<PAGE> 1
As filed with the Securities and Exchange Commission on November 12, 1998
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______.
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
COMMONWEALTH OF MASSACHUSETTS 04-2976299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (617) 912-1900
NOT APPLICABLE
(Former Name, Former Address, and Former Fiscal Year, if Changed
Since Last Report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (OCTOBER 31, 1998):
<TABLE>
<CAPTION>
<S> <C>
Common Stock - Par Value $1.00 10,743,419 Shares
------------------------------ -----------------
(class) (outstanding)
</TABLE>
================================================================================
<PAGE> 2
BOSTON PRIVATE FINANCIAL HOLDINGS, INC
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cover Page 1
Table of Contents 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 18
Item 3 Qualitative and Quantitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities and Use of Proceeds 19
Item 3 Defaults upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signature Page 20
</TABLE>
<PAGE> 3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 9,924 $ 12,361
Federal funds sold 1,600 1,200
Investment securities available for sale (amortized cost of $51,834
and $36,740, respectively) 52,151 36,776
Investment securities held to maturity (market value of $9,678
as of December 31, 1997) -- 9,654
Mortgage-backed securities available for sale (amortized cost of
$13,056 as of September 30, 1998) 13,189 --
Mortgage-backed securities held to maturity (market value of
$18,141 as of December 31, 1997) -- 18,123
Loans receivable:
Commercial 146,939 134,685
Residential mortgage 168,354 124,865
Home equity 18,379 16,969
Other 285 306
--------- ---------
Total loans 333,957 276,825
Less allowance for loan losses (4,200) (3,645)
--------- ---------
Net loans 329,757 273,180
Stock in the Federal Home Loan Bank of Boston 4,172 3,511
Premises and equipment, net 3,537 2,857
Excess of cost over net assets acquired, net 3,504 3,746
Management fees receivable 3,104 2,750
Accrued interest receivable 2,735 2,169
Other assets 3,721 2,615
--------- ---------
Total assets $ 427,394 $ 368,942
========= =========
LIABILITIES:
Deposits $ 299,667 $ 258,301
Securities sold under agreements to repurchase 3,620 5,366
Federal funds purchased 8,500 13,255
FHLB borrowings 79,091 60,226
Other short-term borrowings -- 837
Accrued interest payable 887 609
Other liabilities 4,942 4,413
--------- ---------
Total liabilities 396,707 343,007
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 30,000,000 shares in 1998 and 18,000,000 in 1997
issued: 10,743,719 shares in 1998 and 10,641,100 shares in 1997 10,744 10,641
Additional paid-in capital 12,644 12,140
Retained earnings 7,510 3,800
Stock subscriptions receivable (499) (669)
Accumulated other comprehensive income (loss) 288 23
--------- ---------
Total stockholders' equity 30,687 25,935
--------- ---------
Total liabilities and stockholders' equity $ 427,394 $ 368,942
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income:
Commercial loans $ 3,350 $ 2,465 $ 9,634 $ 6,882
Residential mortgage loans 2,903 2,140 7,733 5,902
Home equity and other loans 349 295 1,002 827
Investment securities 638 492 1,871 1,328
Mortgage-backed securities 209 329 705 1,049
FHLB stock dividends 64 54 193 160
Federal funds sold 77 14 307 118
Deposits in banks 34 61 110 139
----------- ----------- ----------- -----------
Total interest and dividend income 7,624 5,850 21,555 16,405
----------- ----------- ----------- -----------
Interest expense:
Savings and NOW 110 85 321 260
Money market 1,550 932 4,073 2,545
Certificates of deposit 1,123 940 3,259 2,697
Federal funds purchased 44 173 91 267
Securities sold under agreements to repurchase 47 64 162 256
FHLB borrowings 1,096 679 3,255 2,079
Other short-term borrowings -- 3 19 16
----------- ----------- ----------- -----------
Total interest expense 3,970 2,876 11,180 8,120
----------- ----------- ----------- -----------
Net interest income 3,654 2,974 10,375 8,285
Provision for loan losses 242 130 857 259
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,412 2,844 9,518 8,026
----------- ----------- ----------- -----------
Fees and other income:
Trust and investment management 3,510 3,622 11,300 9,782
Deposit account service charges 64 67 172 160
Gain (loss) on sale of loans 97 15 197 43
Gain (loss) on sale of investment securities 29 -- 84 --
Other 181 334 502 441
----------- ----------- ----------- -----------
Total fees and other income 3,881 4,038 12,255 10,426
----------- ----------- ----------- -----------
Operating expense:
Salaries and employee benefits 3,640 3,813 11,260 10,043
Occupancy and equipment 535 435 1,556 1,170
Professional services 441 310 1,261 1,124
Marketing 88 57 269 266
Business development 122 99 408 362
Amortization of intangibles 81 81 242 242
Merger expenses -- 9 -- 120
Other 395 283 1,092 907
----------- ----------- ----------- -----------
Total operating expense 5,302 5,087 16,088 14,234
----------- ----------- ----------- -----------
Income before income taxes 1,991 1,795 5,685 4,218
Income tax expense 671 380 1,915 898
=========== =========== =========== ===========
