<PAGE>
As filed with the Securities and Exchange Commission on March 6, 2000
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to _______.
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2976299
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 912-1900
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None NA
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of its common stock on the
Nasdaq National Market System on February 22, 2000 was $69,238,561.
11,693,663 shares of the registrant's common stock were
outstanding on February 22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the Company's 2000
Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12
and 13 of Part III.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1 BUSINESS 3
ITEM 2 PROPERTIES 16
ITEM 3 LEGAL PROCEEDINGS 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 17
ITEM 6 SELECTED FINANCIAL DATA 18
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 34
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 64
PART III
The information called for by Items 10-13 of Part III of Form 10-K is
incorporated herein by reference to the Company's Definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 64
SIGNATURES 66
</TABLE>
<PAGE>
PART I
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those projected in the forward-looking statements as a
result of, among other factors, the factors listed under "Risk Factors and
Factors Affecting Forward Looking Statements," changes in loan defaults and
charge-off rates, reduction in the value or amount of deposit levels
necessitating increased borrowing to fund loans and investments, changes in
interest rates, fluctuations in assets under management and other sources of fee
income, the impact of year 2000 issues on the Company, its clients and its
vendors, and changes in assumptions used in making such forward-looking
statements.
ITEM 1. BUSINESS
GENERAL
Boston Private Financial Holdings, Inc. (the "Company"), organized on July
1, 1988, is incorporated under the laws of the Commonwealth of Massachusetts and
is registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). On July 1, 1988, the Company
became the parent holding company of Boston Private Bank & Trust Company (the
"Bank"), a trust company chartered by the Commonwealth of Massachusetts and
insured by the Federal Deposit Insurance Corporation (the "FDIC").
On October 15, 1999, the Company acquired RINET Company, Inc. ("RINET"), a
Massachusetts corporation engaged in providing financial planning services to
high net worth individuals, in exchange for 765,697 newly issued shares of the
Company's common stock. The acquisition was accounted for as a "pooling of
interests." Accordingly, the results of operations of the Company have been
restated to reflect the results of operations, including RINET, on a
consolidated basis.
On October 31, 1997, the Company acquired Westfield Capital Management
Company, Inc. ("Westfield"), a Massachusetts corporation engaged in providing a
range of investment management services to individual and institutional clients,
in exchange for 3,918,367 newly issued shares of the Company's common stock. The
acquisition was accounted for as a "pooling of interests." Accordingly, the
results of operations of the Company have been restated to reflect the results
of operations, including Westfield, on a consolidated basis.
The Company conducts substantially all of its business through its
wholly-owned subsidiaries, the Bank, Westfield and RINET. The Company's and the
Bank's principal offices are located at Ten Post Office Square, Boston,
Massachusetts, Westfield's principal office is located at One Financial Center,
Boston, Massachusetts, and RINET's principal office is located at 213 Union
Wharf, Boston, Massachusetts. The Bank also has a branch office located in
Wellesley, Massachusetts, and has received regulatory approval to open a second
branch office in the Back Bay area of Boston, Massachusetts.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products and services to
high net worth individuals, their families and businesses in the greater Boston
area and New England and, to a lesser extent, Europe and Latin America. The Bank
seeks to anticipate and respond to the financial needs of its client base by
offering high quality products, dedicated personal service and long-term banking
relationships. The Bank offers its clients a broad range of basic deposit
services, including checking and savings accounts, with automated teller machine
("ATM") access, and cash management services. The Bank also offers commercial,
residential mortgage, home equity and consumer loans. In addition, it provides
investment advisory and asset management services, securities custody and
safekeeping services, and trust and estate administration. In December 1996, the
Company received $3.4 million of additional equity capital from an offering of
its common stock, all of which was subsequently invested in the Bank. In
December 1998, the Company invested $1.0 million of additional capital in the
Bank from the proceeds of an intra-company loan from Westfield. In 1999, the
Company invested $2.0 million of additional capital in the Bank from the
proceeds of dividends received from Westfield.
3
<PAGE>
Westfield is an investment management firm serving the investment needs of
high net worth individuals and institutions with endowments, pensions and
profit-sharing or 401(k) plans. The investment management team seeks out
opportunities to purchase growth equities at a reasonable price by applying
fundamental research techniques combined with an evaluation of screens of
securities to identify prospective investments which have broad market
opportunities, accelerating earnings growth, low financial leverage and
sufficient cash flow. They often visit companies to interview management of
prospective investments, seeking to find those situations where there is a
diversity of current investment opinion and where fundamental research can
identify company specific events that create a competitive edge. After making an
investment, Westfield monitors performance against a systematic set of sell
disciplines including: downside price limits, an alteration of the investment
case, changes in relative price momentum, valuation relative to its peer group
and attractiveness versus alternative investments. Westfield primarily manages
individually invested accounts and also acts as manager for five limited
partnerships, two invest primarily in technology stocks, two invest primarily in
midcap equities, and another invests primarily in small capitalization equities.
RINET provides fee-only financial planning, tax planning and investment
management services to high net worth individuals and their families in the
greater Boston area, New England, and other areas of the U.S. Its capabilities
include tax planning and preparation, asset allocation, estate planning,
charitable planning, planning for employment benefits, including 401(k) plans,
alternative investment analysis and mutual fund investing.
The Company's operating results depend primarily on the operating results
of the Bank, Westfield and RINET. The Company generates a significant amount of
fee income from providing investment management and trust services to its
clients at the Bank and from providing investment management services and acting
as manager for limited partnerships for clients at Westfield. Investment
management and trust fees are generally based upon the value of assets under
management, and, therefore, can be significantly affected by fluctuations in the
values of securities caused by changes in the capital markets and by investment
performance of the Bank and Westfield. Fees earned as manager for limited
partnerships are directly related to investment performance and, therefore, will
be significantly affected by the investment performance of Westfield. The Bank
also earns fees and other income from its lending and cash management services.
The net income of the Bank depends primarily on its net interest income, which
is the difference between interest income and interest expense or "cost of
money", and the quality of its assets. Interest income depends on the amount of
interest-earning assets outstanding during the period and the interest rates
earned thereon. The Bank's cost of money is a function of the average amount of
deposits and borrowed money outstanding during the period and the interest rates
paid thereon. The quality of assets further influences the amount of interest
income lost on nonaccrual loans and the amount of additions to the allowance for
loan losses. RINET earns income on a fee-only basis from providing financial
planning services to clients. RINET also earns fees for providing asset
allocation services to clients that are based on the value of such assets.
INVESTMENT MANAGEMENT AND TRUST ADMINISTRATION
The Company and its subsidiaries provide a broad range of investment
management services to individuals, family groups, trusts, endowments and
foundations, retirement plans and investment partnerships. These services
include management of equity, fixed income, balanced and strategic cash
management portfolios. Portfolios are managed based on the investment objectives
of each client, and each portfolio is positioned to benefit from long-term
market trends. Acting as fiduciary, the Bank also provides trust services to
both individuals and institutions. Westfield, acting as the manager of five
limited partnerships, also earns fees based on the performance of these limited
partnerships. For the year ended December 31, 1999, the asset management
business accounted for 83.6% of the Company's total fees and other income and
49.1% of the Company's total revenues, which is defined as net interest income
plus fees and other income. At December 31, 1999, the Company had approximately
$3.7 billion in assets under management. Of this total, $3.6 billion was in
investment advisory accounts, and $98.8 million was invested and administered
under trust arrangements.
LENDING ACTIVITIES
GENERAL. The Bank specializes in lending to individuals and small
businesses, including corporations, partnerships, associations and non-profit
organizations. Loans made by the Bank to individuals include residential
mortgage loans, unsecured and secured personal lines of credit, home equity
loans, mortgage loans on investment and vacation properties, letters of credit
and overdraft protection. Loans made by the Bank to businesses include
commercial mortgage loans, revolving lines of credit, working capital loans,
equipment financing and letters of credit. Commercial loans over $500,000, with
the exception of cash collateralized loans, are reviewed by the Credit
Committee, and commercial loans over $2 million are reviewed by the Senior Loan
Committee. Both committees consist of members of the Bank's management and
lending staff. Commercial and residential mortgage loans that exceed 10% of the
Bank's Tier I capital are reviewed by the Directors Loan Committee, which
consists of four outside Directors of the Bank.
4
<PAGE>
At December 31, 1999, the Bank had loans outstanding of $450.4 million,
which represented approximately 79.4% of the Company's total assets. The
interest rates charged on these loans vary with the degree of risk, maturity
and amount, and are further subject to competitive pressures, market rates,
the availability of funds and legal and regulatory requirements. At December
31, 1999, approximately 82.6% of the Bank's outstanding loans had interest
rates that were either floating or adjustable in nature. See Part II, Item 7A
"Quantitative and Qualitative Disclosures About Market Risk - Interest Rate
Sensitivity and Market Risk." At December 31, 1999, approximately 99.2% of
the Bank's outstanding loans were secured, and approximately 84.1% were
secured, in whole or in part, by real estate, and within the commercial loan
portfolio, $122.0 million, or 64.0% of the portfolio was secured, in whole or
in part by real estate.
At December 31, 1999, the Bank's statutory lending limit to any single
borrower was approximately $7.1 million, subject to certain exceptions provided
under applicable law. At December 31, 1999, the Bank had no outstanding lending
relationships in excess of the legal lending limit. The Bank also has a policy
of extending only secured loans to Directors of the Company and its
subsidiaries, and the aggregate principal amount of loans to all Directors of
the Company and its subsidiaries is limited by law to 100% of capital. At
December 31, 1999, the aggregate principal amount of all loans to Directors and
related entities (including unused commitments under lines of credit) was $4.7
million, or 13.7% of capital.
LOAN PORTFOLIO COMPOSITION AND MATURITY. The following table sets forth the loan
balances for certain loan categories at the dates indicated and the percent of
each category to total gross loans.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Commercial $190,817 42.4% $154,940 44.4% $134,685 48.7% $97,740 47.4% $72,729 46.8%
Residential 234,185 52.0 173,810 49.8 124,865 45.1 96,578 46.9 74,447 48.0
mortgage
Home equity 25,039 5.5 19,866 5.7 16,969 6.1 11,481 5.6 7,783 5.0
Other 347 .1 335 .1 306 .1 308 .1 297 .2
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
450,388 100.0% 348,951 100.0% 276,825 100.0% 206,107 100.0% 155,256 100.0%
Allowance for
loan losses (5,336) (4,386) (3,645) (2,566) (1,942)
-------- -------- -------- -------- --------
Net loans $445,052 $344,565 $273,180 $203,541 $153,314
======== ======== ======== ======== ========
</TABLE>
The following table sets forth scheduled contractual maturities of loans in
the Company's portfolio at December 31, 1999. Loans having no stated maturity
are reported as due in one year or less. The following table also sets forth the
dollar amounts of loans that are scheduled to mature after one year which have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
RESIDENTIAL HOME
COMMERCIAL MORTGAGE EQUITY OTHER TOTAL
----------- ----------- -------- ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less $ 67,531 $ -- $ 679 $347 $ 68,557
After one year through five years 96,603 50 665 -- 97,318
Beyond five years 26,683 234,135 23,695 -- 284,513
------------------------------------------------------
Total $190,817 $234,185 $25,039 $347 $450,388
======================================================
Interest rate terms on amounts due after one year:
Fixed $ 54,744 $ 19,289 $ -- $ -- $ 74,033
Adjustable 68,542 214,896 24,360 -- 307,798
------------------------------------------------------
Total $123,286 $234,185 $24,360 $ -- $381,831
======================================================
</TABLE>
5
<PAGE>
Scheduled contractual maturities typically do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage.
The average life of mortgage loans tends to increase when current market rates
are substantially higher than rates on existing mortgage loans and decrease when
current market rates are substantially lower than rates on existing mortgages
(due to refinancing of adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases as
higher yielding loans are repaid or refinanced at lower rates. In addition, due
to the fact that the Bank will, consistent with industry practice, "rollover" a
significant portion of commercial real estate and commercial loans at or
immediately prior to their maturity by renewing credit on substantially similar
or revised terms, the principal repayments actually received by the Bank are
anticipated to be significantly less than the amounts contractually due in any
particular period. A portion of such loans also may not be repaid due to the
borrower's inability to satisfy the contractual obligations of the loan. See
Part II, Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset Quality."
COMMERCIAL LOANS. Commercial loans include working capital loans, equipment
financings, standby letters of credit, term loans, revolving lines of credit and
commercial real estate and construction loans. Commercial loans to individuals
include construction loans, secured and unsecured personal lines of credit and
term loans.
At December 31, 1999, the Bank had outstanding commercial loans totaling
$190.8 million, which represented 42.4% of total loans and 33.6% of total assets
of the Company. Commercial loans, consisting primarily of loans to businesses,
increased $35.9 million, or 23.2%, during the year ended December 31, 1999,
compared to an increase of $20.3 million, or 15.0%, during the year ended
December 31, 1998. The growth in 1999 and 1998 reflects both an increase in
market demand and initiatives by the Bank to increase market share. Of the
Bank's total commercial loan portfolio, $67.5 million or 35.4% is due within one
year and $123.3 million or 64.6% is due after one year. Loans are typically
priced on a fixed rate basis or at a margin over the Bank's base rate. Floating
rate loans accounted for 68.9% of the Bank's commercial loan portfolio as of
December 31, 1999. The average balance of the Bank's outstanding commercial
loans was approximately $283,000 at year-end 1999.
The Bank has an independent loan review process under which loans are
reviewed for adherence to internal policies and underwriting guidelines. The
Bank also reviews a large percentage of outstanding commercial loans at least
annually. Such credit reviews are first performed by the loan review function
and, if necessary, are presented to the Credit Committee with further review in
certain situations by the Directors Loan Committee. In addition, the Directors
Loan Committee reviews loans on the Bank's internal "watch list" and classified
loan report on a monthly basis. Each of these loans is required to have an
action plan developed by the lending officer in charge of the credit.
RESIDENTIAL MORTGAGE AND HOME EQUITY LOANS. At December 31, 1999, the Bank
had outstanding residential mortgage loans and home equity loans of $234.2
million and $25.0 million, respectively, together representing 57.5% of the
Bank's total loan portfolio. Residential mortgage loans and home equity loans
increased $65.5 million, or 33.8%, during the year ended December 31, 1999,
compared to an increase of $51.8 million, or 36.6%, during 1998. The increases
in both 1999 and 1998 were primarily due to the relatively low level of
adjustable mortgage loan interest rates, as well as an increase in the resources
allocated by the Company to the residential mortgage area. While the Bank has no
minimum size for its mortgage loans, it concentrates its origination activities
in the "Jumbo" segment of the market. This segment consists of loans secured by
single family properties in excess of the amount eligible for purchase by the
Federal National Mortgage Association ("FNMA"), which was $252,700 at December
31, 1999. The average balance of the Bank's outstanding residential mortgage
loans was approximately $329,000 at year-end 1999.
In 1999, the Bank sold $22.6 million of residential mortgage loans compared
to $23.7 million in 1998. Of the loans sold during 1999, $11.8 million were sold
on a non-recourse basis without retaining servicing, and $10.8 were sold with
servicing retained by the Bank. The Bank generally holds adjustable rate
mortgage loans ("ARM's") in its own portfolio and sells most fixed rate mortgage
loans to outside investors. At December 31, 1999, $211.0 million, or 90.1%, of
loans in the Bank's residential mortgage portfolio were ARM's.
OTHER LOANS. Other loans consist of balances outstanding on credit cards
and loans arising from overdraft protection extended to individual customers. At
December 31, 1999, aggregate outstanding balances on such loans were $347,000
compared to $335,000 at December 31, 1998. Other loans increased $12,000, or
3.6%, during the year ended December 31, 1999, compared to an increase of
$29,000, or 9.5%, during 1998. The balance of other loans is primarily dependent
on client demand.
6
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The following table is an analysis of the Bank's
allowance for loan losses for the periods indicated:
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Average loans outstanding .......................... $396,645 $308,978 $224,670 $175,332 $131,928
======== ======== ======== ======== ========
Allowance for loan losses, beginning of period ..... $4,386 $3,645 $2,566 $1,942 $1,232
Charged-off loans:
Commercial ...................................... 128 385 40 6 54
Residential Mortgage ............................ -- -- -- 52 3
Home Equity ..................................... -- -- -- 8 --
Other ........................................... 7 -- -- -- 4
-------- -------- -------- -------- --------
Total charged-off loans ..................... 135 385 40 66 61
-------- -------- -------- -------- --------
Recoveries on loans previously charged-off:
Commercial ...................................... 81 122 308 71 153
Other ........................................... 5 -- 1 -- --
-------- -------- -------- -------- --------
Total recoveries ............................ 86 122 309 71 153
-------- -------- -------- -------- --------
Net loans charged-off (recovered) .................. 49 263 (269) (5) (92)
Provision for loan losses .......................... 999 1,004 810 619 618
-------- -------- -------- -------- --------
Allowance for loan losses, end of period ........... $5,336 $4,386 $3,645 $2,566 $1,942
======== ======== ======== ======== ========
Net loans charged-off (recovered) to average loans . .01% .09% (.12%) (.01%) (.07%)
Allowance for loan losses to ending gross loans .... 1.18% 1.26% 1.32% 1.25% 1.25%
Allowance for loan losses to non-performing loans .. 405.16% 776.28% 487.95% 262.91% 304.87%
</TABLE>
The allowance for loan losses is determined to a great extent on the
judgement and experience of management, who utilize historical experience,
product types, and industry benchmarks. The allowance is segregated into three
components; "general", "specific" and "unallocated". The general component is
determined by applying coverage percentages to groups of loans based on risk
ratings and product types. A system of periodic loan reviews is performed to
individually assess the inherent risk and assign risk ratings to each loan.
Coverage percentages applied are determined based on industry practice and
management's judgement. The specific component is established by allocating a
portion of the allowance for loan losses to individual classified loans on the
basis of specific circumstances and assessments. The unallocated component
supplements the first two components based on management's judgement of the
effect of current and forecasted economic conditions on the borrowers' abilities
to repay, an evaluation of the allowance for loan losses in relation to the size
of the overall loan portfolio, and consideration of the relationship of the
allowance for loan losses to nonperforming loans, net charge-off trends, and
other factors.
The following table represents the allocation of the Bank's allowance for loan
losses and the percent of loans in each category to total loans as of the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Loan category:
Commercial $4,556 42.4% $3,763 44.4% $3,143 48.7% $2,296 47.4% $1,686 46.8%
Residential mortgage 585 52.0 429 49.8 312 45.1 241 46.9 237 48.0
Home equity and other 195 5.6 194 5.8 190 6.2 29 5.7 19 5.2
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
$5,336 100.0% $4,386 100.0% $3,645 100.0% $2,566 100.0% $1,942 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</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.
7
<PAGE>
INVESTMENT ACTIVITIES
The investment activity of the Bank is an integral part of the overall
asset/liability management of the Company. The Bank's investment policy is to
establish a portfolio of securities which will provide liquidity necessary to
facilitate funding of loans and to cover deposit fluctuations while at the same
time achieve a satisfactory return on the funds invested. The securities in
which the Bank may invest are subject to regulation and are generally limited to
securities which are considered "investment grade" securities. In addition, the
Bank has an internal investment policy which restricts investments to the
following categories: U.S. Treasury securities, obligations of U.S. government
agencies and corporations, mortgage-backed securities, including securities
issued by FNMA, the Government National Mortgage Association ("GNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"), securities of states and
political subdivisions and corporate debt, all of which must be considered
investment grade by a recognized rating service. The credit rating of each
security or obligation in the portfolio is monitored and reviewed by the
portfolio manager and by the Asset/Liability Management Committee. See Part II,
Item 8 "Financial Statements and Supplementary Data - Notes 5 and 6 to the
Consolidated Financial Statements" for further information.
The following table summarizes the book value of investments at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Available for sale:
U.S. Government and related obligations ............. $34,812 $35,050 $17,583
Municipal bonds ..................................... 38,793 19,052 19,193
Mortgage-backed securities .......................... 5,510 11,909 --
------- -------- --------
Total available for sale ......................... $79,115 $66,011 $36,776
======= ======== ========
Held to maturity:
U.S. Government and related obligations ............. $ -- $ -- $ 4,654
Municipal bonds ..................................... -- -- 5,000
Mortgage-backed securities .......................... -- -- 18,123
------- -------- --------
Total held to maturity ........................... $ -- $ -- $27,777
======= ======== ========
</TABLE>
SOURCES OF FUNDS
DEPOSITS. Deposits are the principal source of the Bank's funds for use in
lending and for other general business purposes. At December 31, 1999, the Bank
had a total of approximately 3,510 checking accounts consisting of demand
deposit and NOW accounts with an average account balance of approximately
$26,000; 640 savings accounts with an average account balance of approximately
$6,000; and 3,360 money market accounts with an average account balance of
approximately $71,000. Certificates of deposit of $100,000 or greater and
certificates of deposit under $100,000 represented approximately 19.9% and 24.6%
of total deposits at December 31, 1999 and 1998, respectively. See Part II, Item
8 "Financial Statements and Supplementary Data - Note 10 to the Consolidated
Financial Statements" for further information.
The following table sets forth the average balances and interest rates paid
on the Bank's deposits:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
----------------------
AVERAGE AVERAGE
BALANCE RATE
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non interest-bearing deposits:
Checking accounts .................................. $ 44,687 --%
Interest-bearing deposits:
Savings and NOW accounts ........................... 42,968 1.09
Money market accounts .............................. 194,209 3.69
Certificates of deposit under $100,000 ............. 26,864 5.22
Certificates of deposit of $100,000 or greater ..... 63,979 4.97
--------
Total ............................................ $372,707 3.28%
========
</TABLE>
8
<PAGE>
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,
--------------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Less than 3 months remaining .................. $39,791 $40,776
3 to 6 months remaining ....................... 4,010 4,562
6 to 12 months remaining ...................... 11,278 7,178
More than 12 months remaining ................. 6,009 100
-------- --------
Total .................................... $61,088 $52,616
======== ========
</TABLE>
BORROWINGS. The Bank has established various borrowing arrangements to
provide additional sources of liquidity and funding, thereby increasing
flexibility. Management believes that the Bank currently has adequate liquidity
available to respond to current demands. The Bank is a member of the FHLB of
Boston, and as such has access to both short and long-term borrowings of up to
$195.3 million at December 31, 1999. At December 31, 1999, the Bank had $80.7
million in FHLB advances outstanding with a weighted average interest rate of
5.85%, compared to $76.3 million in FHLB advances outstanding with a weighted
average interest rate of 5.74% at December 31, 1998. Of the advances outstanding
at December 31, 1999, $8.0 million have variable rates that reprice at least
annually to market rates. The Bank has the opportunity to repay variable rate
advances on their respective anniversary dates. See Part II, Item 8 "Financial
Statements and Supplementary Data - Note 11 to the Consolidated Financial
Statements" for further information.
The Bank also obtains funds from the sales of securities to institutional
investors and deposit customers under repurchase agreements. In a repurchase
agreement transaction, the Bank will generally sell an investment security,
agreeing to repurchase either the same or a substantially identical security on
a specified later date (generally not more than 90 days for institutional
investors and overnight for deposit customers) at a price slightly greater than
the original sales price. The difference in the sale price and repurchase price
is the cost of the use of the proceeds. The investment securities underlying
these agreements may be delivered to securities dealers who arrange such
transactions as collateral for the repurchase obligation. Repurchase agreements
represent a cost competitive funding source for the Bank. However, the Bank is
subject to the risk that the lender of the securities may default at maturity
and not return the collateral. In order to minimize this potential risk, the
Bank generally deals with large, established investment brokerage firms when
entering into such transactions with institutional investors, and deals with
established deposit customers of the Bank on overnight transactions. Repurchase
transactions are accounted for as financing arrangements rather than as sales of
such securities, and the obligation to repurchase such securities is reflected
as a liability in the Company's Consolidated Financial Statements. At December
31, 1999, the total amount of outstanding repurchase agreements was $16.6
million with a weighted average interest rate of 4.22%, compared to $6.2 million
with a weighted average interest rate of 4.16% at December 31, 1998. See Part
II, Item 8 "Financial Statements and Supplementary Data - Note 12 to the
Consolidated Financial Statements" for further information.
From time to time the Bank purchases federal funds from the FHLB and other
banking institutions to supplement its liquidity position. The Bank has
negotiated federal fund lines of credit totaling $79.0 million with
correspondent institutions to provide the Bank with immediate access to
overnight borrowings. At December 31, 1999, the Bank did not have any borrowings
outstanding under these federal funds lines. The Bank has also negotiated
brokered deposit agreements with several institutions that have nationwide
distribution capabilities. At December 31, 1999, the Bank had $5.4 million of
brokered deposits outstanding under these agreements. See Part II, Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity."
OTHER SOURCES OF FUNDS. Other sources of funds include investment
management fees, loan repayments, maturities of investment securities, and sales
of securities from the available for sale portfolio.
9
<PAGE>
COMPETITION
The ability of the Bank to attract loans and deposits may be limited by its
small size relative to its competitors. The Bank maintains a smaller staff and
has fewer financial and other resources than larger institutions with which it
competes in its market area.
In particular, in attempting to attract deposits and originate loans, the
Bank encounters competition from other institutions, including larger downtown
Boston and suburban-based commercial banking organizations, savings banks,
credit unions, and other financial institutions and non-bank financial service
companies serving Eastern Massachusetts and adjoining areas. The principal
methods of competition include the level of loan interest rates charged to
borrowers, interest rates paid on deposits, range of services provided and the
quality of these services.
