- -------- ------- ------- -------- --------
Net interest sensitivity gap
during the period $ (18,771) $ (7,321) $30,175 $55,999 $(10,614) $ 49,468
========= ======== ======= ======= ======== ========
Cumulative gap $ (18,771) $(26,092) $ 4,083 $60,082 $ 49,468
========= ======== ======= ======= ========
Interest-sensitive assets as a
percent of interest-sensitive
liabilities (cumulative) 88.64% 87.64% 101.70% 122.04% 116.40%
Cumulative gap as a percent
of total assets (6.50)% (9.03)% 1.41% 20.80% 17.12%
</TABLE>
(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 $36.8 million of demand accounts because they are
non-interest bearing.
(3) While Savings and NOW accounts can be withdrawn at any time, management
believes they contain characteristics which make their effective maturity
longer.
The preceding table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest income because the repricing
of various assets and liabilities is discretionary and is subject to competitive
and other factors. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
21
<PAGE> 23
FINANCIAL CONDITION
Total Assets. Total assets increased $75.1 million, or 25.5%, to $368.9
million at December 31, 1997 from $293.9 at December 31, 1996, due mainly to an
increase in portfolio loan originations. This increase was funded by growth in
deposits and borrowings.
Investments. Total investments (consisting of federal funds sold,
investment securities, and mortgage-backed securities) were $65.8 million, or
17.8% of total assets, at December 31, 1997, compared to $65.3 million, or 22.6%
of total assets, at December 31, 1996. This increase of $490,000, or 0.7%, was a
result of reinvestment of principal within the investment portfolio, partially
offset by redeployment of investment income in the loan portfolio. Of total
investments at December 31, 1997, $36.8 million are securities available for
sale. The available for sale portfolio carried a total of $36,000 in unrealized
gains at December 31, 1997.
Loans. Loans totaled $276.8 million, or 75.0% of total assets, at December
31, 1997, compared with $206.1 million, or 70.1% of total assets, at December
31, 1996. This increase of $70.7 million, or 34.3%, was due to a larger
allocation of resources devoted to loan originations, as well as the combination
of a healthy local economy and low interest rates which has helped fuel loan
demand. During 1997, commercial loans increased $36.9 million, or 37.8%,
residential mortgage loans increased $28.3 million, or 29.3%, and home equity
and other loans increased $5.5 million, or 47.8%.
Deposits. The Company has devoted considerable time and resources to
gathering deposits and experienced an increase of $49.0 million, or 23.4%, in
deposits during 1997, from $209.3 million, or 71.2% of total assets, at December
31, 1996, to $258.3 million, or 70.0% of total assets, at December 31, 1997.
Borrowings. Total borrowings (consisting of securities sold under
agreements to repurchase ("repurchase agreements"), federal funds purchased, and
FHLB borrowings) increased $25.2 million, or 46.9%, during 1997. The increase
was mainly attributable to an increase in federal funds purchased and 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
lower cost core deposits.
ASSET QUALITY
The Company's non-performing assets include non-performing loans and other
real estate owned ("OREO"). Non-performing loans include both nonaccrual loans
and loans past due 90 days or more but still accruing.
The following table sets forth information regarding non-performing loans,
other real estate owned, and delinquent loans 30-89 days past due as to interest
or principal, held by the Company at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis $ 722 $ 976 $443 $ 323 $ 964
Loans past due 90 days or more, but still accruing 25 -- 194 175 127
------ ------ ---- ------ ------
Total non-performing loans 747 976 637 498 1,091
Other real estate owned 85 85 245 265 218
------ ------ ---- ------ ------
Total non-performing assets $ 832 $1,061 $882 $ 763 $1,309
====== ====== ==== ====== ======
Delinquent loans 30-89 days past due 1,632 3,066 304 1,010 807
Non-performing loans as a % of gross loans .27% .47% .41% .45% 1.44%
Non-performing assets as a % of total assets .23% .37% .37% .37% 1.24%
Delinquent loans 30-89 days past due as a % of gross loans .59% 1.49% .20% .91% 1.07%
</TABLE>
22
<PAGE> 24
RISK ELEMENTS OF THE LOAN PORTFOLIO
The Company discontinues the accrual of interest on a loan when the
collectibility of principal or interest is in doubt. In certain instances, loans
that have become 90 days past due may remain on accrual status if the value of
the collateral securing the loan is sufficient to cover principal and interest
and the loan is in the process of collection. OREO consists of real estate
acquired through foreclosure proceedings and real estate acquired through
acceptance of a deed in lieu of foreclosure. In addition, the Company may, under
certain circumstances, restructure loans as a concession to a borrower.
Non-Performing Assets. At December 31, 1997, the Company had non-performing
assets of $832,000, which represented 0.23% of total assets. The Company's
non-performing assets consisted of nonaccruing loans aggregating $722,000, loans
past due 90 days or more and still accruing of $25,000, and one OREO property
with a fair value of $85,000. Non-performing assets decreased by $229,000, or
21.6%, from $1.1 million at December 31, 1996. 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, 1997, $1.6 million of loans were 30 to 89
days past due, a decrease of $1.4 million, or 46.8%, from the $3.1 million
reported at December 31, 1996. 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, 1997, the Company had classified $863,000 of
loans as substandard or doubtful based on the rating system adopted by the
Company.
In addition, the Company had designated $1.4 million of loans as special
mention.
Allowance for Loan Losses. The allowance for loan losses is established
through provisions charged to operations. Assessing the adequacy of the
allowance for loan losses involves substantial uncertainties and is based upon
management's evaluation of the amounts required to meet estimated charge-offs in
the loan portfolio after weighing various factors. Among these factors are the
risk characteristics of the loan portfolio, the quality of specific loans, the
level of nonaccruing loans, current economic conditions, trends in delinquencies
and charge-offs, and the value of underlying collateral, all of which can change
frequently. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties.
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review a financial
institution's allowance for loan losses and carrying amounts of other real
estate owned. Such agencies may require the financial institution to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
23
<PAGE> 25
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,
--------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- --------------------------- --------------------------
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 $ 3,441 $ 194 5.64% $ 2,548 $ 159 6.24% $ 1,928 $ 71 3.68%
Federal funds sold 4,132 220 5.32% 2,154 110 5.11% 3,531 204 5.78%
Investments 62,356 3,400 5.45% 64,998 3,769 5.80% 75,657 4,394 5.81%
Loans: (1)
Commercial 99,640 9,567 9.60% 78,486 7,482 9.53% 60,036 5,871 9.78%
Residential mortgage 110,750 8,168 7.38% 86,988 6,358 7.31% 64,973 4,730 7.28%
Home equity and other 14,280 1,179 8.26% 9,858 810 8.22% 6,919 679 9.81%
-------- ------- -------- ------- -------- -------
Total earning assets 294,599 22,728 7.71% 245,032 18,688 7.63% 213,044 15,949 7.49%
------- ------- -------
Allowance for loan losses (2,861) (2,177) (1,516)
Cash and due from banks 5,182 5,068 4,255
Premises and equipment 2,694 1,439 1,167
Other assets 11,129 10,681 6,668
-------- -------- --------
Total assets $310,743 $260,043 $223,618
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Savings and NOW $ 24,552 353 1.44% $ 22,895 343 1.50% $ 20,894 407 1.95%
Money market 99,660 3,776 3.79% 80,760 2,990 3.70% 61,515 2,046 3.33%
Certificates of deposit 67,959 3,705 5.45% 57,391 3,070 5.35% 54,718 3,102 5.67%
Borrowed funds 59,532 3,500 5.88% 50,364 2,974 5.91% 47,090 2,896 6.15%
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 251,703 11,334 4.50% 211,410 9,377 4.44% 184,217 8,451 4.59%
------- ------- -------
Non-interest bearing
demand deposits 28,042 24,073 19,032
Payables and other liabilities 5,004 3,785 3,642
-------- -------- --------
Total liabilities 284,749 239,268 206,891
Stockholders' equity 25,994 20,775 16,727
-------- -------- --------
Total liabilities and
stockholders' equity $310,743 $260,043 $223,618
======== ======== ========
Net interest income $11,394 $9,311 $ 7,498
======= ====== =======
Interest rate spread 3.21% 3.19% 2.90%
Net interest margin 3.87% 3.80% 3.52%
</TABLE>
(1) Nonaccrual loans are included in average loan balances.
24
<PAGE> 26
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>
1997 VS 1996 1996 VS 1995
------------------------------- -------------------------------
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 $ (16) $ 51 $ 35 $ 43 $ 45 $ 88
Federal funds sold 4 106 110 (22) (72) (94)
Investments (160) (209) (369) (11) (614) (625)
Loans:
Commercial 54 2,031 2,085 (151) 1,762 1,611
Residential mortgage 59 1,751 1,810 19 1,609 1,628
Home equity and other 4 365 369 (123) 254 131
----- ------ ------ ----- ------ ------
Total interest income (55) 4,095 4,040 (245) 2,984 2,739
----- ------ ------ ----- ------ ------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES:
Deposits:
Savings and NOW (1) 11 10 (68) 4 (64)
Money market 71 715 786 694 944
250
Certificates of deposit 60 575 635 (180) 148 (32)
Borrowed funds (13) 539 526 (118) 196 78
----- ------ ------ ----- ------ ------
Total interest expense 117 1,840 1,957 (116) 1,042 926
----- ------ ------ ----- ------ ------
NET INTEREST INCOME $(172) $2,255 $2,083 $(129) $1,942 $1,813
===== ====== ====== ===== ====== ======
</TABLE>
25
<PAGE> 27
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Income. The Company reported net income of $3.5 million, or $0.32
per share, for the year ended December 31, 1997 after deducting $1.2 million of
non-recurring acquisition expenses, net of tax. For the year ended December 31,
1996 the Company's net income was $5.5 million, or $0.55 per share. The 35.9%
decrease of $2.0 million in reported net income is the result of the $1.2
million of non-recurring acquisition expenses and the tax-exempt, S-Corporation
status of Westfield prior to the acquisition, which provided $1.2 million of tax
savings in 1996. Not including non-recurring acquisition expenses, and had
Westfield been fully taxable in 1997 and 1996, the Company would have reported
proforma net income of $4.5 million, or $0.42 per share, and $4.2 million, or
$0.43 per share for the years ended December 31, 1997 and 1996, respectively.
Net Interest Income. For the year ended December 31, 1997, net interest
income was $11.4 million, an increase of $2.1 million, or 22.4%, over the same
period in 1996. This increase was primarily attributable to higher loan volumes.
Average earning assets were $50.5 million, or 20.1% higher, and average
interest-bearing liabilities were $40.3 million, or 19.1% higher than the
comparable period a year earlier. The net interest margin increased 7 basis
points, or 1.8% from 3.80% in 1996 to 3.87% in 1997 due mainly to higher yields
earned on the loan portfolio.
Interest Income. Loans. Income on commercial loans was $9.6 million for
1997 compared to $7.5 million for 1996, an increase of $2.1 million, or 27.9%.
Income from residential mortgage loans was $8.2 million compared to $6.4
million, an increase of $1.8 million, or 28.5%, and income from home equity and
other loans was $1.2 million compared to $810,000, an increase of $369,000, or
45.6%, for the same periods, respectively. These increases in interest income
are due to higher average balances, and, to a lesser extent, higher yields. The
average balances of commercial and residential mortgage loans during 1997
increased $21.2 million, or 26.9%, and $23.8 million, or 27.3%, respectively,
compared to 1996. The average balance of home equity and other loans increased
$4.7 million, or 47.6%. The yield on commercial loans increased 7 basis points,
or 0.7%, the yield on residential mortgage loans increased 7 basis points, or
1.0%, and the yield on home equity loans increased 4 basis points, or 0.5%
compared to the prior year.
Interest Income. Cash and Investments. Total cash and investment income
decreased to $3.8 million during 1997 compared to $4.0 million during 1996. This
decrease in cash and investment income of $224,000, or 5.5%, was primarily
attributable to a 5.9% decrease in the average yield from 5.79% for 1996 to
5.45% for 1997.
Interest Expense. Interest paid on deposits and borrowings increased $2.0
million, or 20.9%, to $11.3 million for 1997, from $9.4 million for 1996. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $40.3 million, or 19.1%,
between the two periods. The overall cost of interest-bearing liabilities
increased 6 basis points, or 1.4% from 4.44% for 1996 to 4.50% for 1997.
Provision for Loan Losses. The provision for loan losses was $810,000 for
1997 compared to $619,000 for 1996. Management frequently evaluates several
factors, including the risk characteristics of the loan portfolio, actual and
estimated charge-offs, and new loan originations, when determining the provision
for loan losses. The Company's ratio of loan loss allowance to total loans was
1.32% at December 31, 1997 and 1.25% at December 31, 1996. Also see discussion
under "Risk Elements of the Loan Portfolio."
Fees and Other Income. Total fees and other income was $13.8 million for
1997 compared to $12.8 million for 1996. Investment management and trust fees
increased $2.2 million, or 19.8%, primarily as the result of an 18.9% increase
in the Company's average assets under management from $1.7 billion for 1996 to
$2.1 billion for 1997. In 1997, Westfield earned no performance fees as general
partner from the limited partnerships it manages, compared to $1.1 million of
fee income in 1996.
Operating Expense. Total operating expense for 1997 was $18.9 million. This
represents an increase of $4.1 million, or 27.8% as compared to 1996, however,
the 1997 expense includes a non-recurring charge of $1.5 million related to the
Westfield acquisition. An increase in salary expense of $1.8 million, or 18.2%,
and an increase in the remainder of operating expenses of $774,000, or 16.4%,
were primarily the result of the Company's growth, continuing investments in
technology, and expansion of leased premises.
Income Tax Expense. The Company recorded income tax expense of $1.9 million
in 1997 as compared to $1.2 million in 1996. The effective tax rate was 35.2%
and 18.1% in 1997 and 1996, respectively. The increase in tax expense is due to
the fact that Westfield was a tax-exempt S-Corporation prior to the date of
acquisition. If Westfield had been a fully taxable entity, the Company would
have incurred approximately $186,000, or $0.02 per share and $1.2 million, or
$0.12 per share of additional income tax expense in 1997 and 1996, respectively.
26
<PAGE> 28
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. For the year ended December 31, 1996, the Company's net income
increased $1.1 million, or 24.4%, to $5.5 million, or $0.55 per share, from $4.4
million, or $0.47 per share for the year ended December 31, 1995. The overall
increase in the Company's volume of earning assets resulted in a $1.8 million or
24.2% increase in net interest income from $7.5 million to $9.3 million, and the
increase in average assets under management resulted in an increase of $4.0
million, or 56.7%, in fees earned from investment management and trust services,
from $7.0 million during 1995 to $11.0 million during 1996.