Net income $ 1,320 $ 1,415 $ 3,770 $ 3,320
=========== =========== =========== ===========
Per share data:
Basic earnings per share $ 0.12 $ 0.13 $ 0.35 $ 0.31
=========== =========== =========== ===========
Diluted earnings per share $ 0.12 $ 0.13 $ 0.34 $ 0.30
=========== =========== =========== ===========
Average common shares outstanding 10,741,991 10,618,002 10,709,272 10,573,885
=========== =========== =========== ===========
Average diluted shares outstanding 11,125,513 11,016,638 11,129,874 10,950,239
=========== =========== =========== ===========
Proforma information:
Net income $ 1,320 $ 1,415 $ 3,770 $ 3,320
Proforma adjustment for income taxes of entity
previously filing as an S-Corporation -- 237 -- 493
----------- ----------- ----------- -----------
Proforma net income after adjustment for income taxes $ 1,320 $ 1,178 $ 3,770 $ 2,827
=========== =========== =========== ===========
Proforma basic earnings per share $ 0.12 $ 0.11 $ 0.35 $ 0.27
=========== =========== =========== ===========
Proforma diluted earnings per share $ 0.12 $ 0.11 $ 0.34 $ 0.26
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED STOCK COMPREHENSIVE
STOCK CAPITAL EARNINGS SUBSCRIPTIONS INCOME (LOSS) TOTAL
------ ---------- -------- ------------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $10,321 $11,991 $ 4,400 $(847) $ (64) $ 25,801
Net income -- -- 3,320 -- -- 3,320
Other comprehensive income, net:
Change in unrealized gain (loss)
on securities available for sale -- -- -- -- 75 75
--------
Total other comprehensive income 3,395
Stock options exercised 28 37 -- -- -- 65
Proceeds from issuance of
288,000 shares of common stock 288 87 -- -- -- 375
Stock subscription payments -- -- -- 174 -- 174
S-Corporation dividends paid -- -- (2,088) -- -- (2,088)
------- ------- ------- ----- ----- --------
Balance at September 30, 1997 10,637 12,115 5,632 (673) 11 27,722
======= ======= ======= ===== ===== ========
Balance at December 31, 1997 10,641 12,140 3,800 (669) 23 25,935
Net income -- -- 3,770 -- -- 3,770
Other comprehensive income, net:
Change in unrealized gain (loss)
on securities available for sale -- -- -- -- 265 265
--------
Total other comprehensive income 4,035
Stock options exercised 103 504 -- -- -- 607
Stock subscription payments -- -- -- 170 -- 170
S-Corporation dividends paid -- -- (60) -- -- (60)
------- ------- ------- ----- ----- --------
Balance at September 30, 1998 $10,744 $12,644 $ 7,510 $(499) $ 288 $ 30,687
======= ======= ======= ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,770 $ 3,320
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 1,314 729
Gain on sale of loans (197) (43)
Gain on sale of investment securities (84) --
Gain on sale of other real estate owned (4) --
Loss on sale of fixed assets -- 10
Provision for loan losses and uncollectable accounts 857 304
Distributed (undistributed) earnings of partnership investments (108) 795
Loans originated for sale (16,600) (4,972)
Proceeds from sale of loans 16,797 5,015
(Increase) decrease in:
Accrued interest receivable (566) (403)
Investment management fees receivable (354) (722)
Other assets (1,170) (863)
Increase (decrease) in:
Accrued interest payable 278 91
Other liabilities 529 2,186
-------- --------
Net cash provided (used) by operating activities 4,462 5,447
-------- --------
Cash flows from investing activities:
Net decrease (increase) in fed funds sold (400) 5,700
Investment securities available for sale:
Purchases (54,389) (10,183)
Sales 37,654 130
Maturities 11,155 4,317
Investment securities held to maturity:
Purchases -- (5,226)
Maturities -- 4,000
Mortgage-backed securities available for sale:
Principal payments 5,034 --
Mortgage-backed securities held to maturity:
Principal payments -- 5,291
Net decrease (increase) in loans (57,731) (36,022)
Purchase of FHLB stock (661) --
Proceeds from sales of other real estate owned 38 --
Capital expenditures (1,209) (1,442)
-------- --------
Net cash provided (used) by investing activities (60,509) (33,435)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 41,366 26,798
Net increase (decrease) in repurchase agreements (1,746) (1,247)
Net increase (decrease) in federal funds purchased (4,755) 2,000
FHLB advances:
Proceeds 38,646 36,120
Repayments (19,781) (31,323)
Net increase (decrease) in other short-term borrowings (837) (1,051)
S-corporation dividends paid (60) (2,089)
Proceeds from stock subscriptions receivable 170 174
Proceeds from issuance of common stock 607 440
-------- --------
Net cash provided (used) by financing activities 53,610 29,822
-------- --------
Net increase (decrease) in cash and due from banks (2,437) 1,834
Cash and due from banks at beginning of year 12,361 8,709
-------- --------
Cash and due from banks at end of period $ 9,924 $ 10,543
======== ========
Supplementary disclosures of cash flow information:
Cash paid during the period for interest $ 10,902 $ 8,013
Cash paid during the period for income taxes 3,346 896
Supplementary disclosures of non-cash activities:
Transfer of loans to other real estate owned 42 --
Transfer of investments to available for sale 17,865 --
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The consolidated financial statements of Boston Private Financial Holdings, Inc.