In this competitive environment, the Bank may be unable to attract
sufficient and high-quality loans in order to continue its loan growth, which
may adversely affect the Bank's results of operations and financial condition,
including the level of its non-performing assets. The Bank's competitors include
several major financial companies whose greater resources may afford them a
marketplace advantage by enabling them to maintain numerous banking locations
and mount extensive promotional and advertising campaigns. In particular, the
Bank's current commercial borrowing customers may develop needs for credit
facilities larger than it can accommodate. Moreover, under the
Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley Act"), effective March
11, 2000, securities firms, insurance companies and other financial services
providers that elect to become financial holding companies may acquire banks and
other financial institutions. The Gramm-Leach-Bliley Act may significantly
change the competitive environment in which the Company and its subsidiaries
conduct business. See "The Financial Services Modernization Legislation" below.
The financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial
services. These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
In addition, the ability of the Bank and Westfield to attract investment
management and trust business may be inhibited by their relatively short history
and record of performance. With respect to their investment management and trust
services, the Bank and Westfield compete primarily with commercial banks and
trust companies, mutual fund companies, investment advisory firms, stock
brokerage firms, other financial companies and law firms. Competition is
especially keen in the Bank's and Westfield's market area, because Boston has a
well-established investment management industry. Many of the Bank's and
Westfield's competitors have greater resources than either the Bank, Westfield,
or the Company on a consolidated basis. In addition to competing directly for
clients, competition can impact the fee structures of the Bank and Westfield.
The Company believes that the ability of the Bank and Westfield to compete
effectively with other firms is dependent upon their products, level of
investment performance and client service, as well as the marketing and
distribution of their investment products. There can be no assurance that the
Bank and Westfield will be able to achieve favorable investment performance and
retain their existing clients.
RINET competes with a wide variety of firms including national and regional
financial services firms, accounting firms, trust companies, and law firms. Many
of these companies have greater resources and broader product lines, and may
already have relationships with RINET's clients in related product areas. The
Company believes that the ability of RINET to compete effectively with other
firms is dependent upon the quality and level of service, personal
relationships, price, and investment performance. There can be no assurance that
RINET will be able to retain their existing clients, expand existing
relationships, or add new clients.
EMPLOYEES
At December 31, 1999, the Company had 170 full-time and 3 part-time
employees. The Company's employees are not represented by a collective
bargaining unit, and the Company believes its employee relations are good.
REGULATION
Banks and bank holding companies are subject to extensive government
regulation through federal and state statutes and regulations, which are subject
to changes that significantly affect the way in which such entities conduct
business. Recently enacted legislation, as well as recent changes in regulatory
policy, has substantially increased the level of competition among commercial
banks, thrift institutions and non-banking institutions, including insurance
companies, brokerage firms, mutual funds and investment banks. The following
summary is qualified in its entirety by the text of the relevant statutes and
regulations.
10
<PAGE>
THE FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act repeals provisions of the
Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve member banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Gramm-Leach-Bliley Act also
contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the BHCA framework
to permit a holding company system, such as the Company, to engage in a full
range of financial activities through a new entity known as a Financial Holding
Company. "Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
Generally, the Gramm-Leach-Bliley Act:
o repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
o broadens the activities that may be conducted by national banks (and
derivatively state banks), banking subsidiaries of bank holding
companies, and their financial subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act of 1977, as amended (the "CRA") (See "Community
Reinvestment Act" below); and
o addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
In order to engage in the new activities, a bank holding company, such
as the Company, must meet certain tests. Specifically, all of a bank holding
company's banks must be well-capitalized and well-managed, as measured by
regulatory guidelines, and all of the bank holding company's banks must have
been rated "satisfactory" or better in the most recent CRA evaluation of each
bank. See "Community Reinvestment Act" below. At this time, the Company has not
determined whether it will become a financial holding company.
REGULATION OF THE COMPANY
GENERAL. The Company has been incorporated as a business corporation under
Massachusetts law. Thus, the rights of the Company's stockholders are governed,
in part, by Massachusetts corporate law. As a bank holding company, the Company
is subject to regulation and supervision by the Federal Reserve Board pursuant
to the BHCA.
BHCA-ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board.
The BHCA also generally prohibits a bank holding company from engaging in
any business other than banking or managing or controlling banks or from
acquiring more than 5% of the voting shares of any company that is not a bank,
unless the Federal Reserve Board has determined its activities to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto.
11
<PAGE>
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines that generally require bank holding companies to maintain
total capital equal to 8% of total risk-weighted assets, with at least one-half
of that amount consisting of Tier 1 capital. Tier 1 capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stock which may be included as Tier 1 capital), less
goodwill and other intangibles. Total capital consists of Tier 1 capital and
supplementary capital, which includes: hybrid capital instruments and perpetual
debt; perpetual preferred stock, which is not eligible to be included as Tier 1
capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses.
Assets are adjusted under the risk-based guidelines to take into account
different levels of credit risk, with the categories ranging from 0% (requiring
no additional capital) for assets such as cash to 100% for the bulk of assets
which are typically held by a bank, including commercial real estate loans,
commercial business loans and consumer loans. In addition to the risk-based
capital requirements, the Federal Reserve Board requires bank holding companies
to maintain a minimum ratio of Tier 1 capital to total assets of 3%, with most
bank holding companies required to maintain a 4% ratio. Furthermore, the bank
holding company rating system used by the Federal Reserve Board to analyze the
adequacy of a bank holding company's management, operations, earnings and
capital generally evaluates "primary capital" and "total capital," with the
leverage ratios for "well capitalized" institutions being 5.5% and 6%,
respectively. Finally, the Federal Reserve Board has also imposed certain
capital requirements applicable to certain non-banking activities, including
adjustments in connection with off-balance sheet items.
LIMITATIONS ON ACQUISITIONS OF COMMON STOCK. The Federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to expiration of
the disapproval period if the Federal Reserve Board issues written notice of its
intent not to disapprove the action. The acquisition of 10% or more of a class
of voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act, such as the Company, would, under certain
circumstances, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the company's outstanding
common stock, or such lesser number of shares of voting securities and other
indications of control as constitute control over the Company. Such approval
would be contingent upon, among other things, the acquiror (if not already
registered) registering as a bank holding company, divesting all impermissible
holdings and ceasing any activities not permissible for a bank holding company.
MASSACHUSETTS LAW. Massachusetts law requires all bank holding companies to
receive prior written approval of the Board of Bank Incorporation (the "BBI")
to, among other things, acquire all or substantially all of the assets of a
banking institution or to merge or consolidate with a Massachusetts bank holding
company. The Company owns no voting stock in any banking institution other than
the Bank. In addition, prior approval of the BBI is required before any bank
holding company owning 25% or more of the stock of two banking institutions may
acquire additional voting stock in those banking institutions, or acquire more
than 5% of the voting stock of another banking institution.
REGULATION OF THE BANK
GENERAL. The Bank is subject to extensive regulation and examination by the
Commissioner of Banks of the Commonwealth of Massachusetts and by the FDIC,
which insures its deposits to the maximum extent permitted by law, and to
certain requirements established by the Federal Reserve Board. The federal and
state laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for certain loans.
FDIC INSURANCE PREMIUMS. Pursuant to the FDIC's risk-based assessment
system, an institution is assigned to one of three capital groups based solely
on the level of the institution's capital -- "well capitalized," "adequately
capitalized" and "undercapitalized" -- which would be defined in generally the
same manner as the regulations establishing the prompt corrective action system
under Section 38 of the Federal Deposit Insurance Act (the "FDIA"), as discussed
below. The three capital groups are divided into three subgroups which reflect
varying levels of supervisory concern, from those considered to be healthy to
those considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications. At December 31, 1999, the Bank
was considered "well capitalized" with regard to these regulations.
12
<PAGE>
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
that, like the Bank, are not members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board, as described above.
PROMPT CORRECTIVE ACTION. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action established by
Section 38 of the FDIA. Under the regulations, a bank shall be deemed to be: (i)
"well capitalized" if it has total risk-based capital of 10.0% or more, has a
Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital
ratio of 5.0% or more and is not subject to any written agreement, order or
directive requiring the bank to maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more
and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the accompanying regulations also specify circumstances under which a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
REGULATORY CONSEQUENCES OF FAILING TO MEET CAPITAL REQUIREMENTS. A number
of sanctions may be imposed on FDIC-insured banks that are not in compliance
with the capital regulations, including, among other things, restrictions on
asset growth and imposition of a capital directive that may require, among other
things, an increase in regulatory capital, reduction of rates paid on savings
accounts, cessation of or limitations on deposit-gathering, lending, purchasing
loans, making specified investments, or issuing new accounts, limits on
operational expenditures, an increase in liquidity and such other restrictions
or corrective actions as the FDIC may deem necessary or appropriate. In
addition, any FDIC-insured bank that is not meeting its capital requirements
must provide the FDIC with prior notice before the addition of any new director
or senior officer.
BROKERED DEPOSITS AND PASS-THROUGH DEPOSIT INSURANCE LIMITATIONS.
Well-capitalized institutions may accept brokered deposits. A depository
institution that is adequately capitalized may not accept, renew or roll over
any brokered deposit unless it obtains a waiver of statutory limitations from
the FDIC. Even if an adequately capitalized institution receives such a waiver,
it may offer yields on brokered deposits only within specified limits. An
undercapitalized depository institution may not accept brokered deposits. The
definitions of "well capitalized," "adequately capitalized," and
"undercapitalized" generally conform to the definitions described above for
prompt corrective action. In addition, "pass-through" insurance coverage may not
be available for certain employee benefit accounts and eligible deferred
compensation plans maintained by depository institutions that cannot accept
brokered deposits.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24 of
the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), generally limits the equity investments and activities
of FDIC-insured, state non-member banks and their subsidiaries to those that are
permissible for national banks. Under the FDIC's final regulations dealing with
equity investments, an insured state bank generally may not directly or
indirectly acquire or retain any equity investment of a type, or in an amount,
that is not permissible for a national bank. An insured state bank is not
prohibited from, among other things, (i) acquiring or retaining a majority
interest in a subsidiary that engages in activities permissible for subsidiaries
of national banks, (ii) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that
such limited partnership investments may not exceed 2% of the Bank's total
assets, (iii) for insured state banks located in certain states, including
Massachusetts, retaining under certain circumstances and subject to certain
limitations, listed common and preferred shares or registered investment company
shares, (iv) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees', and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (v) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
With respect to the activities limitations, pursuant to FDIC regulation,
FDIC insured state chartered banks must obtain prior consent from the FDIC
before directly, or indirectly through a majority-owned subsidiary, engaging "as
principal" in any activity that is not allowed for a national bank. This
limitation generally does not apply, however, to activities which the Federal
Reserve Board has approved, securities activities performed in accordance with
FDIC regulations, and activities that the FDIC determines do not pose a
significant risk to the deposit insurance fund.
13
<PAGE>
Further, the Gramm-Leach-Bliley Act includes a new section of the FDICIA
governing subsidiaries of state banks that engage in "activities as principal
that would only be permissible" for a national bank to conduct in a financial
subsidiary. This provision will permit state banks, to the extent permitted
under state law, to engage in certain new activities which are permissible for
subsidiaries of a financial holding company. Further, it expressly preserves the
ability of a state bank to retain all existing subsidiaries. In order to form a
financial subsidiary, a state bank must be well-capitalized, and the state bank
would be subject to certain capital deduction, risk management and affiliate
transaction rules which are applicable to national banks.
SAFETY AND SOUNDNESS GUIDELINES. The federal banking agencies have adopted
safety and soundness guidelines for all insured depository institutions and
depository institution holding companies, prescribing in a general manner
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation and other
operational and managerial standards.
COMMUNITY REINVESTMENT ACT
The CRA was enacted to encourage every financial institution to help meet
the credit needs of its entire community, including low-and-moderate-income
neighborhoods, consistent with its safe and sound operation. The CRA does not
establish specific lending requirements or programs for financial institutions,
nor does it limit an institution's discretion to develop the type of products
and services that it believes are best suited to its particular community,
consistent with the purposes of the CRA.
The federal bank regulatory agencies jointly issued amendments to the
regulations implementing the CRA that substantially revised the applicable CRA
framework effective January 1, 1996. The amended CRA regulations are based upon
objective criteria of the performance of institutions under three key assessment
tests: (i) a lending test, to evaluate the institution's record of making loans
in its service areas; (ii) an investment test, to evaluate the institution's
record of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and (iii)
a service test, to evaluate the institution's delivery of services through its
branches, ATMs, and other offices. As of the date of the most recent regulatory
exam in September 1997, the Bank's CRA rating was "satisfactory."
GOVERNMENT REGULATION OF OTHER ACTIVITIES
Virtually all aspects of the Company's investment management business are
subject to extensive regulation. Westfield, RINET, and Boston Private Asset
Management ("BPAM"), an investment management subsidiary of the Bank, are
registered with the Securities and Exchange Commission (the "Commission") as
investment advisers under the Investment Advisers Act of 1940, as amended (the
"Investment Advisors Act"). As an investment adviser, each is subject to the
provisions of the Investment Advisers Act and the Commission's regulations
promulgated thereunder. The Investment Advisers Act imposes numerous obligations
on registered investment advisers, including fiduciary, recordkeeping,
operational, and disclosure obligations. Westfield, RINET and BPAM are also
subject to regulation under the securities laws and fiduciary laws of certain
states. Each of the mutual funds for which Westfield acts as adviser, or
subadviser, is registered with the Commission under the Investment Company Act
of 1940, as amended (the "1940 Act"), shares of each such fund are registered
with the Commission under the Securities Act, and the shares of each fund are
qualified for sale (or exempt from such qualification) under the laws of each
state and the District of Columbia to the extent such shares are sold in any of
such jurisdictions. As an adviser or subadviser to a registered investment
company, Westfield is subject to requirements under the 1940 Act and the
Commission's regulations promulgated thereunder. The Company is also subject to
the Employee Retirement Income Security Act of 1974 ("ERISA"), and to
regulations promulgated thereunder, insofar as it is a "fiduciary" under ERISA
with respect to certain of its client. ERISA and the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), impose certain
duties on persons who are fiduciaries under ERISA, and prohibit certain
transactions by the fiduciaries (and certain other related parties) to such
plans.
Under the Investment Advisers Act, every investment advisory contract
between a registered investment adviser and its clients must provide that it may
not be assigned by the investment adviser without the consent of the client. In
addition, under the 1940 Act, each contract with a registered investment company
must provide that it terminates upon its assignment. Under both the Investment
Advisers Act and the 1940 Act, an investment advisory contract is deemed to have
been assigned in the case of a direct "assignment" of the contract as well as in
the case of a sale, directly or indirectly, of a "controlling block" of the
adviser's voting securities. Such an assignment may be deemed to take place when
a firm is acquired by the Company.
14
<PAGE>
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict
either Westfield, RINET or BPAM from conducting their business in the event that
they fail to comply with such laws and regulations. Possible sanctions that may
be imposed in the event of such noncompliance include the suspension of
individual employees, limitations on the business activities for specified
periods of time, revocation of registration as an investment adviser, commodity
trading adviser and/or other registrations, and other censures and fines.
Changes in these laws or regulations could have a material adverse impact on the
profitability and mode of operations of the Company.
FEDERAL TAXATION
The Company, the Bank, Westfield, and RINET are subject to those rules of
federal income taxation generally applicable to corporations under the Code. The
Bank is also, under Subchapter H of the Code, subject to certain special rules
applicable to banking institutions as to securities, reserves for loan losses,
and any common trust funds. The Company, the Bank, Westfield, and RINET, as
members of an affiliated group of corporations within the meaning of Section
1504 of the Code, will file a consolidated federal income tax return, which has
the effect of eliminating or deferring the tax consequences of inter-company
distributions, including dividends, in the computation of consolidated taxable
income for federal tax purposes.
In addition to regular corporate income tax, corporations are subject to an
alternative minimum tax which generally is equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items which are generally
applicable include an amount equal to 75% of the amount by which a bank's
adjusted current earnings (generally alternative minimum taxable income computed
without regard to this preference and prior to reduction for net operating
losses) exceeds its alternative minimum taxable income without regard to this
preference. Alternative minimum tax paid can be credited against regular tax due
in later years.
STATE AND LOCAL TAXATION
COMMONWEALTH OF MASSACHUSETTS. The Bank is subject to an annual
Massachusetts excise tax. The tax rate applicable to financial institutions,
including trust companies, was 10.50% during 1999 on net income apportioned to
Massachusetts. The rate was 11.72% for 1996, 11.32% for 1997 and 10.91% for
1998. Net income for years beginning before January 1, 1999 includes gross
income as defined under the provisions of the Code, plus interest from bonds,
notes and evidences of indebtedness of any state, including Massachusetts, less
the deductions, excluding the deductions for dividends received, state taxes,
and net operating losses, but not the credits as defined under the provisions of
the Code. For taxable years beginning on or after January 1, 1999, the
definition of Massachusetts net income is modified to allow a deduction for 95%
of dividends received from stock where the Bank owns 15% or more of the voting
stock of the institution paying the dividend and to allow deductions from
certain expenses allocated to federally tax exempt obligations. Finally,
affiliated financial institutions are not permitted to file a combined tax
return in Massachusetts under the new legislation.
Bank holding companies and certain non-bank subsidiaries are subject to the
Massachusetts corporate excise tax on business corporations provided they were
subject to such tax in taxable years before 1995. Under the corporate excise
tax, a corporation is taxed on its net income apportioned to Massachusetts at
the rate of 9.5% plus a tax of .26% on either its apportioned net worth or
tangible property. These grandfathered corporations may elect to file a combined
Massachusetts excise tax return through 1998. For taxable years beginning in
1999, these corporations were taxed as a financial institution and taxed at a
rate of 10.5% on their net income apportioned to Massachusetts. Certain of the
Bank's subsidiaries meeting certain definitional tests relating to investments
are not subject to either the corporate excise tax or the tax on financial
institutions, but instead are taxed on their gross income at the rate of 1.32%.
The Bank and certain of its affiliates are subject to local property taxes.
Massachusetts excise or local property taxes paid by the Bank or its affiliates
are generally deductible for federal income tax purposes.
15
<PAGE>
ITEM 2. PROPERTIES
The Company and its subsidiaries conduct operations in leased premises.
The Company's and the Bank's headquarters are located at Ten Post Office
Square, Boston, Massachusetts with a branch office in Wellesley,
Massachusetts. The Bank has also received regulatory approval to open a
second branch office in the Back Bay area of Boston, Massachusetts. Westfield
is located at One Financial Center, Boston, Massachusetts, and RINET is
located at 213 Union Wharf, Boston, Massachusetts. Generally, the initial
terms of the leases for these properties range from five to fifteen years.
Most of the leases also include options to renew at fair market value for
periods of five to ten years. In addition to minimum rentals, certain leases
include escalation clauses based upon various price indices and include
provisions for additional payments to cover taxes.
The Company has from time to time also acquired properties through
foreclosure, which are marketed by local real estate brokers or by its lending
staff.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1999.
16
<PAGE>
PART II
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those projected in the forward-looking statements as a
result of, among other factors, the factors listed under "Risk Factors and
Factors Affecting Forward Looking Statements," changes in loan defaults and
charge-off rates, reduction in deposit levels necessitating increased borrowing
to fund loans and investments, changes in interest rates, fluctuations in the
value or amount of assets under management and other sources of fee income, the
impact of Year 2000 issues on the Company, its clients and its vendors, and
changes in assumptions used in making such forward-looking statements.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's common stock, par value $1.00 per share (the "Common Stock"),
is traded on the Nasdaq National Market System ("Nasdaq") under the symbol
"BPFH". At February 22, 2000 there were 11,693,663 shares of Common Stock
outstanding, which were held by approximately 420 holders of record.
The following table sets forth the high and low closing sale prices for the
Company's Common Stock for the periods indicated, as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999
Fourth Quarter .......................................... $9.25 $7.63
Third Quarter ........................................... 8.94 7.44
Second Quarter .......................................... 7.75 6.63
First Quarter ........................................... 8.63 6.50
FISCAL YEAR ENDED DECEMBER 31, 1998
Fourth Quarter .......................................... $ 9.25 $7.00
Third Quarter ........................................... 10.50 6.88
Second Quarter .......................................... 11.75 9.38
First Quarter ........................................... 10.38 8.00
</TABLE>
DIVIDENDS
The Company declared its first quarterly dividend in respect of its common
stock on January 20, 2000 in the amount of $0.03 per share. The Company
presently plans to pay cash dividends on its common stock on a quarterly basis
based on the results of operations of the applicable quarters. However,
declaration of dividends by the Board of Directors of the Company will depend on
a number of factors, including capital requirements, regulatory limitations, the
Company's operating results and financial condition and general economic
conditions. The Bank, Westfield and RINET are the principal assets of the
Company, and as such, provide the only source of payment of dividends by the
Company. Under Massachusetts law, trust companies such as the Bank may pay
dividends only out of "net profits" and only to the extent that such payments
will not impair the Bank's capital stock and surplus account. These restrictions
on the ability of the Bank to pay dividends to the Company restrict the ability
of the Company to pay dividends to the holders of the Common Stock. Although
Massachusetts law does not define what constitutes "net profits" it is generally
assumed that the term includes a bank's retained earnings and does not include
its additional paid-in capital account. There are no such comparable statutory
restrictions on Westfield's or RINET's ability to pay dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On October 15, 1999, the Company issued 765,697 shares of its common stock
in a private placement exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended. The Company issued
these shares to the then shareholders of RINET in connection with the Company's
acquisition of RINET.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data for the five
fiscal years ended December 31, 1999. The data set forth below does not purport
to be complete. It should be read in conjunction with, and is qualified in its
entirety by, the more detailed information, including the Company's Consolidated
Financial Statements and related Notes, appearing elsewhere herein.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31:
Total balance sheet assets ............................... $ 567,373 $ 457,815 $ 369,543 $ 294,424 $ 245,926
Total loans .............................................. 450,388 348,951 276,825 206,107 155,256
Allowance for loan losses ................................ 5,336 4,386 3,645 2,566 1,942
Investment securities .................................... 73,605 54,102 46,430 33,024 35,101
Mortgage-backed securities ............................... 5,510 11,909 18,123 25,289 32,052
Cash and cash equivalents ................................ 11,190 23,949 13,578 15,702 9,918
Excess of cost over net assets acquired .................. 3,015 3,424 3,746 4,068 4,390
Deposits ................................................. 420,535 334,852 258,301 209,302 178,885
Borrowed funds ........................................... 97,259 82,643 79,753 54,864 41,983
Stockholders' equity ..................................... 39,145 32,613 26,292 26,140 19,224
Non-performing assets .................................... 1,317 565 832 1,061 882
Client assets under management ........................... $3,660,000 $2,839,000 $2,410,000 $2,075,000 $1,683,000
FOR THE YEAR ENDED DECEMBER 31:
Interest and dividend income ............................. $34,942 $29,285 $22,728 $18,688 $15,949
Interest expense ......................................... 17,407 15,137 11,334 9,377 8,451
---------- ---------- ---------- ---------- ----------
Net interest income ...................................... 17,535 14,148 11,394 9,311 7,498
Provision for loan losses ................................ 999 1,004 810 619 618
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses....... 16,536 13,144 10,584 8,692 6,880
Fees and other income .................................... 24,960 19,886 16,198 14,866 10,929
Operating expense ........................................ 30,657 24,694 21,334 16,838 13,304
---------- ---------- ---------- ---------- ----------
Income before income taxes ............................... 10,839 8,336 5,448 6,720 4,505
Income tax expense (benefit) ............................. 3,643 2,865 1,922 1,227 103
---------- ---------- ---------- ---------- ----------
Net income ............................................... $ 7,196 $ 5,471 $ 3,526(2) $ 5,493 $ 4,402
========== ========== ========== ========== ==========
PER SHARE DATA:
Basic earnings per share ................................. $0.62 $0.48 $0.31 $0.53 $0.44
Diluted earnings per share ............................... $0.60 $0.46 $0.30(2) $0.52 $0.43
Average common shares outstanding ........................ 11,590,757 11,483,814 11,355,697 10,363,000 9,957,000
Average diluted shares outstanding ....................... 11,910,444 11,888,357 11,725,697 10,646,000 10,160,000
Book value ............................................... $3.37 $2.83 $2.44 $2.50 $2.03
SELECTED OPERATING RATIOS:
Return on average assets ................................. 1.41% 1.34% 1.13% 2.14% 1.99%
Return on average equity ................................. 20.05% 18.54% 13.39% 29.00% 27.05%
Interest rate spread (1) ................................. 3.21% 3.20% 3.33% 3.24% 2.90%
Net interest margin (1) .................................. 3.76% 3.78% 3.99% 3.85% 3.52%
Total Fees and Other Income / Total Revenue (3) .......... 58.74% 58.43% 58.71% 61.49% 59.31%
ASSET QUALITY RATIOS:
Non-performing loans to total loans ...................... 0.29% 0.16% 0.27% 0.47% 0.41%
Non-performing assets to total assets .................... 0.23% 0.12% 0.23% 0.36% 0.36%
Allowance for loan losses to total loans ................. 1.18% 1.26% 1.32% 1.25% 1.25%
Allowance for loan losses to non-performing loans ........ 405.16% 776.28% 487.95% 262.10% 304.87%
Loans charged-off to average loans ....................... 0.03% 0.13% 0.02% 0.04% 0.05%
CAPITAL RATIOS:
Average equity to average assets ......................... 7.05% 7.22% 8.46% 7.39% 7.35%
Tier I leverage capital ratio ............................ 6.57% 6.54% 6.64% 7.90% 6.21%
Tier I risk-based capital ratio .......................... 9.59% 10.61% 9.94% 12.95% 11.38%
Total risk-based capital ratio ........................... 10.84% 11.87% 11.20% 14.20% 12.63%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets on a fully-taxable equivalent basis, and
the weighted average cost of interest-bearing liabilities, and net interest
margin represents net interest income on a fully-taxable equivalent basis
as a percent of average interest-earning assets.