Net Interest Income. For the year ended December 31, 1996, net interest
income was $9.3 million, an increase of $1.8 million, or 24.2%, over the same
period in 1995. This increase was primarily attributable to higher average loan
balances. 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 28 basis
points, or 7.9% from 3.52% in 1995 to 3.80% 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 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. Cash and Investments. Total cash and investment income
decreased to $4.0 million during 1996 compared to $4.7 million during 1995. This
decrease of $631,000, or 13.5%, was primarily attributable to a shift of assets
from investments to loans, resulting in 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%, 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 "Risk Elements of
the Loan Portfolio."
Fees and Other Income. Total fees and other income was $12.8 million for
1996 compared to $9.0 million for 1995, an increase of $3.8 million, or 42.1%.
Investment management and trust fees increased $4.0 million, or 56.7%, primarily
as the result of a 68.4% increase in the Company's average assets under
management from $1.0 billion for 1995 to $1.7 billion for 1996. Performance fees
earned by Westfield as managing general partner of two limited partnerships
decreased $182,000, or 13.8% to $1.1 million in 1996.
Operating Expense. Total operating expense for 1996 was $14.8 million,
compared to $11.4 million for 1995. An increase in salary expense of $2.5
million, or 32.2%, and an increase in the remainder of operating expenses of
$966,000, or 25.6%, were primarily the result of the Company's growth, and
expansion of leased premises.
Income Tax Expense. The Company recorded income tax expense of $1.2 million
for 1996, compared to $104,000 for 1995. During 1995, the Company utilized the
remainder of its 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. Westfield was a
tax-exempt S-Corporation in 1996 and 1995.
27
<PAGE> 29
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. Comprehensive income is
defined by the Statement as net income plus revenues, expenses, gains, and
losses that under generally accepted accounting principles are excluded from net
income. This Statement requires that an entity classify items of comprehensive
income by their nature in the financial statements, and display the accumulated
balance of comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position. The
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods is required for
comparative purposes. This Statement only affects presentation in the financial
statements, it will have no impact on the Company's results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". This Statement establishes standards for
the way that public entities report information about operating segments in
annual financial statements, and requires that selected information about
operating segments be reported in interim financial reports issued to
shareholders. Operating segments are components of an entity about which
separate financial information is available and is evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires that public entities report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It also requires reconciliation of the amounts disclosed for segments to
corresponding amounts in the consolidated financial statements. However, this
Statement does not require an entity to report information that is not prepared
for internal use if reporting it would be impracticable. The Statement is
effective for periods beginning after December 15, 1997. This Statement only
affects presentation in the financial statements, it will have no impact on the
Company's results of operations.
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.
YEAR 2000
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the year 2000. The approach of
the year 2000 presents a problem in that many computer programs have been
written using two digits rather than four to define the applicable year. Any of
the Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
internal system failure or miscalculation, and also creates risk for the Company
from third parties with whom the Company deals on financial transactions. The
Company has conducted a comprehensive review of its computer systems to identify
the systems that could be affected by the year 2000, and has developed an
implementation plan to resolve the issue. The Company believes that, with
modifications to existing software and conversions to new software, the year
2000 problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. The Company is not purchasing any
new software products or engaging in any new contracts unless the products and
counterparties are year 2000 compliant. Maintenance, testing, and modification
costs will be expensed as incurred, while the costs of new software products
will be capitalized and amortized over their useful lives. The Company does not
expect the amounts required to be expensed to resolve the year 2000 issue to
have a material effect on its financial position or results of operations.
28
<PAGE> 30
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 15, 1998
29
<PAGE> 31
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 12,361 $ 8,709
Federal funds sold 1,200 6,950
Investment securities available for sale (amortized cost of $36,740
and $26,738, respectively, Notes 3, 10 and 11) 36,776 26,637
Investment securities held to maturity (market value of $9,678
and $6,384, respectively, Notes 3, 10 and 11) 9,654 6,387
Mortgage-backed securities held to maturity (market value of $18,141
and $25,258, respectively, Notes 4 and 11) 18,123 25,289
Loans receivable (Notes 5 and 11):
Commercial 134,685 97,740
Residential mortgage 124,865 96,578
Home equity 16,969 11,481
Other 306 308
-------- --------
Total loans 276,825 206,107
Less allowance for loan losses (Note 6) (3,645) (2,566)
-------- --------
Net loans 273,180 203,541
Stock in the Federal Home Loan Bank of Boston (Note 11) 3,511 3,317
Other real estate owned (Note 7) 85 85
Premises and equipment, net (Note 8) 2,857 1,927
Excess of cost over net assets acquired, net 3,746 4,068
Management fees receivable 2,750 2,499
Accrued interest receivable 2,169 1,745
Other assets 2,530 2,725
-------- --------
Total assets $368,942 $293,879
======== ========
LIABILITIES:
Deposits (Note 9) $258,301 $209,302
Securities sold under agreements to repurchase (Note 10) 5,366 8,126
Federal funds purchased 13,255 --
FHLB borrowings (Note 11) 60,226 45,533
Other short-term borrowings 837 1,035
Accrued interest payable 609 348
Other liabilities 4,413 3,734
-------- --------
Total liabilities 343,007 268,078
-------- --------
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: 10,641,100 shares in
1997 and 10,321,456 shares in 1996 10,641 10,321
Additional paid-in capital 12,140 11,991
Retained earnings 3,800 4,400
Stock subscriptions receivable (669) (847)
Unrealized gain (loss) on securities available for sale, net (Note 3) 23 (64)
-------- --------
Total stockholders' equity 25,935 25,801
-------- --------
Total liabilities and stockholders' equity $368,942 $293,879
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest and dividend income:
Commercial loans $ 9,567 $ 7,482 $ 5,871
Residential mortgage loans 8,168 6,358 4,730
Home equity and other loans 1,179 810 679
Investment securities 1,834 1,799 2,148
Mortgage-backed securities 1,351 1,758 2,012
FHLB stock dividends 215 212 234
Federal funds sold 220 110 204
Deposits in banks 194 159 71
---------- ---------- ----------
Total interest and dividend income 22,728 18,688 15,949
---------- ---------- ----------
Interest expense:
Savings and NOW 353 343 407
Money market 3,776 2,990 2,046
Certificates of deposit 3,705 3,070 3,102
Federal funds purchased 293 146 91
Securities sold under agreements to repurchase 322 336 324
FHLB borrowings 2,852 2,426 2,430
Other short-term borrowings 33 66 51
---------- ---------- ----------
Total interest expense 11,334 9,377 8,451
---------- ---------- ----------
Net interest income 11,394 9,311 7,498
Provision for loan losses (Note 6) 810 619 618
---------- ---------- ----------
Net interest income after provision for loan losses 10,584 8,692 6,880
---------- ---------- ----------
Fees and other income:
Investment management and trust 13,199 11,022 7,034
Equity in earnings of partnerships -- 1,139 1,321
Deposit account service charges 225 156 134
Gain on sale of loans 95 112 80
Gain on sale of investment securities (Note 3) 10 33 237
Other 255 369 224
---------- ---------- ----------
Total fees and other income 13,784 12,831 9,030
---------- ---------- ----------
Operating expense:
Salaries and employee benefits (Note 13) 11,935 10,097 7,638
Occupancy (Note 8) 1,014 661 535
Equipment 604 469 338
Professional services 1,378 1,418 1,053
Marketing 346 375 272
Business development 477 434 376
Amortization of intangibles (Note 2) 322 322 156
Merger expenses 1,510 -- --
Other (Note 14) 1,365 1,053 1,036
---------- ---------- ----------
Total operating expense 18,951 14,829 11,404
---------- ---------- ----------
Income before income taxes 5,417 6,694 4,506
Income tax expense (Note 12) 1,909 1,216 104
---------- ---------- ----------
Net income $ 3,508 $ 5,478 $ 4,402
========== ========== ==========
Per share data (Note 2):
Basic earnings per share $ 0.33 $ 0.57 $ 0.48
========== ========== ==========
Diluted earnings per share $ 0.32 $ 0.55 $ 0.47
========== ========== ==========
Average common shares outstanding 10,590,000 9,597,000 9,191,000
========== ========== ==========
Average diluted shares outstanding 10,960,000 9,880,000 9,394,000
========== ========== ==========
Proforma information:
Net income $ 3,508 $ 5,478 $ 4,402
Proforma adjustment for income taxes of acquired entity
previously filing as an S Corporation 186 1,233 1,063
---------- ---------- ----------
Proforma net income after adjustment for income taxes $ 3,322 $ 4,245 $ 3,339
========== ========== ==========
Proforma basic earnings per share $ 0.31 $ 0.44 $ 0.36
========== ========== ==========
Proforma diluted earnings per share $ 0.30 $ 0.43 $ 0.36
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 33
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED UNREALIZED
ADDITIONAL EARNINGS GAIN (LOSS)
COMMON PAID-IN (ACCUMULATED) TREASURY STOCK ON
STOCK CAPITAL DEFICIT STOCK SUBSCRIPTIONS INVESTMENTS TOTAL
------ ---------- ------------ -------- ------------- ----------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 9,141 $ 8,283 $(2,353) $(45) $ -- $ (144) $ 14,882
Net income -- -- 4,402 -- -- -- 4,402
Proceeds from issuance of
166,667 shares of common stock 167 430 -- -- -- -- 597
Issuance of stock subscriptions -- 74 -- -- (85) -- (11)
S-Corporation dividends paid -- -- (1,233) -- -- -- (1,233)
Change in unrealized gain
(loss) on securities available
for sale, net -- -- -- -- -- 263 263
------- ------- ------- ---- ----- ------- --------
Balance at December 31, 1995 9,308 8,787 816 (45) (85) 119 18,900
Net income -- -- 5,478 -- -- -- 5,478
Proceeds from issuance of
990,904 shares of common stock 991 2,372 -- -- -- -- 3,363
Stock options exercised 22 45 -- 45 -- -- 112
Issuance of stock subscriptions -- 787 -- -- (762) -- 25
S-Corporation dividends paid -- -- (1,894) -- -- -- (1,894)
Change in unrealized gain
(loss) on securities
available for sale, net -- -- -- -- -- (183) (183)
------- ------- ------- ---- ----- ------- --------
Balance at December 31, 1996 10,321 11,991 4,400 -- (847) (64) 25,801
Net income -- -- 3,508 -- -- 3,508
Proceeds from issuance of
290,691 shares of common stock 291 107 -- -- -- -- 322
Stock options exercised 29 42 -- -- -- -- 147
Stock subscription payments -- -- -- -- 178 -- 178
S-Corporation dividends paid -- -- (4,108) -- -- -- (4,108)
Change in unrealized gain
(loss) on securities available
for sale, net -- -- -- -- -- 87 87
------- ------- ------- ---- ----- ------- --------
Balance at December 31, 1997 $10,641 $12,140 $ 3,800 $ -- $(669) $ 23 $ 25,935
======= ======= ======= ==== ===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,508 $ 5,478 $ 4,402
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,034 694 587
Deferred compensation (1,466) 193 351
Early extinguishment of indebtedness -- -- (65)
(Gain) loss on sale of securities (10) (33) (237)
Gain on sale of loans (95) (112) (80)
Loss on disposal of property and equipment 10 14 --
Provision for loan losses 810 619 618
Payments received on other real estate owned -- -- 20
Loans originated for sale (8,419) (12,976) (2,584)
Proceeds from sale of loans 8,514 13,088 2,664
(Increase) decrease in accrued interest receivable (424) (51) (242)
(Increase) decrease in deferred income tax asset, net (37) 25 (259)
(Increase) decrease in other assets (1,052) (1,115) (637)
Increase (decrease) in accrued interest payable 261 (160) 166
Increase (decrease) in other liabilities 2,145 1,148 342
-------- -------- --------
Net cash provided by operating activities 4,779 6,812 5,046
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold 5,750 (6,450) 6,700
Investment securities available for sale:
Purchases (25,283) (38,371) (47,503)
Sales 650 18,702 33,654
Maturities 14,440 15,200 13,900
Investment securities held to maturity:
Purchases (8,252) (3,384) --
Maturities 5,000 9,775 6,750
Mortgage-backed securities held to maturity:
Principal payments 7,130 6,622 3,235
Purchase of FHLB stock (194) -- --
Distributed (undistributed) earnings of partnership investments 1,089 89 (1,322)
Capital contribution for partnership investment (94) -- --
Net increase in loans (70,631) (50,964) (44,193)
Recoveries on loans previously charged-off 309 71 153
Sales of other real estate owned -- 360 --
Capital expenditures, net of sale proceeds (1,553) (1,088) (661)
Acquisition of investment management business (1,051) (1,048) (2,372)
-------- -------- --------
Net cash used in investing activities (72,690) (50,486) (31,659)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 48,999 30,417 33,970
Net increase (decrease) in repurchase agreements (2,760) 4,328 (2,543)
Net increase (decrease) in federal funds purchased 13,255 -- --
Net increase (decrease) in other short-term debt 837 -- --
Proceeds from FHLB borrowings 52,125 79,800 39,078
Repayments of FHLB borrowings (37,432) (72,410) (39,818)
S-corporation dividends paid (4,107) (2,670) (458)
Proceeds from stock subscriptions receivable 178 25 624
Proceeds from issuance of common stock, net 468 3,475 597
-------- -------- --------
Net cash provided by financing activities 71,563 42,965 31,450
-------- -------- --------
(Continued)
</TABLE>
33
<PAGE> 35
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Continued)
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net increase (decrease) in cash and due from banks 3,652 (709) 4,837
Cash and due from banks at beginning of year 8,709 9,418 4,581
------- ------ ------
Cash and due from banks at end of year $12,361 $8,709 $9,418
======= ====== ======
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest $11,051 $9,471 $8,234
Cash paid for income taxes 1,224 934 264
Non-cash transactions:
Transfers to other real estate owned -- 200 --
Change in unrealized gain (loss) on securities
available for sale, net of estimated income taxes 87 (183) 263
Transfer to securities available for sale during
SFAS 115 `open window' -- -- 2,117
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Boston Private Bancorp, Inc. (the "Company") is a holding company which
owns all of the issued and outstanding shares of common stock of Boston Private
Bank & Trust Company (the "Bank"), a Massachusetts chartered trust company, and
Westfield Capital Management Company Inc. ("Westfield"). On October 31, 1997,
the Company acquired Westfield, a Massachusetts corporation engaged in providing
a range of investment management services to individual and institutional
clients, in exchange for 3,918,367 newly issued shares of the Company's common
stock. The acquisition was accounted for as a "pooling of interests".