(the "Company") include the accounts of the Company and its wholly-owned
subsidiaries, Boston Private Bank & Trust Company (the "Bank") and Boston
Private Investment Management, Inc. ("BPIM"). The Bank's consolidated financial
statements include the accounts of its wholly-owned subsidiaries, BPB Securities
Corporation and Boston Private Asset Management Corporation, and BPIM's
consolidated financial statements include the accounts of its wholly-owned
subsidiary, Westfield Capital Management Company, Inc. ("Westfield"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties.
The unaudited interim consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles and include
all necessary adjustments of a normal recurring nature, which in the opinion of
management, are required for a fair presentation of the results and financial
condition of the Company. The interim results of consolidated operations are not
necessarily indicative of the results for the entire year.
The information in this report should be read in conjunction with the
consolidated financial statements and accompanying notes included in the
December 31, 1997 Annual Report to Shareholders.
(2) EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard ("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. 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. The earnings per share
calculation is based upon the weighted average number of common shares and
common share equivalents outstanding during the period. Stock options, when
dilutive, are included as common stock equivalents using the treasury stock
method.
The following tables are a reconciliation of the numerators and denominators of
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -----------------------------
1998 1997
------------------------------ ------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income $1,320 10,742 $ 0.12 $1,415 10,618 $ 0.13
====== ======
EFFECT OF DILUTIVE
SECURITIES
Stock Options -- 384 -- 399
------ ------ ------ ------
DILUTED EPS
------ ------ ------ ------ ------ ------
Net Income $1,320 11,126 $ 0.12 $1,415 11,017 $ 0.13
====== ====== ====== ====== ====== ======
</TABLE>
7
<PAGE> 8
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont.)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -----------------------------
1998 1997
------------------------------ ------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income $3,770 10,709 $ 0.35 $ 3,320 10,574 $ 0.31
====== ======
EFFECT OF DILUTIVE
Securities
Stock Options -- 421 -- 376
------ ------ ------- ------
DILUTED EPS
------ ------ ------ ------- ------ ------
Net Income $3,770 11,130 $ 0.34 $ 3,320 10,950 $ 0.30
====== ====== ====== ======= ====== ======
</TABLE>
(3) RECLASSIFICATIONS
Certain fiscal 1997 information has been reclassified to conform with the 1998
presentation.
(4) RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as "derivatives") and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair market
value. Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement will not have a material effect on the Company's consolidated
financial statements.
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 annual periods beginning after December 15, 1997, and for interim
periods beginning after December 15, 1998. This statement only affects
presentation in the financial statements, it will have no impact on the
Company's results of operations.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarter Ended September 30, 1998
This quarterly report contains certain statements that are 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.
GENERAL
Boston Private Financial Holdings, Inc. (the "Company") is incorporated under
the laws of the Commonwealth of Massachusetts and is registered with the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board") as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). On July 1, 1988, the Company became the parent holding company of
Boston Private Bank & Trust Company (the "Bank"), a trust company chartered by
the Commonwealth of Massachusetts and insured by the Federal Deposit Insurance
Corporation (the "FDIC"). Effective April 22, 1998, the Company changed its name
from Boston Private Bancorp, Inc. to Boston Private Financial Holdings, Inc.
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.
Concurrent with the acquisition, the Company formed a subsidiary, Boston Private
Investment Management, Inc., as a holding company for Westfield. 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.
The Company conducts substantially all of its business through its wholly-owned
operating 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
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 personal loans. In
addition, it provides investment advisory and asset management services,
securities custody and safekeeping services, and trust and estate
administration.
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. 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.
FINANCIAL CONDITION
TOTAL ASSETS. Total assets increased $58.5 million, or 15.8%, from $368.9
million at December 31, 1997 to $427.4 million at September 30, 1998. This
increase was primarily due to an increase in outstanding loan balances.
9
<PAGE> 10
INVESTMENTS. Total investments (consisting of cash, federal funds sold,
investment securities, mortgage-backed securities, and stock in the FHLB of
Boston) totaled $81.0 million, or 19.0% of total assets, at September 30, 1998,
compared to $81.6 million, or 22.1% of total assets, at December 31, 1997. Funds
from the sale and maturity of $48.9 million of investment securities and $5.0
million of principal repayments on mortgage-backed securities, were reinvested
in municipal bonds and U.S. government and agency obligations. Management
periodically evaluates investment alternatives to properly manage the overall
balance sheet. The timing of sales and reinvestments is based on various
factors, including management's evaluation of interest rate trends and loan
demand.
During the quarter ended September 30, 1998, the Bank reconsidered its intent to
hold investments until maturity. As a result, investment and mortgage-backed
securities classified as held to maturity with an amortized cost of $17.9
million and an unrealized gain of $170,000 were reclassified as available for
sale.
The following table is a summary of investment and mortgage-backed securities as
of September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------------------ ---------------------------------------------
AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET
------------------- -------------------
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- -------- --------- --------- ---------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT SEPTEMBER 30, 1998
U.S. Government and agencies $ 22,298 $ 158 $ (11) $ 22,445 $ -- $ -- $ -- $ --
Municipal bonds 29,536 170 -- 29,706 -- -- -- --
Mortgage-backed securities 13,056 136 (3) 13,189 -- -- -- --
--------- -------- -------- --------- ---------- -------- -------- ---------
Total investments $ 64,890 $ 464 $ (14) $ 65,340 $ -- $ -- $ -- $ --
========= ======== ======== ========= ========== ======== ======== =========
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
Mortgage-backed securities -- -- -- -- 18,123 157 (139) 18,141
--------- -------- -------- --------- ---------- -------- -------- ---------
Total investments $ 36,740 $ 54 $ (18) $ 36,776 $ 27,777 $ 181 $ (139) $ 27,819
========= ======== ======== ========= ========== ======== ======== =========
</TABLE>
LOANS. Total loans increased $57.1 million during the first nine months of 1998
from $276.8 million, or 75.0% of total assets, at December 31, 1997, to $334.0
million, or 78.1% of total assets, at September 30, 1998. This increase was
primarily due to increases in residential mortgage loans, and to a lesser
extent, commercial and home equity loans.