(2) After deducting $1.2 million of non-recurring merger expenses, net income
for the year ended December 31, 1997 was $4.7 million, or $0.40 per share,
return on average assets was 1.52%, and return on average equity was 17.94%.
(3) Total revenue is defined as net interest income plus fees and other income.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, their notes, and other statistical information included in this
annual report. The discussions set forth below and elsewhere herein contain
certain statements that may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company's actual
results could differ materially from those projected in the forward-looking
statements as a result of, among other factors, the factors listed under "Risk
Factors and Factors Affecting Forward Looking Statements," changes in loan
defaults and charge-off rates, reduction in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
fluctuations in the value or amount of assets under management and other sources
of fee income, the impact of Year 2000 issues on the Company, its clients, and
its vendors, and changes in assumptions used in making such forward-looking
statements. In addition, prevailing economic conditions, as well as government
policies and regulations concerning, among other things, monetary and fiscal
affairs, could significantly affect the operations of financial institutions
such as the Company.
LIQUIDITY
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity as the
ability to respond to the needs of depositors and borrowers as well as to
earnings enhancement opportunities in a changing marketplace. Primary sources of
liquidity consist of investment management fees, deposit inflows, loan
repayments, borrowed funds, and maturity and sales of investment securities.
These sources fund the Company's lending and investment activities.
Management is responsible for establishing and monitoring liquidity targets
as well as strategies to meet these targets. In general, the Company maintains a
relatively high degree of liquidity. At December 31, 1999, cash, federal funds
sold and securities available for sale amounted to $90.3 million, or 15.9% of
total assets of the Company. This compares to $90.0 million, or 19.7% of total
assets, at December 31, 1998.
In general, the Bank maintains a liquidity target of 10% to 20% of total
assets. The Bank is a member of the FHLB of Boston, and as such has access to
both short and long-term borrowings of up to $195.3 million at the current time.
In addition, the Bank maintains a line of credit at the FHLB of Boston as well
as other lines of credit and brokered deposit lines with other correspondent
banks. Management believes that the Bank has adequate liquidity to meet its
commitments for the foreseeable future.
Westfield's primary source of liquidity consists of investment management
fees that are collected on a quarterly basis. At December 31, 1999, Westfield
had working capital of approximately $2.5 million. Management believes that
Westfield has adequate liquidity to meet its commitments for the foreseeable
future.
RINET's primary source of liquidity consists of financial planning fees
which are collected on a quarterly basis. At December 31, 1999, RINET had
working capital of approximately $300,000. Management believes that RINET has
adequate liquidity to meet its commitments for the foreseeable future.
The Company's primary sources of funds are dividends from its
subsidiaries, issuance of its common stock and borrowings. The Company has
executed a $7.5 million line of credit with a correspondent bank to provide
short-term working capital to the Company and its subsidiaries, if necessary.
As of December 31, 1999, there were no borrowings under this line of credit.
Management believes that the Company has adequate liquidity to meet its
commitments for the foreseeable future.
CAPITAL RESOURCES
Total stockholders' equity of the Company at December 31, 1999 was $39.1
million, compared to $32.6 million at December 31, 1998. This increase of $6.5
million was primarily the result of the Company's net income for 1999 of $7.2
million combined with common stock issued in connection with stock grants and
proceeds from options exercised, less the change in the unrealized loss on
investment securities available for sale.
19
<PAGE>
As a bank holding company, the Company is subject to a number of regulatory
capital requirements that have been adopted by the Federal Reserve Board. At
December 31, 1999, the Company's Tier I leverage capital ratio stood at 6.57%,
compared to 6.54% at December 31, 1998. The Company is also subject to a
risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. According to these standards, the Company had a Tier I risk-based
capital ratio of 9.59% and a Total risk-based capital ratio of 10.84% at
December 31, 1999. This compares to a Tier I risk-based capital ratio of 10.61%
and a Total risk-based capital ratio of 11.87% at December 31, 1998. The minimum
Tier I leverage, Tier I risk-based, and Total risk-based capital ratios
necessary to enable the Company to be classified for regulatory purposes as a
"well capitalized" institution are 5.00%, 6.00% and 10.00%, respectively. The
Company was considered to be "well capitalized" as of December 31, 1999 and
1998. See Part I, Item 1, "Business - Regulation of the Company - Capital
Requirements."
The Bank is also subject to a number of regulatory capital measures. At
December 31, 1999, the Bank's Tier I leverage capital ratio stood at 5.99%, as
compared to 5.96% at December 31, 1998. The Bank is also subject to a risk-based
capital measure. The risk-based capital guidelines include both a definition of
capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories.
According to these standards, the Bank had a Tier I risk-based capital ratio of
9.46% and a Total risk-based capital ratio of 10.72% at December 31, 1999. This
compares to a Tier I risk-based capital ratio of 9.62% and a Total risk-based
capital ratio of 10.87% at December 31, 1998. The minimum Tier I leverage, Tier
I risk-based, and Total risk-based capital ratios necessary to be classified for
regulatory purposes as a "well capitalized" institution are 5.00%, 6.00% and
10.00%, respectively. The Bank was considered to be "well capitalized" as of
December 31, 1999 and 1998. See Part I, Item 1, "Business - Regulation of the
Company - Capital Requirements."
FINANCIAL CONDITION
TOTAL ASSETS. Total assets increased $109.6 million, or 23.9%, to $567.4
million at December 31, 1999 from $457.8 at December 31, 1998. This increase was
mainly attributed to an increase in residential and commercial loan balances and
was primarily funded by an increase in deposits.
INVESTMENTS. Total investments (consisting of federal funds sold,
investment securities and mortgage-backed securities) were $79.1 million, or
13.9% of total assets, at December 31, 1999, compared to $77.0 million, or 16.8%
of total assets, at December 31, 1998. This increase of $2.1 million, or 2.7%,
was due to purchases of securities necessary to maintain the Company's liquidity
ratios, and reinvestment of interest income within the investment portfolio. As
of December 31, 1999, all investments are classified as available for sale. The
investment portfolio carried a total of $1.9 million of net unrealized losses at
December 31, 1999, compared to $175,000 in net unrealized gains at December 31,
1998.
LOANS. Loans totaled $450.4 million, or 79.4% of total assets, at December
31, 1999, compared with $349.0 million, or 76.2% of total assets, at December
31, 1998. This increase of $101.4 million, or 29.1%, was due to a larger
allocation of resources devoted to loan origination, as well as the combination
of a healthy local economy and relatively low interest rates which helped fuel
loan demand. During 1999, commercial loans increased $35.9 million, or 23.2%, to
$190.8 million from $154.9 million at December 31, 1998; residential mortgage
loans increased $60.4 million, or 34.8%, to $234.2 million from $173.8 million
at December 31, 1998; and home equity and other loans increased $5.1 million, or
25.7%, to $25.3 million from $20.2 million at December 31, 1998.
DEPOSITS. The Company experienced an increase of $85.6 million, or 25.6%,
in deposits during 1999, from $334.9 million, or 73.1% of total assets, at
December 31, 1998, to $420.5 million, or 74.1% of total assets, at December 31,
1999. The Company opened a new banking office in Wellesley, Massachusetts in
April 1998, which contributed approximately $38.8 million of deposits as of
December 31, 1999, compared to $11.5 million of deposits as of December 31,
1998.
BORROWINGS. Total borrowings (consisting of securities sold under
agreements to repurchase ("repurchase agreements"), federal funds purchased,
FHLB borrowings, and other short-term borrowings) increased $14.7 million, or
17.8%, during 1999 to $97.3 million from $82.6 million at December 31, 1998. The
increase was mainly attributable to an increase in FHLB borrowings to help fund
loan growth. Management takes advantage of opportunities to fund asset growth
with borrowings, but on a long-term basis, the Company intends to replace a
portion of its borrowings with lower-cost core deposits.
20
<PAGE>
ASSET QUALITY
The Company's non-performing assets include non-performing loans and OREO.
Non-performing loans include both nonaccrual loans and loans past due 90 days or
more but still accruing.
The following table sets forth information regarding non-performing loans,
other real estate owned, and delinquent loans 30-89 days past due as to interest
or principal, held by the Company at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis .................... $1,317 $565 $722 $ 976 $443
Loans past due 90 days or more, but still accruing ........... -- -- 25 -- 194
--------------------------------------------
Total non-performing loans ................................... 1,317 565 747 976 637
Other real estate owned ...................................... -- -- 85 85 245
--------------------------------------------
Total non-performing assets .................................. $1,317 $565 $832 $1,061 $882
============================================
Delinquent loans 30-89 days past due ......................... $2,042 $3,307 $1,632 $3,066 $304
Non-performing loans as a % of total loans ................... 0.29% 0.16% 0.27% 0.47% 0.41%
Non-performing assets as a % of total assets ................. 0.23% 0.12% 0.23% 0.37% 0.37%
Delinquent loans 30-89 days past due as a % of total loans ... 0.45% 0.95% 0.59% 1.49% 0.20%
</TABLE>
RISK ELEMENTS OF THE LOAN PORTFOLIO
The Company discontinues the accrual of interest on a loan when the
collectibility of principal or interest is in doubt. In certain instances, loans
that have become 90 days past due may remain on accrual status if the value of
the collateral securing the loan is sufficient to cover principal and interest
and the loan is in the process of collection. OREO consists of real estate
acquired through foreclosure proceedings and real estate acquired through
acceptance of a deed in lieu of foreclosure. In addition, the Company may, under
certain circumstances, restructure loans as a concession to a borrower.
NON-PERFORMING ASSETS. At December 31, 1999, the Company had
non-performing assets of $1.3 million, which were 0.23% of total assets,
representing an increase of $752,000, or 133.1%, from $565,000 at December
31, 1998. As of December 31, 1999 and 1998, the Company's non-performing
assets consisted entirely of nonaccruing loans. The Company continues to
evaluate the underlying collateral of each non-performing loan and pursues
the collection of interest and principal. Also see Part II, Item 8,
"Financial Statements and Supplementary Data Notes 7 and 8 to the
Consolidated Financial Statements" for further information on non-performing
assets.
DELINQUENCIES. At December 31, 1999, $2.0 million of loans were 30 to 89
days past due, a decrease of $1.3 million, or 38.3%, from the $3.3 million
reported at December 31, 1998. Most of these loans are adequately secured and
the payment performance of these borrowers varies from month to month.
ADVERSELY CLASSIFIED LOANS. The Company's management adversely classifies
certain loans using an internal rating system based on criteria established by
federal bank regulatory authorities. These loans evidence weakness or potential
weakness related to repayment history, the borrower's financial condition, or
other factors. Delinquent loans may or may not be adversely classified depending
upon management's judgment with respect to each individual loan. Certain of
these loans are non-performing or may become non-performing in future periods.
At December 31, 1999, the Company had classified $2.1 million of loans as
substandard or doubtful based on the rating system adopted by the Company.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through provisions charged to operations. Assessing the adequacy of the
allowance for loan losses involves substantial uncertainties and is based upon
management's evaluation of the amounts required to meet estimated charge-offs in
the loan portfolio after weighing various factors. Among these factors are the
risk characteristics of the loan portfolio, the quality of specific loans, the
level of nonaccruing loans, current economic conditions, trends in delinquencies
and charge-offs, and the value of underlying collateral, all of which can change
frequently. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties.
21
<PAGE>
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review a financial
institution's allowance for loan losses and carrying amounts of other real
estate owned. Such agencies may require the financial institution to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
NET INTEREST INCOME AND MARGIN
Net interest income represents the difference between interest earned,
primarily on loans and investments, and interest paid on funding sources,
primarily deposits and borrowings. Net interest margin is the amount of net
interest income, on a fully taxable-equivalent basis, expressed as a percentage
of average interest-earning assets. The average yield on interest earning assets
is the amount of taxable equivalent interest income expressed as a percentage of
average earnings assets. The average rate paid on funding sources is equal to
interest expense as a percentage of average interest-earning assets.
The following table sets forth average assets, liabilities, and
stockholders' equity, interest income and interest expense, average yields and
rates, and the composition of the Company's net interest margin for the years
ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
---------- ---------- -------- ---------- --------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest bearing deposits in banks $ 3,690 $ 146 3.96% $2,840 $140 4.93% $3,441 $194 5.64%
Federal funds sold 9,812 476 4.85% 6,875 351 5.11% 4,132 220 5.32%
Investments (1) 73,809 4,256 5.77% 70,038 4,187 5.98% 62,356 3,746 6.01%
Loans: (2)
Commercial 170,132 15,075 8.86% 140,296 13,083 9.33% 99,640 9,567 9.60%
Residential mortgage 203,543 13,804 6.78% 151,684 10,665 7.03% 110,750 8,168 7.38%
Home equity and other 22,970 1,835 7.99% 16,998 1,396 8.21% 14,280 1,179 8.26%
-------- ------- -------- ------- -------- -------
Total earning assets 483,956 35,592 7.35% 388,731 29,822 7.67% 294,599 23,074 7.83%
---- ----- -----
Allowance for loan losses (4,806) (3,901) (2,861)
Cash and due from banks 10,732 7,226 5,182
Other assets 19,292 16,947 14,408
-------- -------- --------
Total assets $509,174 $409,003 $311,328
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Savings and NOW $ 42,968 467 1.09% $ 32,647 414 1.27% $ 24,552 353 1.44%
Money market 194,209 7,165 3.69% 142,440 5,514 3.87% 99,660 3,776 3.79%
Certificates of deposit 90,843 4,581 5.04% 80,299 4,379 5.45% 67,959 3,705 5.45%
Borrowed funds 92,600 5,194 5.61% 83,174 4,830 5.81% 59,532 3,500 5.88%
-------- ------- ---- -------- ------- ---- --------- -------
Total interest bearing
liabilities 420,620 17,407 4.14% 338,560 15,137 4.47% 251,703 11,334 4.50%
------- ------- -------- -------
Non-interest bearing demand
deposits 44,687 34,774 28,042
Payables and other liabilities 7,975 6,155 5,249
-------- -------- --------
Total liabilities 473,282 379,489 284,994
Stockholders' equity 35,892 29,514 26,334
-------- -------- --------
Total liabilities and
stockholders' equity $509,174 $409,003 $311,328
======== ======== ========
Net interest income $18,185 $14,685 $11,740
======= ======= =======
Interest rate spread 3.21% 3.20% 3.33%
Net interest margin 3.76% 3.78% 3.99%
</TABLE>
(1) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 34% for each year
presented. These adjustments were $650,000, $537,000, and $346,000 for the years
ended December 31, 1999, 1998, and 1997, respectively.
(2) Nonaccrual loans are included in average loan balances.
(3) Average balances are derived from daily balances.
22
<PAGE>
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>
1999 VS. 1998 1998 VS. 1997
----------------------------------- -----------------------------------
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 $ (34) $ 40 $ 6 $ (22) $ (32) $ (54)
Federal funds sold (18) 143 125 (9) 140 131
Investments (145) 101 (44) (44) 294 250
Loans:
Commercial (678) 2,670 1,992 (282) 3,798 3,516
Residential mortgage (390) 3,529 3,139 (397) 2,894 2,497
Home equity and other (39) 478 439 (6) 223 217
------ ------ ------ ----- ------ ------
Total interest income (1,304) 6,961 5,657 (760) 7,317 6,557
------ ------ ------ ----- ------ ------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES:
Deposits:
Savings and NOW (79) 132 53 (31) 92 61
Money market (228) 1,879 1,651 84 1,654 1,738
Certificates of deposit (346) 548 202 1 673 674
Borrowed funds (171) 535 364 (44) 1,374 1,330
------ ------ ------ ----- ------ ------
Total interest expense (824) 3,094 2,270 10 3,793 3,803
------ ------ ------ ----- ------ ------
NET INTEREST INCOME $ (480) $3,867 $3,387 $(770) $3,524 $2,754
====== ====== ====== ===== ====== ======
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
NET INCOME. The Company reported net income of $7.2 million, or $0.60
per diluted share, for the year ended December 31, 1999, an increase of 31.5%
compared to net income for the year ended December 31, 1998 of $5.5 million, or
$0.46 per diluted share. Not including non-recurring RINET acquisition expenses
of $180,000, net of tax, and a one-time charge of $125,000 to reflect the
cumulative effect of a change in accounting principle, the Company would have
reported net income of $7.5 million, or $0.63 per diluted share, for the year
ended December 31, 1999.
NET INTEREST INCOME. For the year ended December 31, 1999, net interest
income was $17.5 million, an increase of $3.4 million, or 23.9%, over the same
period in 1998. This increase was primarily attributable to higher loan volumes.
Average earning assets were $95.2 million, or 24.5% higher, and average
interest-bearing liabilities were $82.1 million, or 24.2%, higher than the
comparable period a year earlier. The net interest margin decreased 2 basis
points, or 1.0%, from 3.78% in 1998 to 3.76% in 1999 due mainly to lower yields
earned on the loan portfolio.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income was $34.9
million for 1999 compared to $29.3 million for 1998, an increase of $5.7
million, or 19.3%. Income on commercial loans was $15.1 million for 1999
compared to $13.1 million for 1998, an increase of $2.0 million, or 15.2%.
Income from residential mortgage loans was $13.8 million compared to $10.7
million, an increase of $3.1 million, or 29.4%, and income from home equity and
other loans was $1.8 million compared to $1.4 million, an increase of $439,000,
or 31.4%, for the same periods, respectively. These increases in interest income
are due to higher average balances, partially offset by lower yields. The
average balances of commercial and residential mortgage loans during 1999
increased $29.8 million, or 21.3%, and $51.9 million, or 34.2%, respectively,
compared to 1998. The average balance of home equity and other loans increased
$6.0 million, or 35.1%. The yield on commercial loans decreased 47 basis points,
or 5.0%, the yield on residential mortgage loans decreased 25 basis points, or
3.6%, and the yield on home equity loans decreased 22 basis points, or 2.7%,
compared to the prior year.
23
<PAGE>
Interest and dividend income on cash and investments increased to $4.2
million during 1999 compared to $4.1 million during 1998. This increase in cash
and investment income of $87,000, or 2.1%, was primarily attributable to a 9.5%
increase in the average balance of interest-bearing cash and investments,
partially offset by a 35 basis point, or 6.7% decrease in the yield earned.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $2.3
million, or 15.0%, to $17.4 million for 1999, from $15.1 million for 1998. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $82.1 million, or 24.2%,
between the two periods. The overall cost of interest-bearing liabilities
decreased 33 basis points, or 7.4%, compared to the prior year.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.0 million
for both 1999 and 1998. Management evaluates several factors, including the risk
characteristics of the loan portfolio, actual and estimated charge-offs, and new
loan originations, when determining the provision for loan losses. The Company's
ratio of loan loss allowance to total loans was 1.18% at December 31, 1999 and
1.26% at December 31, 1998.
FEES AND OTHER INCOME. Total fees and other income increased $5.1 million,
or 25.5% to $25.0 million for 1999, from $19.9 million for 1998. Investment
management and trust fees increased $2.8 million, or 18.6%, primarily as the
result of a 28.9% increase in the Company's assets under management from $2.8
billion as of December 31, 1998 to $3.7 billion as of December 31, 1999.
Financial planning fees increased $338,000, or 12.5% due to increased services
provided as well as annual fee increases. Westfield earned performance fees and
partnership income of $2.9 million in 1999 on the limited partnerships it
manages, compared to $732,000 in 1998.
Deposit account service charges increased $43,000, or 18.1%, to $280,000
for 1999 as a result of an increase in the number of deposit accounts and
transactions. Gain on sale of loans decreased $156,000, or 51.5%, due to the
fact that fewer loans were sold in the secondary market as a result of lower
demand for fixed rate loans. Other fee income increased $30,000, or 5.5%, to
$574,000 for 1999 due to an increase in non-amortized loan fees.
OPERATING EXPENSE. Total operating expense for 1999 was $30.5 million
compared to $24.7 million for 1998, an increase of $5.8 million, or 23.6%. This
increase in total operating expense was primarily attributable to the Company's
continued growth and expansion, non-recurring charges for RINET acquisition
expenses, Year 2000 readiness expenses, and expanded image advertising. The
Company has experienced a 23.9% increase in total assets, and an 8.7% increase
in the number of employees from December 31, 1998 to December 31, 1999.
Salaries and benefits, the largest component of operating expense,
increased $3.2 million, or 18.2%, to $20.8 million for the year ended December
31, 1999, from $17.6 million for the corresponding period in 1998. This increase
was primarily due to an 8.7% increase in the number of employees, salary
increases, and increases in business driven variable compensation such as sales
commissions and bonuses.
Occupancy and equipment expense increased $660,000, or 28.1%, to $3.0
million for 1999, from $2.4 million in 1998. Of this increase $444,000, or 67.3%
is primarily due to the Bank's expansion at its headquarters during 1999, and
the opening of the Wellesley, Massachusetts banking office in April 1998. The
remaining increase was mainly attributable to expenses related to the Company's
continued investments in technology.
Professional services, which include such expenses as legal and consulting
fees, audit and compliance services and other fees paid to external service
providers, increased $455,000, or 36.8% to $1.7 million for 1999. Of this
increase, $141,000, or 31.0% is due to expenses incurred for the Year 2000
Readiness Program, and $100,000, or 22.0%, is due to expenses associated with
establishing an ongoing tax saving strategy. The remaining increase is primarily
due to legal and consulting expenses related to special projects during 1999.
Marketing and business development expenses increased $562,000, or 57.1%,
to $1.5 million for 1999. Of this increase, $456,000, or 81.1% is due to
expanded image advertising designed to increase the visibility of the Company
and its products and services. The remaining increase is a result of an increase
in the number of employees and new business generating activities.
Contract services and processing, which represent fees paid to outside
service providers for data processing, custody, and systems, increased $391,000,
or 57.2% to $1.1 million for 1999. Of this increase, approximately $100,000, or
25.6%, is due to an increase in custody expense for client assets under
management at the Bank. The remaining increase is a result of an increase in
volume related charges for data processing and service charges related to new
products offered to the Bank's clients.
24
<PAGE>
In 1999, the Company incurred acquisition expenses of $225,000 related to
the pooling acquisition of RINET. There were no such expenses in 1998. Other
expenses include supplies, telephone, postage, publications and subscriptions,
employee training, and other miscellaneous business expenses. These expenses
have increased $386,000, or 24.8%, to $1.9 million for 1999 as a result of the
Company's continued growth and expansion.
INCOME TAX EXPENSE. The Company recorded income tax expense of $3.6 million
in 1999 as compared to $2.9 million in 1998. The effective tax rate was 33.2%
and 34.4% in 1999 and 1998, respectively. The decrease in the Company's
effective tax rate is a result of a tax saving strategy implemented during 1999.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME. The Company reported net income of $5.5 million, or $0.46
per diluted share, for the year ended December 31, 1998. For the year ended
December 31, 1997 the Company's net income was $3.5 million, or $0.30 per
diluted share after deducting $1.2 million of non-recurring acquisition
expenses, net of tax. The $1.9 million, or 55.2% increase in reported net income
is primarily the result of the effect on the Company's 1997 net income of the
$1.2 million of non-recurring Westfield acquisition expenses and the tax-exempt,
S-Corporation status of Westfield prior to the acquisition in 1997. Not
including the non-recurring acquisition expenses, and had Westfield been fully
taxable in 1997, the Company would have reported net income of $4.7 million, or
$0.40 per diluted share, for the year ended December 31, 1997.
NET INTEREST INCOME. For the year ended December 31, 1998, net interest
income was $14.1 million, an increase of $2.8 million, or 24.2%, over the
corresponding period in 1997. This increase was primarily attributable to higher
loan volumes. Average earning assets were $94.1 million, or 32.0% higher, and
average interest-bearing liabilities were $86.9 million, or 34.5%, higher than
the comparable period a year earlier. The net interest margin decreased 21 basis
points, or 5.3%, from 3.99% in 1997 to 3.78% in 1998 due mainly to lower yields
earned on the loan portfolio.
INTEREST INCOME. Income on commercial loans was $13.1 million for 1998
compared to $9.6 million for 1997, an increase of $3.5 million, or 36.8%. Income
from residential mortgage loans was $10.7 million compared to $8.2 million, an
increase of $2.5 million, or 30.6%, and income from home equity and other loans
was $1.4 million compared to $1.2 million, an increase of $217,000, or 18.4%,
for the same periods, respectively. These increases in interest income are due
to higher average balances, partially offset by lower yields. The average
balances of commercial and residential mortgage loans during 1998 increased
$40.7 million, or 40.8%, and $40.9 million, or 37.0%, respectively, compared to
1997. The average balance of home equity and other loans increased $2.7 million,
or 19.0%. The yield on commercial loans decreased 27 basis points, or 2.8%, the
yield on residential mortgage loans decreased 35 basis points, or 4.7%, and the
yield on home equity loans decreased 5 basis points, or 0.6%, compared to the
prior year.