Accordingly, the current and prior period results of operations of the Company
have been restated to reflect the results of operations on a consolidated basis.
On July 31, 1995, the Company acquired substantially all of the assets and
assumed certain liabilities of an investment management business for a total
purchase price of approximately $4.2 million, of which $2.1 million, consisting
of $1.5 million in cash and 166,667 shares of the Company's common stock, was
paid at closing. In each of January and July 1996 and 1997, the Company made
additional scheduled payments consisting of $375,000 in cash and 41,667 shares
of the Company's common stock. The acquisition was accounted for as a purchase.
Accordingly, the results of operations of the acquired business have been
included with those of the Company subsequent to the date of acquisition. The
Company conducts substantially all of its business through its wholly-owned
subsidiaries, the Bank and Westfield.
The 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 invested substantially all of the proceeds of the $3.4 million of
additional equity capital received from a Common Stock Offering in the Bank.
Westfield serves the investment management needs of high net worth
individuals and institutions with endowments or retirement plans in the greater
Boston area, New England, and other areas of the U.S. It also acts as the
managing general partner for two limited partnerships. One of the partnerships
invests primarily in technology stocks, and the other invests primarily in small
capitalization equities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to prevailing industry practices. The
following is a summary of the significant accounting and reporting policies used
by management in preparing and presenting the consolidated financial statements.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Bank and Westfield. The Bank's
consolidated financial statements include the accounts of its wholly-owned
subsidiaries, BPB Securities Corporation, and Boston Private Asset Management
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from those estimates.
35
<PAGE> 37
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 prior years consolidated financial statements have been
reclassified to conform with the current year's presentation.
Statement of Cash Flows
For purposes of reporting cash flows, the Company considers cash and due
from banks to be cash equivalents. Cash flows relating to short term investments
with original maturities of less than 90 days, loans, and deposits are presented
net in the statements of cash flows.
Cash and Due From Banks
The Bank is required to maintain average reserve balances in a non-interest
bearing account with the Federal Reserve Bank based upon a percentage of certain
deposits. As of December 31, 1997, the daily amount required to be held was $1.2
million.
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are classified as held to
maturity, available for sale, or trading. Securities 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
Impaired loans are loans for which it is probable that the Company will not
be able to collect all amounts due according to the contractual terms of the
loan agreements. Impaired loans are accounted for at the present value of the
expected future cash flows discounted at the loan's effective interest rate,
except those loans that are accounted for at fair value or at the lower of cost
or fair value. At December 31, 1997 and 1996 the amount of impaired loans was
immaterial.
Loans on which the accrual of interest has been discontinued are designated
nonaccrual loans. Accrual of interest income on loans is discontinued when
concern exists as to the collectibility of principal or interest. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period income. Loans are removed from nonaccrual
status when they become less than ninety days past due and when concern no
longer exists as to the collectibility of principal or interest. Interest
received on nonaccruing loans is either applied against principal or reported as
income according to management's judgment as to the collectibility of principal.
36
<PAGE> 38
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 June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" which was
adopted by the Company effective January 1, 1997. 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 adoption of SFAS 125 did not have a
material impact on the Company's 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.
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 or losses are realized in the consolidated
statement of operations upon final disposition of the respective properties.
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
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization is computed primarily by the
straight-line method over the estimated useful lives of the assets, or the terms
of the leases if shorter.
37
<PAGE> 39
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 company
generated additions to intangible assets of $4.3 million. Accumulated
amortization amounted to $1,085,000, $763,000, and $441,000 at December 31,
1997, 1996 and 1995, respectively.
Investment Management and Trust Assets
Investment management and trust assets amounted to $2.2 billion and $1.9
billion at December 31, 1997 and 1996, respectively. These assets are not
included in the consolidated financial statements because they are held in a
fiduciary or agency capacity and are not assets of the Company.
Employee Benefits
The Company maintains a Section 401(k) savings plan for employees of the
Company and the Bank. Under the plan, the Company makes a matching contribution
of one-half of the amount contributed by each participating employee, up to 6%
of the employee's yearly salary. The Company's contributions are charged against
current operations in the year made.
The Company maintains a defined contribution profit-sharing plan for the
employees of Westfield. The annual contribution to the plan is determined by the
Board of Directors of Westfield. The Company has contributed $288,000, $258,000,
and $235,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
Effective January 1, 1996, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation,". 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.
38
<PAGE> 40
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS 128, "Earnings Per
Share". This Statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. This Statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, "Earnings
Per Share", and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS,
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures, and requires a
reconciliation of the numerator and the denominator of the basic EPS calculation
to the numerator and the denominator of the diluted EPS calculation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. This statement is effective for periods ending
after December 15, 1997, and requires restatement of all prior periods
presented.
The following table is a reconciliation of the numerators and denominators
of basic and diluted earnings per share computations for the years ended
December 31.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- -------------------------- --------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income $3,508 10,590 $0.33 $5,478 9,597 $0.57 $4,402 9,191 $0.48
===== ===== =====
EFFECT OF DILUTIVE
SECURITIES
Stock Payable -- 23 -- 106 -- 70
Stock Options -- 347 -- 177 -- 133
----------------- --------------- ----------------
DILUTED EPS
-------------------------- ------------------------- -------------------------
Net Income $3,508 10,960 $0.32 $5,478 9,880 $0.55 $4,402 9,394 $0.47
========================== ========================= =========================
</TABLE>
39
<PAGE> 41
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
--------------------------------------- -------------------------------------
Unrealized Unrealized
Amortized --------------- Market Amortized ---------------- Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ----- ------ ------ --------- ----- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1997
U.S. Government and agencies $17,589 $12 $ (18) $17,583 $4,654 $ 2 $ -- $4,656
Municipal bonds 19,151 42 -- 19,193 5,000 22 -- 5,022
-------------------------------------- -----------------------------------
Total $36,740 $54 $ (18) $36,776 $9,654 $24 $ -- $9,678
====================================== ===================================
AT DECEMBER 31, 1996
U.S. Government and agencies $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
====================================== ===================================
The following table sets forth the maturities of investment securities at
December 31, 1997 and the weighted average yields of such securities:
<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
agencies $ 7,601 $ 7,595 5.65% $ 2,988 $ 2,984 5.67% $7,000 $7,003 7.22%
Municipal bonds 4,369 4,374 3.72 13,072 13,098 4.33 1,710 1,722 4.49
----------------- ----------------- ----------------
Total $11,970 $11,969 4.95% $16,060 $16,082 4.58% $8,710 $8,725 6.68%
========================== ========================== ========================
HELD TO MATURITY:
U.S. Government and
agencies $ 4,003 $ 4,004 5.48% $ 650 $ 652 5.68% $ -- $ -- --
Municipal bonds 1,156 1,158 4.98 3,845 3,864 3.91 -- -- --
----------------- ----------------- ----------------
Total $ 5,159 $ 5,162 5.37% $ 4,495 $ 4,516 4.17% $ -- $ -- --%
========================== ========================== ========================
</TABLE>
The weighted average remaining life of investment securities available for
sale and held to maturity at December 31, 1997 is 1.69 years and .39 years,
respectively. As of December 31, 1997, approximately $9.0 million of securities
available for sale and $200,000 of securities held to maturity were callable
before maturity.
The following table presents the sale of investment securities with the
resulting realized gains, losses, and net proceeds from such sales:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost of securities sold $640 $18,669 $33,417
Gains realized on sales 10 38 237
Losses realized on sales -- (5) --
---- ------- -------
Net proceeds from sales $650 $18,702 $33,654
==== ======= =======
</TABLE>
40
<PAGE> 42
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
-----------------------------------------
Unrealized
Amortized ---------------- Market
Cost Gains Losses Value
-----------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1997
FIXED RATE:
FHLMC $ 5,646 $ -- $ (84) $ 5,562
FNMA 2,616 1 (55) 2,562
ADJUSTABLE RATE:
FNMA 379 1 -- 380
GNMA 9,482 155 -- 9,637
------------------------------------------
Total $18,123 $157 $(139) $18,141
==========================================
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
==========================================
</TABLE>
The following table sets forth the maturities of mortgage-backed securities
at December 31, 1997 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 $3,992 $3,913 6.17% $ 688 $ 685 6.20% $ 965 $ 963 5.71%
FNMA -- -- -- 2,310 2,255 6.19% 307 308 5.67
ADJUSTABLE RATE:
FNMA -- -- -- -- -- -- 379 380 6.02
GNMA -- -- -- -- -- -- 9,482 9,637 6.43
---------------- ---------------- ------------------
Total $3,992 $3,913 6.17% $2,998 $2,940 6.19% $11,133 $11,288 6.33%
========================= ========================= ===========================
</TABLE>
These securities have final maturities ranging from 1 to 26 years. The
weighted average remaining life of mortgage-backed securities is 17.1 years.
Expected maturities will differ from contractual maturities because borrowers
may repay obligations without prepayment penalties.
41
<PAGE> 43
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 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, 1997, the Company had $54.5 million of fixed rate loans and $222.3 million
of variable rate loans outstanding.
The Company's lending limit to any single borrower is limited by regulation
to approximately $4.9 million. The Bank had no relationships with an individual
borrower at December 31, 1997 which were in excess of the legal lending limit
established for Massachusetts state-chartered banks.
Loans serviced for others were $2.6 million and $3.9 million at December
31, 1997 and 1996, respectively.
Loans outstanding to executive officers and directors of the Company
aggregated $293,000 at December 31, 1997 and 1996. An analysis of the activity
of these loans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year $293 $303
Repayments -- (10)
---- ----
Balance at end of year $293 $293
==== ====
</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.
The following table presents a summary of risk elements within the loan
portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans $ 722 $ 976 $443
Loans past due 90 days or more,
but still accruing 25 - 194
------ ------ ----
Total nonperforming loans $ 747 $ 976 $637
====== ====== ====
Loans past due 30-89 days $1,632 $3,066 $304
</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 were subsequently renewed.
Management does not consider these loans to be includable in the past due
category.
42
<PAGE> 44
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $2,566 $1,942 $1,232
Provision for loan losses 810 619 618
Charge-offs (40) (66) (61)
Recoveries 309 71 153
------ ------ ------
Balance at end of year $3,645 $2,566 $1,942
====== ====== ======
The following table represents the allocation of the allowance for loan
losses as of the dates indicated:
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan category:
Commercial $3,143 $2,296 $1,686
Residential mortgage 312 241 237
Home equity and other 190 29 19
------ ------ ------
Total $3,645 $2,566 $1,942
====== ====== ======
(7) OTHER REAL ESTATE OWNED
The components of other real estate owned are as follows:
<CAPTION>
DECEMBER 31,
---------------
1997 1996
---- ----
(IN THOUSANDS)
Land $85 $85
--- ---
Total $85 $85
=== ===
</TABLE>
43
<PAGE> 45
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------------
USEFUL LIFE 1997 1996
----------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Leasehold improvements 5-9 Years $ 1,988 $ 1,287
Computer equipment 3-5 Years 1,016 750
Furniture and fixtures 5-7 Years 1,245 778
Office equipment 5-7 Years 292 220
------- -------
Subtotal 4,541 3,035
Less accumulated depreciation and amortization (1,684) (1,108)
======= =======
Total premises and equipment $ 2,857 $ 1,927
======= =======
</TABLE>
Depreciation and amortization expense was $624,000, $417,000, and $245,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$848,000, $594,000 and $523,000, respectively. In October 1994, the Company
executed a lease for new banking premises at Ten Post Office Square, Boston,
Massachusetts. 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 January 1996, Westfield executed a lease for 11,320 square feet of
office space at One Financial Center which expires in August 2001, and is
renewable for an additional five years. Approximately 13% of this space is
subleased to a tenant under a noncancellable operating lease which expires in
August 2001. Rental income from this sublease agreement was $47,000 for the
years ended December 31, 1997, 1996 and 1995.
In November 1997, the Bank executed a lease for a 6,216 square foot
building at 336 Washington Street, Wellesley, Massachusetts. This lease for this
office expires in October 2012, and contains three five year options for
renewal.
The Company is obligated for minimum rental payments under these
noncancellable operating leases. In accordance with the terms of these leases,
the Company is currently committed to minimum annual rent as follows:
<TABLE>
<CAPTION>
MINIMUM
LEASE PAYMENTS
--------------
(IN THOUSANDS)
<S> <C>
1998 $1,033
1999 1,055
2000 1,060
2001 961
2002 737
Thereafter 3,407
======
$8,253
======
</TABLE>
44
<PAGE> 46
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Demand deposits $ 36,848 $ 38,223
NOW 24,938 15,777
Savings 5,787 4,579
Money market 117,984 90,940
Certificates of deposit under $100,000 22,956 20,164
Certificates of deposit $100,000 or greater 49,788 39,619
-------- --------
Total $258,301 $209,302
======== ========
Certificates of deposit had the following schedule of maturities:
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Less than 3 months remaining $43,166 $39,826
3 to 6 months remaining 10,406 7,490
6 to 12 months remaining 10,084 4,855
More than 12 months remaining 9,088 7,612
------- -------
Total $72,744 $59,783
======= =======
</TABLE>
Interest expense on certificates of deposit greater than $100,000 was $2.4
million, $2.2 million, and $2.5 million for the years ended December 31, 1997,
1996, and 1995, respectively.
(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,
-------------------------------------
1997 1996 1995
---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Outstanding $ 5,366 $ 8,126 $3,798
Maturity date 1/98-3/98 1/97-3/97 1/96
Outstanding collateralized by U.S. Treasury
and related agency securities with:
Book value 5,400 8,173 3,825
Market value 5,402 8,182 3,834
Average outstanding for the year 7,032 7,120 6,893
Maximum outstanding at any month end 10,685 11,544 14,778
Weighted average rate at end of period 4.45% 4.52% 4.62%
Weighted average rate paid for the period 4.57% 4.72% 4.70%
</TABLE>
45
<PAGE> 47
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,
---------------------------------------------------
1997 1996
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 year $18,000 5.87% $14,000 5.74%
Over 1 year to 2 years 16,000 6.01 11,000 5.81
Over 2 years to 3 years 7,000 6.19 10,500 6.23
Over 3 years to 5 years 12,770 6.04 6,479 6.07
Over 5 years 6,456 6.31 3,554 6.34
------- -------
$60,226 6.03% $45,533 5.96%
======= ==== ======= ====
</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, 1997 were $33.4 million. The
Bank had additional short-term federal fund lines with the FHLB and
correspondent banks of $23.2 million at December 31, 1997. As of December 31,
1997, there were $13.3 million of 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, 1997, the Bank's FHLB
stock holdings were $3.5 million. The Bank's investment in FHLB stock is
recorded at cost, and is redeemable at par.