Interest rates affect both the level of new loan originations and refinancings
or paydowns of existing loans. During the first nine months of 1998, interest
rates were at relatively low levels, and demand for new loans and refinancings
was strong. As a result, during this period, residential mortgage loans
increased $43.5 million, or 34.8%, and commercial loans increased $12.3 million,
or 9.1%. The increases in the home equity and other loan portfolios during the
first nine months of 1998 were mainly due to the use of existing credit lines.
RISK ELEMENTS. The following table sets forth information regarding
non-performing loans, non-performing assets, and delinquent loans 30-89 days
past due as to interest or principal at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a nonaccrual basis $ 911 $ 722
Loans past due 90 days or more, but still accruing 6 25
------ ------
Total non-performing loans 917 747
Other real estate owned 85 85
====== ======
Total non-performing assets $1,002 $ 832
====== ======
Delinquent loans 30-89 days past due 1,323 1,632
Non-performing loans as a percent of gross loans .27% .27%
Non-performing assets as a percent of total assets .23% .23%
</TABLE>
10
<PAGE> 11
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. Other real estate owned 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.
Total non-performing assets increased by $170,000, or 20.4%, during the first
nine months of 1998. The Company continues to evaluate the underlying collateral
and value of each of its non-performing assets and pursues the collection of all
amounts due.
At September 30, 1998, loans with an aggregate balance of $1.3 million, or 0.40%
of total loans, were 30 to 89 days past due. This represents a decrease of
$309,000, or 18.9%, from the $1.6 million, or 0.59% of total loans which were
reported as 30 to 89 days past due on December 31, 1997. In management's view,
most of these loans are adequately secured, but these borrowers do not make
timely payments on a regular basis.
ALLOWANCE FOR LOAN LOSSES. 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 may obtain 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.
As the Company continues to be affected by changes in the risk characteristics
of the loan portfolio, levels of non-performing loans, trends in delinquencies
and charge-offs, and current economic conditions, it will continue to evaluate
the adequacy of the allowance for loan losses. Notwithstanding these future
evaluations, management believes that the allowance for loan losses as of
September 30, 1998 is adequate based upon the information currently available.
The following table is an analysis of the Bank's allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Ending gross loans $ 333,957 $ 242,493 $ 333,957 $ 242,493
========= ========= ========= =========
Allowance for loan losses, beginning of period $ 3,931 $ 2,729 $ 3,645 $ 2,566
Provision for loan losses 242 130 857 259
Charge-offs (3) (9) (379) (22)
Recoveries 30 234 77 281
--------- --------- --------- ---------
Allowance for loan losses, end of period $ 4,200 $ 3,084 $ 4,200 $ 3,084
========= ========= ========= =========
Allowance for loan losses to ending gross loans 1.26% 1.27% 1.26% 1.27%
========= ========= ========= =========
</TABLE>
11
<PAGE> 12
DEPOSITS AND BORROWINGS. The Company experienced an increase in total deposits
of $41.4 million, or 16.0%, during the first nine months of 1998, from $258.3
million, or 70.0% of total assets, at December 31, 1997, to $299.7 million, or
70.1% of total assets, at September 30, 1998. This increase was primarily
attributable to growth in money market accounts. However all deposit categories
experienced growth during this period except for savings accounts.
The following table shows the composition of the Company's deposits at September
30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Demand deposits $ 41,826 $ 36,848
NOW 28,257 24,938
Savings 4,606 5,787
Money market 144,039 117,984
Certificates of deposit under $100,000 27,137 22,956
Certificates of deposit $100,000 or greater 53,802 49,788
-------- --------
Total $299,667 $258,301
======== ========
</TABLE>
Total borrowings (consisting of securities sold under agreements to repurchase,
federal funds purchased, FHLB borrowings, and other short-term borrowings)
increased by $11.5 million, or 14.5%, during the first nine months of 1998. This
increase was primarily attributable to an increase in FHLB of Boston borrowings
used to help fund loan growth, partially offset by a decrease in federal funds
purchased and paydown of other short-term borrowings. Management will from time
to time take advantage of opportunities to fund asset growth with borrowings,
but on a long-term basis, the Company intends to replace a portion of its
borrowings with core deposits.
LIQUIDITY. Liquidity is defined as the ability to meet current and future
financial obligations of a short-term nature. The Company further defines
liquidity as the ability to respond to the needs of depositors and borrowers as
well as to earnings enhancement opportunities in a changing marketplace. Primary
sources of liquidity consist of deposit inflows, loan repayments, borrowed
funds, maturity of investment securities and sales of securities from the
available for sale portfolio. These sources fund the Company's lending and
investment activities.
Management is responsible for establishing and monitoring liquidity targets as
well as strategies and tactics to meet these targets. At September 30, 1998,
cash, federal funds sold and securities available for sale amounted to $76.9
million, or 18.0% of total assets. This compares to $50.3 million, or 13.6% of
total assets at December 31, 1997.