Interest and dividend income on cash and investments increased to $4.1
million during 1998 compared to $3.8 million during 1997. This increase in cash
and investment income of $327,000, or 8.6%, was primarily attributable to a
14.1% increase in the average balance of interest-bearing cash and investments,
partially offset by a decrease in the yield earned.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $3.8
million, or 33.6%, to $15.1 million for 1998, from $11.3 million for 1997. This
increase in the Company's interest expense primarily reflects an increase in the
average balance of interest-bearing liabilities of $86.9 million, or 34.5%,
between the two periods. The overall cost of interest-bearing liabilities
decreased 3 basis points, or 0.7%, compared to the prior year.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.0 million
for 1998 compared to $810,000 for 1997. Management frequently evaluates several
factors, including the risk characteristics of the loan portfolio, actual and
estimated charge-offs, and new loan originations, when determining the provision
for loan losses. The Company's ratio of loan loss allowance to total loans was
1.26% at December 31, 1998 and 1.32% at December 31, 1997.
FEES AND OTHER INCOME. Total fees and other income were $19.9 million for
1998 compared to $16.2 million for 1997. Investment management and trust fees
increased $2.0 million, or 14.8%, primarily as the result of a 17.8% increase in
the Company's assets under management from $2.4 billion for 1997 to $2.8 billion
for 1998. Financial planning fees increased $359,000, or 15.4% due to a
combination of new clients, increased services to existing clients, and annual
fee increases. In 1998, Westfield earned net performance fees of $732,000 on the
limited partnerships it manages. In 1997, no such fees were earned.
25
<PAGE>
Deposit account service charges increased $12,000, or 5.3%, to $237,000 for
1998 as a result of an increase in the number of deposit accounts and
transactions. Gain on sale of loans increased $208,000 due to the fact that more
loans were sold in the secondary market as a result of strong demand for fixed
rate loans. Other fee income increased $212,000, or 63.9% to $544,000 for 1998
due mainly to an increase in non-amortized loan fees.
OPERATING EXPENSE. Total operating expense for 1998 was $24.7 million
compared to $21.3 million for 1997, an increase of $3.4 million, or 15.8%, as
compared to 1997. This increase in total operating expense was primarily the
result of the Company's growth, continuing investments in technology and
expansion of leased premises. The Company experienced a 23.9% increase in total
assets, and an 18.8% increase in the number of employees from December 31, 1997
to December 31, 1998.
Salaries and benefits, the largest component of operating expense,
increased $3.7 million, or 26.9%, to $17.6 million for the year ended December
31, 1998, from $13.8 million for the corresponding period in 1997. This increase
was primarily due to an 18.8% increase in the number of employees, salary
increases, and increases in business driven variable compensation such as sales
commissions and bonuses.
Occupancy and equipment expense increased $464,000, or 24.6%, to $2.4
million for 1998, from $1.9 million in 1997. This increase is primarily due to
the Bank's improvements at its headquarters during 1998, the opening of the
Wellesley, Massachusetts banking office in April 1998, and expenses related to
the Company's continued investments in technology.
Professional services, which include such expenses as legal and consulting
fees, audit and compliance services and other fees paid to external service
providers, increased $359,000, or 41.0%, to $1.2 million for 1998. This increase
is primarily due to the fact that in 1998, the Company outsourced internal audit
and compliance functions which had previously been done internally. The Company
also incurred a higher level of legal and consulting expenses related to special
projects during 1998 than during 1997.
Marketing and business development expenses increased $128,000, or 14.9%,
to $985,000 for 1998. This increase is primarily due to expanded image
advertising designed to increase the visibility of the Company and its products
and services, as well as an increase in the number of employees and new business
generating activities.
Contract services and processing, which represent fees paid to outside
service providers for data processing, custody, and systems, increased $157,000,
or 29.8%, to $684,000 for 1998. This increase is primarily due to an increase in
custody expense for assets under management at the Bank and volume related
charges for data processing and service charges related to new products offered
to the Bank's clients.
In 1997, the Company incurred merger expenses of $1.5 million related to
the pooling acquisition of Westfield. There were no such expenses in 1998. Other
expenses include supplies, telephone, postage, publications and subscriptions,
employee training, and other miscellaneous business expenses. These expenses
were relatively flat during 1998 as compared to 1997.
INCOME TAX EXPENSE. The Company recorded income tax expense of $2.9 million
in 1998 as compared to $1.9 million in 1997. The effective tax rate was 34.4%
and 35.3% in 1998 and 1997, respectively. The increase in tax expense is
partially due to the fact that Westfield was a tax-exempt S-Corporation prior to
the date of acquisition. If Westfield had been a fully taxable entity, the
Company would have incurred approximately $186,000, or $0.02 per share, of
additional income tax expense in 1997. Under these circumstances, the effective
tax rate in 1997 would have been 38.7%.
26
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Position ("SOP") 98-5, "Accounting for Costs of a Start-Up Entity".
SOP 98-5 requires organizational costs which were being amortized to be expensed
as of the effective date of this statement, January 1, 1999, and accounted for
as a cumulative effect of a change in accounting principle. On January 1, 1999,
the Bank expensed $125, 000 of unamortized organizational costs, net of tax.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. Under this Statement, an entity that elects
to apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No.137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". The Statements are effective for fiscal years beginning
after June 15, 2000, and are not expected to have a material impact on the
Company's consolidated financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes thereto,
presented in Part II, Item 8, "Financial Statements and Supplementary Data,"
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
YEAR 2000 READINESS DISCLOSURE
SCOPE AND OVERVIEW. In 1996, the Company formed a Year 2000 project team to
identify information technology and non-information technology systems,
procedures, and practices that require modification or replacement. The Year
2000 problem concerns the inability of computer-based systems, including among
others, computer hardware, embedded chips, and computer software programs, to
recognize properly and process date-sensitive information involving 20th and
21st century dates. Data processing for the Company's major operating systems
(investment management, custody, loans and deposits) is conducted through third
party vendors using on-site computer interfaces. Inventory and Year 2000
readiness assessment of all information technology and non-information
technology systems and applications have been completed and all third party
vendors who service the Company have been contacted. Efforts to bring the major
operating systems, and certain outsourced applications, into compliance with
Year 2000 requirements have been accomplished primarily through the installation
of updated or replacement hardware or programs developed by third parties. In
addition the status of all Company facilities and all significant third-party
providers of goods and services to the Company has been assessed.
STATE OF READINESS. The Company's Year 2000 Readiness Program contained
a number of discrete segments, including Awareness and Assessment, Project
Planning, Remediation, User Acceptance Test Plans, Unit Testing, Commercial,
Personal, Contingency Plans for Information Systems and Contingency Plans for
Business Continuation. Each segment of the Company's Year 2000 Readiness Program
has been completed. Contingency Planning for all mission critical information
technology systems (i.e. those vital to the successful continuation of core
business activities) and for Business Continuation has been completed and will
be updated periodically during 2000.
The Company relies on several third party service providers for key
business processes. It continues to work closely with these companies to monitor
the effects of Year 2000 on these providers. The Company's Year 2000 project
team has contacted all material service providers to discuss and assess their
Year 2000 readiness. In addition, the Company sought verbal and written
verification from its material third party service providers as to their Year
2000 readiness. The Company began Year 2000 testing with material third party
service providers during the third quarter of 1998, and completed testing by
June 30, 1999.
27
<PAGE>
The Remediation phase, wherein non-compliant software and hardware are
either modified or replaced, was substantially completed by December 31, 1998
for mission critical applications and by March 31, 1999 for non-mission critical
applications. The Company also completed User Acceptance Testing for mission
critical information technology and non-information technology systems by June
30, 1999. Test Plans for non-critical applications were completed during the
third quarter of 1999.
The initial portion of the Commercial phase, which includes the
evaluation of credit risk stemming from problems borrowers may have in resolving
their own Year 2000 issues, has been completed; however, monitoring of the
remediation efforts of high risk customers will be ongoing. During the
monitoring stage the Company is taking steps designed to reduce any increased
potential credit risk as a result of borrowers' Year 2000 issues. Assessment of
Year 2000 risk has been incorporated into the loan underwriting process. During
this phase the Company is also evaluating investments made on behalf of
investment management and trust clients and in the Company's own investment
portfolio to determine risk stemming from problems securities issuers may have
in resolving their own Year 2000 issues. Also encompassed in this phase, are
in-process evaluation, assessment and monitoring of the state of readiness of
the Company's funds providers and the capital markets. The Personal phase is
largely focused on customer communications as to the state of the Company's Year
2000 readiness. Initial communications have been distributed and the process is
ongoing.
RISKS OF YEAR 2000 ISSUES. The Company's businesses are substantially
dependent upon its data processing software and hardware systems, and on its
ability to process information. If the Company failed to be Year 2000 compliant,
as compared to its competitors, there could be an adverse effect on the
Company's business. In addition, since the Company is regulated by various
regulatory agencies of state and federal banking authorities, failure to be Year
2000 compliant could subject the Company to formal supervisory or enforcement
actions, which could have an adverse impact on the Company's business.
Since the Company relies on third parties for software and other
support, there are risks that the Company's operations could be disrupted by
adverse developments affecting the operations of these third parties. Such risks
include, among others, an inability to process and underwrite loan applications,
to credit deposits and withdrawals from deposit accounts, to credit loan
payments or track delinquencies, to properly reconcile and record daily activity
or to engage in normal banking activities. The Company continues to discuss
these matters with, obtain written certification from, and test the systems of
third party service providers as to Year 2000 compliance. However, there can be
no assurance that any potential impact associated with incompatible systems
after December 31, 1999 would not have a material adverse effect on the
Company's business, financial condition or results of operation.
Additionally, if those commercial borrowers whose operations depend
heavily on automated systems experience Year 2000 compliance problems affecting
their ability to repay, the Company's financial condition and results of
operations could be adversely affected by requirements to record additional loan
loss provision. Furthermore, the Company faces financial risk from its fund
providers as the Year 2000 problem may produce some deposit contraction forcing
a change to alternative and higher costing funding sources. Finally, to the
extent that certain utility and communication services utilized by the Company
face Year 2000 problems, the Company's operations could be disrupted.
CONTINGENCY PLANS. To date, the Company has not experienced any
significant Year 2000 problems. The Company has developed contingency plans in
the event of a Year 2000 problem, however there can be no assurance that these
plans will fully mitigate any failures or problems. Furthermore, there may be
certain mission critical third party services where alternative arrangements are
limited or unavailable.
EXPENSES. Year 2000 Readiness Program expenses are absorbed within
normal spending levels. The Company upgrades its hardware and associated
software and invests in new information technology systems as part of its
ongoing operations. Neither the upgrades, nor new investments made to date
through December 31, 1999, have been accelerated due to the Year 2000 Readiness
Program. The out-of-pocket costs related to the Year 2000 Readiness Program were
$141,000 for the year ended December 31, 1999. The Company's credit risk
associated with borrowers may increase to the extent that borrowers fail to
adequately address Year 2000 issues. As part of the Company's Year 2000 project,
existing loans have been evaluated to identify and monitor those loans with the
highest exposure to Year 2000 risk.
The preceding "Year 2000 Readiness Disclosure" discussion contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1933. These forward-looking statements represent the Company's
beliefs or expectations regarding future events. When used in the "Year 2000
Readiness Disclosure" discussion, the words "believes," "expects," "estimates,"
and similar expressions are intended to identify forward-looking statements.
Forward-looking statements include, without limitation, the Company's
expectations as to when it will complete the modification and testing phases of
its Year 2000 project plan as well as its Year 2000 contingency plans; its
estimated cost of
28
<PAGE>
achieving Year 2000 readiness; and the Company's belief that its internal
systems will be Year 2000 compliant in a timely manner. All forward-looking
statements involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors that may
cause these differences include, but are not limited to, the availability of
qualified personnel and other information technology resources; the ability to
identify and remediate all date sensitive lines of computer code or to replace
embedded computer chips in affected systems or equipment; and the actions of
governmental agencies or other third parties with respect to Year 2000 problems.
RISK FACTORS AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT, INCLUDING THE INFORMATION INCORPORATED HEREIN BY
REFERENCE, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS SET FORTH IN THIS ANNUAL REPORT INCLUDING THE INFORMATION
INCORPORATED HEREIN BY REFERENCE. FACTORS WHICH MAY CAUSE SUCH A MATERIAL
DIFFERENCE INCLUDE THOSE SET FORTH BELOW. INVESTORS IN THE COMPANY'S COMMON
STOCK SHOULD CAREFULLY CONSIDER THE DISCUSSION OF RISK FACTORS BELOW, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN BANKING CUSTOMERS AT CURRENT LEVELS
Competition in the local banking industry coupled with our relatively small
size may limit the ability of the Bank to attract and retain banking
customers. The Bank faces competition from the following:
o other banking institutions (including larger Boston and suburban
commercial banking organizations);
o savings banks;
o credit unions;
o other financial institutions; and
o non-bank financial service companies serving eastern Massachusetts
and adjoining areas.
In particular, the Bank's competitors include several major financial
companies whose greater resources may afford them a marketplace advantage by
enabling them to maintain numerous banking locations and mount extensive
promotional and advertising campaigns. Areas of competition include interest
rates for loans and deposits, efforts to obtain deposits and range and
quality of services provided.
Because the Bank maintains a smaller staff and has fewer financial and
other resources than larger institutions with which it competes, it may be
limited in its ability to attract customers. In addition, some of the Bank's
current commercial banking customers may seek alternative banking sources as
they develop needs for credit facilities larger than the Bank can accommodate.
If the Bank is unable to attract and retain banking customers, it may be
unable to continue its loan growth and its results of operations and
financial condition may otherwise be negatively impacted. In as much as the
Bank is our sole banking subsidiary, its financial performance is very
significant to our overall results of operations and financial condition.
Also see Part I, Item 1, "Business--Competition" for further information.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN INVESTMENT MANAGEMENT CLIENTS
AT CURRENT LEVELS
Due to the intense local competition and our relatively short history
and limited record of performance in the investment management business, the
Bank and our investment management subsidiaries, Westfield and RINET, may not
be able to attract and retain investment management clients at current levels.
In the investment management industry, we compete primarily with the
following:
o commercial banks and trust companies;
o mutual fund companies;
o investment advisory firms;
o stock brokerage firms;
o law firms; and
o other financial services companies.
29
<PAGE>
Competition is especially keen in our geographic market area, because there
are numerous well-established and successful investment management firms in
Boston. Many of our competitors have greater resources than we have.
Our ability to successfully attract and retain investment management
clients is dependent upon the ability of each to compete with its competitors'
investment products, level of investment performance, client services and
marketing and distribution capabilities. If we are not successful, our results
from operations and financial position may be negatively impacted.
In addition, our ability to retain investment management clients may be
impaired by the fact that our investment management contracts are typically
short-term in nature. Approximately 47% of our revenues are derived from
investment management contracts which are typically terminable upon less than 30
days' notice. Most of our clients may withdraw funds from accounts under
management generally in their sole discretion.
Moreover, Westfield receives performance-based fees resulting from its
status as general partner or investment manager of three limited partnership
investment funds. The amount of these fees is impacted directly by the
investment performance of Westfield. As a result, the future revenues from
such fees may fluctuate and may be affected by conditions in the capital
markets and other general economic conditions. Westfield is our major
investment management subsidiary, and its financial performance is a
significant factor in our overall results of operations and financial
condition. Also see Part I, Item 1, "Business--Competition" for further
information.
DEFAULTS IN THE REPAYMENT OF LOANS MAY NEGATIVELY IMPACT OUR BUSINESS
Defaults in the repayment of loans by the Bank's customers may
negatively impact its business. A borrower's default on its obligations under
one or more of the Bank's loans may result in lost principal and interest
income and increased operating expenses as a result of the allocation of
management time and resources to the collection and work-out of the loan.
In certain situations, where collection efforts are unsuccessful or
acceptable work-out arrangements cannot be reached, the Bank may have to
write-off the loan in whole or in part. In such situations, the Bank may
acquire any real estate or other assets, if any, which secure the loan
through foreclosure or other similar available remedies. In such cases, the
amount owed under the defaulted loan often exceeds the value of the assets
acquired.
The Bank's management periodically makes a determination of an allowance
for loan losses based on available information, including the quality of its
loan portfolio, certain economic conditions, the value of the underlying
collateral and the level of its non-accruing loans. Provisions to this
allowance result in an expense for the period. If, as a result of general
economic conditions or an increase in defaulted loans, management determines
that additional increases in the allowance for loan losses are necessary,
the Bank will incur additional expenses.
In addition, bank regulatory agencies periodically review the Bank's
allowance for loan losses and the values it attributes to real estate
acquired through foreclosure or other similar remedies. Such regulatory
agencies may require the Bank to adjust its determination of the value for
these items. These adjustments could negatively impact the Bank's results of
operations or financial position.
A DOWNTURN IN THE LOCAL ECONOMY OR REAL ESTATE MARKET COULD NEGATIVELY
IMPACT OUR BANKING BUSINESS
A downturn in the local economy or real estate market could negatively
impact our banking business. Because the Bank serves primarily individuals
and smaller businesses located in eastern Massachusetts and adjoining areas,
with a particular concentration in the Greater Boston Metropolitan Area, the
ability of the Bank's customers to repay their loans is impacted by the
economic conditions in these areas. The Bank's commercial loans are generally
concentrated in the following customer groups:
o real estate developers and investors;
o financial service providers;
o technology companies;
o manufacturing and communications companies;
o professional service providers;
o general commercial and industrial companies; and
o individuals.
30
<PAGE>
The Bank's commercial loans, with limited exceptions, are secured by
either real estate (usually, income producing residential and commercial
properties), marketable securities or corporate assets (usually, accounts
receivable, equipment or inventory). Substantially all of the Bank's
residential mortgage and home equity loans are secured by residential
property in eastern Massachusetts. As a result, conditions in the real estate
market specifically, and the Massachusetts economy generally, can materially
impact the ability of the Bank's borrowers to repay their loans and affect
the value of the collateral securing these loans.
FLUCTUATIONS IN INTEREST RATES MAY NEGATIVELY IMPACT OUR BANKING BUSINESS
Fluctuations in interest rates may negatively impact the business of the
Bank. The Bank's main source of income from operations is net interest
income, which is equal to the difference between the interest income received
on interest-bearing assets (usually, loans and investment securities) and the
interest expense incurred in connection with interest-bearing liabilities
(usually, deposits and borrowings). The Bank's net interest income can be
affected significantly by changes in market interest rates. In particular,
changes in relative interest rates may reduce the Bank's net interest income
as the difference between interest income and interest expense decreases. As
a result, the Bank has adopted asset and liability management policies to
minimize the potential adverse effects of changes in interest rates on net
interest income, primarily by altering the mix and maturity of loans,
investments and funding sources. However, we cannot assure you that a
decrease in interest rates will not negatively impact the Bank's results from
operations or financial position.
An increase in interest rates could also have a negative impact on the
Bank's results of operations by reducing the ability of borrowers to repay
their current loan obligations, which could not only result in increased loan
defaults, foreclosures and write-offs, but also necessitate further increases
to the Bank's allowance for loan losses.
OUR COST OF FUNDS FOR BANKING OPERATIONS MAY INCREASE AS A RESULT OF GENERAL
ECONOMIC CONDITIONS, INTEREST RATES AND COMPETITIVE PRESSURES
Our cost of funds for banking operations may increase as a result of
general economic conditions, interest rates and competitive pressures. The
Bank has traditionally obtained funds principally through deposits and
through borrowings. As a general matter, deposits are a cheaper source of
funds than borrowings, because interest rates paid for deposits are typically
less than interest rates charged for borrowings. Historically and in
comparison to commercial banking averages, the Bank has had a higher
percentage of its time deposits in denominations of $100,000 or more. Within
the banking industry, the amounts of such deposits are generally considered
more likely to fluctuate than deposits of smaller denominations. If as a
result of general economic conditions, market interest rates, competitive
pressures or otherwise, the value of deposits at the Bank decreases relative
to its overall banking operations, the Bank may have to rely more heavily on
borrowings as a source of funds in the future.
OUR INVESTMENT MANAGEMENT BUSINESS MAY BE NEGATIVELY IMPACTED BY CHANGES IN
ECONOMIC AND MARKET CONDITIONS
Our investment management business may be negatively impacted by changes in
general economic and market conditions because the performance of such business
is directly affected by conditions in the financial and securities markets.
The financial markets and the investment management industry in general
have experienced record performance and record growth in recent years. The
financial markets and businesses operating in the securities industry, however,
are highly volatile (meaning that performance results can vary greatly within
short periods of time) and are directly affected by, among other factors,
domestic and foreign economic conditions and general trends in business and
finance, all of which are beyond our control. We cannot assure you that broad
market performance will be favorable in the future. Any decline in the financial
markets or a lack of sustained growth may result in a corresponding decline in
our performance and may adversely affect the assets which we manage.
In addition, Westfield's management contracts generally provide for fees
payable for investment management services based on the market value of
assets under management, although a portion also provide for the payment of
fees based on investment performance. Because most contracts provide for a
fee based on market values of securities, fluctuations in securities prices
may have a material adverse effect on our results of operations and financial
condition.
31
<PAGE>
OUR INVESTMENT MANAGEMENT BUSINESS IS HIGHLY REGULATED
Our investment management business is highly regulated, primarily at the
federal level. The failure of any of our subsidiaries that provide investment
management services to comply with applicable laws or regulations could result
in fines, suspensions of individual employees or other sanctions, including
revocation of such subsidiary's registration as an investment adviser.
Specifically, three of our subsidiaries, including Westfield and RINET
are registered investment advisers under the Investment Advisers Act. The
Investment Advisers Act imposes numerous obligations on registered investment
advisers, including fiduciary, record keeping, operational and disclosure
obligations. These subsidiaries, as investment advisers, are also subject to
regulation under the federal and state securities laws and the fiduciary laws
of certain states. In addition, Westfield acts as a sub-adviser to a mutual
fund which is registered under the 1940 Act and is subject to that act's
provisions and regulations.
We are also subject to the provisions and regulations of ERISA to the
extent we act as a "fiduciary" under ERISA with respect to certain of our
clients. ERISA and the applicable provisions of the federal tax laws, impose a
number of duties on persons who are fiduciaries under ERISA and prohibit certain
transactions involving the assets of each ERISA plan which is a client of ours,
as well as certain transactions by the fiduciaries (and certain other related
parties) to such plans.
In addition, applicable law provides that all investment contracts with
mutual fund clients may be terminated by the clients, without penalty, upon no
later than 60 days' notice. Investment contracts with institutional and other
clients are typically terminable by the client, also without penalty, upon 30
days' notice.
Boston Private Financial Holdings itself does not manage investments for
clients, does not provide any investment management services and, therefore,
is not a registered investment adviser. The Bank is exempt from the
regulatory requirements of the Investment Advisors Act, but is subject to
extensive regulation by the FDIC and the Commissioner of Banks of The
Commonwealth of Massachusetts.
OUR BANKING BUSINESS IS HIGHLY REGULATED
Bank holding companies and state chartered banks operate in a highly
regulated environment and are subject to supervision and examination by
federal and state regulatory agencies. Boston Private Financial Holdings is
subject to the BHCA, and to regulation and supervision by the Federal Reserve
Board. The Bank, as a Massachusetts chartered trust company the deposits of
which are insured by the FDIC, is subject to regulation and supervision by
the Massachusetts Commissioner of Banks and the FDIC.
Federal and state laws and regulations govern numerous matters including
changes in the ownership or control of banks and bank holding companies,
maintenance of adequate capital and the financial condition of a financial
institution, permissible types, amounts and terms of extensions of credit and
investments, permissible non-banking activities, the level of reserves
against deposits and restrictions on dividend payments. The FDIC and the
Massachusetts Commissioner of Banks possess cease and desist powers to
prevent or remedy unsafe or unsound practices or violations of law by banks
subject to their regulation, and the Federal Reserve Board possesses similar
powers with respect to bank holding companies. These and other restrictions
limit the manner in which Boston Private Financial Holdings and the Bank
may conduct business and obtain financing.
Furthermore, our banking business is affected not only by general
economic conditions, but also by the monetary policies of the Federal Reserve
Board. Changes in monetary or legislative policies may affect the interest
rates the Bank must offer to attract deposits and the interest rates it must
charge on its loans, as well as the manner in which it offers deposits and
makes loans. These monetary policies have had, and are expected to continue
to have, significant effects on the operating results of depository
institutions generally including the Bank.
TO THE EXTENT THAT WE ACQUIRE OTHER COMPANIES IN THE FUTURE, OUR BUSINESS MAY
BE NEGATIVELY IMPACTED BY CERTAIN RISKS INHERENT WITH SUCH ACQUISITIONS
Although we do not have an aggressive acquisition strategy, we have in the
past considered, and will in the future continue to consider, the acquisition of
other banking and investment management companies. To the extent that we acquire
other companies in the future, our business may be negatively impacted by
certain risks inherent with such acquisitions.