(12) INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal $1,254 $ 946 $ 335
State 370 245 28
------ ------ -----
Total current expense 1,624 1,191 363
------ ------ -----
Deferred expense (benefit):
Federal 202 11 214
State 23 14 9
Change in valuation reserve 60 -- (482)
------ ------ -----
Total deferred expense (benefit) 285 25 (259)
------ ------ -----
Total income tax expense (benefit) $1,909 $1,216 $ 104
====== ====== =====
</TABLE>
46
<PAGE> 48
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,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Benefit of S-Corporation status (4.2) (17.0) (20.1)
State income tax, net of Federal tax benefit 4.8 2.6 .5
Amortization of intangibles .2 .2 .3
Change in valuation allowance (10.7)
-- --
Tax exempt interest, net (5.8) (1.2) (2.0)
Merger expense 4.0
-- --
Other, net 2.2 (.5) .3
---- ---- ----
Effective federal income tax rate 35.2% 18.1% 2.3%
==== ==== ====
The components of gross deferred tax assets and gross deferred tax
liabilities are as follows:
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------ -----
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Allowance for losses on loans and real estate $ 964 $665
Depreciation 62 86
Organization costs 152 --
Pre-operating costs 104 104
Unrealized loss on securities available for sale -- 37
Other 46 34
------ ----
Gross deferred tax assets 1,328 926
Valuation allowance (60) --
------ ----
Total deferred tax assets 1,268 926
Gross deferred tax liabilities:
Net receivables acquired 602 --
Investment in partnerships 62 --
Unrealized gain on securities available for sale 13 --
------ ----
Total gross deferred tax liabilities 677 --
------ ----
Net deferred tax asset $ 591 $926
====== ====
</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
$1.7 million of future net taxable income to realize the net deferred tax asset
at December 31, 1997. 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.
47
<PAGE> 49
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") for the benefit of
employees at the Company and the Bank which qualifies as a tax exempt plan and
trust under Sections 401 and 501 of the Internal Revenue Code. Generally,
employees who are at least twenty-one (21) years of age and have completed one
year of service are eligible to participate in the Plan. Expenses associated
with the 401(k) plan were $100,000, $93,000 and $71,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Profit Sharing Plan
The Company maintains a Profit Sharing Plan (the "Plan") for the benefit of
employees of Westfield which qualifies as a tax exempt plan under Sections 401
of the Internal Revenue Code. Generally, employees who are at least twenty-one
(21) years of age and have completed one year of service are eligible to
participate in the Plan. Expenses associated with the profit sharing plan were
$288,000, $258,000 and $235,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
Stock Option Plans
The Company offers options on its common stock to officers, key employees,
and directors under an Incentive Stock Option Plan and a Directors' Stock Option
Plan. 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,
-------------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income:
As reported $3,508 $5,478 $4,402
Proforma 3,141 5,335 4,331
Basic earnings per share:
As reported $ 0.33 $ 0.57 $ 0.48
Proforma 0.30 0.56 0.47
Diluted earnings per share:
As reported $ 0.32 $ 0.55 $ 0.47
Proforma 0.29 0.54 0.46
</TABLE>
Under the 1997 Incentive Stock Option Plan, the Company may grant options
to its employees for an amount not to exceed 4% of the number of shares of
common stock outstanding as of the previous year-end. Under the Directors' Stock
Option Plan, the Company may grant options to its non-employee directors for up
to 200,000 shares of common stock. Under both plans, the exercise price of each
option equals the market value of the stock on the date the options are granted,
and all options expire ten years from the date granted. Generally, options vest
over a three year period under the 1997 Incentive Stock Option Plan, and options
are fully vested three years after the grant date. Under the Directors' Stock
Option Plan, options generally vest one year after the grant date.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995: expected volatility of 40% ;
expected life of 7 years; and risk-free interest rates of 5% in 1997, 6% in 1996
and 7% in 1995.
48
<PAGE> 50
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, 1997, 1996, and 1995, and changes during the years then ended are
presented below.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
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 550,202 $2.82 494,152 $2.58 393,402 $2.48
Granted 277,300 6.75 148,050 3.82 141,800 3.06
Exercised (29,250) 2.39 (40,075) 2.66 (187) 2.00
Canceled (800) 3.46 (51,925) 3.43 (40,863) 3.27
------- ------- -------
Options at end of year 797,452 $4.21 550,202 $2.82 494,152 $2.58
======= ===== ======= ===== ======= =====
Options exercisable at year end 481,727 $2.91 390,215 $2.53 277,777 $2.39
======= ===== ======= ===== ======= =====
Weighted average fair value of
options granted during the year $3.62 $2.03 $1.67
===== ===== =====
The following table summarizes information about fixed stock options
outstanding at December 31, 1997.
<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 $3.00 371,452 6.0 $2.44 356,077 $2.43
$3.50 to $4.00 98,400 8.1 3.64 56,100 3.67
$4.13 to $5.83 159,800 8.9 4.95 67,675 4.71
$6.00 to $7.00 42,000 9.5 6.18 1,875 7.00
$8.13 to $8.44 125,800 9.8 8.26 -- --
------- -------
$2.00 to $8.44 797,452 7.6 $4.21 481,727 $2.91
======= === ===== ======= =====
(14) OTHER OPERATING EXPENSE
Major components of other operating expense are as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Forms and supplies $ 293 $ 255 $ 291
Telephone 143 136 103
Training and education 116 83 49
Publications and subscriptions 96 57 23
Postage 85 99 71
Insurance 87 77 67
Other 545 346 432
------ ------ ------
Total $1,365 $1,053 $1,036
====== ====== ======
</TABLE>
49
<PAGE> 51
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,
-----------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans $16,472 $ 7,248
Unused lines of credit 54,101 35,111
Standby letters of credit 4,807 2,425
</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 estimated fair value amounts have been determined by using available
quoted market information or other appropriate valuation methodologies. The
aggregate fair value amounts presented do not represent the underlying value of
the Company taken as a whole.
The fair value estimates provided are made at a specific point in time,
based on relevant market information and the characteristics of the financial
instrument. The estimates do not provide for any premiums or discounts that
could result from concentrations of ownership of a financial instrument. Because
no active market exists for some of the Company's financial instruments, certain
fair value estimates are based on subjective judgments regarding current
economic conditions, risk characteristics of the financial instruments, future
expected loss experience, prepayment assumptions, and other factors. The
resulting estimates involve uncertainties and therefore cannot be determined
with precision. Changes made to any of the underlying assumptions could
significantly affect the estimates.
50
<PAGE> 52
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,
------------------------------------------------------
1997 1996
---------------------------- -----------------------
(IN THOUSANDS)
BOOK BOOK
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- ----- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 12,361 $ 12,361 $ 8,709 $ 8,709
Federal funds sold 1,200 1,200 6,950 6,950
Investment securities 46,430 46,454 33,024 33,021
Mortgage-backed securities 18,123 18,141 25,289 25,258
Stock in the Federal Home Loan Bank of Boston 3,511 3,511 3,317 3,317
Loans receivable (net of allowance for loan losses):
Commercial 131,542 134,642 95,444 95,926
Residential mortgage 124,553 125,263 96,337 95,355
Home equity and other 17,085 17,085 11,760 11,760
Accrued interest receivable 2,169 2,169 1,745 1,745
LIABILITIES:
Deposits:
Demand deposits 36,848 36,848 38,223 38,223
NOW 24,938 24,938 15,777 15,777
Savings 5,787 5,787 4,579 4,579
Money market 117,984 117,984 90,940 90,940
Certificates of deposit under $100,000 22,956 23,114 20,164 20,208
Certificates of deposit $100,000 or more 49,788 49,845 39,619 39,647
Securities sold under agreements to repurchase 5,366 5,366 8,126 8,126
FHLB borrowings 60,226 60,046 45,533 45,380
Other short-term borrowings 837 837 1,035 1,188
Accrued interest payable 609 609 348 348
</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 a third party pricing service.
51
<PAGE> 53
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.
Securities sold under agreements to repurchase
The carrying values reported in the balance sheet for repurchase agreements
approximate fair value because of the short-term nature of these instruments.
Other short-term borrowings
The fair value reported for other short-term borrowings is estimated based
on the discounted value of contractual cash flows. The discount rate used is
based on the Company's estimated current incremental borrowing rate for debt of
similar maturities.
Accrued interest receivable and payable
The carrying values for accrued interest receivable and payable approximate
fair value because of the short-term nature of these financial instruments.
Financial instruments with off-balance sheet risk
The Company's commitments to originate loans, and for unused lines and
outstanding letters of credit are primarily at market interest rates and
therefore there is no fair value adjustment.
52
<PAGE> 54
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(17) BOSTON PRIVATE BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash $ 115 $ 466
Investment in subsidiaries 25,677 25,329
Goodwill -- 298
Other assets 241 6
------- -------
Total assets $26,033 $26,099
======= =======
LIABILITIES:
Stock payable $ -- $ 298
Accounts payable 98 --
------- -------
Total liabilities 98 298
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 18,000,000 shares issued:
10,641,100 shares in 1997 and
10,321,456 shares in 1996 10,641 10,321
Additional paid-in capital 12,140 11,991
Retained earnings 3,800 4,400
Stock subscriptions receivable (669) (847)
Unrealized gain (loss) on securities
available for sale, net 23 (64)
------- -------
Total stockholders' equity 25,935 25,801
------- -------
Total liabilities and stockholders' equity $26,033 $26,099
======= =======
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME:
Interest on cash in banks $ 11 $ 11 $ 10
Dividends from subsidiaries 600 -- --
------ ------ ------
Total income 611 11 10
------ ------ ------
EXPENSES:
Other expenses 126 24 22
Merger expenses 1,021 -- --
------ ------ ------
Total expenses 1,147 24 22
------ ------ ------
Loss before income taxes (536) (13) (12)
Income tax benefit (229) (6) --
------ ------ ------
Loss before equity in undistributed
earnings of subsidiaries (307) (7) (12)
Equity in undistributed earnings of subsidiaries 3,815 5,485 4,414
------ ------ ------
NET INCOME $3,508 $5,478 $4,402
====== ====== ======
</TABLE>
53
<PAGE> 55
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,508 $ 5,478 $ 4,402
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed earnings of subsidiaries (3,815) (5,485) (4,414)
(Increase) decrease in other assets (235) (6) --
Increase (decrease) in other liabilities 98 -- --
------- ------- -------
Total adjustments (3,952) (5,491) (4,414)
------- ------- -------
Net cash used in operating activities (444) (13) (12)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investment in subsidiary Bank (78) (3,063) (597)
------- ------- -------
Net cash used in investing activities (78) (3,063) (597)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 322 3,363 --
Proceeds from exercise of stock options 147 112 --
Increase (decrease) in common stock payable (298) (299) 597
------- ------- -------
Net cash provided by financing activities 171 3,176 597
------- ------- -------
Net increase (decrease) in cash (351) 100 (12)
Cash at beginning of year 466 366 378
------- ------- -------
Cash at end of year $ 115 $ 466 $ 366
======= ======= =======
</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 Company was
examined by the Federal Reserve Bank of Boston in September 1997.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
54
<PAGE> 56
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, 1997,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk based, Tier I risk based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
Actual capital amounts and regulatory capital requirements as of
December 31, 1997 and 1996 are presented in the tables below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
---------------- ----------------------------- -----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total risk-based capital
Company $25,000 11.07% $18,073 [greater than] 8.0% $22,590 [greater than] 10.0%
Bank 23,756 10.68% 17,788 [greater than] 8.0% 22,235 [greater than] 10.0%
Tier I risk-based
Company 22,166 9.81% 9,036 [greater than] 4.0% 13,554 [greater than] 6.0%
Bank 20,966 9.43% 8,894 [greater than] 4.0% 13,341 [greater than] 6.0%
Tier I leverage capital
Company 22,166 6.54% 13,554 [greater than] 4.0% 16,943 [greater than] 5.0%
Bank 20,966 6.28% 13,354 [greater than] 4.0% 16,693 [greater than] 5.0%
AS OF DECEMBER 31, 1996:
Total risk-based capital
Company $24,847 14.10% $14,098 [greater than] 8.0% $17,623 [greater than] 10.0%
Bank 20,911 12.17% 13,746 [greater than] 8.0% 17,183 [greater than] 10.0%
Tier I risk-based
Company 22,644 12.85% 7,049 [greater than] 4.0% 10,574 [greater than] 6.0%
Bank 18,758 10.92% 6,873 [greater than] 4.0% 10,310 [greater than] 6.0%
Tier I leverage capital
Company 22,644 7.83% 11,565 [greater than] 4.0% 14,456 [greater than] 5.0%
Bank 18,758 6.59% 11,393 [greater than] 4.0% 14,242 [greater than] 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.
55
<PAGE> 57
BOSTON PRIVATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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.
Notwithstanding the Court's dismissal of the underlying claims against the
Bank and its denial of the plaintiff's motion for reconsideration, litigation
continues among other parties. The time for an appeal by plaintiff has not yet
run because no judgment has been obtained for or against the other defendants
remaining in the case. The Bank continues to believe it has valid defenses to,
and will vigorously defend, all claims and allegations of wrongdoing in
connection with the transaction. The Company has previously incurred legal
expenses of approximately $15,000 net of recoveries under an insurance policy.
No further estimate of any loss can be made at this time.
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
56
<PAGE> 58
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1998 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.
ITEM 13. EXHIBITS, LISTS, 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
Organization and the By-Laws of the Company
set forth in Exhibits 3.1 and 3.2 to Form........... --
8-K.
10.1 Employee Incentive Stock Option Plan
incorporated herein by reference to Exhibit
10.5 to the Company's Registration Statement
on Form S-1 filed with the Commission on
April 1, 1991 (33-39690) (the "Form S-1").+......... --
10.2 Employee Incentive Compensation Plan
incorporated herein by reference to Exhibit
10.6 to the Form S-1................................ --
10.3 Directors' Stock Option Plan adopted May 26,
1993 as amended March 15, 1995 incorporated
herein by reference to Exhibit 10.3 to the
Company's Form 10-KSB for the fiscal year
ended December 31, 1996 filed with the
Commission on March 25, 1997........................ --
10.4 Employment Agreement dated January 1, 1996
by and among the Company, the Bank and
Timothy L. Vaill.+.................................. --
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....................................... --
10.7 Agreement and Plan of Merger dated August 13,
1997, by and among the Company, Boston Private
Investment Management Inc., and the stockholders
of Westfield, incorporated by reference to the
Company's current report on Form 8-K filed with
the Commission on August 21, 1997................... --
57
<PAGE> 59
10.8 Employment agreement dated August 13, 1997
by and among the Company, Westfield, and
Arthur J. Bauernfeind.*+............................... 61
10.9 Employment agreement dated August 13, 1997
by and among the Company, Westfield, and
C. Michael Hazard.*+ .................................. 81
21 Subsidiaries of the Company incorporated
herein by reference to Exhibit 22.0 to Form S-1........ --
23.1 Independent Auditors' Consent.* ....................... 101
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on November 14, 1997,
reporting the acquisition of Westfield Capital Management, Inc.,
and filing certain financial statements of Westfield.