The Bank is a member of the FHLB of Boston, and as such has access to both short
and long-term borrowings. In addition, the Bank maintains a line of credit at
the FHLB of Boston as well as other lines of credit with several correspondent
banks. Management believes that the Bank had adequate liquidity to meet its
commitments at September 30, 1998.
Westfield's primary source of liquidity consists of investment management fees
that are generally collected on a quarterly basis. At September 30, 1998
Westfield had working capital of approximately $1.9 million. Management believes
that Westfield had adequate liquidity to meet its commitments at September 30,
1998.
The Company's primary sources of funds are dividends from subsidiaries, issuance
of common stock, and borrowings. Management believes that the Company had
adequate liquidity to meet its commitments at September 30, 1998.
12
<PAGE> 13
CAPITAL RESOURCES. Total stockholders' equity of the Company at September 30,
1998 was $30.7 million, compared to $25.9 million at December 31, 1997. This
increase was the result of the Company's net income for the nine months ended
September 30, 1998 of $3.8 million, combined with issuance of additional stock
in connection with the exercise of stock options, and the change in accumulated
other comprehensive income.
The following table presents actual capital amounts and regulatory capital
requirements as of September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTUAL FOR CAPITAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------- ------------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------------- --------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998
Total risk-based capital:
Company $ 30,226 11.38% $ 21,250 > 8.0% $ 26,563 > 10.0%
Bank 26,996 10.29 20,890 > 8.0 26,225 > 10.0
Tier I risk-based capital:
Company 26,895 10.12 10,625 > 4.0 15,938 > 6.0
Bank 23,707 9.04 10,490 > 4.0 15,735 > 6.0
Tier I leverage capital:
Company 26,895 6.44 16,698 > 4.0 20,872 > 5.0
Bank 23,707 5.73 16,556 > 4.0 20,696 > 5.0
AS OF DECEMBER 31, 1997
Total risk-based capital:
Company $ 25,000 11.07% $ 18,073 > 8.0% $ 22,590 > 10.0%
Bank 23,756 10.68 17,788 > 8.0 22,235 > 10.0
Tier I risk-based capital:
Company 22,166 9.81 9,036 > 4.0 13,554 > 6.0
Bank 20,966 9.43 8,894 > 4.0 13,341 > 6.0
Tier I leverage capital:
Company 22,166 6.54 13,554 > 4.0 16,943 > 5.0
Bank 20,966 6.28 13,354 > 4.0 16,693 > 5.0
</TABLE>
YEAR 2000 ISSUE. In 1996, the Company formed a Year 2000 project team to
identify information technology and non-information technology systems,
procedures, and practices that require modification or replacement. A detailed
project plan has been developed with specific goals and target completion dates.
The Company's business areas are in various stages of this project plan. The
Company expects to complete testing of mission critical information technology
and non-information technology systems by June 30, 1999.
The Company believes that, with modifications to existing systems and
conversions to new systems, the Year 2000 problem will not pose significant
operational problems for the Company's systems as so modified and converted. The
Company expects that the necessary modifications will be implemented prior to
the Year 2000, although there can be no assurance that this will be the case. In
the event that modifications are not completed prior to the Year 2000, the
Company has developed contingency plans. However there can be no assurance that
these plans will fully mitigate any failures or problems. Furthermore, there may
be certain mission critical third party services where alternative arrangements
are limited or unavailable.
The Company relies on several third party service providers for key business
processes. It continues to work closely with these companies to monitor the
progress of their Year 2000 efforts. The Company's Year 2000 project team has
contacted all material service providers to discuss and assess their Year 2000
readiness. In addition, the Company is seeking verbal and written verification
from its material third party service providers as to their Year 2000 readiness.
13
<PAGE> 14
The Company began Year 2000 testing with material third party service providers
during the third quarter of 1998, and plans to complete testing by June 30,
1999. This schedule continues to track in line with the Company's overall Year
2000 project plan.
The Company continues to discuss these matters with, obtain written
certification from, and test the systems of third party service providers as to
Year 2000 compliance, however, there can be no assurance that any potential
impact associated with incompatible systems after December 31, 1999 would not
have a material adverse effect on the Company's business, financial condition or
results of operation.
The Company's credit risk associated with borrowers may increase to the extent
that borrowers fail to adequately address Year 2000 issues. As part of the
Company's Year 2000 project, existing loans have been evaluated to identify and
monitor those loans with the highest exposure to Year 2000 risk. Also,
assessment of Year 2000 risk has been incorporated into the loan underwriting
process. Even with these review procedures in place, there may be increases in
the Company's problem loans and credit losses in future years. It is not
possible to quantify the potential impact of such losses at this time.
The Company currently expects that the total aggregate costs to address the Year
2000 issue will not be material to the Company's consolidated results of
operations, although as the Company proceeds with its implementation plan, there
may be additional unforeseen costs, which may be significant. The 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.
The preceding "Year 2000 Issue" discussion contains various forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1933. These forward-looking statements represent the Company's beliefs or
expectations regarding future events. When used in the "Year 2000 Issue"
discussion, the words "believes", "expects", "estimates", and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements include, without limitation, the Company's expectations as to when it
will complete the modification and testing phases of its Year 2000 project plan
as well as its Year 2000 contingency plans; its estimated cost of achieving Year
2000 readiness; and the Company's belief that its internal systems will be Year
2000 compliant in a timely manner. All forward-looking statements involve a
number of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources; the ability to identify and remediate
all date sensitive lines of computer code or to replace embedded computer chips
in affected systems or equipment; and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.