32
<PAGE>
These risks include the following:
o the risk that the acquired business will not perform in accordance
with management's expectations;
o the risk that difficulties will arise in connection with the
integration of the operations of the acquired business with the
operations of our banking or investment management businesses;
o the risk that management will divert its attention from other aspects
of our business;
o the risk that we may lose key employees of the acquired business; and
o the risks associated with entering into geographic and product markets
in which we have limited or no direct prior experience.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY
NEGATIVELY AFFECT THE MARKET VALUE OF OUR COMMON STOCK AND COULD IMPACT OUR
ABILITY TO OBTAIN ADDITIONAL EQUITY FINANCING
On February 4, 2000, the Commission declared a registration statement on
Form S-3 effective, pursuant to which 3,094,589 shares of common stock of the
Company were registered to enable the holders to publicly sell shares which
would otherwise be ineligible for sale in the public market. The registration
of these shares discharged our obligations under the terms of registration
rights agreements with the former stockholders of Westfield and RINET. The
sale of substantial number of shares of common stock into the public market,
or the availability of these shares for future sale, could adversely affect
the market price for our common stock and could impair our ability to obtain
additional capital in the future through an offering of equity securities
should we desire to do so.
33
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY AND MARKET RISK
Management considers interest rate risk to be a significant market risk for
the Company. Interest rate risk is the exposure to adverse changes in the net
income of the Company as a result of changes in interest rates. Consistency in
the Company's earnings is related to the effective management of interest rate
sensitive assets and liabilities, and on the degree of fluctuation of investment
management fee income due to changes in interest rates.
Fee income from investment management and trust services is not directly
dependent on market interest rates and may provide the Company a relatively
stable source of income in varying market interest rate environments. However,
this fee income is generally based upon the value of assets under management
and, therefore, can be significantly affected by changes in the values of
equities and bonds. Furthermore, performance fees and partnership income earned
by Westfield as manager of limited partnerships are directly dependent upon
short-term investment performance that can fluctuate significantly with changes
in the capital markets.
The principal objective of the Bank's asset and liability management is to
maximize profit potential while minimizing the vulnerability of its operations
to changes in interest rates by means of managing the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Bank's actions in this regard are taken under
the guidance of its Asset/Liability Committee ("ALCO"), which is comprised of
members of senior management. This committee is actively involved in formulating
the economic assumptions that the Bank uses in its financial planning and
budgeting process and establishes policies which control and monitor the
sources, uses and pricing of funds. The Bank evaluates hedging techniques to
reduce interest rate risk where possible.
The ALCO uses both interest rate "gap" sensitivity and simulation analysis
to measure inherent risk in the bank's balance sheet at a specific point in
time. The simulations look forward at one and two year increments with
instantaneous and sustained interest rate shocks of up to 200 basis points, and
take into account the repricing, maturity, and prepayment characteristics of
individual products and investments. The simulation results are reviewed to
determine whether the exposure to net interest income and to the fair value of
the available for sale investment portfolio is within the guidelines which are
set and monitored at both the ALCO and Board levels. The ALCO committee reviews
the results with regard to the established tolerance levels and recommends
appropriate strategies to manage this exposure. As of December 31, 1999, net
interest income simulation and fair market value simulation indicated that the
Bank's exposure to changing interest rates was within the established tolerance
levels. While the ALCO reviews simulation assumptions to ensure that they
reflect historical experience, it should be noted that income simulation may not
always prove to be an accurate indicator of interest rate risk because the
actual repricing, maturity, and prepayment characteristics of individual
products may differ from the estimates used in the simulations. The following
table presents the impact of instantaneous and sustained interest rate shocks on
pro forma net interest income over a twelve month period:
<TABLE>
<CAPTION>
TWELVE MONTHS BEGINNING 1/1/00
-----------------------------------
DOLLAR PERCENT
CHANGE CHANGE
---------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Up 200 basis point shock ............ $ (255) (1.25%)
Down 200 basis point shock........... 37 0.18%
</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.
34
<PAGE>
The Bank has historically sought to maintain a relatively narrow gap
position and has, in some instances, foregone investment in higher yielding
assets when such investment, in management's opinion, exposed the Bank to undue
interest rate risk. However, the Bank does not attempt to perfectly match
interest rate sensitive assets and liabilities and will indeed selectively
mismatch its assets and liabilities to a controlled degree when it considers it
both appropriate and prudent to do so. There are a number of relevant time
periods in which to measure the gap position, such as at the 30, 60, 90, or 180
day points in the maturity schedule. Management monitors the Bank's gap position
at each of these maturity points, and also tends to focus closely on the gap at
the one year point in making funding decisions, such as with respect to the
Bank's adjustable rate mortgage loan portfolio. Assumptions based on the
historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the repricing schedule. These
assumptions are inherently uncertain and, as a result, the repricing schedule
cannot precisely measure net interest income or predict the impact of
fluctuations in interest rates on net interest income.
The repricing schedule for the Bank's interest-earning assets and
interest-bearing liabilities is measured on a cumulative basis. The simulation
analysis is based on actual cash flows and repricing characteristics, and
incorporates market-based assumptions regarding the impact of changing interest
rates on the prepayment speeds of certain assets and liabilities. The model also
includes senior management projections for activity levels in product lines
offered by the Bank. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes as well as changes in
market conditions and management strategies. The following table presents the
repricing schedule for the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1999:
<TABLE>
<CAPTION>
OVER THREE
WITHIN TO SIX OVER SIX OVER ONE
THREE MONTHS TO TWELVE YEAR TO OVER FIVE
MONTHS MONTHS FIVE YEARS YEARS TOTAL
------------- ------------ ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets(1):
Cash and due from banks $ 1,817 $ -- $ -- $ -- $ -- $ 1,817
Federal funds sold -- -- -- -- -- --
Investment securities 1,406 8,097 10,849 30,634 22,619 73,605
Mortgage-backed securities 402 3,726 351 1,030 1 5,510
FHLB stock 4,830 -- -- -- -- 4,830
Loans-fixed rate 2,953 3,322 8,149 48,485 15,601 78,510
Loans-variable rate 166,479 17,356 36,552 140,931 10,560 371,878
-------- --------- -------- -------- -------- --------
Total interest earning assets 177,887 32,501 55,901 221,080 48,781 536,150
-------- --------- -------- -------- -------- --------
Interest bearing liabilities (2):
Savings and NOW accounts (3) 4,598 4,602 -- -- 36,282 45,482
Money market accounts 189,275 29,543 -- -- 19,696 238,514
Time certificates under $100,000 12,045 4,144 3,407 2,691 106 22,393
Time certificates $100,000 or more 39,791 4,010 11,278 6,009 -- 61,088
Reverse repurchase agreements 16,551 -- -- -- -- 16,551
Borrowings 6,036 3,085 15,174 49,006 7,407 80,708
-------- --------- -------- -------- -------- --------
Total interest bearing liabilities 268,296 45,384 29,859 57,706 63,491 464,736
-------- --------- -------- -------- -------- --------
Net interest sensitivity gap
during the period $( 90,409) $ (12,883) $ 26,042 $163,374 $(14,710) $ 71,414
========= ========= ======== ======== ======== ========
Cumulative gap $( 90,409) $(103,292) $(77,250) $ 86,124 $71,414
========= ======== ======== ======== =======
Interest-sensitive assets as a
percent of interest-sensitive
liabilities (cumulative) 66.30% 67.07% 77.51% 121.46% 115.37%
Cumulative gap as a percent of total (15.93)% (18.21)% (13.62)% 15.18% 12.59%
assets
- -------------------------------------------------------------------------------------------------------------
</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 $53.1 million of demand accounts because they are
non-interest bearing.
(3) While Savings and NOW accounts can be withdrawn any time, management
believes they have characteristics that make their effective maturity longer.
The preceding table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest income because the repricing
of various assets and liabilities is discretionary and is subject to competitive
and other factors. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rates.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Boston Private Financial Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Boston
Private Financial Holdings, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Boston
Private Financial Holdings, Inc. and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
January 19, 2000
36
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998
---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 11,190 $ 12,949
Federal funds sold -- 11,000
Investment securities available for sale (amortized cost of $75,424
and $53,996, respectively, Notes 5, 11 and 12) 73,605 54,102
Mortgage-backed securities available for sale (amortized cost of $5,627
and $11,840, respectively, Notes 6 and 11) 5,510 11,909
Loans receivable (Notes 7 and 11):
Commercial 190,817 154,940
Residential mortgage 234,185 173,810
Home equity 25,039 19,866
Other 347 335
-------- --------
Total loans 450,388 348,951
Less allowance for loan losses (Note 8) (5,336) (4,386)
-------- --------
Net loans 445,052 344,565
Stock in the Federal Home Loan Bank of Boston (Note 11) 4,830 4,718
Premises and equipment, net (Note 9) 4,739 3,790
Excess of cost over net assets acquired, net 3,015 3,424
Fees receivable 6,320 3,614
Accrued interest receivable 3,597 2,405
Other assets 9,515 5,339
-------- --------
Total assets $567,373 $457,815
======== ========
LIABILITIES:
Deposits (Note 10) $420,535 $334,852
FHLB borrowings (Note 11) 80,672 76,329
Securities sold under agreements to repurchase (Note 12) 16,551 6,241
Other borrowings 36 73
Accrued interest payable 1,281 651
Other liabilities 9,153 7,056
-------- --------
Total liabilities 528,228 425,202
-------- --------
Commitments and contingencies (Notes 9, 16, 19 and 20)
STOCKHOLDERS' EQUITY (NOTES 3, 14 AND 19):
Common stock, $1.00 par value per share;
authorized: 30,000,000 shares
issued: 11,616,070 shares in 1999 and 11,513,441 shares in 1998 11,616 11,513
Additional paid-in capital 12,341 11,932
Retained earnings 16,747 9,551
Stock subscriptions receivable (320) (495)
Accumulated other comprehensive (loss) income (1,239) 112
-------- --------
Total stockholders' equity 39,145 32,613
-------- --------
Total liabilities and stockholders' equity $567,373 $457,815
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest and dividend income:
Loans $30,714 $25,144 $18,914
Taxable investment securities 1,575 1,454 1,116
Non-taxable investment securities 1,262 1,043 718
Mortgage-backed securities 451 896 1,351
FHLB stock dividends 318 257 215
Federal funds sold 476 351 220
Deposits in banks 146 140 194
------- ------- -------
Total interest and dividend income 34,942 29,285 22,728
------- ------- -------
Interest expense:
Deposits 12,213 10,307 7,834
FHLB borrowings 4,532 4,439 2,852
Securities sold under agreements to repurchase 529 181 322
Federal funds purchased and other 133 210 326
------- ------- -------
Total interest expense 17,407 15,137 11,334
------- ------- -------
Net interest income 17,535 14,148 11,394
Provision for loan losses (Note 8) 999 1,004 810
------- ------- -------
Net interest income after provision for loan losses 16,536 13,144 10,584
------- ------- -------
Fees and other income:
Investment management and trust fees 17,982 15,156 13,199
Financial planning fees 3,034 2,696 2,337
Equity in earnings of partnerships 2,895 732 --
Deposit account service charges 280 237 225
Gain on sale of loans, net 147 303 95
Gain on sale of investment securities, net (Note 5) 48 218 10
Other 574 544 332
------- ------- -------
Total fees and other income 24,960 19,886 16,198
------- ------- -------
Operating expense:
Salaries and employee benefits (Note 14) 20,758 17,561 13,843
Occupancy and equipment (Note 9) 3,010 2,350 1,886
Professional services 1,690 1,235 876
Marketing and business development 1,547 985 857
Contract services and processing 1,075 684 527
Amortization of intangibles (Note 2) 284 322 322
Merger expenses 225 -- 1,510
Other (Note 15) 1,943 1,557 1,513
------- ------- -------
Total operating expense 30,532 24,694 21,334
------- ------- -------
Income before income taxes 10,964 8,336 5,448
Income tax expense (Note 13) 3,643 2,865 1,922
------- ------- -------
Income before cumulative effect of a change in accounting principle 7,321 5,471 3,526
Cumulative effect of a change in accounting principle, net of tax (Note 2) 125 -- --
------- ------- -------
Net income $ 7,196 $ 5,471 $ 3,526
======= ======= =======
Per share data (Note 2):
Basic earnings per share:
Income before cumulative effect of change in accounting principle $ 0.63 $ 0.48 $ 0.31
Cumulative effect of change in accounting principle $ (0.01) $ 0.00 $ 0.00
------- ------- -------
Net Income $ 0.62 $ 0.48 $ 0.31
======= ======= =======
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.61 $ 0.46 $ 0.30
Cumulative effect of change in accounting principle $ (0.01) $ 0.00 $ 0.00
------- ------- -------
Net Income $ 0.60 $ 0.46 $ 0.30
======= ======= =======
Average basic common shares outstanding 11,590,757 11,483,814 11,355,697
========== ========== ==========
Average diluted common shares outstanding 11,910,444 11,888,357 11,725,697
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL STOCK OTHER
COMMON PAID-IN RETAINED SUBSCRIPTIONS COMPREHENSIVE
STOCK CAPITAL EARNINGS RECEIVABLE INCOME (LOSS) TOTAL
------------ ------------ --------------- ------------- --------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $11,087 $11,242 $ 4,723 $(847) $(64) $26,141
Net income -- -- 3,526 -- -- 3,526
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- 87 87
-------
Total comprehensive income, net 3,613
Proceeds from issuance of
290,691 shares of common stock 291 107 -- -- -- 398
Stock options exercised 29 42 -- -- -- 71
Stock subscription payments -- -- -- 178 -- 178
S-Corporation dividends paid -- -- (4,108) -- -- (4,108)
------- ------- ------- ----- ------- -------
Balance at December 31, 1997 11,407 11,391 4,141 (669) 23 26,293
Net income -- -- 5,471 -- -- 5,471
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- 89 89
-------
Total comprehensive income, net 5,560
Proceeds from issuance of
56,469 shares of common stock 56 453 -- -- -- 509
Stock options exercised 50 88 -- -- -- 138
Stock subscription payments -- -- -- 174 -- 174
S-Corporation dividends paid -- -- (61) -- -- (61)
------- ------- ------- ----- ------- -------
Balance at December 31, 1998 11,513 11,932 9,551 (495) 112 32,613
Net income -- -- 7,196 -- -- 7,196
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- (1,351) (1,351)
-------
Total comprehensive income, net 5,845
Proceeds from issuance of 44,579
shares of common stock 45 308 -- -- -- 353
Stock options exercised 58 101 -- -- -- 159
Stock subscription payments -- -- -- 175 -- 175
------- ------- ------- ----- ------- -------
Balance at December 31, 1999 $11,616 $12,341 $16,747 $(320) $(1,239) $39,145
======= ======= ======= ===== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,196 $ 5,471 $ 3,526
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,447 1,142 1,090
Deferred compensation -- -- (1,466)
Gain on sale of securities (48) (218) (10)
Gain on sale of loans (147) (303) (95)
Loss on disposal of property and equipment -- -- 10
Provision for loan losses 999 1,004 810
Deferred income tax (benefit) expense (307) (693) 285
Loans originated for sale (22,583) (23,709) (8,419)
Proceeds from sale of loans 22,730 24,012 8,514
(Increase) decrease in accrued interest receivable (1,192) (236) (424)
(Increase) decrease in other assets (4,825) (826) (1,442)
Increase (decrease) in accrued interest payable 630 42 261
Increase (decrease) in other liabilities 2,097 2,468 2,177
-------- -------- -------
Net cash provided by operating activities 5,997 8,154 4,817
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold 11,000 (9,800) 5,750
Investment securities available for sale:
Purchases (70,150) (85,661) (25,283)
Sales 7,300 58,378 650
Maturities 41,007 14,730 14,440
Investment securities held to maturity:
Purchases -- (874) (8,252)
Sales -- 794 --
Maturities -- 4,900 5,000
Mortgage-backed securities available for sale:
Principal payments 2,830 1,216 --
Sales 3,387 -- --
Mortgage-backed securities held to maturity:
Principal payments -- 5,034 7,130
Purchase of FHLB stock (112) (1,207) (194)
Distributed (undistributed) earnings of partnership investments (990) (1,793) 995
Net increase in loans (101,197) (72,260) (70,631)
Recoveries on loans previously charged-off 86 122 309
Sales of other real estate owned -- 124 --
Capital expenditures, net of sale proceeds (1,903) (1,487) (1,623)
Acquisition of investment management business -- -- (1,051)
-------- -------- -------
Net cash used in investing activities (108,742) (87,784) (72,760)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 85,683 76,551 48,999
Net increase (decrease) in repurchase agreements 10,310 875 (2,760)
Net increase (decrease) in federal funds purchased -- (13,255) 13,255
Net increase (decrease) in other short-term debt (37) (833) 843
Proceeds from FHLB borrowings 116,770 48,011 52,125
Repayments of FHLB borrowings (112,427) (31,908) (37,432)
S-corporation dividends paid -- (61) (4,108)
Proceeds from stock subscriptions receivable 175 174 178
Proceeds from issuance of common stock, net 512 647 469
-------- -------- -------
Net cash provided by financing activities 100,986 80,201 71,569
-------- -------- -------
(Continued)
</TABLE>
40
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net increase (decrease) in cash and due from banks (1,759) 571 3,626
Cash and due from banks at beginning of year 12,949 12,378 8,752
-------- -------- -------
Cash and due from banks at end of year $ 11,190 $ 12,949 $ 12,378
======== ======== ========
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest $ 16,777 $ 15,455 $ 11,051
Cash paid for income taxes 3,460 3,859 1,224
Non-cash transactions:
Transfers to other real estate owned -- 42 --
Change in unrealized gain (loss) on securities available for sale, net
of estimated income taxes (1,351) 89 87
Transfer of investments to investment securities available for sale -- 17,865 --
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION
Boston Private Financial Holdings, Inc. (the "Company") is a holding
company which owns all of the issued and outstanding shares of common stock of
Boston Private Bank & Trust Company (the "Bank"), a Massachusetts chartered
trust company, Westfield Capital Management Company, Inc. ("Westfield"), a
registered investment advisor, and RINET Company, Inc. ("RINET"), a financial
planning firm. On October 31, 1997, the Company acquired Westfield, a
Massachusetts corporation engaged in providing a range of investment management
services to individual and institutional clients, in exchange for 3,918,367
newly issued shares of the Company's common stock. On October 15, 1999, the
Company acquired RINET, a Massachusetts corporation engaged in providing
financial planning and asset allocation services to high net worth individuals
and families, in exchange for 765,697 newly issued shares of the Company's
common stock. Each acquisition was accounted for as a "pooling of interests".
Accordingly, the results of operations of the Company reflect the financial
position and results of operations including Westfield and RINET on a
consolidated basis for all periods presented. The Company conducts substantially
all of its business through its wholly-owned subsidiaries, the Bank, Westfield
and RINET.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products to high net
worth individuals, their families and businesses in the greater Boston area and
New England and, to a lesser extent, Europe and Latin America. The Bank seeks to
anticipate and respond to the financial needs of its client base by offering
high quality products, dedicated personal service and long-term banking
relationships. The Bank offers its clients a broad range of basic deposit
services, including checking and savings accounts, with automated teller machine
access, and cash management services through sweep accounts and repurchase
agreements. The Bank also offers commercial, residential mortgage, home equity
and consumer loans. In addition, it provides investment advisory and asset
management services, securities custody and safekeeping services, trust and
estate administration and IRA and Keogh accounts.
Westfield serves the investment management needs of high net worth
individuals and institutions with endowments or retirement plans in the greater
Boston area, New England, and other areas of the U.S. Westfield specializes in
separately managed growth equity portfolios, and also acts as the investment
manager of five limited partnerships. Its investment services include a
particular focus on identifying and managing small and mid cap equity positions
as well as balanced growth accounts.
RINET provides fee-only financial planning, tax planning and investment
management services to high net worth individuals and their families in the
greater Boston area, New England, and other areas of the U.S. Its capabilities
include tax planning and preparation, asset allocation, estate planning,
charitable planning, planning for employment benefits, including 401(k) plans,
alternative investment analysis and mutual fund investing.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to prevailing industry practices. The
following is a summary of the significant accounting and reporting policies used
by management in preparing and presenting the consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Bank, Westfield and RINET. The Bank's
consolidated financial statements include the accounts of its wholly-owned
subsidiaries, BPB Securities Corporation, Boston Private Preferred Capital
Corporation, and Boston Private Asset Management Corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from those estimates. Material estimates
related to the determination of the allowance for loan losses are particularly
susceptible to change. In connection with the determination of the allowance for
loan losses, management obtains independent appraisals for significant
properties.
42
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, the Company considers cash and due
from banks to be cash equivalents. Cash flows relating to short term investments
with original maturities of less than 90 days, loans, and deposits are presented
net in the statements of cash flows.
CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances in a non-interest
bearing account with the Federal Reserve Bank based upon a percentage of certain
deposits. As of December 31, 1999, the daily amount required to be held was $5.6
million.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are classified as held to
maturity, available for sale, or trading. Securities classified as held to
maturity are carried at amortized cost only if the Company has a positive intent
and the ability to hold these securities to maturity. Securities classified as
trading are carried at fair value, with unrealized gains and losses included in
earnings, if they are bought and held principally for the purpose of selling in
the near term. Securities not classified as either held to maturity or trading
are classified as available for sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as other comprehensive
income, net of estimated income taxes.
During the quarter ended September 30, 1998, the Bank reconsidered its
intent to hold investments until maturity. As a result, investment and
mortgage-backed securities classified as held to maturity with an amortized cost
of $17.9 million and an unrealized gain of $170,000 at September 30, 1998 were
reclassified as available for sale. As of December 31, 1999, all of the
Company's investment and mortgage-backed securities were classified as available
for sale.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income by a method that approximates the level-yield
method. Actual prepayment experience is reviewed periodically and the timing of
the accretion and amortization is adjusted accordingly. If a decline in fair
value below the amortized cost basis of an investment or mortgage-backed
security is judged to be other than temporary, the cost basis of the investment
is written down to fair value. The amount of the write down is included as a
charge against gain on sale of investment and mortgage-backed securities. Gains
and losses on the sale of investment and mortgage-backed securities are
recognized at the time of sale on a specific identification basis.
LOANS
Impaired loans are loans for which it is probable that the Company will not
be able to collect all amounts due according to the contractual terms of the
loan agreements. Impaired loans are accounted for at the present value of the
expected future cash flows discounted at the loan's effective interest rate,
except those loans that are accounted for at fair value or at the lower of cost
or fair value. Accrual of interest income is discontinued and all interest
previously accrued but not collected is reversed against current period income
when a loan is classified as impaired. Interest received on impaired loans is
either applied against principal or reported as income according to management's
judgment as to the collectibility of principal. At December 31, 1999 and 1998,
the amounts of impaired loans were immaterial.
Loans on which the accrual of interest has been discontinued are designated
nonaccrual loans. Accrual of interest income on loans is discontinued when
concern exists as to the collectibility of principal or interest. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period income. Loans are removed from nonaccrual
status when they become less than ninety days past due and when concern no
longer exists as to the collectibility of principal or interest. Interest
received on nonaccruing loans is either applied against principal or reported as
income according to management's judgment as to the collectibility of principal.
43
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Loan origination fees, net of related direct incremental loan origination
costs, are deferred and recognized into income over the contractual lives of the
related loans as an adjustment to the loan yield, using a method which
approximates the level-yield method. When a loan is sold or paid off, the
unamortized portion of net fees is recognized into income.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a charge to
operations. When management believes that the collection of a loan's principal
balance is unlikely, the principal amount is charged against the allowance.
Recoveries on loans which have been previously charged off are credited to the
allowance as received.
The allowance for loan losses is determined using a systematic analysis and
procedural discipline based on historical experience, product types, and
industry benchmarks. The allowance is segregated into three components;
"general," "specific" and "unallocated". The general component is determined by
applying coverage percentages to groups of loans based on risk ratings and
product types. A system of periodic loan reviews is performed to assess the
inherent risk and assign risk ratings to each loan individually. Coverage
percentages applied are determined based on industry practice and management's
judgement. The specific component is established by allocating a portion of the
allowance for loan losses to individual classified loans on the basis of
specific circumstances and assessments. The unallocated component supplements
the first two components based on management's judgement of the effect of
current and forecasted economic conditions on borrowers' abilities to repay, an
evaluation of the allowance for loan losses in relation to the size of the
overall loan portfolio, and consideration of the relationship of the allowance
for loan losses to nonperforming loans, net charge-off trends, and other
factors. While this evaluation process utilizes historical and other objective
information, the classification of loans and the establishment of the allowance
for loan losses relies to a great extent on the judgement and experience of
management.
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review a financial
institution's allowance for loan losses. Such agencies may require the financial
institution to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization is computed primarily by the
straight-line method over the estimated useful lives of the assets, or the terms
of the leases if shorter.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired is being amortized to expense
using the straight-line method over 15 years. On an ongoing basis, management
reviews the valuation and amortization of its intangible assets, taking into
consideration any events and circumstances that might have diminished their
value. Accumulated amortization amounted to $1.8 million, $1.4 million, and $1.1
million at December 31, 1999, 1998 and 1997, respectively.
INVESTMENT MANAGEMENT AND TRUST ASSETS
Investment management and trust assets amounted to $3.7 billion and $2.8
billion at December 31, 1999 and 1998, respectively. These assets are not
included in the consolidated financial statements because they are held in a
fiduciary or agency capacity and are not assets of the Company.
EMPLOYEE BENEFITS
The Company maintains a Section 401(k) savings plan for employees of the Company
and the Bank. Under the plan, the Company makes a matching contribution of
one-half of the amount contributed by each participating employee, up to 6% of
the employee's yearly salary. The Company also maintains a Section 401(k)
savings plan for the employees of RINET. The annual contribution to this plan is
determined by the Board of Directors of RINET. Contributions to both plans are
charged against current operations in the year they are made.