* Filed herewith.
58
<PAGE> 60
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 27th day of
February, 1998.
Boston Private Bancorp, Inc.
By: /s/ Timothy L. Vaill
-------------------------------------
Timothy L. Vaill
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Walter M. Pressey
-------------------------------------
Walter M. Pressey
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities on the date indicated.
/s/ Charles O. Wood, III Chairman of the Board February 27, 1998
- ----------------------------
Charles O. Wood, III
/s/ Herbert S. Alexander Director February 27, 1998
- ----------------------------
Herbert S. Alexander
/s/ John M. Barry Director February 27, 1998
- ----------------------------
John M. Barry
/s/ Arthur J. Bauernfeind Director February 27, 1998
- ----------------------------
Arthur J. Bauernfeind
/s/ Eugene S. Colangelo Director February 27, 1998
- ----------------------------
Eugene S. Colangelo
59
<PAGE> 61
Michael S. Davis Director February 27, 1998
- ----------------------------------
Michael S. Davis
/s/ C. Michael Hazard Director February 27, 1998
- ----------------------------------
C. Michael Hazard
/s/ Lynn Thompson Hoffman Director February 27, 1998
- ----------------------------------
Lynn Thompson Hoffman
/s/ E. Christopher Palmer Director February 27, 1998
- ----------------------------------
E. Christopher Palmer
/s/ Robert A. Radloff Director February 27, 1998
- ----------------------------------
Robert A. Radloff
/s/ Dr. Allen Sinai Director February 27, 1998
- ----------------------------------
Dr. Allen Sinai
/s/ Timothy L. Vaill Director February 27, 1998
- ----------------------------------
Timothy L. Vaill
60
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 13th day of August, 1997, by and
among Arthur J. Bauernfeind, an individual (the "Employee"), Westfield Capital
Management Company, Inc., a Massachusetts corporation ("Westfield") and Boston
Private Bancorp, Inc., a Massachusetts corporation ("BPB").
WHEREAS, simultaneously with execution and delivery of this Agreement BPB,
Boston Private Investment Management, Inc. ("BPIM"), Westfield and all of the
stockholders of Westfield have entered into an Agreement and Plan of Merger (the
"Acquisition Agreement") dated as of the date hereof;
WHEREAS, BPB has adopted the Boston Private Bancorp, Inc. 1997 Long-Term
Stock Incentive Plan (the "Stock Plan"), providing, among other things, for the
grant to employees of BPB or certain of its affiliates (i) shares (the
"Restricted Stock") of BPB common stock, par value $1.00 per share (the "Common
Stock"), and (ii) options (the "Options") to purchase from BPB shares of Common
Stock;
WHEREAS, Westfield, BPIM and BPB desire to have the benefit of the
Employee's services after the closing of the transactions contemplated by
the Acquisition Agreement (the "Closing"); and
WHEREAS, the parties desire to set forth the terms and conditions under
which the Employee shall be employed by Westfield and upon which Westfield shall
compensate the Employee following the Closing.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Westfield, BPB and the Employee agree as follows:
61
<PAGE> 2
ARTICLE I
EMPLOYMENT
1.1 OFFICE; EFFECTIVENESS. Westfield hereby employs, engages and hires
the Employee, and the Employee agrees to serve Westfield as President, Chief
Operating Officer, Investment Strategist and Portfolio Manager. This Agreement
and the commencement of the Employee's employment hereunder shall become
effective at the time of the Closing.
1.2 RESPONSIBILITIES. The Employee shall serve as President, Chief
Operating Officer, Investment Strategist and Portfolio Manager of Westfield,
subject to the direction and supervision of the Board of Directors of Westfield
(the "Westfield Board"). Employee will report directly to the Westfield CEO (as
hereafter defined).
1.3 FULL-TIME COMMITMENT. The Employee hereby accepts such employment
hereunder, and agrees that he will devote all of his working time, attention,
knowledge, and skills, faithfully, diligently, and to the best of his ability in
furtherance of the business of Westfield and as otherwise reasonably necessary
to such employment. During the term of his employment hereunder, the Employee
will not, without the prior written approval of the Chief Executive Officer of
Westfield (the "Westfield CEO") and the Chief Executive Officer of BPB (the "BPB
CEO"), accept employment or compensation from or perform services of any nature
for any business enterprise other than Westfield or one of its Affiliates. As
used herein the term "Affiliate" means any corporation, partnership or other
entity that directly or indirectly through one or more intermediaries, controls,
is controlled by or is under common control with the person specified.
62
<PAGE> 3
ARTICLE II
TERM OF EMPLOYMENT
2.1 TERM. The employment of the Employee pursuant to the terms hereof
shall commence as of the Closing and remain in effect for an initial term
expiring on the 5th anniversary of the Closing (the "Initial Term") unless
sooner terminated pursuant to the provisions hereof. The term of employment
hereunder may be extended upon the mutual agreement of the parties hereto. Upon
any extension of the term hereof, employment of the Employee hereunder shall
continue for the extended term unless terminated pursuant to the provisions
hereof. Such employment term in effect at any given time (without giving effect
to any termination pursuant to the provisions hereof) is referred to herein as
the "Term".
ARTICLE III
COMPENSATION OF EMPLOYEE
3.1 SALARY AND BONUS. As full compensation for his services hereunder,
Westfield will pay to the Employee the following:
(i) an annual base salary equal to $350,236.04; and
(ii) commencing with fiscal year ending December 31, 1998, an
annual performance fee share bonus payable not later than 90 days after the
fiscal year end representing the Employees' allocation of the annual
limited partnership bonus pool of Westfield for the fiscal year just ended.
The limited partnership bonus pool shall be determined by the Westfield CEO
and approved by the Westfield Board in accordance with the procedures set
forth in the Supplemental Executive Compensation Memo. The Employee's
allocation of the
63
<PAGE> 4
limited partnership bonus pool for any year shall be a percentage
determined in respect of such year by the Westfield CEO and approved by the
Westfield Board.
3.2 RESERVED.
3.3 FUTURE RESTRICTED STOCK AND OPTIONS. The Employee shall be
entitled to participate in the Stock Plan as contemplated by the Supplemental
Executive Compensation Memo subject to and on a basis consistent with the terms,
conditions and overall administration of such Stock Plan.
3.4 BENEFITS: OTHER COMPENSATION. The Employee shall be entitled to
participate in the Westfield Profit Sharing Plan, as in effect on the date
hereof, and to such health, life, and disability insurance benefits, paid
vacation and other fringe benefits available to employees of Westfield from time
to time as contemplated by the Supplemental Executive Compensation Memo.
64
<PAGE> 5
3.5 EXPENSES. During the term of this Agreement, the Employee shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Employee in performing services hereunder, provided such expenses are
properly accounted for in accordance with BPB policy.
ARTICLE IV
TERMINATION
65
<PAGE> 6
4.1 DISCHARGE FOR CAUSE. The Employee may be terminated from his
employment by the Westfield CEO (or in the case of the Westfield CEO, the BPB
CEO) for Cause upon written notice. Discharge for Cause shall mean the
termination of such Employee's employment with Westfield by reason of any one or
more of the following events: (i) the charge or indictment of Employee of any
crime (whether or not involving Westfield) which constitutes a felony in the
jurisdiction involved, excluding driving while under the influence of alcohol or
drugs, (ii) such Employee's embezzlement or intentional misappropriation of any
property of Westfield, any Affiliate of Westfield or any clients of any of them
or the commission by such Employee of any other crime of moral turpitude, (iii)
the commission by such Employee of an act that would cause such Employee,
Westfield or any Affiliate of Westfield to be disqualified in any manner under
Section 9 of the Investment Company Act of 1940, as amended, if the Securities
and Exchange Commission (the "Commission") were not to grant an exemptive order
under Section 9(c) thereof (irrespective of whether such order is granted), that
would constitute grounds for the Commission to deny, revoke or suspend
registration of Westfield or any Affiliate thereof as an investment advisor,
broker/dealer or transfer agent with the Commission or that would constitute
grounds for any court, federal or state regulatory body or self-regulatory
organization to deny, revoke, suspend or limit the authority of Westfield or any
Affiliate thereof or the Employee to engage in any activity in or incidental to
the securities, commodities, banking or trust business, (iv) continued
insubordination or dereliction of duties after written notice specifying in
reasonable detail the nature of the insubordination or dereliction of duties and
an opportunity to cure of not less than 30 days have been given to such Employee
or (v) continued alcohol or other substance abuse or addiction that renders such
Employee incapable of satisfactorily performing his duties after written notice
and an opportunity to cure such condition have been given to such Employee.
4.2 RESIGNATION OR RETIREMENT. The Employee's employment hereunder
shall automatically terminate upon
66
<PAGE> 7
his Retirement during the Term. Retirement shall mean the termination by the
Employee of his full-time employment hereunder after reaching the age of 65, or
any Resignation of the Employee designated as Retirement by the Westfield CEO
with the approval of the Westfield Board (or in the case of the Westfield CEO,
by the BPB CEO). Resignation shall mean the termination of the Employee's
full-time employment with Westfield other than by reason of a Disabling Event
(as defined below), termination for Good Reason, Retirement, termination Without
Cause (as defined below) or Discharge for Cause.
4.3 DISABLING EVENT. In the event of a Disabling Event with respect to
the Employee, the Westfield CEO with the approval of the Westfield Board (or in
the case of the Westfield CEO, the BPB CEO) may terminate the Employee's
employment hereunder. Disabling Event shall mean the Employee's death or the
Employee's physical or mental disability, as certified by a physician
satisfactory to the Employee or his legal representative and to the Westfield
CEO with the approval of the Westfield Board (or in the case of the Westfield
CEO, the BPB CEO), which renders such Employee incapable of performing his
material duties and services as an employee of Westfield and which continues for
more than six consecutive months during any one-year period or more than twelve
months during any two-year period.
4.4 GOOD REASON. The Employee may terminate his employment hereunder
for Good Reason (as defined below) during the 60 day period after the occurrence
of the circumstances constituting Good Reason if the Employee has notified the
Westfield CEO and the BPB CEO in writing of the specific circumstances
constituting Good Reason and, in the case of a Diminished Responsibility, a
Westfield Breach or a Governance Event, during the 30 days following such
notification Westfield and BPB have failed to eliminate such Employee's Good
Reason. As used herein, the following events constitute "Good Reason":
(i) a material, adverse diminution, at a time when the Westfield
CEO (or in the case of the Westfield CEO, the BPB CEO)
67
<PAGE> 8
would not be entitled to terminate such Employee's employment hereunder for
Cause or as a result of a Disabling Event, of the Employee's title or
responsibilities from that which is in effect as of the effectiveness of
this Agreement, where the BPB CEO or BPB has requested such decision or
diminution (a "Diminished Responsibility");
(ii) any change in the business of Westfield after the
effectiveness of this Agreement or any request by Westfield relating to the
employment activities of Employee, as to which Employee gives written
notice of objection ("Notice of Objection") to the Westfield CEO and the
BPB CEO within 30 days of such change or request containing sufficient
detail to identify such change or request and the reason for the objection,
provided that a committee consisting of one person selected by the
Westfield CEO from the Westfield Board, the Westfield CEO and the BPB CEO
(a "Review Committee") finds within 15 days of the BPB CEO's receipt of
such Notice of Objection that such objection is sufficient to entitle
Employee to terminate his or her employment for Good Reason (an
"Operational Dispute") and fails to find on or before the 30th day after
the BPB CEO's receipt of such Notice of Objection that the change or
request constituting such Operational Dispute has been eliminated.
Decisions of the Review Committee shall be made by a majority of its
members (acting by written consent or at a meeting); provided, however,
that if a Review Committee shall have at any time during the 12 month
period prior to receipt by the BPB CEO of such Notice of Objection made a
determination that any employee of Westfield was entitled to terminate his
or her employment for Good Reason relating to an Operational Dispute
pursuant to this Section 4.4(ii), the finding of an Operational Dispute in
response to such Notice of Objection by Employee shall require the
unanimous
68
<PAGE> 9
consent of the members of the Review Committee. If all members of the
Review Committee are members of the Westfield Board, the Review Committee
shall operate as a Committee of the Westfield Board;
(iii) a material breach by Westfield or BPB of any of their
respective obligations to the Employee under this Agreement (a "Westfield
Breach"); or
(iv) (A) until the earlier to occur of the fifth anniversary
hereof or the date that Mr. C. Michael Hazard ceases to be an employee of
Westfield other than as a result of a termination Without Cause, BPB shall
fail to nominate Mr. C. Michael Hazard for election as a member of the
Board of Directors of BPB, (B) until the earlier to occur of the third
anniversary hereof or the date that the Employee ceases to be an employee
of Westfield, BPB shall fail to nominate the Employee for election as a
member of the Board of Directors of BPB, (C) commencing on the date that
the Employee ceases to be a member of the BPB Board of Directors and ending
on a date that is the earlier to occur of the fourth anniversary of such
date that the Employee ceases to be a member of the BPB Board of Directors
and the date that Mr. Michael Chapman ceases to be an em- ployee of
Westfield other than as a result of a termination Without Cause, BPB shall
fail to nominate Mr. Michael Chapman for election as a member of the Board
of Directors of BPB, (D) until the fifth anniversary hereof, BPB shall
cause a majority of the Westfield Board to be composed of persons who are
not at the time of election or appointment professional employees of
Westfield or (E) until the sixth anniversary hereof, BPB or the Westfield
Board shall cause the position of the Westfield CEO to be filled by any
person who is not a professional investment management employee of
Westfield (each of
69
<PAGE> 10
the foregoing events being referred to as a "Governance Event"), it being
understood and agreed that, notwithstanding that such action may result in
a Governance Event, the power to elect members of the Westfield Board and
the power to select and to terminate the Westfield CEO shall be vested
exclusively in the controlling stockholder of Westfield.