14
<PAGE> 15
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
GENERAL. The Company recorded net income of $1.3 million, or $0.12 per
fully-diluted share, for the three months ended September 30, 1998, compared to
$1.4 million, or $0.13 per fully-diluted share, for the same period in 1997. The
current quarter results include an increase in net interest income, reduced by
increases in the provision for loan losses, operating expenses, and the
Company's effective tax rate. The Company's annualized return on average assets
was 1.25% for the third quarter of 1998, compared to 1.80% for the same period
in 1997, and the annualized return on stockholders' equity was 17.60% for the
third quarter of 1998, compared to 21.24% for the same period in 1997.
NET INTEREST INCOME. For the quarter ended September 30, 1998, net interest
income was $3.7 million, an increase of $680,000, or 22.9%, from $3.0 million
for the same period in 1997. This increase was primarily attributable to an
increase of $104.3 million, or 35.2%, in the average balance of earning assets,
partially offset by a 27 basis point decrease in the net interest margin.
INTEREST INCOME. During the third quarter of 1998, interest income was $7.6
million, an increase of $1.8 million, or 30.3%, over the same period in 1997.
Interest income on commercial loans increased 35.9% to $3.4 million for the
three months ended September 30, 1998, compared to $2.5 million for the same
period in 1997. Interest income from residential mortgage loans increased 35.7%
to $2.9 million for the third quarter of 1998 as compared to $2.1 million for
the same period in 1997. Home equity and other loans increased 18.3% to $349,000
for the third quarter of 1998 as compared to $295,000 for the same period in
1997. These increases were primarily due to an increase in loan volume. The
average balance of commercial loans increased $39.4 million, or 38.8%, while the
average rate decreased 20 basis points, or 2.1%, as compared to the same period
in 1997. The average balance of residential mortgage loans increased $50.1
million, or 43.6%, while the average rate decreased 40 basis points, or 5.5% as
compared to the same period in 1997. The average balance of home equity and
other loans increased $2.8 million, or 19.8%, while the average rate decreased
13 basis points, or 1.5% as compared to the same period in 1997.
Total investment income increased $72,000, or 7.6%, to $1.0 million during the
quarter ended September 30, 1998, compared to $950,000 during the same period in
1997. This increase was primarily attributable to an increase in the average
balance of investments of $12.0 million, or 18.2%.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $1.1
million, or 38.0%, to $4.0 million for the three months ended September 30,
1998, from $2.9 million for the same period during 1997. This increase in the
Company's interest expense is primarily due to an increase in the average
balance of interest-bearing liabilities of $98.1 million, or 38.9%. The average
cost of interest-bearing liabilities remained relatively flat during this
period.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $242,000 for the
quarter ended September 30, 1998, compared to $130,000 for the same period in
1997. Management evaluates several factors including new loan originations,
estimated charge-offs, and risk characteristics of the loan portfolio when
determining the provision for loan losses. These factors include the level and
mix of loan growth, the level of non-accrual and delinquent loans, and the level
of charge-offs and recoveries. Also see discussion under Financial Condition
- -"Allowance for Loan Losses." Net recoveries were $27,000 during the third
quarter of 1998, compared to $225,000 for the same period in 1997. The reserve
coverage as a percentage of total loans was 1.26% as of September 30, 1998.
FEES AND OTHER INCOME. Fees and other income decreased $157,000, or 3.9%, to
$3.9 million for the three month period ended September 30, 1998, compared to
$4.0 million for the same period in 1997. The majority of fee income is
attributable to advisory fees earned on assets under management. These fees
decreased $112,000, or 3.1%, to $3.5 million for the third quarter of 1998
compared to $3.6 million for the same period in 1997. This decrease is primarily
due to a decrease in average assets under management from $2.3 billion for the
quarter ended September 30, 1997 to $2.2 billion for the quarter ended September
30, 1998.
Deposit account service fees have decreased $3,000, or 4.5%, to $64,000 as a
result of deposit account activity. Gain on sale of loans has increased $82,000
to $97,000 due to a higher volume of fixed rate loans that were sold in the
secondary market. During the third quarter of 1998, the Company realized $29,000
of gains from the sale of investment securities. There were no sales of
investment securities during the third quarter of 1997.
15
<PAGE> 16
OPERATING EXPENSE. Total operating expense for the third quarter of 1998
increased $215,000, or 4.2%, to $5.3 million compared to $5.1 million for the
same period in 1997. However, operating expense for the third quarter of 1997
included a $400,000 one-time bonus payment. Not including this bonus payment,
operating expense would have increased $615,000, or 13.1% as compared to the
third quarter of 1997. The increase in total operating expense was primarily
attributable to the Company's continued growth and expansion. The Company
experienced a 29.7% increase in total assets, and a 24.8% increase in the number
of full time employees from September 30, 1997 to September 30, 1998. In
addition, the Company opened a new banking office in Wellesley, Massachusetts in
April 1998, which contributed to the overall increase in operating expenses.