44
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company maintains a defined contribution profit-sharing plan (the
"Profit Sharing Plan") for the employees of Westfield. The annual contribution
to the plan is determined by the Board of Directors of Westfield. Contributions
to the Profit Sharing Plan are charged against current operations in the year
they are made.
The Company measures compensation cost for stock-based compensation plans
as the difference between the exercise price of options granted and the fair
market value of the Company's stock at the grant date. The Company discloses
proforma net income and earnings per share in the notes to its consolidated
financial statements as if compensation cost was measured at the grant date
based on the value of the award and recognized over the service period.
INCOME TAXES
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income during
the period that includes the enactment date.
EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
The following table is a reconciliation of the numerators and denominators
of basic and diluted EPS computations for the years ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Per Per Per
Net Share Net Share Net Share
Income Shares Amount Income Shares Amount Income Shares Amount
------------------------------ ------------------------------ -------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $7,196 11,591 $0.62 $5,471 11,484 $0.48 $3,526 11,356 $0.31
Effect of Dilutive
Securities
Stock Payable -- -- -- -- -- 23
Stock Options -- 319 -- 404 -- 347
------ ------ ------ ------ ------ ------
Diluted EPS $7,196 11,910 $0.60 $5,471 11,888 $0.46 $3,526 11,726 $0.30
====== ====== ===== ====== ====== ===== ====== ====== =====
</TABLE>
For the year ended December 31, 1997, the proforma adjustment for income
taxes of an acquired entity previously filing as an S-Corporation was $186,000,
resulting in proforma net income of $3.3 million, proforma basic earnings per
share of $0.29, and proforma diluted earnings per share of $0.28.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. Under this Statement, an entity that elects
to apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No.137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". The Statements are effective for fiscal years beginning
after June 15, 2000, and are not expected to have a material impact on the
Company's consolidated financial statements.
45
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) COMPREHENSIVE INCOME
Comprehensive income represents the change in equity of the Company during
a period from transactions and other events and circumstances from
non-shareholder sources. It includes all changes in equity during a period
except those resulting from investments by shareholders and distributions to
shareholders.
The Company's other comprehensive income (loss) and related tax effects for
the years ended December 31, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
TAX EXPENSE
PRE-TAX (BENEFIT) NET
----------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
1999
UNREALIZED LOSSES ON SECURITIES:
Unrealized holding losses arising during period $(2,063) $(744) $(1,319)
Less: adjustment for realized gains (48) (16) (32)
------- ----- -------
Other comprehensive loss $(2,111) $(760) $(1,351)
======= ===== =======
1998
UNREALIZED GAINS ON SECURITIES:
Unrealized holding gains arising during period $ 357 $ 137 $ 220
Less: adjustment for realized gains (218) (87) (131)
------- ----- -------
Other comprehensive income $ 139 $ 50 $ 89
======= ===== =======
1997
UNREALIZED GAINS ON SECURITIES:
Unrealized holding gains arising during period $ 147 $ 54 $ 93
Less: adjustment for realized gains (10) (4) (6)
------- ----- -------
Other comprehensive income $ 137 $ 50 $ 87
======= ===== =======
</TABLE>
(4) BUSINESS SEGMENTS
MANAGEMENT REPORTING
The Company has three reportable segments, the Bank, Westfield and RINET.
The financial performance of the Company is managed and evaluated by business
segment. The segments are managed separately as each business is a company with
different clients, employees, systems, risks, and marketing strategies.
DESCRIPTION OF BUSINESS SEGMENTS
A description of each business segment is provided in Note 1 to the
Consolidated Financial Statements.
MEASUREMENT OF SEGMENT PROFIT AND ASSETS
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Revenues, expenses and assets
are recorded by each segment, and separate financial statements are reviewed by
management. In addition to direct expenses, each business segment is allocated a
share of holding company expenses based on the segment's percentage of
consolidated net income.
46
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RECONCILIATION OF REPORTABLE SEGMENT ITEMS
The following tables are a reconciliation of the revenues, net income,
assets, and other significant items of reportable segments as of and for the
years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 17,535 $ 92 $ -- $ -- $ (92) $ 17,535
Non-Interest Income 8,766 13,088 3,106 -- -- 24,960
-------- ------- ------ ------ ------- --------
Total Revenues 26,301 13,180 3,106 -- (92) 42,495
Provision for Loan Losses 999 -- -- -- -- 999
Non-Interest Expense 19,308 8,203 3,033 113 -- 30,657
Income Taxes 1,576 2,037 30 -- -- 3,643
-------- ------- ------ ------ ------- --------
Segment Profit $ 4,418 $ 2,940 $ 43 $ (113) $ (92) $ 7,196
======== ======= ====== ====== ======= ========
BALANCE SHEET DATA:
Total Segment Assets $557,734 $ 8,802 $ 699 $1,340 $(1,202) $567,373
======== ======= ====== ====== ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,754 $ 61 $ 88 $ -- $ -- 1,903
======== ======= ====== ====== ======= ========
Depreciation and Amortization $ 1,215 $ 155 $ 77 $ -- $ -- $ 1,447
======== ======= ====== ====== ======= ========
1998
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 14,166 $ 65 $ -- $ 9 $ (92) $ 14,148
Non-Interest Income 6,818 10,310 2,758 -- -- 19,886
-------- ------- ------ ------ ------- --------
Total Revenues 20,984 10,375 2,758 9 (92) 34,034
Provision for Loan Losses 1,004 -- -- -- -- 1,004
Non-Interest Expense 14,889 6,986 2,819 -- -- 24,694
Income Taxes 1,503 1,387 (25) -- -- 2,865
-------- ------- ------ ------ ------- --------
Segment Profit $ 3,588 $ 2,002 $ (36) $ 9 $ (92) $ 5,471
======== ======= ====== ====== ======= ========
BALANCE SHEET DATA:
Total Segment Assets $452,045 $ 6,903 $ 568 $1,269 $(2,970) $457,815
======== ======= ====== ====== ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,415 $ 33 $ 39 $ -- $ -- $ 1,487
======== ======= ====== ====== ======= ========
Depreciation and Amortization $ 960 $ 132 $ 50 $ -- $ -- $ 1,142
======== ======= ====== ====== ======= ========
1997
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 11,325 $ 69 $ -- $ 11 $ (11) $ 11,394
Non-Interest Income 4,844 8,940 2,414 -- -- 16,198
-------- ------- ------ ------ ------- --------
Total Revenues 16,169 9,009 2,414 11 (11) 27,592
Provision for Loan Losses 810 -- -- -- -- 810
Non-Interest Expense 11,959 5,845 2,383 1,147 -- 21,334
Income Taxes 981 1,157 13 (229) -- 1,922
-------- ------- ------ ------ ------- --------
Segment Profit $ 2,419 $ 2,007 $ 18 $ (907) $ (11) $ 3,526
======== ======= ====== ====== ======= ========
BALANCE SHEET DATA:
Total Segment Assets $365,351 $ 3,586 $ 601 $ 120 $ (115) $369,543
======== ======= ====== ====== ======= ========
OTHER FINANCIAL DATA:
Expenditures for Long Lived Assets $ 1,333 $ 220 $ 70 $ -- $ -- $ 1,623
======== ======= ====== ====== ======= ========
Depreciation and Amortization $ 873 $ 161 $ 56 $ -- $ -- $ 1,090
======== ======= ====== ====== ======= ========
</TABLE>
47
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) INVESTMENT SECURITIES
A summary of investment securities available for sale follows:
<TABLE>
<CAPTION>
Unrealized
Amortized -------------------- Market
Cost Gains Losses Value
----------- --------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
U.S. Government and agencies $36,174 $ -- $(1,362) $34,812
Municipal bonds 39,250 2 (459) 38,793
------- ---- ------- -------
Total $75,424 $ 2 $(1,821) $73,605
======= ==== ======= =======
AT DECEMBER 31, 1998
U.S. Government and agencies $35,074 $ 10 $ (34) $35,050
Municipal bonds 18,922 132 (2) 19,052
------- ---- ------- -------
Total $53,996 $142 $ (36) $54,102
======= ==== ======= =======
</TABLE>
The following table sets forth the maturities of investment securities available
for sale at December 31, 1999 and the weighted average yields of such
securities:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
AND AGENCIES MUNICIPAL BONDS TOTAL
------------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
Amortized Market Average Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield Cost Value Yield
------------------------------- ------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within One Year $ 8,708 $ 8,656 5.90% $11,708 $11,683 4.03% $20,416 $20,339 4.83%
After One, But Within Five Years 9,000 8,933 6.26 22,061 21,699 4.36 31,061 30,632 4.92
After Five, But Within Ten Years 8,466 8,182 7.82 2,763 2,745 4.21 11,229 10,927 6.96
After Ten Years 10,000 9,041 7.82 2,718 2,666 5.32 12,718 11,707 7.31
------- ------- ------- ------- ------- -------
Total $36,174 $34,812 6.97% $39,250 $38,793 4.31% $75,424 $73,605 5.60%
======= ======= ======= ======= ======= =======
</TABLE>
The weighted average remaining life of investment securities available for
sale at December 31, 1999 was 4.8 years. As of December 31, 1999, approximately
$19.3 million of investment securities available for sale were callable before
maturity.
The following table presents the sale of investment securities and
mortgage-backed securities with the resulting realized gains, losses, and net
proceeds from such sales:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost of securities sold $10,639 $58,954 $640
Gains realized on sales 48 222 10
Losses realized on sales -- (4) --
------- ------- ----
Net proceeds from sales $10,687 $59,172 $650
======= ======= ====
</TABLE>
48
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities available for sale follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ---------------------- Market
Cost Gains Losses Value
-------------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
FIXED RATE:
FHLMC $ 1,762 $-- $ (79) $ 1,683
FNMA 1,112 -- (22) 1,090
ADJUSTABLE RATE:
FNMA 233 -- (5) 228
GNMA 2,520 -- (11) 2,509
------- --- ----- -------
Total $ 5,627 $-- $(117) $ 5,510
======= === ===== =======
AT DECEMBER 31, 1998
FIXED RATE:
FHLMC $ 3,174 $10 $ (11) $ 3,173
FNMA 1,512 -- -- 1,512
ADJUSTABLE RATE:
FNMA 277 -- (3) 274
GNMA 6,877 73 -- 6,950
------- --- ----- -------
Total $11,840 $83 $ (14) $11,909
======= === ===== =======
</TABLE>
The following table sets forth the maturities of mortgage-backed securities
at December 31, 1999 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
AFTER ONE, BUT
WITHIN ONE YEAR WITHIN FIVE YEARS AFTER TEN YEARS
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Amortized Market Average Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield Cost Value Yield
------------------------------ ------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
FIXED RATE:
FHLMC $1,391 $1,326 6.13% $ 371 $ 357 6.01% $ -- $ -- --%
FNMA -- -- -- 1,112 1,090 5.97 -- -- --
ADJUSTABLE RATE:
FNMA -- -- -- -- -- -- 233 228 5.59
GNMA -- -- -- -- -- -- 2,520 2,509 5.78
------ ------ ------ ------ ------ ------
Total $1,391 $1,326 6.13% $1,483 $1,447 5.98% $2,753 $2,737 5.76%
====== ====== ====== ====== ====== ======
</TABLE>
These securities have final maturities ranging from 0.25 to 24.2 years. The
weighted average remaining life of mortgage-backed securities was 12.7 years as
of December 31, 1999. Expected maturities will differ from contractual
maturities because borrowers may repay obligations without prepayment penalties.
49
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LOANS RECEIVABLE
The Bank's lending activities are conducted principally in the Boston
metropolitan area and, to a lesser extent, elsewhere in Massachusetts and New
England. The Bank originates single and multi-family residential loans,
commercial real estate loans, commercial loans and consumer loans (principally
home equity loans). Most loans made are secured by borrowers' personal or
business assets. The ability of the Bank's single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity within the lending area. Commercial
borrowers' ability to repay is generally dependent upon the health of the
economy and the real estate sector in particular. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio is
susceptible to changing conditions in the New England economy. As of December
31, 1999, the Bank had $78.5 million of fixed rate loans and $371.9 million of
variable rate loans outstanding.
The Bank's lending limit to any single borrower is limited by regulation to
approximately $7.1 million. The Bank had no relationships with an individual
borrower at December 31, 1999 that were in excess of the legal lending limit
established for Massachusetts state-chartered banks. Mortgage loans serviced for
others totaled $10.5 million and $1.3 million at December 31, 1999 and 1998,
respectively.
Loans outstanding to executive officers and directors of the Company
aggregated $3.7 million and $3.6 million at December 31, 1999 and 1998,
respectively. An analysis of the activity of these loans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year $ 3,643 $ 293
Originations 2,982 3,643
Repayments (2,974) (293)
------- ------
Balance at end of year $ 3,651 $3,643
======= ======
</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,
---------------------------------------------
1999 1998 1997
------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans $1,317 $ 565 $ 722
Loans past due 90 days or more, but still accruing -- -- 25
------ ------ ------
Total non-performing loans $1,317 $ 565 $ 747
====== ====== ======
Loans past due 30-89 days $2,042 $3,307 $1,632
====== ====== ======
</TABLE>
(8) ALLOWANCE FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $4,386 $3,645 $2,566
Provision for loan losses 999 1,004 810
Charge-offs (135) (385) (40)
Recoveries 86 122 309
------ ------ ------
Balance at end of year $5,336 $4,386 $3,645
====== ====== ======
</TABLE>
50
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED --------------------------------
USEFUL LIFE 1999 1998
-------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Leasehold improvements 5-20 Years $2,904 $2,550
Computer equipment 3-5 Years 2,025 1,372
Furniture and fixtures 5-7 Years 2,175 1,519
Automobiles 5 Years 125 106
Office equipment 5-7 Years 685 478
------- -------
Subtotal 7,914 6,025
Less accumulated depreciation and amortization (3,175) (2,235)
------- -------
Premises and equipment, net $ 4,739 $ 3,790
======= =======
</TABLE>
Depreciation and amortization expense related to premises and equipment
was $954,000, $727,000, and $680,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
The Company and its subsidiaries conduct operations in leased premises. The
Company's and the Bank's headquarters are located at Ten Post Office Square,
Boston, Massachusetts, with a branch office in Wellesley, Massachusetts. The
Bank has also signed a lease for a second branch office in the Back Bay area of
Boston, Massachusetts. Westfield is located at One Financial Center, Boston,
Massachusetts, and RINET is located at 213 Union Wharf, Boston, Massachusetts.
Generally, the initial terms of the leases for these properties range from five
to fifteen years. Most of the leases also include options to renew at fair
market value for periods of five to ten years. In addition to minimum rentals,
certain leases include escalation clauses based upon various price indices and
include provisions for additional payments to cover taxes.
The Company is obligated for minimum rental payments under these
noncancelable operating leases. In accordance with the terms of these leases,
the Company is currently committed to minimum annual rent as follows:
<TABLE>
<CAPTION>
MINIMUM
LEASE PAYMENTS
--------------------
(IN THOUSANDS)
<S> <C>
2000 $ 2,516
2001 2,515
2002 2,307
2003 2,211
2004 2,263
Thereafter 3,067
-------
Total $14,879
=======
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$1.5 million, $1.3 million, and $1.0 million respectively.
51
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Demand deposits $ 53,058 $ 47,766
NOW 40,875 35,735
Savings 4,607 4,235
Money market 238,513 164,626
Certificates of deposit under $100,000 22,394 29,874
Certificates of deposit $100,000 or greater 61,088 52,616
-------- --------
Total $420,535 $334,852
======== ========
</TABLE>
Certificates of deposit had the following schedule of maturities:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Less than 3 months remaining $51,915 $51,075
3 to 6 months remaining 8,103 11,998
6 to 12 months remaining 14,688 12,188
More than 12 months remaining 8,776 7,229
------- -------
Total $83,482 $82,490
======= =======
</TABLE>
Interest expense on certificates of deposit greater than $100,000 was $3.2
million, $2.8 million, and $2.4 million for the years ended December 31, 1999,
1998, and 1997, respectively.
(11) FEDERAL HOME LOAN BANK BORROWINGS
A summary of borrowings from the Federal Home Loan Bank of Boston ("FHLB")
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 year $16,916 5.66% $21,000 5.75%
Over 1 year to 2 years 20,193 5.82 16,916 5.66
Over 2 years to 3 years 13,120 6.23 10,286 5.53
Over 3 years to 5 years 14,556 5.89 15,653 5.90
Over 5 years 15,887 5.74 12,474 5.78
------- -------
Total $80,672 5.85% $76,329 5.74%
======= =======
</TABLE>
Borrowings from the FHLB are secured by the Bank's stock in the FHLB and a
blanket lien on "qualified collateral" defined principally as 90% of the market
value of U.S. Government and federal agency obligations and 75% of the carrying
value of certain residential mortgage loans. Unused borrowings with the FHLB at
December 31, 1999 were $114.7 million. The Bank had additional short-term
federal fund lines with the FHLB and correspondent banks of $79.0 million at
December 31, 1999. As of December 31, 1999, there were no federal funds
purchased.
52
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As a member of the FHLB, the Bank is required to invest in the common
stock of the FHLB in the amount of one percent of its outstanding loans secured
by residential housing, or three tenths of one percent of total assets, or five
percent of its outstanding advances from the FHLB, whichever is highest. As and
when such stock is redeemed, the Bank would receive from the FHLB an amount
equal to the par value of the stock. As of December 31, 1999, the Bank's FHLB
stock holdings totaled $4.8 million. The Bank's investment in FHLB stock is
recorded at cost, and is redeemable at par.
(12) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to
repurchase with clients and brokers. These agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the Company's consolidated balance sheets. The securities underlying the
agreements remain under the Company's control. Information concerning securities
sold under agreements to repurchase is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
----------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Outstanding $16,551 $6,241 $ 5,366
Maturity date 1/00 1/99 1/98-3/98
Outstanding collateralized by U.S. Treasury
and related agency securities with:
Book value 17,760 6,315 5,400
Market value 16,640 6,297 5,402
Average outstanding for the year 12,126 5,962 7,032
Maximum outstanding at any month end 19,936 7,613 10,685
Weighted average rate at end of period 4.22% 4.16% 4.45%
Weighted average rate paid for the period 4.37% 4.43% 4.57%
</TABLE>
(13) INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense:
Federal $3,374 $2,723 $1,264
State 576 835 373
------ ------ ------
Total current expense 3,950 3,558 1,637
------ ------ ------
Deferred expense (benefit):
Federal (208) (543) 202
State (91) (122) 23
Change in valuation reserve (8) (28) 60
------ ------ ------
Total deferred expense (benefit) (307) (693) 285
------ ------ ------
Income tax expense $3,643 $2,865 $1,922
====== ====== ======
</TABLE>
53
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The difference between the statutory federal income tax rate and the
effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of Federal tax benefit 2.9 5.7 4.8
Tax exempt interest, net (4.0) (4.2) (5.8)
Benefit of S-Corporation status -- -- (4.2)
Merger expense -- -- 4.0
Other, net (0.7) (1.1) 2.5
---- ---- ----
Effective federal income tax rate 33.2% 34.4% 35.3%
==== ==== ====
</TABLE>
The components of gross deferred tax assets and gross deferred tax
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Allowance for losses on loans and real estate $1,767 $1,358
Depreciation 37 90
Organization costs 91 123
Pre-operating costs 103 103
Investment in partnerships -- 27
Unrealized loss on securities available for sale 697 --
Other 9 52
------ ------
Gross deferred tax assets 2,704 1,753
Valuation allowance (23) (32)
------ ------
Total deferred tax assets 2,681 1,721
Gross deferred tax liabilities:
Cash to accrual adjustment 339 551
Investment in partnerships 168 --
Unrealized gain on securities available for sale -- 63
------ ------
Total gross deferred tax liabilities 507 614
------ ------
Net deferred tax asset $2,174 $1,107
====== ======
</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
$5.6 million of future net taxable income to realize the net deferred tax asset
at December 31, 1999. Management believes that it is more likely than not that
the net deferred tax asset will be realized based on the generation of future
taxable income.
54
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) EMPLOYEE BENEFITS
EMPLOYEE 401(k) PLANS
The Company maintains a 401(k) plan for the benefit of the employees of the
Company and the Bank which qualifies as a tax exempt plan and trust under
Sections 401 and 501 of the Internal Revenue Code. Generally, employees who are
at least twenty-one (21) years of age are immediately enrolled and are eligible
to participate in this 401(k) plan. Expenses associated with this 401(k) plan
were $250,000, $153,000, and $100,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company also maintains a 401(k) plan for the benefit of the employees
of RINET which qualifies as a tax exempt plan and trust under Sections 401 and
501 of the Internal Revenue Code. Generally, employees who are at least
twenty-one (21) years of age and have completed one year of service are eligible
to participate in this 401(k) plan. Expenses associated with this 401(k) plan
were $33,000, $32,000, and $31,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
PROFIT SHARING PLAN
The Company maintains the Profit Sharing Plan for the benefit of the
employees of Westfield that qualifies as a tax exempt plan under Section 401 of
the Internal Revenue Code. Generally, employees who are at least twenty-one (21)
years of age and have completed one year of service are eligible to participate
in the Profit Sharing Plan. Expenses associated with the Profit Sharing Plan
were $306,000, $294,000, and $288,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
STOCK OPTION PLANS
The Company offers options on its common stock to officers, key employees,
and directors under an employee stock option plan and a director stock option
plan. The Company accounts for these plans by measuring compensation at the
grant date as the difference between the fair market value of the Company's
stock and the exercise price of the options granted. Generally, the Company
grants options at the fair market value of the stock on the date of grant.
Accordingly, no compensation cost has been charged against income. Had
compensation cost been determined consistent with a fair value based approach,
the Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported $7,196 $5,471 $3,526
Proforma 6,460 4,888 3,159
Basic earnings per share:
As reported $ 0.62 $ 0.48 $ 0.31
Proforma 0.56 0.43 0.28
Diluted earnings per share:
As reported $ 0.60 $ 0.46 $ 0.30
Proforma 0.54 0.41 0.27
</TABLE>
Under the employee stock option plan, the Company may grant options to its
employees for an amount not to exceed 4% of the number of shares of common stock
outstanding as of the previous year-end. Under the directors stock option plan,
the Company may grant options to its non-employee directors for an amount not to
exceed 1% of the number of shares of common stock outstanding as of the previous
year-end. Under both plans, the exercise price of each option equals the market
value of the stock on the date the options are granted, and all options expire
ten years from the date granted. Generally, options vest over a three year
period after the grant date under the employee stock option plan. Under the
directors stock option plan, options generally vest one year after the grant
date.
55
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997: expected life of 7 years;
expected volatility of 21% in 1999, 37% in 1998, and 40% in 1997, and risk-free
interest rates of 6.7% in 1999, 5.7% in 1998, and 5.3% in 1997.
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1999, 1998, and 1997, and changes during the years then ended is
presented below.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
UNEXERCISED AVERAGE UNEXERCISED AVERAGE UNEXERCISED AVERAGE
OPTIONS OPTION PRICE OPTIONS OPTION PRICE OPTIONS OPTION PRICE
------------- ---------------- --------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of year 963,896 $5.48 797,452 $4.21 550,202 $2.82
Granted 322,269 7.83 229,494 9.43 277,300 6.75
Exercised (58,050) 2.75 (50,175) 2.75 (29,250) 2.39
Canceled (48,150) 8.33 (12,875) 7.46 (800) 3.46
--------- ------- -------
Options at end of year 1,179,965 $6.13 963,896 $5.48 797,452 $4.21
========= ===== ======= ===== ======= =====
Options exercisable at year end 877,207 $5.39 655,438 $4.26 481,727 $2.91
========= ===== ======= ===== ======= =====
Weighted average fair value of
options granted during the year $3.25 $4.71 $3.62
===== ===== =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 to $3.00 287,552 4.2 $ 2.52 287,552 $ 2.52
$3.83 to $5.25 234,250 6.6 4.45 234,250 4.45
$6.00 to $7.50 83,100 8.5 6.89 36,100 6.11
$7.72 to $8.84 495,963 8.7 8.21 279,755 8.32
$9.13 to $10.75 79,100 8.4 10.42 39,550 10.42
--------- -------
$2.00 to $10.75 1,179,965 7.1 $ 6.13 877,207 $ 5.39
========= =======
</TABLE>
(15) OTHER OPERATING EXPENSE
Major components of other operating expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Forms and supplies $ 364 $ 304 $ 311
Telephone 186 166 161
Training and education 132 99 127
Postage 113 110 95
Insurance 133 117 111
Other 1,015 761 708
------ ------ ------
Total $1,943 $1,557 $1,513
====== ====== ======
</TABLE>
56
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate loans, unused lines
of credit and standby letters of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance sheet risk are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans:
Fixed rate $ 588 $12,406
Variable rate 20,084 36,061
Unused lines of credit 87,000 83,609
Standby letters of credit 5,895 6,241
</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.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available
quoted market information or other appropriate valuation methodologies. The
aggregate fair value amounts presented do not represent the underlying value of
the Company taken as a whole.
The fair value estimates provided are made at a specific point in time,
based on relevant market information and the characteristics of the financial
instrument. The estimates do not provide for any premiums or discounts that
could result from concentrations of ownership of a financial instrument. Because
no active market exists for some of the Company's financial instruments, certain
fair value estimates are based on subjective judgments regarding current
economic conditions, risk characteristics of the financial instruments, future
expected loss experience, prepayment assumptions, and other factors. The
resulting estimates involve uncertainties and therefore cannot be determined
with precision. Changes made to any of the underlying assumptions could
significantly affect the estimates.