ARTICLE V
EFFECT OF TERMINATION
5.1 CAUSE, RESIGNATION, RETIREMENT OR DISABLING EVENT. (a) If the
Employee's employment is terminated (i) by Westfield (or in the case of the
Westfield CEO, the BPB CEO) by a Discharge for Cause, (ii) by the Employee by
his Resignation or (iii) by reason of Retirement or a Disabling Event, the
Employee's salary, bonus, and other benefits specified in Sections 3.1, 3.4 and
3.5 shall cease at the time of such termination except as provided in Section
5.1(b) below.
(b) If the Employee's employment is terminated by reason of Retirement or a
Disabling Event, the Employee shall be eligible for a bonus provided for in
Section 3.1 hereof for the year of termination. The bonus amount shall be
prorated for the period of employment during the applicable bonus period.
5.2 WITHOUT CAUSE; GOOD REASON. (a) If the Employee's employment is
terminated by Westfield (or in the case of the Westfield CEO, the BPB CEO) for
any reason other than those set forth in Section 5.1(a)(i) and (iii) ("Without
Cause"), (A) the Employee's salary provided for in Section 3.1 hereof and
benefits provided for in Section 3.4 hereof, other than profit sharing plan
participation, shall continue to be paid or provided to the Employee for the
remainder of the Term (the "Severance Period"), provided, however, that if the
Employee obtains employment of any kind during the Severance
70
<PAGE> 11
Period, (1) the amount payable to the Employee under this Section 5.2(a)(A)
shall be reduced by 50% of the total W-2 income received or deferred by the
Employee with respect to the Severance Period from such other employment,
provided, further, that the amount payable to Employee under this Section
5.2(a)(A) during the Severance Period shall not be reduced to less than 50% of
the Employee's salary provided for in Section 3.1 hereof multiplied by the
number of full and fractional years in the Severance Period and (2) the Employee
shall no longer be entitled to receive any benefits provided for in Section 3.4
hereof to the extent that substantially similar benefits are available to the
Employee from such other employment, (B) the Employee shall be eligible for a
bonus provided for in Section 3.1 hereof for the year of termination, prorated
for the period of employment during the applicable bonus period and (C) the
Employee shall be released from the restrictions of Section 6.5(a)(i). The
provisions of this Section 5.2(a) shall constitute the Employee's sole remedy in
the event of a termination Without Cause.
(b) (i) If the Employee's employment is terminated by the Employee for Good
Reason occasioned by Diminished Responsibility or Westfield Breach, (A) the
Employee's salary provided for in Section 3.1 hereof and benefits provided
for in Section 3.4 hereof, other than profit sharing plan participation,
shall continue to be paid or provided to the Employee for the shorter of
(x) the remainder of the Term and (y) the remainder of the Term less two
years (the "Good Reason Severance Period"), provided, however, that if the
Employee obtains employment of any kind during the Good Reason Severance
Period, (1) the amount payable to the Employee under this Section 5.2 shall
be reduced by 50% of the total W-2 income received or deferred by the
Employee with respect to the Good Reason Severance Period from such other
employment, provided, further, that the amount payable to the Employee
under this Section 5.2(b)(i)(A)
71
<PAGE> 12
during the Good Reason Severance Period shall not be reduced to less than
50% of the Employee's salary provided for in Section 3.1 hereof multiplied
by the number of full and fractional years in the Good Reason Severance
Period and (2) the Employee shall no longer be entitled to receive any
benefits provided for in Section 3.4 hereof to the extent that
substantially similar benefits are available to the Employee from such
other employment, and (B) the Employee shall be released from the
restrictions of Section 6.5(a)(i).
(ii) If the Employee's employment is terminated by the Employee
for Good Reason occasioned by an Operational Dispute or a Governance Event,
(A) the Employee's salary, bonus, and other benefits specified in Sections
3.1, 3.4 and 3.5 shall cease at the time of such termination and (B) the
Employee shall be released from the restrictions of Section 6.5(a)(i).
(iii) The provisions of this Section 5.2(b) shall constitute the
Employee's sole remedy in the event of a Good Reason termination.
(c) As a condition to the receipt of any salary or benefits required to be paid
or provided to the Employee pursuant to this Section 5.2, Westfield or BPB
may require the Employee to provide appropriate documentation verifying the
Employee's employment status and related compensation and benefits,
including annual federal income tax returns.
ARTICLE VI
CONFIDENTIAL INFORMATION
6.1 ACKNOWLEDGEMENT. The Employee agrees and acknowledges that in the
course of rendering services to
72
<PAGE> 13
Westfield and its clients and customers he has had and shall have access to and
has become and shall become acquainted with confidential information about the
professional, business and financial affairs of Westfield and its Affiliates and
their respective clients and customers and potential clients and customers and
may have contributed to or may in the future contribute to such information. The
Employee acknowledges that Westfield and its Affiliates are engaged in a highly
competitive business and that the success of Westfield and its Affiliates in the
marketplace depends upon its good will and reputation. The Employee agrees and
acknowledges that reasonable limits on his ability to engage in activities
competitive with Westfield and its Affiliates are warranted to protect
Westfield's substantial investment in developing and maintaining its status in
the marketplace, reputation and goodwill and to protect the substantial premium
paid by BPB for the equity interest in Westfield. The Employee recognizes that
in order to guard the legitimate interests of Westfield and its Affiliates it is
necessary to protect all such confidential information, goodwill and reputation
and explicitly acknowledges the reasonableness of the provisions of Sections 6.2
through 6.6 in light thereof.
6.2 PROPRIETARY INFORMATION. In the course of his service to
Westfield, the Employee has had and shall have access to confidential know-how,
business documents or information, marketing data, client lists, contact lists
and trade secrets regarding Westfield and its Affiliates which are confidential.
Such information shall hereinafter be called "Proprietary Information" and shall
include any and all items enumerated in the preceding sentence to which the
Employee has had or may have access, whether previously existing, now existing
or arising hereafter, whether or not conceived or developed by others or by the
Employee alone or with others during the period of his service to Westfield, and
whether or not conceived or developed during regular working hours; PROVIDED,
HOWEVER, that "Proprietary Information" shall not include (i) any information
which is in the public domain, provided such information is not in the public
domain as a consequence of disclosure by the Employee in
73
<PAGE> 14
violation of this Agreement and (ii) any information that becomes available to
the Employee after he ceases to be an employee of Westfield on a nonconfidential
basis from a source other than Westfield.
6.3 FIDUCIARY OBLIGATIONS. The Employee agrees and acknowledges that
Proprietary Information is of critical importance to Westfield and BPB and a
violation of this Article VI would seriously and irreparably impair and damage
the business of Westfield and its Affiliates. The Employee therefore agrees to,
at all times that the Employee is employed by Westfield, keep all Proprietary
Information in a fiduciary capacity for the sole benefit of Westfield and its
Affiliates.
6.4 NON-DISCLOSURE. The Employee shall not at any time whether during
the Term or thereafter disclose, directly or indirectly (except as required by
law and after consultation with the Westfield CEO and the BPB CEO), any
Proprietary Information to any person other than (a) BPB and its Affiliates, (b)
authorized employees thereof with a legitimate need to know related to the
business of Westfield or its Affiliates at the time of such disclosure or (c) at
the direction of the Westfield CEO or the BPB CEO, and in all such cases only in
the course of the Employee's service to Westfield. Immediately upon any
termination of his employment, the Employee shall deliver to Westfield or BPB
all notes, letters, documents, and records which may contain Proprietary
Information which are then in his possession or control and shall not retain or
use any copies or summaries thereof.
6.5 COMPETITIVE ACTIVITIES. (a) Except as otherwise expressly
consented to, approved or otherwise permitted by the Westfield CEO and the BPB
CEO in writing, and to the fullest extent permitted under applicable law, the
Employee shall not, directly or indirectly:
(i) accept any employment or engage in any business, trade or
other enterprise substantially similar to, or directly or indirectly in
competition with, the investment
74
<PAGE> 15
advisory or trust business of Westfield or any of its Affiliates, or extend
credit to or assist in arranging credit to establish or conduct any such
business, or permit his name, reputation or affiliations to be used in
connection with any such business;
(ii) request, induce or attempt to influence any then current or
prospective clients or customers of Westfield or its Affiliates to limit,
curtail or cancel its business with Westfield or any Affiliate of Westfield
or solicit such party for such business; or
(iii) request, induce or attempt to influence any current or
future officer, director, employee, consultant, agent or representative of
Westfield or any Affiliate of Westfield or any prospective officer,
director or employee of Westfield or any Affiliate of Westfield to (A)
terminate his employment or business relationship with Westfield or any
Affiliate of Westfield or (B) commit any act that, if committed by such
Employee, would constitute a breach of any provision hereof.
Notwithstanding any provision of this Section 6.5(a) to the contrary, nothing
herein shall prohibit an Employee from providing investment management services
with respect to his own personal assets or the personal assets of members of his
immediate family.
As applied to Employee after termination of employment, (i) "then
current client or customer" means any client or customer as of the date of
termination of employment, (ii) "prospective client or customer" means any
person as to whom an in-person presentation has been made within 12 months prior
to or 4 months after such termination, provided that any restriction as to such
person under Section 6.5(a)(ii) shall terminate as of the first anniversary of
such termination of employment unless as of such anniversary the person has
become an actual client of Westfield or any of its Affiliates and
75
<PAGE> 16
(iii) "prospective officer, director or employee" means any person as to whom an
in-person interview has been held within 12 months prior to or 4 months after
such termination, provided that any restriction as to such person under Section
6.5(a)(iii) shall terminate as of the first anniversary of such termination of
employment unless as of such anniversary the person has become an actual
officer, director or employee of Westfield or any of its Affiliates.
(b) Except as provided in Section 5.2, the provisions of Section 6.5(a)(i)
hereof shall continue in effect through the end of the Term.
(c) The provisions of Section 6.5(a)(ii) and (iii) shall continue in effect
until the latter of the fifth anniversary of termination of employment or the
end of the Term.
(d) The provisions of clauses (i), (ii) and (iii) of Section 6.5(a), Section
6.5(b) and Section 6.5(c) are separate and distinct commitments independent of
each of the other such clauses.
6.6 EQUITABLE REMEDIES. Notwithstanding any other provision of this
Agreement to the contrary, the Employee acknowledges and agrees that the
services to be rendered by Employee hereunder are of irreplaceable value and
Westfield and its Affiliates will suffer irreparable injury and damage and will
have no adequate remedy at law and could not be reasonably or adequately
compensated in damages for any breach or threatened or attempted breach by him
of the provisions of this Article VI. Accordingly, the Employee expressly agrees
that Westfield and BPB shall be entitled, in addition to the other rights or
remedies that may be available to it under this Agreement or at law, to a
temporary or permanent order enjoining or restraining the Employee from engaging
in any conduct in violation or threatened violation of the provisions of this
Article VI. The Employee hereby consents to the issuance of any such injunction.
76
<PAGE> 17
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 NOTICES. All notices hereunder, to be effective, shall be in
writing and shall be deemed delivered when delivered by hand, upon confirmation
of receipt by telecopy or when sent by first-class, certified mail, postage, and
fees prepaid, as follows:
(a) For notices and communications to Westfield:
One Financial Center
Boston, Massachusetts 02111-2621
Telecopy: (617) 428-7190
Attention: C. Michael Hazard
(b) For notices and communications to BPB:
Ten Post Office Square
Boston, Massachusetts 02109
Telecopy: (617) 912-4557
Attention: Timothy L. Vaill
(c) For notices and communications to the Employee:
One Financial Center
Boston, Massachusetts 02111-2621
Telecopy: (617) 428-7190
Attention: Arthur J. Bauernfeind
By notice complying with the foregoing provisions of this Section, each party
shall have the right to change the
77
<PAGE> 18
address for future notices and communications to such party.
7.2 MODIFICATION. As of the Closing this Agreement (and the other
agreements and documents referred to herein) shall constitute the entire
agreement between the parties hereto with regard to the subject matter hereof,
superseding all prior understandings and agreements, whether written or oral.
Any amendment or modification shall require the written agreement of all parties
hereto. Notwithstanding any provisions to the contrary contained herein, in the
event that Employee shall become the Westfield CEO, Employee understands and
agrees that Employee shall while Westfield CEO report directly to the BPB CEO
and that the BPB CEO will have responsibility for administering all employment
and compensation matters with respect to Employee under this Agreement the
administration of which presently are the responsibility of the Westfield CEO or
the Westfield Board.
7.3 ASSIGNMENT. This Agreement and all rights hereunder are personal
to the Employee and may not, unless otherwise specifically permitted herein, be
assigned by him. Notwithstanding anything else in this Agreement to the
contrary, Westfield and BPB may not assign their rights and obligation under
this Agreement, except that the rights of Westfield hereunder may be assigned
to, and shall inure to the benefit of, any person, firm or corporation
succeeding to all or substantially all of the business or assets of Westfield
whether by purchase, merger or consolidation.
7.4 CAPTIONS. Captions herein have been inserted solely for
convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
7.5 SEVERABILITY. The provisions of this Agreement are severable, and
the invalidity of any provision shall not affect the validity of any other
provision. In the event that any provision of this Agreement or the application
thereof is held to be unenforceable
78
<PAGE> 19
because of the duration or scope thereof, the parties hereto agree that the
panel of arbitrators or court making such determination shall have the power to
reduce the duration and scope of such provision to the extent necessary to make
it enforceable, and that the Agreement in its reduced form shall be valid and
enforceable to the full extent permitted by law.
7.6 ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Boston, Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. Arbitration shall be conducted before a panel of
three arbitrators, one designated by the Employee, one by BPB and one by mutual
agreement of the Employee and BPB. In the event the Employee and BPB are unable
to agree on a third arbitrator, such arbitrator shall be designated by the two
arbitrators previously designated. Judgment may be entered on the arbitrator's
award in any court having jurisdiction; provided, however, that Westfield or BPB
shall be entitled to seek a restraining order or injunction in any court of
competent jurisdiction to prevent any violation (or any continuation thereof) of
the provisions of Article VI of this Agreement and the Employee hereby consents
that such restraining order or injunction may be granted without the necessity
of Westfield or BPB posting any bond. Except to the extent determined otherwise
by the arbitrators, the expense of the arbitrators in such arbitration shall be
borne equally by the Employee, on the one hand, and Westfield, on the other
hand.
7.7 GOVERNING LAW. This Agreement shall be construed under and
governed by the laws of the Commonwealth of Massachusetts (without giving
effect to the principles of conflicts of law thereunder).