Salaries and benefits, the largest component of operating expense, decreased
$173,000, or 4.5%, to $3.6 million for the quarter ended September 30, 1998,
from $3.8 million for the same period in 1997. However, salaries and benefits
for the third quarter of 1997 included a $400,000 one-time bonus payment. Not
including this bonus payment, salaries and benefits increased $227,000, or 6.7%,
as compared to the third quarter of 1997. This increase was due to an increase
in the number of employees and ordinary course salary increases.
Occupancy and equipment expense increased $100,000, or 23.0%, to $535,000 for
the third quarter of 1998 from $435,000 for the same period last year. This
increase was primarily attributable to ongoing technology investments and
expenses related to the new banking office in Wellesley, Massachusetts.
Professional services include outsourced data processing and custody expense,
legal fees, consulting fees, and other professional services such as audit and
tax preparation. These expenses increased $131,000, or 42.3%, primarily as a
result of a new contract to outsource internal audit and compliance functions,
and higher volume related charges for data processing and custody services.
Marketing expenses increased $31,000, or 54.4%, to $88,000 for the third quarter
of 1998 as a result of an increase in advertising designed to increase the
visibility of the Company and its products and services. The Company also
experienced a $23,000, or 23.2%, increase in business development expense as a
result of an increase in the number of employees and new business activity.
There was $9,000 of merger expenses incurred in the third quarter of 1997
related to the acquisition of Westfield. There were no such expenses during the
third quarter of 1998.
Other expenses include supplies, telephone, postage, publications and
subscriptions, and other miscellaneous business expenses. These expenses have
increased $112,000, or 39.6% to $395,000, primarily as a result of the Company's
continued growth and expansion.
INCOME TAX EXPENSE. The Company recorded income tax expense of $671,000 for the
third quarter of 1998 as compared to $380,000 for the same period last year. The
effective tax rate was 33.7% and 21.2% for the two periods, respectively. The
increase in the Company's effective tax rate is primarily due to the fact that
Westfield was a tax-exempt S-Corporation during 1997. If Westfield had been a
fully taxable entity, the Company would have incurred approximately $237,000 of
additional income tax expense for the third quarter of 1997, which equates to an
effective tax rate of approximately 34.4%.
16
<PAGE> 17
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
GENERAL. The Company recorded net income of $3.8 million, or $0.34 per
fully-diluted share, for the nine months ended September 30, 1998, compared to
$3.3 million, or $0.30 per fully-diluted share, for the same period in 1997. The
current period results include an increase in net interest income and fee
income, partially reduced by increases in the provision for loan losses,
operating expenses, and the Company's effective tax rate. The Company's
annualized return on average assets was 1.27% for the first nine months of 1998,
compared to 1.47% for the first nine months of 1997, and the annualized return
on stockholders' equity was 17.68% compared to 17.08% for the same periods,
respectively.
NET INTEREST INCOME. For the nine months ended September 30, 1998, net interest
income was $10.4 million, an increase of $2.1 million, or 25.2%, over the same
period in 1997. This increase was primarily attributable to an increase of $81.8
million, or 27.5%, in the average balance of earning assets, partially offset by
a 20 basis point decrease in the net interest margin.
INTEREST INCOME. During the first nine months of 1998, interest income was $21.6
million, an increase of $5.2 million, or 31.4%, over the same period in 1997.
Interest income on commercial loans increased 40.0% to $9.6 million for the nine
months ended September 30, 1998, compared to $6.9 million for the same period in
1997. Interest income from residential mortgage loans increased 31.0% to $7.7
million for the first nine months of 1998 as compared to $5.9 million for the
same period in 1997, and home equity and other loans increased 21.2% to $1.0
million compared to $827,000, for the same periods, respectively. These
increases were primarily due to an increase in loan volume. For the first nine
months of 1998, the average balance of commercial loans increased $41.3 million,
or 43.2%, while the average rate decreased 20 basis points, or 2.2%. The average
balance of residential mortgage loans increased $38.5 million, or 36.1%, while
the average rate decreased 27 basis points, or 3.7% for the same period. The
average balance of home equity and other loans increased $2.7 million, or 20.6%,
while the average rate remained relatively flat.
Total investment income increased $392,000, or 14.0%, to $3.2 million during the
nine months ended September 30, 1998, compared to $2.8 million during the same
period in 1997. This increase was primarily attributable to an increase in the
average balance of investments of $13.3 million, or 19.8%.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $3.1
million, or 37.7%, to $11.2 million for the nine months ended September 30,
1998, from $8.1 million for the same period during 1997. This increase in the
Company's interest expense is due to an increase in the average balance of
interest-bearing liabilities of $77.4 million, or 30.7%, between the two
periods, and an increase in the average cost of interest-bearing liabilities
from 4.50% for the first nine months of 1997 to 4.55% for the same period in
1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $857,000 for the
nine months ended September 30, 1998, compared to $259,000 for the same period
in 1997. When determining the provision for loan losses, management evaluates
several factors including new loan originations, estimated charge-offs, and risk
characteristics of the loan portfolio. These factors include the level and mix
of loan growth, the level of non-accrual and delinquent loans, and the level of
charge-offs and recoveries. Also see discussion under Financial Condition
- -"Allowance for Loan Losses." Total loans increased $57.1 million, or 20.6%,
during the first nine months of 1998, while the level of non-performing loans
increased 22.8%. Net charge-offs were $302,000 during the first nine months of
1998, compared to $259,000 of net recoveries for the same period in 1997. The
majority of the 1998 charge-offs resulted from one loan, which was written off
due to concern about the borrower's ability to repay. The Bank plans to pursue
collection of the outstanding balance. The reserve coverage as a percentage of
total loans was 1.26% as of September 30, 1998 as compared to 1.27% as of
September 30, 1997.