57
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The book values and fair values for the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
(IN THOUSANDS)
BOOK BOOK
VALUE FAIR VALUE VALUE FAIR VALUE
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 11,190 $ 11,190 $ 12,949 $ 12,949
Federal funds sold -- -- 11,000 11,000
Investment securities 73,605 73,605 54,102 54,102
Mortgage-backed securities 5,510 5,510 11,909 11,909
Stock in the Federal Home Loan Bank of Boston 4,830 4,830 4,718 4,718
Loans receivable (net of allowance for loan losses):
Commercial 186,258 188,834 151,177 151,593
Residential mortgage 233,599 229,013 173,382 174,030
Home equity and other 25,195 25,195 20,006 20,006
Accrued interest receivable 3,597 3,597 2,405 2,405
LIABILITIES:
Deposits:
Demand deposits 53,058 53,058 47,766 47,766
NOW 40,875 40,875 35,735 35,735
Savings 4,607 4,607 4,235 4,235
Money market 238,513 238,513 164,626 164,626
Certificates of deposit under $100,000 22,394 22,447 29,874 30,078
Certificates of deposit $100,000 or more 61,088 61,173 52,616 52,655
Securities sold under agreements to repurchase 16,551 16,551 6,241 6,241
FHLB borrowings 80,672 77,648 76,329 76,823
Other borrowings 36 36 73 73
Accrued interest payable 1,281 1,281 651 651
</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.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The fair values presented for investment and mortgage-backed securities are
based on quoted bid prices received from a third party pricing service.
STOCK IN THE FEDERAL HOME LOAN BANK OF BOSTON
The fair value of stock in the FHLB equals the carrying value reported in
the balance sheet. This stock is redeemable at full par value only by the FHLB.
58
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LOANS RECEIVABLE
Fair value estimates are based on loans with similar financial
characteristics. Loans have been segregated by homogenous groups into
commercial, residential mortgage, home equity and other loans. Fair values of
commercial and residential mortgage loans are estimated by discounting
contractual cash flows adjusted for prepayment estimates and using discount
rates approximately equal to current market rates on loans with similar
characteristics and maturities. The incremental credit risk for non-performing
loans has been considered in the determination of the fair value of loans. The
fair value estimated for home equity and other loans equals their carrying value
because of the floating rate nature of these loans.
DEPOSITS
The fair values reported for demand deposits, NOW, savings, and money
market accounts are equal to their respective book values reported on the
balance sheet. The fair values disclosed are, by definition, equal to the amount
payable on demand at the reporting date. The fair values reported for
certificates of deposit are based on the discounted value of contractual cash
flows. The discount rates used are representative of approximate rates currently
offered on certificates of deposit with similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The carrying values reported in the balance sheet for repurchase agreements
approximate fair value because of the short-term nature of these instruments.
FHLB BORROWINGS
The fair value reported for FHLB borrowings is estimated based on the
discounted value of contractual cash flows. The discount rate used is based on
the Company's estimated current incremental borrowing rate for FHLB borrowings
of similar maturities.
OTHER BORROWINGS
The carrying values reported in the balance sheet for other borrowings
approximate fair value because of the short-term nature of these instruments.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying values for accrued interest receivable and payable approximate
fair value because of the short-term nature of these financial instruments.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's commitments to originate loans, and for unused lines and
outstanding letters of credit are primarily at market interest rates and
therefore there is no fair value adjustment.
59
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(18) BOSTON PRIVATE FINANCIAL HOLDINGS, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash $ 956 $ 930
Investment in subsidiaries 38,252 32,708
Other assets 384 339
------- -------
Total assets $39,592 $33,977
======= =======
LIABILITIES:
Due to Westfield $ -- $ 1,000
Accounts payable 447 364
------- -------
Total liabilities 447 1,364
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share; authorized: 30,000,000
issued: 11,616,070 shares in 1999 and 11,513,441 shares in 1998 11,616 11,513
Additional paid-in capital 12,341 11,932
Retained earnings 16,747 9,551
Stock subscriptions receivable (320) (495)
Accumulated other comprehensive (loss) income (1,239) 112
------- -------
Total stockholders' equity 39,145 32,613
------- -------
Total liabilities and stockholders' equity $39,592 $33,977
======= =======
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME:
Interest on cash in subsidiary bank $ -- $ 9 $ 11
Management fees from subsidiaries 1,864 1,854 --
Dividends from subsidiaries 2,700 -- 600
------ ------ ------
Total income 4,564 1,863 611
------ ------ ------
EXPENSES:
Salaries and benefits 1,093 1,214 --
Professional fees 467 230 --
Other expenses 304 419 126
Merger expenses 113 -- 1,021
------ ------ ------
Total expenses 1,977 1,863 1,147
------ ------ ------
Income (loss) before income taxes 2,587 -- (536)
Income tax expense (benefit) -- -- (229)
------ ------ ------
Income (loss) before equity in undistributed earnings of subsidiaries 2,587 -- (307)
Equity in undistributed earnings of subsidiaries 4,609 5,471 3,833
------ ------ ------
NET INCOME $7,196 $5,471 $3,526
====== ====== ======
</TABLE>
60
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,196 $ 5,471 $ 3,526
Adjustments to reconcile net income to net cash provided by
(used) in operating activities:
Equity in undistributed earnings of subsidiaries (7,309) (5,471) (4,433)
Dividends from subsidiaries 2,700 -- 600
(Increase) decrease in other assets (46) (98) (235)
Increase (decrease) in other liabilities 85 266 98
------- ------- ------
Total adjustments (4,570) (5,303) (3,970)
------- ------- ------
Net cash provided by (used) in operating activities 2,626 168 (444)
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investment in RINET (112) -- --
Capital investment in subsidiary Bank (2,000) (1,000) (78)
------- ------- ------
Net cash used in investing activities (2,112) (1,000) (78)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 353 509 322
Proceeds from exercise of stock options 159 138 147
Proceeds from short-term borrowings -- 1,000 --
Repayment of short-term borrowings (1,000) -- --
Increase (decrease) in common stock payable -- -- (298)
------- ------- ------
Net cash provided by financing activities (488) 1,647 171
------- ------- ------
Net increase (decrease) in cash 26 815 (351)
Cash at beginning of year 930 115 466
------- ------- ------
Cash at end of year $ 956 $ 930 $ 115
======= ======= ======
</TABLE>
(19) REGULATORY MATTERS
The Company and its subsidiaries are subject to extensive regulation and
examination by the Federal Reserve Board, the Federal Deposit Insurance
Corporation ("FDIC"), which insures the Bank's deposits to the maximum extent
permitted by law, and by the Massachusetts Commissioner of Banks. The federal
and state laws and regulations which are applicable to banks regulate, among
other things, the scope of their business, their investments, their reserves
against deposits, the timing of the availability of deposited funds, and the
nature and amount of collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and not
for the purpose of protecting stockholders. The Bank was last examined by the
FDIC in December 1999 and by the Massachusetts Commissioner of Banks in March
1998. The Company was examined by the Federal Reserve Bank of Boston in January
2000.
The Company is subject to various regulatory capital requirements
administered by federal agencies. Failure to meet minimum capital requirements
can result in certain mandatory, and possibly additional discretionary actions
by regulators that, if undertaken, could have a material effect on the Company's
financial statements. For example, under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Similarly, the Company is also subject to capital
requirements administered by the Federal Reserve Bank with respect to certain
non-banking activities, including adjustments in connection with off-balance
sheet items.
61
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Current FDIC regulations regarding capital requirements of FDIC-insured
institutions require banks to maintain a leverage capital ratio of at least 3%
and a qualifying total capital to risk-weighted assets of at least 8%, of which
at least 4% must be Tier I capital. Tier I capital is defined as common equity
and retained earnings, less goodwill, and is compared to Total Risk Weighted
Assets. Assets and off-balance sheet items are assigned to four risk categories,
each with appropriate weights. The resulting capital ratio represents Tier I
capital as a percentage of risk-weighted assets and off-balance sheet items. The
risk-based capital rules are designed to make regulatory capital more sensitive
to differences in risk profiles among banks and bank holding companies, to
account for off-balance sheet exposure and to minimize disincentives for holding
liquid assets. As of December 31, 1999, management believes that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. Similarly, the most recent notification from the
Federal Reserve Bank categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank and the Company must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Bank's or the Company's category.
Actual capital amounts and regulatory capital requirements as of December
31, 1999 and 1998 are presented in the tables below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------------------------- ------------------------------ ------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------------- ------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total risk-based capital
Company $45,717 10.84% $33,741 >8.0% $42,176 >10.0%
Bank 36,837 10.72 27,495 8.0 34,368 10.0
Tier I risk-based
Company 40,444 9.59 16,870 4.0 25,305 6.0
Bank 32,528 9.46 13,747 4.0 20,621 6.0
Tier I leverage capital
Company 40,444 6.57 24,607 4.0 30,759 5.0
Bank 32,528 5.99 21,720 4.0 27,150 5.0
AS OF DECEMBER 31, 1998:
Total risk-based capital
Company $32,514 11.87% $21,919 >8.0% $27,399 >10.0%
Bank 29,157 10.87 21,452 8.0 26,815 10.0
Tier I risk-based
Company 29,077 10.61 10,959 4.0 16,439 6.0
Bank 25,792 9.62 10,726 4.0 16,089 6.0
Tier I leverage capital
Company 29,077 6.54 17,792 4.0 22,240 5.0
Bank 25,792 5.96 17,318 4.0 21,647 5.0
</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.
62
<PAGE>
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(20) LITIGATION
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
63
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10-13 of Part III of Form 10-K is
incorporated herein by reference to the Company's Definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(A) FINANCIAL STATEMENTS AND EXHIBITS PAGE NO.
(1) FINANCIAL STATEMENTS
<S> <C>
a) Consolidated Balance Sheets 37
b) Consolidated Statements of Operations 38
c) Consolidated Statements of Changes in Stockholders' Equity 39
d) Consolidated Statements of Cash Flows 40
e) Notes to Consolidated Financial Statements 42
</TABLE>
(2) FINANCIAL SCHEDULES
NONE
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1(a) Articles of Organization of the Company.*
3.1(b) Articles of Amendment.*
3.2 By-Laws of the Company.*
4.1 Instruments Defining the Rights of Security Holders, including
Indentures are incorporated herein by reference to the
Articles of Organization and the By-Laws of the Company set
forth in Exhibits 3.1 and 3.2 to this Form 10-K.
10.1 Employee Incentive Stock Option Plan is incorporated herein by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S-1 filed with the Commission on
April 1, 1991 (33-39690) (the "Form S-1").
10.2 Employee Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.6 to
the Form S-1.
10.3 Directors' Stock Option Plan adopted May 26, 1993, as amended March 15, 1995, is
incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-KSB for the
fiscal year ended December 31, 1996 filed with the Commission on March 25, 1997.
</TABLE>
64
<PAGE>
<TABLE>
<S> <C>
10.4 Employment Agreement dated January 1, 1996 by and among the Company, the Bank and
Timothy L. Vaill is incorporated herein by reference to Exhibit 10.4 to the Company's
Form 10-KSB for the year ended December 31, 1996 filed with the Commission
on March 25, 1997.
10.5 Commercial Lease dated October 31, 1994, by and between the Company and Leggat
McCall Properties Management, Inc. incorporated herein by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994.
10.6 Asset Purchase Agreement dated as of June 16, 1995 by and among the Company and the
stockholders of CH&P, Inc., is incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Commission on June 28, 1995.
10.7 Agreement and Plan of Merger dated August 13, 1997, by and among the Company,
Boston Private Investment Management Inc., and the stockholders of Westfield,
is incorporated herein by reference to the Company's current report on Form 8-K filed with the
Commission on August 21, 1997.
10.8 Employment Agreement dated August 13, 1997 by and among the Company, Westfield, and
Arthur J. Bauernfeind is incorporated herein by reference to
Exhibit 10.8 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997 filed with
the Commission on February 27, 1998
("Form 10-KSB").
10.9 Employment Agreement dated August 13, 1997 by and among the
Company, Westfield, and C. Michael Hazard is incorporated
herein by reference to Exhibit 10.8 of Form 10-KSB.
10.10 Employment Agreement dated July 22, 1999 by and among the Company, RINET, and
Richard N. Thielen.*
21 Subsidiaries of the Company are incorporated herein by reference to Exhibit 22.0 to Form S-1.
23.1 Independent Auditors' Consent. *
27 Financial Data Schedule. *
</TABLE>
- -------------
* Filed herewith.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
quarter ended December 31, 1999.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 6th day of
March, 2000.
Boston Private Financial Holdings, Inc.
By: /s/ Timothy L. Vaill
-----------------------------------
Timothy L. Vaill
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated.
<TABLE>
<S> <C> <C>
/s/ Timothy L. Vaill Chairman of the Board, President March 6, 2000
- ------------------------------------------------- and Chief Executive Officer
Timothy L. Vaill
/s/ Walter M. Pressey Executive Vice President, Treasurer March 6, 2000
- ------------------------------------------------- and Chief Financial Officer
Walter M. Pressey (Principal Financial Officer)
/s/ Charles O. Wood, III Lead Director March 6, 2000
- -------------------------------------------------
Charles O. Wood, III
/s/ Herbert S. Alexander Director March 6, 2000
- -------------------------------------------------
Herbert S. Alexander
/s/ Arthur J. Bauernfeind Director March 6, 2000
- -------------------------------------------------
Arthur J. Bauernfeind
/s/ Peter C. Bennett Director March 6, 2000
- -------------------------------------------------
Peter C. Bennett
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Eugene S. Colangelo Director March 6, 2000
- -------------------------------------------------
Eugene S. Colangelo
/s/ C. Michael Hazard Director March 6, 2000
- -------------------------------------------------
C. Michael Hazard
s/ Lynn Thompson Hoffman Director March 6, 2000
- -------------------------------------------------
Lynn Thompson Hoffman
/s/ Dr. Allen Sinai Director March 6, 2000
- -------------------------------------------------
Dr. Allen Sinai
/s/ Richard N. Thielen Director March 6, 2000
- -------------------------------------------------
Richard N. Thielen
</TABLE>
67
<PAGE>
Exhibit 3.1(a)
The Commonwealth of Massachusetts
OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE
MICHAEL JOSEPH CONNOLLY, Secretary
ONE ASHBURTON PLACE, BOSTON, MASS. 02108
ARTICLES OF ORGANIZATION
(Under G.L Ch. 156B)
Incorporators
NAME POST OFFICE ADDRESS
Include given name in full in case of natural persons: in case of a corporation,
give state of incorporation.
Laura C. Glynn c/o Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109
The above-named incorporator(s) do hereby associate (themselves) with the
intention of forming a corporation under the provisions of General Laws, Chapter
156B and hereby state(s):
1. The name by which the corporation shall be known is:
Boston Private Bancorp, Inc.
2. The purpose for which the corporation is formed is as follows:
To engage in activities permitted to bank holding companies under
the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et.seq.), as
amended and in force from time to time, and regulations thereunder,
including but not limited to the ownership of substantially all the
shares of stock of Boston Private Bank and Trust Company; and
To engage in any business or other activity which may be lawfully
carried on by a corporation organized under the Business Corporation
Law of the Commonwealth of Massachusetts, whether or not related to
those referred to hereinabove.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of
paper leaving a left hand margin of at least 1 inch for binding. Additions to
more than one article may be continued on a single sheet so long as each article
requiring each such addition is clearly indicated.
<PAGE>
3. The total number of shares and the par value, if any, of each class of
stock within the corporation is authorized as follows:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
CLASS OF STOCK -------------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES PAR AMOUNT
VALUE
- --------------------------------------------------------------------------------
Preferred -- $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Common -- 4,000,000 $1.00 4,000,000
- --------------------------------------------------------------------------------
*4 If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting powers,
qualifications, special or relative rights or privileges as to each class
thereof and any series now established:
See Continuation Sheet 4A attached hereto and
incorporated by reference herein
*5. The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are as follows:
N/A
*6. Other lawful provisions, if any, for the conduct and regulation of
business and affairs of the corporation, for its voluntary dissolution,
or for limiting, defining, or regulating the powers of the corporation,
or of its directors or stockholders, or of any class of stockholders.
See Continuation Sheets 6A through 6E attached hereto
and incorporated by reference herein
<PAGE>
CONTINUATION SHEET 4A
Article 4: Capital Stock
A description of the different classes and series of the corporation's
capital stock and a statement of the designations and the relative rights,
preferences and limitations of the shares of each class and series of capital
stock are as follows:
Section 4.1 Common Stock. Except as provided by law or in this Article 4
(or in any supplementary sections hereto or in any certificate of establishment
of any series of preferred stock), the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of common stock
shall be entitled to one (1) vote on all matters for each share held by such
holder. There shall be no cumulative voting rights in the election of directors.
In the event of any liquidation, dissolution or winding up of the
corporation, the holders of the common stock, and of any class or series of
stock entitled to participate in whole or in part therewith as to the
distribution of assets, shall be entitled, after payment or provision for
payment of all debts and liabilities of the corporation, to receive the
remaining assets of the corporation available for distribution, in cash or in
kind, in proportion to their holdings.
Section 4.2 Preemptive Rights. Stockholders shall have preemptive rights
to acquire unissued or treasury shares of common stock or securities convertible
into such shares or carrying a right to subscribe to or acquire such shares
which are issued by the corporation in a public offering or private placement of
such securities, the aggregate sales price of which is equal to or greater than
$1.0 million. Only stockholders of record on the date of commencement of such
public offering or private placement shall be entitled to exercise such
preemptive rights. Such stockholders of record shall be entitled to subscribe
for and purchase such securities in the proportion in which their holdings of
stock in the corporation bear to the total issued and outstanding capital stock
of the corporation at the time of the commencement of the public offering or
private placement. The preemptive rights provided herein shall be deemed waived
by any stockholder who does not exercise his preemptive right and purchase such
securities within thirty (30) days following receipt of notice in writing from
the corporation stating the price, terms and other conditions of the issuance
and sale of such securities, which shall be no less favorable than those
specified in the public offering or private placement, as the case may be, and
inviting him to exercise his preemptive rights.
<PAGE>
CONTINUATION SHEET 6A
Article 6: Other Lawful Provisions
Section 6.1 Directors. The corporation shall be under the direction of a
Board of Directors. The number of directors shall be determined in the manner
provided in the by-laws, but shall not be fewer nor more than permitted by law.
The names of the original directors under these Articles, together with the year
of expiration of their respective terms, are set forth in Article 9b. Each
member of the Board of Directors shall be elected annually. Those persons whose
names are listed in Article 9b hereto serving as directors of the corporation on
the date of adoption of these Articles shall continue to serve for the terms
specified in Article 9b hereto and until their successors are elected and
qualified, unless they sooner resign, retire, die or are removed.
Any director (including any person elected by directors to fill vacancies
in the Board of Directors) may be removed from office only as follows: (i) with
or without cause by an affirmative vote of the holders of at least a majority of
the then outstanding shares of capital stock, or (ii) for cause by an
affirmative vote of a majority of the members of the Board of Directors then in
office. A director may be removed for cause only after reasonable notice and an
opportunity to be heard before the body proposing to remove him.
Section 6.2 Transactions with Interested Persons. No contract or
transaction between the corporation and one or more of its directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization with which one or more of its directors or
officers are directors or officers, or have a financial or other interest, shall
be void or voidable solely for this reason, or solely because any such director
(as used in this Section 6.2, an "interested director") or officer is present at
or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, nor shall any such director or officer be
under any liability to the corporation on account of any such contract or
transaction if:
(1) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee authorized the
contract or transaction by the affirmative vote of a majority of the
directors who are not interested directors (as used in this Section 6.2,
"disinterested directors"), even though the disinterested directors be
less than a quorum; or
-2-
<PAGE>
CONTINUATION SHEET 6B
(2) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved by a vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof, or the stockholders.
Interested or disinterested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction, and if they are stockholders,
their votes may be counted for the purpose of a stockholder vote approving such
contract or transaction.
Section 6.3 Indemnification. The corporation shall, to the extent legally
permissible, indemnify any person serving or who has served as a director,
officer, employee or agent of the corporation, or at its request as a director,
officer, employee, agent or trustee of any organization in which the corporation
directly or indirectly owns shares or of which it is a creditor, or at its
request in any capacity with respect to any employee benefit plan, against all
liabilities and expenses, including amounts paid in satisfaction or judgments,
in compromise or as fines and penalties, and counsel fees, reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
serving or having served in such capacity, except with respect to any matter as
to which he shall have been adjudicated in any proceeding not to have acted in
good faith in the reasonable belief that his action was in the best interests of
the corporation (or, to the extent that such matter relates to service with
respect to any employee benefit plan, in the best interests of the participants
or beneficiaries of such employment benefit plan); provided, however, that as to
any matter disposed of by a compromise payment by such director, officer,
employee, agent or trustee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses shall be
provided unless such compromise and indemnification therefor shall be approved:
(i) by a majority vote of a quorum consisting of disinterested
directors (as hereinafter defined);
(ii) if such a quorum cannot be obtained, then by a majority vote of
a committee of the Board of Directors consisting of all the disinterested
directors;
-3-
<PAGE>
CONTINUATION SHEET 6C
(iii) If there are not two or more disinterested directors in
office, then by a majority of the directors then in office, provided they
have obtained an opinion in writing of special independent legal counsel
appointed by a majority of the directors to the effect that, based upon a
reasonable investigation of the relevant facts as described in such
opinion, such director, officer, employee, agent or trustee appears to
have acted in good faith in the reasonable belief that his action was in
the best interests of the corporation (or, to the extent that such matter
relates to service with respect to any employee benefit plan, in the best
interests of the participants or beneficiaries of such employees benefit
plan);
(iv) by the holders of a majority of the shares of stock entitled to
vote for the election of directors, which majority may include interested
directors and officers; or
(v) by a court of competent jurisdiction.
The notice of any meeting of the directors or any committee thereof or the
stockholders and any waiver of such notice shall specify indemnification as one
of the purposes of such meeting.
If authorized in the manner specified above for compromise payments,
expenses (including counsel fees) reasonably incurred by any such director,
officer, employee, agent or trustee in connection with the defense or
disposition of any such action, suit or other proceeding, may be paid from time
to time by the corporation in advance of the final disposition thereof upon
receipt of (a) an affidavit of such individual or his good faith belief that he
has met the standard of conduct necessary for indemnification under this Section
6.3. and (b) an undertaking by such individual to repay the amounts so paid to
the corporation if it is ultimately determined that indemnification for such
expenses is not authorized by law or under this Section 6.3, which undertaking
may be accepted by the corporation without reference to the financial ability of
such person to make repayment.
If both the corporation and any director, officer, employees agent or
trustee are parties to an action, suit or proceeding (other than an action or
suit by or in the right of the corporation to procure a judgment in its favor),
counsel representing the corporation therein may also represent such director,
officer, employee, agent or trustee (unless such dual representation would
involve such counsel in a conflict of interest in violation of applicable
principles of professional ethics), and the corporation shall pay all fees and
expenses of such counsel incurred during the period of dual representation other
than those, if any, which would not have been incurred if counsel were
representing only the corporation; and any
-4-
<PAGE>
CONTINUATION SHEET 6D
allocation made in good faith by such counsel of fees and disbursements payable
under this paragraph by the corporation versus fees and disbursements payable by
any director, officer, employee, agent or trustee shall be final and binding
upon the corporation and such director, officer, employee, agent or trustee.
The right of indemnification hereby provided shall not be exclusive of nor
affect any other rights to which any such director, officer, employee, agent or
trustee may be entitled. Nothing contained in this Section 6.3 shall affect any
rights to indemnification to which corporation personnel other than such
directors, officers, employees, agents or trustees may be entitled by contract,
by vote to the Board of Directors, or otherwise under law.
The corporation may purchase and maintain insurance on behalf of any
person who was or is a director, officer, employee or agent of the corporation,
or was or is serving at the request of the corporation as a director, officer,
employee, agent or trustee of any subsidiary, or was or is serving at the
request of the corporation in any capacity with respect to any employee benefit
plan, against any liability asserted against, and incurred by, such person in
any capacity, or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify such person against such liability
by law or under the provisions of this Section 6.3. The obligation to indemnify
and reimburse set forth in this Section 6.3, if applicable, shall be reduced by
the amount of any such insurance proceeds paid to such person, or the
representatives or successors of such person.
As used in this Section 6.3, the terms "director", "officer", "employee",
"agent" and "trustee" include their respective heirs, executors and
administrators, an "interested" director or officer is one against whom in such
capacity the proceedings in question or other proceedings on the same or similar
grounds are then pending, and a "disinterested" director or officer is any
director or officer who is not an interested director.
If any term or provision of this Section 6.3, or the application thereof
to any person or circumstances, shall to any extent be held invalid or
unenforceable, the remainder of this Section 6.3, or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Section 6.3 shall be held valid and be enforced to the fullest
extent permitted by law.
-5-
<PAGE>
CONTINUATION SHEET 6E
Section 6.4. Limitation of liability. No director shall be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director notwithstanding any provision of law imposing such
liability; provided, however, that this provision shall not eliminate the
liability of a director, to the extent that such liability is imposed by
applicable law, (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 61 or 62 or any successor or amendatory provisions of the Massachusetts
Business Corporation Law or (iv) for any transaction from which the director
derived an improper personal benefit.
Section 6.5. Acting as a Partner. the corporation may be a partner in any
business enterprise which it would have power to conduct by itself.