7.8 SURVIVAL. The provisions of Articles VI and VII hereof shall
survive the expiration of the Term and any other termination of the Employee's
employment. This Section 7.8 shall not be deemed to negate the Employee's rights
upon termination of employment under Article V.
79
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
a binding contract as of the day and year first above written.
/s/ Arthur J. Bauernfeind
--------------------------------
Name: Arthur J. Bauernfeind
WESTFIELD CAPITAL MANAGEMENT
COMPANY, INC.
By: /s/ William A. Muggia
--------------------------------
Name: William A. Muggia
Title: Senior Vice President
BOSTON PRIVATE BANCORP, INC.
By: /s/ Timothy L. Vaill
--------------------------------
Name: Timothy L. Vaill
Title: President and CEO
80
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 13th day of August, 1997, by and
among C. Michael Hazard, an individual (the "Employee"), Westfield Capital
Management Company, Inc., a Massachusetts corporation ("Westfield") and Boston
Private Bancorp, Inc., a Massachusetts corporation ("BPB").
WHEREAS, simultaneously with execution and delivery of this Agreement BPB,
Boston Private Investment Management, Inc. ("BPIM"), Westfield and all of the
stockholders of Westfield have entered into an Agreement and Plan of Merger (the
"Acquisition Agreement") dated as of the date hereof;
WHEREAS, BPB has adopted the Boston Private Bancorp, Inc. 1997 Long-Term
Stock Incentive Plan (the "Stock Plan"), providing, among other things, for the
grant to employees of BPB or certain of its affiliates (i) shares (the
"Restricted Stock") of BPB common stock, par value $1.00 per share (the "Common
Stock"), and (ii) options (the "Options") to purchase from BPB shares of Common
Stock;
WHEREAS, Westfield, BPIM and BPB desire to have the benefit of the
Employee's services after the closing of the transactions contemplated by
the Acquisition Agreement (the "Closing"); and
WHEREAS, the parties desire to set forth the terms and conditions under
which the Employee shall be employed by Westfield and upon which Westfield shall
compensate the Employee following the Closing.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Westfield, BPB and the Employee agree as follows:
81
<PAGE> 2
ARTICLE I
EMPLOYMENT
1.1 OFFICE; EFFECTIVENESS. Westfield hereby employs, engages and hires
the Employee, and the Employee agrees to serve Westfield as Chairman, Chief
Executive Officer, Chief Investment Officer and Portfolio Manager. This
Agreement and the commencement of the Employee's employment hereunder shall
become effective at the time of the Closing.
1.2 RESPONSIBILITIES. The Employee shall serve as Chairman, Chief
Executive Officer, Chief Investment Officer and Portfolio Manager of Westfield,
subject to the direction and supervision of the Board of Directors of Westfield
(the "Westfield Board"). Employee will report directly to the BPB CEO (as
defined below).
1.3 FULL-TIME COMMITMENT. The Employee hereby accepts such employment
hereunder, and agrees that he will devote all of his working time, attention,
knowledge, and skills, faithfully, diligently, and to the best of his ability in
furtherance of the business of Westfield and as otherwise reasonably necessary
to such employment. During the term of his employment hereunder, the Employee
will not, without the prior written approval of the Chief Executive Officer of
BPB (the "BPB CEO"), accept employment or compensation from or perform services
of any nature for any business enterprise other than Westfield or one of its
Affiliates. As used herein the term "Affiliate" means any corporation,
partnership or other entity that directly or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with the
person specified.
ARTICLE II
TERM OF EMPLOYMENT
2.1 TERM. The employment of the Employee pursuant to the terms hereof
shall commence as of the
82
<PAGE> 3
Closing and remain in effect for an initial term expiring on the 4th anniversary
of the Closing (the "Initial Term") unless sooner terminated pursuant to the
provisions hereof. The term of employment hereunder may be extended upon the
mutual agreement of the parties hereto. Upon any extension of the term hereof,
employment of the Employee hereunder shall continue for the extended term unless
terminated pursuant to the provisions hereof. Such employment term in effect at
any given time (without giving effect to any termination pursuant to the
provisions hereof) is referred to herein as the "Term".
ARTICLE III
COMPENSATION OF EMPLOYEE
3.1 SALARY AND BONUS. As full compensation for his services hereunder,
Westfield will pay to the Employee the following:
(i) an annual base salary equal to $431,037.16; and
(ii) commencing with fiscal year ending December 31, 1998, an
annual performance fee share bonus payable not later than 90 days after the
fiscal year end representing the Employees' allocation of the annual
limited partnership bonus pool of Westfield for the fiscal year just ended.
The limited partnership bonus pool shall be determined by the Chief
Executive Officer of Westfield (the "Westfield CEO") and approved by the
Westfield Board in accordance with the procedures set forth in the
Supplemental Executive Compensation Memo. The Employee's allocation of the
limited partnership bonus pool for any year shall be a percentage
determined in respect of such year by the Westfield CEO and approved by the
Westfield Board.
3.2 RESERVED.
83
<PAGE> 4
3.3 FUTURE RESTRICTED STOCK AND OPTIONS. The Employee shall be
entitled to participate in the Stock Plan as contemplated by the Supplemental
Executive Compensation Memo subject to and on a basis consistent with the terms,
conditions and overall administration of such Stock Plan.
3.4 BENEFITS: OTHER COMPENSATION. The Employee shall be entitled to
participate in the Westfield Profit Sharing Plan, as in effect on the date
hereof, and to such health, life, and disability insurance benefits, paid
vacation and other fringe benefits available to employees of Westfield from time
to time as contemplated by the Supplemental Executive Compensation Memo.
84
<PAGE> 5
3.5 EXPENSES. During the term of this Agreement, the Employee shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Employee in performing services hereunder, provided such expenses are
properly accounted for in accordance with BPB policy.
ARTICLE IV
TERMINATION
85
<PAGE> 6
4.1 DISCHARGE FOR CAUSE. The Employee may be terminated from his
employment by the BPB CEO for Cause upon written notice. Discharge for Cause
shall mean the termination of such Employee's employment with Westfield by
reason of any one or more of the following events: (i) the charge or indictment
of Employee of any crime (whether or not involving Westfield) which constitutes
a felony in the jurisdiction involved, excluding driving while under the
influence of alcohol or drugs, (ii) such Employee's embezzlement or intentional
misappropriation of any property of Westfield, any Affiliate of Westfield or any
clients of any of them or the commission by such Employee of any other crime of
moral turpitude, (iii) the commission by such Employee of an act that would
cause such Employee, Westfield or any Affiliate of Westfield to be disqualified
in any manner under Section 9 of the Investment Company Act of 1940, as amended,
if the Securities and Exchange Commission (the "Commission") were not to grant
an exemptive order under Section 9(c) thereof (irrespective of whether such
order is granted), that would constitute grounds for the Commission to deny,
revoke or suspend registration of Westfield or any Affiliate thereof as an
investment advisor, broker/dealer or transfer agent with the Commission or that
would constitute grounds for any court, federal or state regulatory body or
self-regulatory organization to deny, revoke, suspend or limit the authority of
Westfield or any Affiliate thereof or the Employee to engage in any activity in
or incidental to the securities, commodities, banking or trust business, (iv)
continued insubordination or dereliction of duties after written notice
specifying in reasonable detail the nature of the insubordination or dereliction
of duties and an opportunity to cure of not less than 30 days have been given to
such Employee or (v) continued alcohol or other substance abuse or addiction
that renders such Employee incapable of satisfactorily performing his duties
after written notice and an opportunity to cure such condition have been given
to such Employee.
4.2 RESIGNATION OR RETIREMENT. The Employee's employment hereunder
shall automatically terminate upon his Retirement during the Term. Retirement
shall mean
86
<PAGE> 7
the termination by the Employee of his full-time employment hereunder after
reaching the age of 70, or any Resignation of the Employee designated as
Retirement by the BPB CEO. Resignation shall mean the termination of the
Employee's full-time employment with Westfield other than by reason of a
Disabling Event (as defined below), termination for Good Reason, Retirement,
termination Without Cause (as defined below) or Discharge for Cause.
4.3 DISABLING EVENT. In the event of a Disabling Event with respect to
the Employee, the BPB CEO may terminate the Employee's employment
hereunder. Disabling Event shall mean the Employee's death or the Employee's
physical or mental disability, as certified by a physician satisfactory to the
Employee or his legal representative and to the BPB CEO, which renders such
Employee incapable of performing his material duties and services as an employee
of Westfield and which continues for more than six consecutive months during any
one-year period or more than twelve months during any two-year period.
4.4 GOOD REASON. The Employee may terminate his employment hereunder
for Good Reason (as defined below) during the 60 day period after the occurrence
of the circumstances constituting Good Reason if the Employee has notified the
BPB CEO in writing of the specific circumstances constituting Good Reason and,
in the case of a Diminished Responsibility, a Westfield Breach or a Governance
Event, during the 30 days following such notification Westfield and BPB have
failed to eliminate such Employee's Good Reason. As used herein, the following
events constitute "Good Reason":
(i) a material, adverse diminution, at a time when the BPB CEO
would not be entitled to terminate such Employee's employment hereunder for
Cause or as a result of a Disabling Event, of the Employee's title or
responsibilities from that which is in effect as of the effectiveness of
this Agreement, where the BPB CEO or BPB has requested such decision or
diminution (a "Diminished Responsibility");
87
<PAGE> 8
(ii) any change in the business of Westfield after the
effectiveness of this Agreement or any request by Westfield relating to the
employment activities of Employee, as to which Employee gives written
notice of objection ("Notice of Objection") to the BPB CEO within 30 days
of such change or request containing sufficient detail to identify such
change or request and the reason for the objection, provided that a
committee consisting of one person selected by the Westfield CEO from the
Westfield Board, one person selected by the BPB CEO from the Westfield
Board and the BPB CEO (a "Review Committee") finds within 15 days of the
BPB CEO's receipt of such Notice of Objection that such objection is
sufficient to entitle Employee to terminate his or her employment for Good
Reason (an "Operational Dispute") and fails to find on or before the 30th
day after the BPB CEO's receipt of such Notice of Objection that the change
or request constituting such Operational Dispute has been eliminated.
Decisions of the Review Committee shall be made by a majority of its
members (acting by written consent or at a meeting); provided, however,
that if a Review Committee shall have at any time during the 12 month
period prior to receipt by the BPB CEO of such Notice of Objection made a
determination that any employee of Westfield was entitled to terminate his
or her employment for Good Reason relating to an Operational Dispute
pursuant to this Section 4.4(ii), the finding of an Operational Dispute in
response to such Notice of Objection by Employee shall require the
unanimous consent of the members of the Review Committee. If all members of
the Review Committee are members of the Westfield Board, the Review
Committee shall operate as a Committee of the Westfield Board;
(iii) a material breach by Westfield or BPB of any of their
respective
88
<PAGE> 9
obligations to the Employee under this Agreement (a "Westfield Breach"); or
(iv) (A) until the earlier to occur of the fifth anniversary
hereof or the date that the Employee ceases to be an employee of Westfield,
BPB shall fail to nominate the Employee for election as a member of the
Board of Directors of BPB, (B) until the earlier to occur of the third
anniversary hereof or the date that Mr. Arthur Bauernfeind ceases to be an
employee of Westfield other than as a result of a termination Without
Cause, BPB shall fail to nominate Mr. Arthur Bauernfeind for election as a
member of the Board of Directors of BPB, (C) commencing on the date that
Mr. Arthur Bauernfeind ceases to be a member of the BPB Board of Directors
and ending on a date that is the earlier to occur of the fourth anniversary
of such date that Mr. Arthur Bauernfeind ceases to be a member of the BPB
Board of Directors and the date that Mr. Michael Chapman ceases to be an
employee of Westfield other than as a result of a termination Without
Cause, BPB shall fail to nominate Mr. Michael Chapman for election as a
member of the Board of Directors of BPB, (D) until the fifth anniversary
hereof, BPB shall cause a majority of the Westfield Board to be composed of
persons who are not at the time of election or appointment professional
employees of Westfield or (E) until the sixth anniversary hereof, BPB or
the Westfield Board shall cause the position of the Westfield CEO to be
filled by any person who is not a professional investment management
employee of Westfield (each of the foregoing events being referred to as a
"Governance Event"), it being understood and agreed that, notwithstanding
that such action may result in a Governance Event, the power to elect
members of the Westfield Board and the power to select and to terminate the
Westfield CEO shall be vested
89
<PAGE> 10
exclusively in the controlling stockholder of Westfield.
ARTICLE V
EFFECT OF TERMINATION
5.1 CAUSE, RESIGNATION, RETIREMENT OR DISABLING EVENT. (a) If the
Employee's employment is terminated (i) by the BPB CEO by a Discharge for Cause,
(ii) by the Employee by his Resignation or (iii) by reason of Retirement or a
Disabling Event, the Employee's salary, bonus, and other benefits specified in
Sections 3.1, 3.4 and 3.5 shall cease at the time of such termination except as
provided in Section 5.1(b) below.
(b) If the Employee's employment is terminated by reason of Retirement
or a Disabling Event, the Employee shall be eligible for a bonus provided for in
Section 3.1 hereof for the year of termination. The bonus amount shall be
prorated for the period of employment during the applicable bonus period.
5.2 WITHOUT CAUSE; GOOD REASON. (a) If the Employee's employment is
terminated by the BPB CEO for any reason other than those set forth in Section
5.1(a)(i) and (iii) ("Without Cause"), (A) the Employee's salary provided for in
Section 3.1 hereof and benefits provided for in Section 3.4 hereof, other than
profit sharing plan participation, shall continue to be paid or provided to the
Employee for the remainder of the Term (the "Severance Period"), provided,
however, that if the Employee obtains employment of any kind during the
Severance Period, (1) the amount payable to the Employee under this Section
5.2(a)(A) shall be reduced by 50% of the total W-2 income received or deferred
by the Employee with respect to the Severance Period from such other employment,
provided, further, that the amount payable to Employee under this Section
5.2(a)(A) during the Severance Period shall not be reduced to less than 50% of
the Employee's salary provided for in Section 3.1 hereof multiplied by the
number of full and fractional years in
90
<PAGE> 11
the Severance Period and (2) the Employee shall no longer be entitled to receive
any benefits provided for in Section 3.4 hereof to the extent that substantially
similar benefits are available to the Employee from such other employment, (B)
the Employee shall be eligible for a bonus provided for in Section 3.1 hereof
for the year of termination, prorated for the period of employment during the
applicable bonus period and (C) the Employee shall be released from the
restrictions of Section 6.5(a)(i). The provisions of this Section 5.2(a) shall
constitute the Employee's sole remedy in the event of a termination Without
Cause.