FEES AND OTHER INCOME. Fees and other income increased $1.8 million, or 17.5%,
to $12.3 million for the nine month period ended September 30, 1998, compared to
$10.4 million for the same period in 1997. The majority of fee income is
attributable to advisory fees earned on assets under management. These fees
increased $1.5 million, or 15.5%, to $11.3 million for the first nine months of
1998 compared to $9.8 million for the same period in 1997. This increase is
primarily due to an increase in average assets under management from $2.0
billion for the nine month period ended September 30, 1997 to $2.1 billion for
the nine month period ended September 30, 1998.
17
<PAGE> 18
Deposit account service fees have increased $12,000, or 7.5%, to $172,000 as a
result of an increase in deposit account activity, and a revised fee schedule,
which went into effect during the third quarter of 1997. Gain on sale of loans
has increased $154,000 to $197,000 due to a higher volume of fixed rate loans
that were sold in the secondary market. During the first nine months of 1998,
the Company realized $84,000 of gains from the sale of investment securities.
There were no sales of investment securities during the first nine months of
1997.
OPERATING EXPENSE. Total operating expense for the first nine months of 1998
increased $1.9 million, or 13.0%, to $16.1 million compared to $14.2 million for
the same period in 1997. However, operating expense for the first nine months of
1997 includes a $400,000 one-time bonus payment. Not including this bonus
payment, operating expense for the nine month period ended September 30, 1998
would have increased $2.3 million, or 16.3%, as compared to the same period in
1997. The increase in total operating expense was primarily attributable to the
Company's continued growth and expansion. The Company experienced a 29.7%
increase in total assets, and a 24.8% increase in the number of full time
employees from September 30, 1997 to September 30, 1998. In addition, the
Company opened a new banking office in Wellesley, Massachusetts in April 1998,
which contributed to the overall increase in operating expenses.
Salaries and benefits, the largest component of operating expense, increased
$1.2 million, or 12.1%, to $11.2 million for the nine months ended September 30,
1998, from $10.0 million for the same period in 1997. However, salaries and
benefits for the first nine months of 1997 include a $400,000 one-time bonus
payment. Not including this bonus payment, salaries and benefits for the nine
month period ended September 30, 1998 increased $1.6 million, or 16.8%, as
compared to the same period in 1997. This increase was due to a 24.8% increase
in the number of employees and ordinary course salary increases.
Occupancy and equipment expense increased $386,000, or 33.0%, to $1.6 million
for the first nine months of 1998, from $1.2 million, for the same period last
year. This increase was primarily attributable to ongoing technology investments
and expenses related to the new banking office in Wellesley, Massachusetts.
Professional services include outsourced data processing and custody expense,
legal fees, consulting fees, and other professional services such as audit and
tax preparation. These expenses increased $137,000, or 12.2%, primarily as a
result of a new contract to outsource internal audit and compliance functions,
and higher volume related charges for data processing and custody services.
Marketing expenses increased $3,000, or 1.1%, to $269,000 for the first nine
months of 1998 as a result of ongoing advertising designed to increase the
visibility of the Company and its products and services. The Company also
experienced a $46,000, or 12.7%, increase in business development expense as a
result of an increase in the number of employees and new business activity.
There was $120,000 of merger expenses incurred in the first nine months of 1997
related to the acquisition of Westfield. There were no such expenses during the
same period in 1998.
Other expenses include supplies, telephone, postage, publications and
subscriptions, and other miscellaneous business expenses. These expenses have
increased $185,000, or 20.4%, to $1.1 million, primarily as a result of
increased business volume and an increase in the number of employees.
INCOME TAX EXPENSE. The Company recorded income tax expense of $1.9 million, for
the first nine months of 1998 as compared to $898,000 for the same period last
year. The effective tax rate was 33.7% and 21.3% for the two periods,
respectively. The increase in the Company's effective tax rate was primarily due
to the fact that Westfield was a tax-exempt S-Corporation during 1997. If
Westfield had been a fully taxable entity, the Company would have incurred
approximately $493,000 of additional income tax expense for the first nine
months of 1997, which equates to an effective tax rate of approximately 33.0%.
18
<PAGE> 19
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to this item, see the Company's December 31, 1997
Form 10-KSB, Item 6 - Interest Rate Sensitivity and Market Risk. No material
changes have occurred since that date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information related to this item, see the Company's December 31, 1997 Form
10-KSB. No material changes have occurred since that date.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No changes in security holders' rights have taken place and no equity securities
of the Company have been sold during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No defaults upon senior securities have taken place.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No submissions of matters to a vote of the security holders have taken place
during the period covered by this report.
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
Exhibit 27.1 Financial Data Schedule
No reports on Form 8-K were filed during the three-month period ended September
30, 1998.
19
<PAGE> 20
SIGNATURES
----------
Pursuant to the requirements 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.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Registrant)
November 12, 1998 /s/ Timothy L. Vaill
----------------------------------------
Timothy L. Vaill
President and Chief
Executive Officer
November 12, 1998 /s/ Walter M. Pressey
----------------------------------------
Walter M. Pressey
Senior Vice President and
Chief Financial Officer
20
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