(b) (i) If the Employee's employment is terminated by the
Employee for Good Reason occasioned by Diminished Responsibility or
Westfield Breach, (A) the Employee's salary provided for in Section 3.1
hereof and benefits provided for in Section 3.4 hereof, other than profit
sharing plan participation, shall continue to be paid or provided to the
Employee for the shorter of (x) the remainder of the Term and (y) the
remainder of the Term less two years (the "Good Reason Severance Period"),
provided, however, that if the Employee obtains employment of any kind
during the Good Reason Severance Period, (1) the amount payable to the
Employee under this Section 5.2 shall be reduced by 50% of the total W-2
income received or deferred by the Employee with respect to the Good Reason
Severance Period from such other employment, provided, further, that the
amount payable to the Employee under this Section 5.2(b)(i)(A) during the
Good Reason Severance Period shall not be reduced to less than 50% of the
Employee's salary provided for in Section 3.1 hereof multiplied by the
number of full and fractional years in the Good Reason Severance Period and
(2) the Employee shall no longer be entitled to receive any benefits
provided for in Section 3.4 hereof to the extent that substantially similar
benefits are available to
91
<PAGE> 12
the Employee from such other employment, and (B) the Employee shall be
released from the restrictions of Section 6.5(a)(i).
(ii) If the Employee's employment is terminated by the Employee
for Good Reason occasioned by an Operational Dispute or a Governance
Event, (A) the Employee's salary, bonus, and other benefits specified
in Sections 3.1, 3.4 and 3.5 shall cease at the time of such
termination and (B) the Employee shall be released from the
restrictions of Section 6.5(a)(i).
(iii) The provisions of this Section 5.2(b) shall constitute the
Employee's sole remedy in the event of a Good Reason termination.
(c) As a condition to the receipt of any salary or benefits
required to be paid or provided to the Employee pursuant to this Section 5.2,
Westfield or BPB may require the Employee to provide appropriate documentation
verifying the Employee's employment status and related compensation and
benefits, including annual federal income tax returns.
ARTICLE VI
CONFIDENTIAL INFORMATION
6.1 ACKNOWLEDGEMENT. The Employee agrees and acknowledges that in the
course of rendering services to Westfield and its clients and customers he has
had and shall have access to and has become and shall become acquainted with
confidential information about the professional, business and financial affairs
of Westfield and its Affiliates and their respective clients and customers and
potential clients and customers and may have contributed to or may in the future
contribute to such information. The Employee acknowledges that Westfield and its
Affiliates are engaged in a highly competitive
92
<PAGE> 13
business and that the success of Westfield and its Affiliates in the marketplace
depends upon its good will and reputation. The Employee agrees and acknowledges
that reasonable limits on his ability to engage in activities competitive with
Westfield and its Affiliates are warranted to protect Westfield's substantial
investment in developing and maintaining its status in the marketplace,
reputation and goodwill and to protect the substantial premium paid by BPB for
the equity interest in Westfield. The Employee recognizes that in order to guard
the legitimate interests of Westfield and its Affiliates it is necessary to
protect all such confidential information, goodwill and reputation and
explicitly acknowledges the reasonableness of the provisions of Sections 6.2
through 6.6 in light thereof.
6.2 PROPRIETARY INFORMATION. In the course of his service to West
field, the Employee has had and shall have access to confidential know-how,
business documents or information, marketing data, client lists, contact lists
and trade secrets regarding Westfield and its Affiliates which are confidential.
Such information shall hereinafter be called "Proprietary Information" and shall
include any and all items enumerated in the preceding sentence to which the
Employee has had or may have access, whether previously existing, now existing
or arising hereafter, whether or not conceived or developed by others or by the
Employee alone or with others during the period of his service to Westfield, and
whether or not conceived or developed during regular working hours; PROVIDED,
HOWEVER, that "Proprietary Information" shall not include (i) any information
which is in the public domain, provided such information is not in the public
domain as a consequence of disclosure by the Employee in violation of this
Agreement and (ii) any information that becomes available to the Employee after
he ceases to be an employee of Westfield on a nonconfidential basis from a
source other than Westfield.
6.3 FIDUCIARY OBLIGATIONS. The Employee agrees and acknowledges that
Proprietary Information is of critical importance to Westfield and BPB and a
violation of this Article VI would seriously and irreparably impair
93
<PAGE> 14
and damage the business of Westfield and its Affiliates. The Employee therefore
agrees to, at all times that the Employee is employed by Westfield, keep all
Proprietary Information in a fiduciary capacity for the sole benefit of
Westfield and its Affiliates.
6.4 NON-DISCLOSURE. The Employee shall not at any time whether during
the Term or thereafter disclose, directly or indirectly (except as required by
law and after consultation with the BPB CEO), any Proprietary Information to any
person other than (a) BPB and its Affiliates, (b) authorized employees thereof
with a legitimate need to know related to the business of Westfield or its
Affiliates at the time of such disclosure or (c) at the direction of the BPB
CEO, and in all such cases only in the course of the Employee's service to
Westfield. Immediately upon any termination of his employment, the Employee
shall deliver to Westfield or BPB all notes, letters, documents, and records
which may contain Proprietary Information which are then in his possession or
control and shall not retain or use any copies or summaries thereof.
6.5 COMPETITIVE ACTIVITIES. (a) Except as otherwise expressly
consented to, approved or otherwise permitted by the BPB CEO in writing, and to
the fullest extent permitted under applicable law, the Employee shall not,
directly or indirectly:
(i) accept any employment or engage in any business, trade or
other enterprise substantially similar to, or directly or indirectly in
competition with, the investment advisory or trust business of Westfield or
any of its Affiliates, or extend credit to or assist in arranging credit to
establish or conduct any such business, or permit his name, reputation or
affiliations to be used in connection with any such business;
(ii) request, induce or attempt to influence any then current or
prospective clients or customers of Westfield or its Affiliates
94
<PAGE> 15
to limit, curtail or cancel its business with Westfield or any Affiliate of
Westfield or solicit such party for such business; or
(iii) request, induce or attempt to influence any current or
future officer, director, employee, consultant, agent or representative of
Westfield or any Affiliate of Westfield or any prospective officer,
director or employee of Westfield or any Affiliate of Westfield to (A)
terminate his employment or business relationship with Westfield or any
Affiliate of Westfield or (B) commit any act that, if committed by such
Employee, would constitute a breach of any provision hereof.
Notwithstanding any provision of this Section 6.5(a) to the contrary, nothing
herein shall prohibit an Employee from providing investment management services
with respect to his own personal assets or the personal assets of members of his
immediate family.
As applied to Employee after termination of employment, (i)
"then current client or customer" means any client or customer as of the date of
termination of employment, (ii) "prospective client or customer" means any
person as to whom an in-person presentation has been made within 12 months prior
to or 4 months after such termination, provided that any restriction as to such
person under Section 6.5(a)(ii) shall terminate as of the first anniversary of
such termination of employment unless as of such anniversary the person has
become an actual client of Westfield or any of its Affiliates and (iii)
"prospective officer, director or employee" means any person as to whom an
in-person interview has been held within 12 months prior to or 4 months after
such termination, provided that any restriction as to such person under Section
6.5(a)(iii) shall terminate as of the first anniversary of such termination of
employment unless as of such anniversary the person has become an actual
officer, director or employee of Westfield or any of its Affiliates.
95
<PAGE> 16
(b) Except as provided in Section 5.2, the provisions of Section
6.5(a)(i) hereof shall continue in effect through the end of the Term.
(c) The provisions of Section 6.5(a)(ii) and (iii) shall continue in
effect until the latter of the fifth anniversary of termination of employment or
the end of the Term.
(d) The provisions of clauses (i), (ii) and (iii) of Section 6.5(a),
Section 6.5(b) and Section 6.5(c) are separate and distinct commitments
independent of each of the other such clauses.
6.6 EQUITABLE REMEDIES. Notwithstanding any other provision of this
Agreement to the contrary, the Employee acknowledges and agrees that the
services to be rendered by Employee hereunder are of irreplaceable value and
Westfield and its Affiliates will suffer irreparable injury and damage and will
have no adequate remedy at law and could not be reasonably or adequately
compensated in damages for any breach or threatened or attempted breach by him
of the provisions of this Article VI. Accordingly, the Employee expressly agrees
that Westfield and BPB shall be entitled, in addition to the other rights or
remedies that may be available to it under this Agreement or at law, to a
temporary or permanent order enjoining or restraining the Employee from engaging
in any conduct in violation or threatened violation of the provisions of this
Article VI. The Employee hereby consents to the issuance of any such injunction.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 NOTICES. All notices hereunder, to be effective, shall be in
vriting and shall be deemed delivered when delivered by hand, upon confirmation
of receipt by telecopy or when sent by first-class, certified mail, postage, and
fees prepaid, as follows:
96
<PAGE> 17
(a) For notices and communications to Westfield:
One Financial Center
Boston, Massachusetts 02111-2621
Telecopy: (617) 428-7190
Attention: C. Michael Hazard
(b) For notices and communications to BPB:
Ten Post Office Square
Boston, Massachusetts 02109
Telecopy: (617) 912-4557
Attention: Timothy L. Vaill
(c) For notices and communications to the Employee:
One Financial Center
Boston, Massachusetts 02111-2621
Telecopy: (617) 428-7190
Attention: C. Michael Hazard
By notice complying with the foregoing provisions of this Section, each party
shall have the right to change the address for future notices and communications
to such party.
7.2 MODIFICATION. As of the Closing this Agreement (and the other
agreements and documents referred to herein) shall constitute the entire
agreement between the parties hereto with regard to the subject matter hereof,
superseding all prior understandings and agreements, whether written or oral.
Any amendment or modification shall require the written agreement of all parties
hereto.
97
<PAGE> 18
7.3 ASSIGNMENT. This Agreement and all rights hereunder are personal
to the Employee and may not, unless otherwise specifically permitted herein, be
assigned by him. Notwithstanding anything else in this Agreement to the
contrary, Westfield and BPB may not assign their rights and obligation under
this Agreement, except that the rights of Westfield hereunder may be assigned
to, and shall inure to the benefit of, any person, firm or corporation
succeeding to all or substantially all of the business or assets of Westfield
whether by purchase, merger or consolidation.
7.4 CAPTIONS. Captions herein have been inserted solely for
convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
7.5 SEVERABILITY. The provisions of this Agreement are severable, and
the invalidity of any provision shall not affect the validity of any other
provision. In the event that any provision of this Agreement or the application
thereof is held to be unenforceable because of the duration or scope thereof,
the parties hereto agree that the panel of arbitrators or court making such
determination shall have the power to reduce the duration and scope of such
provision to the extent necessary to make it enforceable, and that the Agreement
in its reduced form shall be valid and enforceable to the full extent permitted
by law.
7.6 ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Boston, Massachusetts, in accordance with the rules of the American
Arbitration Association then in effect. Arbitration shall be conducted before a
panel of three arbitrators, one designated by the Employee, one by BPB and one
by mutual agreement of the Employee and BPB. In the event the Employee and BPB
are unable to agree on a third arbitrator, such arbitrator shall be designated
by the two arbitrators previously designated. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Westfield or BPB
98
<PAGE> 19
shall be entitled to seek a restraining order or injunction in any court of
competent jurisdiction to prevent any violation (or any continuation thereof) of
the provisions of Article VI of this Agreement and the Employee hereby consents
that such restraining order or injunction may be granted without the necessity
of Westfield or BPB posting any bond. Except to the extent determined otherwise
by the arbitrators, the expense of the arbitrators in such arbitration shall be
borne equally by the Employee, on the one hand, and Westfield, on the other
hand.
7.7 GOVERNING LAW. This Agreement shall be construed under and
governed by the laws of the Commonwealth of Massachusetts (without giving
effect to the principles of conflicts of law thereunder).
7.8 SURVIVAL. The provisions of Articles VI and VII hereof shall
survive the expiration of the Term and any other termination of the Employee's
employment. This Section 7.8 shall not be deemed to negate the Employee's rights
upon termination of employment under Article V.
7.9 OTHER INTERESTS. Neither Employee's existing position as of the
date hereof as a director of, nor Employee's existing interest as of the date
hereof as a stockholder in E.R. Taylor & Co. shall in and of (themselves)
constitute a violation of any provision of this Agreement.
99
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as a binding contract as of the day and year first above written.
/s/ C. Michael Hazard
-------------------------------------
Name: C. Michael Hazard
WESTFIELD CAPITAL MANAGEMENT
COMPANY, INC.
By: /s/ Arthur J. Bauernfeind
-------------------------------------
Name: Arthur J. Bauernfeind
Title: President
BOSTON PRIVATE BANCORP, INC.
By: /s/ Timothy L. Vaill
-------------------------------------
Name: Timothy L. Vaill
Title: President and CEO
100
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors of
Boston Private Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-30775, 333-06941, 33-93634, 33-2617, 33-26133 and 2-98875) on Forms
S-8 and in Registration Statements (Nos. 333-46391 and 333-19823) on Form S-3 of
Boston Private Bancorp, Inc., of our report dated January 15, 1998 relating to
the consolidated balance sheets of Boston Private Bancorp, Inc., and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and the cash flows for
each of the years in the three year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 10-KSB of Boston Private
Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 25, 1998
101
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,361
<INT-BEARING-DEPOSITS> 4,932
<FED-FUNDS-SOLD> 1,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,776
<INVESTMENTS-CARRYING> 27,777
<INVESTMENTS-MARKET> 27,819
<LOANS> 276,825
<ALLOWANCE> 3,645
<TOTAL-ASSETS> 368,942
<DEPOSITS> 258,301
<SHORT-TERM> 19,458
<LIABILITIES-OTHER> 5,022
<LONG-TERM> 60,226
0
0
<COMMON> 10,641
<OTHER-SE> 15,294
<TOTAL-LIABILITIES-AND-EQUITY> 368,942
<INTEREST-LOAN> 18,914
<INTEREST-INVEST> 3,185
<INTEREST-OTHER> 629
<INTEREST-TOTAL> 22,728
<INTEREST-DEPOSIT> 7,834
<INTEREST-EXPENSE> 11,334
<INTEREST-INCOME-NET> 11,394
<LOAN-LOSSES> 810
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 18,951
<INCOME-PRETAX> 5,417
<INCOME-PRE-EXTRAORDINARY> 5,417
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,508
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
<YIELD-ACTUAL> 7.71
<LOANS-NON> 722
<LOANS-PAST> 1,632
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,566
<CHARGE-OFFS> 40
<RECOVERIES> 309
<ALLOWANCE-CLOSE> 3,645
<ALLOWANCE-DOMESTIC> 3,645
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