Section 6.6. Stockholders Meetings. Any action required or permitted to be
taken by the stockholders of the corporation must be effected at a duly called
annual or special meeting of such stockholders and may not be effected by any
consent in writing by such stockholder. Meetings of stockholders may be held at
such place in the Commonwealth of Massachusetts or, if permitted by applicable
law, elsewhere in the United States as the Board of Directors may determine.
Section 6.7. Call of Special Meetings. Special meetings of the
stockholders shall be called by the President or by the Board of Directors.
Section 6.8. Amendment of By-Laws. The By-Laws may be amended at any time
by a majority of the full Board of Directors subject to repeal or change by vote
of the holders of a majority of the shares of capital stock issued and
outstanding.
Section 6.9. Amendment of Articles of Organization. No amendment,
addition, alteration, change or repeal of these Articles of Organization shall
be made, unless the same is first approved by the affirmative vote of at least a
majority of the directors of the corporation then in office, and thereafter
approved by the stockholders by an affirmative vote of not less than two thirds
of the total votes eligible to be cast at a duly constituted meeting, or, in the
case of Articles 1 or 3 of these Articles, by an affirmative vote of not less
than a majority of the total votes eligible to be case at a duly constituted
meeting. Unless otherwise provided by law, any amendment, addition, alteration,
change or repeal so acted upon shall be effective on the date it is filed with
the Secretary of State of the Commonwealth of Massachusetts or on such other
date as specified in such amendment, addition, alteration, change or repeal
and/or as the Secretary of State may specify.
-6-
<PAGE>
CONTINUATION SHEET 9A
9b. The name, residence, post office address and year that term of office
expires of each of the initial directors of the corporation are as follows:
Post
Office
Name Residence Address Term
- ---- --------- ------- ----
Robert H. Bradley 56 Beverly Road Same 1988
Wellesley, MA 02181
Richard S. Vokey 1250 Lowell Road Same 1988
Concord, MA 01742
5627G
-7-
<PAGE>
7. By-laws of the corporation have been duly adopted and the initial
directors, president, treasurer and clerk, whose names are set out below,
have been duly elected.
8. The effective date of organization of the corporation shall be the date of
filing with the Secretary of the Commonwealth or if later date is desired,
specify date. (not more than 30 days after the date of filing.)
9. The following information shall not for any purpose be treated as a
permanent part of the Articles of Organization of the corporation.
a. The post office address of the initial principal office of the
corporation of Massachusetts is:
One Winthrop Square, Boston, Massachusetts 02110
b. The name, residence, and post office address of each of the initial
directors and following officers of the corporation are as follows:
NAME RESIDENCE POST OFFICE ADDRESS
President: Robert H. Bradley 56 Beverly Road Same
Wellesley, MA 02181
Treasurer: Richard S. Vokey 1250 Lowell Road Same
Concord, MA 01742
Clerk: Harold Jacobi, III 49 Bridge Road Same
Sudbury, MA 01776
Directors: See Continuation Sheet 9A attached hereto and incorporated by
reference herein.
c. The date initially adopted on which the corporation's fiscal year
ends is:
December 31st
d. The date initially fixed in the by-laws for the annual meeting of
stockholders of the corporation is:
Last Wednesday in May
e. The name and business address of the resident agent, if any, of the
corporation is:
None
IN WITNESS WHEREOF and under the penalties of perjury the INCORPORATOR(S)
sign(s) these Articles of Organization this 1st day of September 1987
/s/ Laura C. Glynn
----------------------------------------------------------------------
Laura C. Glynn, Sole Incorporator
----------------------------------------------------------------------
----------------------------------------------------------------------
The signature of each incorporator which is not a natural person must be an
individual who shall show the capacity in which he acts and by signing shall
represent under the penalties of perjury that he is duly authorized on its
behalf to sign these Articles of Organization.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF ORGANIZATION
GENERAL LAWS, CHAPTER 156B, SECTION 12
======================================
I hereby certify that, upon an examination of the within-written articles
of organization, duly submitted to me, it appears that the provisions of the
General Laws relative to the organization of corporations have been complied
with, and I hereby approve said articles: and the filing fee in the amount of
$2,000.00 having been paid, said articles are deemed to have been filed with me
this 2nd day of September 1987
Effective date
/s/ Michael J. Connolly
MICHAEL JOSEPH CONNOLLY
Secretary of State
PHOTO COPY OF ARTICLES OF ORGANIZATION TO BE SENT TO BE FILLED IN BY CORPORATION
TO:
Laura C. Glynn, Esquire
CHOATE, HALL & STEWART
----------------------------------
Exchange Place
53 State Street
----------------------------------
Boston, MA 02109
----------------------------------
Telephone (617) 227-5020
----------------------------------
FILING FEE: 1/20 of 1% of the total amount of the authorized capital stock with
par value, and one cent a share for all authorized shares without par
value, but not less than $150 General Laws, Chapter 156B. Shares of stock
with a par value less than one dollar shall be deemed to have par value of
one dollar per share.
Copy Mailed
<PAGE>
Exhibit 3.1(b)
FEDERAL IDENTIFICATION
NO. 04-2976299
------------------
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
We, Timothy L. Vaill , *President / *Vice President,
---------------------------------------------
and Ana E. Steele , *Clerk / *Assistant Clerk,
------------------------------------------------
of Boston Private Bancorp, Inc. ,
----------------------------------------------------------------------------
(Exact name of corporation)
located at 10 Post Office Square, Boston, MA 02109 ,
--------------------------------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
One and Three
- --------------------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held on April 22,
1998, by vote of:
7,557,859 shares of Common Stock of 10,682,900 shares outstanding,
- --------- ---------------------- ----------
(type, class & series, if any)
voted in favor of amending Article One
7,464,302 shares of Common Stock of 10,682,900 shares outstanding, and
- --------- ---------------------- ----------
(type, class & series, if any)
voted in favor of amending Article Three
shares of of shares outstanding,
- --------- ---------------------- ----------
(type, class & series, if any)
(1)** being at least a majority of each type, class or series outstanding and
entitled to vote thereon:
To change the name of the Company from Boston Private Bancorp, Inc. to Boston
Private Financial Holdings, Inc.
* Delete the inapplicable words.
** Delete the inapplicable clause.
(1) For amendments adopted pursuant to Chapter 156B, Section 70.
(2) For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of separate 8 1/2 x
11 sheets of paper leaving a left margin of at least 1 inch. Additions to more
than one article may be made on a single sheet so long as each article requiring
each addition is clearly indicated.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
Common Common: 18,000,000 $1.00
- --------------------------------------------------------------------------------
Preferred Preferred: 2,000,000 $1.00
- --------------------------------------------------------------------------------
Change the total authorized to:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
Common Common: 30,000,000 $1.00
- --------------------------------------------------------------------------------
Preferred Preferred: 2,000,000 $1.00
- --------------------------------------------------------------------------------
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: ____________________________________.
SIGNED UNDER THE PENALTIES OF PERJURY, this 22 day of April, 1998
-- ----- ----
/s/ Timothy L. Vaill Timothy L. Vaill , *President
- --------------------------------------------
/s/ Ana E. Steele Ana E. Steele , *Clerk
- ------------------------------------------------
* Delete the inapplicable words.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72)
=======================================
I hereby approve the within Articles of Amendment and, the filing fee in the
amount of $12,100 having been paid, said articles are deemed to have been filed
with me this 22nd day of April 1998.
Effective date: ________________________________________________________________
/s/ William Francis Galvin
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
-----------------------------
A TRUE COPY ATTEST
/s/ William Francis Galvin
WILLIAM FRANCIS GALVIN
SECRETARY OF THE COMMONWEALTH
-----------------------------
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Catherine S. Konovaliv
Goodwin, Procter & Hoar LLP
-----------------------------------------
Exchange Place
-----------------------------------------
Boston, MA 02109
-----------------------------------------
<PAGE>
BY-LAWS
OF
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
AS AMENDED MAY 19, 1994
ARTICLE FIRST
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The Annual meeting of stockholders shall be held
each year at the hour, date and place determined by the Board of Directors or an
officer designated by the Board of Directors, which hour, date and place may be
subsequently changed at any time by the Board of Directors. The purposes for
which the annual meeting is to be held, in addition to those prescribed by law,
by the Articles of Organization or by these By-laws, may be specified by the
Directors or the President. If no annual meeting is held in accordance with the
foregoing provisions, a special meeting may be held in lieu thereof, and any
action taken at such meeting shall have the same effect as if taken at the
annual meeting.
SECTION 2. MATTERS TO BE CONSIDERED AT ANNUAL MEETING. At any annual
meeting of stockholders, only such business shall be conducted, and only such
proposals shall be acted upon, as shall have been properly brought before such
annual meeting. To be considered as properly brought before an annual meeting of
stockholders, business must be: (a) specified in the notice of meeting (or any
supplement thereto), (b) otherwise properly brought before the meeting by, or at
the direction of, the Board of Directors, or (c) otherwise properly brought
before the meeting by any holder of record (both as of the time notice of such
proposal is given by the stockholder as set forth below and as of the record
date for the annual meeting in question) of any shares of capital stock of the
Corporation entitled to vote at such annual meeting who complies with the
requirements set forth in this Section 2.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, the stockholder of
record of any shares of capital stock entitled to vote at such annual meeting
(other than a stockholder proposal included in the Corporation's proxy statement
pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, such
stockholder shall: (i) give timely notice as required by this Section 2 to the
Clerk of the Corporation, and (ii) be present at such meeting, either in person
or by a representative. To be timely, a stockholder's notice must be delivered
to, or mailed and received by the Corporation at its principal executive office
not less than 60 days nor more than 120 days prior to the anniversary date of
the immediately preceding annual meeting of stockholders (the "Anniversary
Date:); provided, that in the event that the annual meeting is scheduled to be
held on a date more than 30 days before the Anniversary Date or more than 60
days after the Anniversary Date, timely notice by the stockholder must be
delivered not earlier than the close of business on the 120th day prior to the
scheduled date of such annual meeting and not later than the close of business
on the later of (A) the 60th day prior to the scheduled date of such annual
meeting or (B) the 10th day following the first date on which the date of such
annual meeting is publicly disclosed.
Public disclosure of the scheduled date of the annual meeting of
stockholders made by means of: (i) a press release, (ii) a report or other
document filed publicly with the Securities and Exchange Commission or (iii) a
letter or report sent to stockholders of record of the Corporation at the time
of the mailing of such letter or report shall be deemed sufficient as public
disclosure of the date of such meeting for purposes of these By-laws.
A stockholder's notice to the Clerk shall set forth as to each matter
proposed to be brought before an annual meeting of stockholders: (i) a brief
description of the business the stockholder desires to bring before such annual
meeting and the reasons for conducting such business at such annual meeting,
(ii) the name and address, as they appear on the Corporation's stock transfer
books, of the stockholder proposing such business, (iii) the class and number of
shares of the Corporation beneficially owned by the stockholder proposing such
business, (iv) the names and addresses of the beneficial owners, if any, of any
stock registered in such stockholder's name on such books, and the class and
number of shares of the Corporation beneficially owned by such beneficial
owners, (v) the names and
<PAGE>
addresses of other stockholders known by the stockholder proposing such business
to support such proposal, and the class and number of shares of the Corporation
beneficially owned by such other stockholders, and (vi) any material interest of
the stockholder proposing to bring such business before such meeting (or any
other stockholders known to be supporting such proposal) in such proposal.
If the Board of Directors or a designated committee thereof determines
that any stockholder proposal was not made in a timely fashion in accordance
with the provisions of this Section 2 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2 in any material respect, such proposal shall not be presented for
action at the annual meeting in question. If neither the Board of Directors nor
such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the annual
meeting shall determine and declare at the annual meeting whether the
stockholder proposal was made in accordance with the terms of this Section 2. If
the presiding officer determines that a stockholder proposal was made in
accordance with the requirements of this Section 2, he shall so declare at the
annual meeting and ballots shall be provided for use at the meeting with respect
to such proposal. If the presiding officer determines that a stockholder
proposal was not made in accordance with the requirements of this Section 2, he
shall so declare at the annual meeting and such proposal shall not be acted upon
at such meeting.
SECTION 3. SPECIAL MEETINGS. Special Meetings of the stockholders may be
called by the President or by a majority of the members of the Board of
Directors. Special meetings shall be called by the Clerk, in the case of the
death, absence, incapacity or refusal of the Clerk or, by any other officer,
upon written application of one or more stockholders who hold at least: (i) 66
2/3% in interest of the capital stock of the Corporation entitled to vote at
such meeting or (ii) such lesser percentage, if any (but in no event less than
40%) as shall be determined to be the maximum percentage which the Corporation
is permitted by applicable law to establish as the minimum percentage in
interest eligible to apply to the Clerk to call such a meeting.
Application to a court pursuant to Section 34(b) of Chapter 156B of the
General Laws of Massachusetts (or any successor statute governing domestic
corporations organized under the laws of Massachusetts) may be made only by
stockholders holding at lease: (i) 66 2/3% in interest of the capital stock of
the Corporation entitled to vote at such meeting or (ii) such lesser percentage,
if any (but in no event less than 40%) as shall be determined to be the maximum
percentage which the Corporation is permitted by applicable law to establish as
the minimum percentage in interest eligible to apply to the Clerk to call such a
meeting.
The hour, date and place of any special meeting and the record date for
determining the stockholders having the right to notice of and to vote at such
meeting shall be determined by the President, if such meeting is called by the
President, or by the Board of Directors if such meeting is called by the Board
of Directors or is to be called by the Clerk upon the written application of one
or more stockholders as provided in this Section 3. At any special meeting of
stockholders only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been stated in the written notice of the
special meeting given by the Clerk or the person calling such meeting and
otherwise properly brought before such special meeting. In order for a proposal
by a stockholder to be properly brought before a special meeting of
stockholders, the application to the Clerk for the call of such meeting must
contain the information required by the fourth paragraph of Article First,
Section 2 of these By-laws with respect to proposals by stockholders to be
considered at annual meetings of stockholders.
SECTION 4. [Intentionally omitted]
SECTION 5. NOTICES OF MEETINGS AND ADJOURNED MEETINGS. A written notice of
each annual or special meeting of the stockholders, stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given by, or at the direction of, the Clerk (or the person or persons
calling the meeting) at least seven days before the date of such meeting to each
stockholder entitled to vote thereat, by leaving such notice with him or at his
residence or usual place of business, or by depositing it, postage prepaid, in
the United States mail, directed to each stockholder at his address as it
appears on the records of the Corporation. An affidavit of the Clerk, Assistant
Clerk, or transfer agent of the Corporation that the notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. No notice need be given to any person with whom communication is
unlawful or to any person who has waived such notice (a) in writing (which
writing need not specify the business to be transacted at, or the purpose of,
the meeting) signed by such person before or after the time of the meeting or
(b) by attending the meeting except for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. When a meeting is adjourned to another time
and place, notice need not be given of the adjourned meeting if the time and
<PAGE>
place thereof are announced at the meeting at which the adjournment is taken
except that, if the adjournment is for more than thirty days or if, after the
adjournment, a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given in the manner provided in this Section 5 of
Article First.
SECTION 6. QUORUM. Unless the Articles of Organization or these By-laws
otherwise provide, at any meeting of stockholders a quorum for the transaction
of business shall consist of one or more individuals appearing in person and/or
as proxies and owning and/or representing a majority of the shares of the
Corporation then outstanding and entitled to vote, provided that less than such
quorum shall have power to adjourn the meeting from time to time.
SECTION 7. VOTING. Unless otherwise provided in the Articles of
Organization and subject to the provisions of Section 11 of this Article First,
each stockholder shall have one vote for each share of stock entitled to vote
held by him of record according to the records of the Corporation. Persons
holding stock in a fiduciary capacity shall be entitled to vote the shares so
held. Persons whose stock is pledged shall be entitled to vote unless in the
transfer by the pledger on the books of the Corporation he has expressly
empowered the pledgee to vote the pledged shares, in which case only the pledgee
or his proxy shall be entitled to vote. If shares stand of record in the names
of two or more persons or if two or more persons have the same fiduciary
relationship respecting the shares, then, unless the Clerk is given written
notice to the contrary and is furnished with a copy of the instrument or order
appointing them or creating the relationship wherein it is so provided to the
contrary: (a) if only one votes, his act binds all; (b) if more than one votes,
the act of the majority so voting binds all; and (c) if more than one votes and
the vote is evenly split, the effect shall be as provided by law. Neither
treasury shares nor shares held by another corporation, if a majority of the
shares entitled to vote for the election of Directors of the other corporation
is held by the Corporation, shall be voted at any meeting or counted in
determining the total number of outstanding shares at any given time.
SECTION 8. PROXIES. Stockholders may vote either in person or by written
proxy dated not more than six months before the meeting named therein. Proxies
shall be filed with the Clerk before being voted at any meeting or any
adjournment thereof. Except as otherwise limited therein, proxies shall entitle
the persons named therein to vote at the meeting specified therein and at any
adjourned session of such meeting but shall not be valid after final adjournment
of the meeting. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at, or prior to, the
exercise of the proxy, the Corporation receives a specific written notice to the
contrary from any of them. A proxy purporting to be executed by or on behalf of
a stockholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving the invalidity shall rest on the challenger.
SECTION 9. ACTION AT MEETING. When a quorum is present at any meeting,
action of the stockholders on any matter properly brought before such meeting
shall require, and may be effected by, the affirmative vote of the holders of a
majority in interest of the stock present or represented and entitled to vote
and voting on such matter, except where a larger vote is required by law, by the
Articles of Organization or by these By-laws.
SECTION 10. STOCKHOLDER LISTS. The officer or agent who has charge of the
stock transfer books of the Corporation shall prepare and make a complete list
of stockholders entitled to vote at each meeting of stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any stockholder during the whole time thereof. The stock
transfer books shall be the only evidence as to who are the stockholders
entitled to examine the list required by this Section or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 11. RECORD DATE. The Directors may fix in advance a time which
shall be not more than sixty days prior to (a) the date of any meeting of
stockholders or (b) the date for the payment of any dividend or the making of
any distribution to stockholders as the record date for determining the
stockholders having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution. In
such case only stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the Corporation after the
record date. Without fixing such record date the Directors may for any of such
purposes close the transfer books for all or any part of such period.
(b) If no record date is fixed:
<PAGE>
(1) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at
the opening of business on the day on which notice is given,
or, if notice is waived, at the opening of business on the day
on which the meeting is held.
(2) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto.
(c) A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
SECTION 12. CONTROL SHARE ACQUISITION. The provisions of Chapter 110D of
the General Laws of The Commonwealth of Massachusetts ("Chapter 110D"), as it
may be amended from time to time, shall not apply to "control share
acquisitions" of the Corporation within the meaning of Chapter 110D.
ARTICLE SECOND
DIRECTORS
SECTION 1. POWERS. The Board of Directors, subject to any action at any
time taken by such stockholders as then have the right to vote, shall have the
entire charge, control and management of the Corporation, its property and
business and may exercise all or any of its powers. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as provided by law or
the Articles of Organization, may execute powers of the full Board until the
vacancy is filled.
SECTION 2. COMPOSITION AND TERM. The Board of Directors shall consist of
not less than the minimum number, nor more than the maximum number of
individuals permitted by law. Subject to the foregoing requirements and
applicable law, the Board of Directors may from time to time fix the number of
Directors, provided that no such action may operate to remove a Director elected
by the stockholders other than in the manner specified in the Articles of
Organization. The Corporation shall have a Board of Directors of not less than
three Directors. The Board of Directors shall be divided into three classes
(Class I, Class II and Class III), as nearly equally in number as possible, with
one class to be elected annually. At each annual meeting of the stockholders,
the successors to the Directors of the class whose term shall expire in that
year shall be elected to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of their election and
until their respective successors are elected and qualified, provided, however,
the initial Directors to be elected as Class I Directors,, Class II Directors
and Class III Directors shall be elected for those terms set forth in the
Articles of Organization.
SECTION 3. DIRECTOR NOMINATIONS. Nominations of candidates for election as
Directors of the Corporation at any annual meeting of stockholders may be made
(a) by, or at the direction of, a majority of the board of Directors or (b) by
any holder of record (both as of the time notice of such nomination is given by
the stockholder as set forth below and as of the record date for the annual
meeting in question) of any shares of capital stock of the Corporation entitled
to vote at such annual meeting who complies with the requirements set forth in
this Section 3. Any stockholder who seeks to make such a nomination or his
representative must be present in person at the annual meeting. Only persons
nominated in accordance with the procedures set forth in this Section 3 shall be
eligible for election as Directors at an annual meeting of stockholders.
Nominations, other than those made by, or at the direction of, the Board of
Directors, shall be made pursuant to timely notice in writing to the Clerk of
the Corporation as set forth in this Section 3. To be timely, a stockholder's
notice must be delivered to, or mailed and received by the Corporation at its
principal executive office not less than 60 days nor more than 120 days prior to
the Anniversary Date; provided, that in the event that the annual meeting is
scheduled to be held on a date more than 30 days before the Anniversary Date or
more than 60 days after the Anniversary Date, timely notice by the stockholder
must be delivered not earlier than the close of business on the 120th day prior
to the scheduled date of such annual meeting and not later than the close of
business on the later of (A) the 60th day prior to the scheduled date of such
annual meeting or (B) the 10th day following the first date on which the date of
such annual meeting is publicly disclosed. Public disclosure of the scheduled
date of the annual meeting of stockholders shall be determined in accordance
with Article First, Section 2 of these By-laws.
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A stockholder's notice to the Clerk shall set forth as to each person whom
the stockholder proposes to nominate for election or re-election as a Director
(i) the name, age, business address and residential address of such person, (ii)
the principal occupation or employment of such person, (iii) the class and
number of shares of the Corporation's capital stock beneficially owned by such
person on the date of such stockholder's notice and (iv) the consent of each
nominee to serve as a Director if elected. A stockholder's notice to the Clerk
shall further set forth as to the stockholder giving such notice: (i) the name
and address, as they appear on the Corporation's stock transfer books, of such
stockholder and of the beneficial owners (if any) of the stock registered in
such stockholder's name and the name and address of other stockholders known by
such stockholder to be supporting such nominees; (ii) the class and number of
shares of the Corporation's capital stock which are held of record, beneficially
owned or represented by proxy by such stockholder and by any other stockholders
known by such stockholder to be supporting such nominees on the record date for
the annual meeting in question (if such date shall then have been made publicly
available) and on the date of such stockholder notice and (iii) a description of
all arrangements or understandings between such stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by such stockholder. At the request
of the Board of Directors, any person nominated by, or at the direction of, the
Board of Directors for election as a Director at an annual meeting shall furnish
to the Clerk of the Corporation the information as to such nominee required to
be set forth in a stockholder's notice of nomination of a candidate for
Director.
If the Board of Directors or a designated committee thereof determines that
any stockholder nomination was not made in a timely fashion in accordance with
the provisions of this Section 3 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 3 in any material respect, such nomination shall not be considered at
the annual meeting in question. If neither the Board of Directors nor such
committee makes a determination as to whether a nomination was made in
accordance with the provisions of this Section 3, the presiding officer of the
annual meeting shall determine and declare at the annual meeting whether a
nomination was made in accordance with such provisions. If the presiding officer
determines that a nomination was made in accordance with the requirements of
this Section 3, he shall so declare at the annual meeting and ballots shall be
provided for use at the meeting with respect to such nominee. If the presiding
officer determines that a nomination was not made in accordance with the
requirements of this Section 3, he shall so declare at the annual meeting and
such nomination shall not be considered at such meeting.
No person shall be eligible to be nominated for election or re-election to
a Director position on the Board of Directors if such person's age exceeds the
age of 70 and, except for those persons elected at the first annual meeting of
the stockholders of the Corporation who shall have the right to serve out their
initial terms after such meeting, each incumbent Director must resign as
Director at or prior to the next annual meeting of Directors, occurring
immediately following the annual meeting of stockholders after such Director has
reached the age of 70. The Board of Directors may require that any person
nominated produce a copy of their birth certificate, or if such is determined
not available to the reasonable satisfaction of the Board, any other adequate
and reasonable proof of age.
SECTION 4. VACANCIES. Any vacancy at any time existing in the Board,
whether resulting from an increase in the size of the Board, from the death,
resignation, disqualification or removal of a Director or otherwise, shall be
filled solely by the affirmative vote of a majority of the remaining Directors
then in office. If the Directors remaining in office constitute fewer than a
quorum of the Board of Directors, such Directors may fill the vacancy by the
affirmative vote of a majority of the Directors remaining in office.
SECTION 5. ENLARGEMENT OF THE BOARD. Except as provided in the Articles of
Organization, the number of the Board of Directors may be increased and one or
more additional Directors elected at any special meeting of the stockholders,
called at least in part for the purpose, or by the Directors by vote of a
majority of the Directors then in office.
SECTION 6. TENURE. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, Directors shall hold office until the next
annual meeting of stockholders and thereafter until their successors are chosen
and qualified.
SECTION 7. RESIGNATION. Any Director may resign by delivering his written
resignation to the Corporation at its principal office or to the President or
Clerk. Such resignation shall be effective upon receipt unless it is specified
to be effective at some other time or upon the happening of some other event.
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SECTION 8. REMOVAL. Any Director may be removed from office only as
provided in the Articles of Organization.
SECTION 9. ANNUAL MEETING. Immediately after each annual meeting of
stockholders, or the special meeting held in lieu thereof, and at the place
thereof, if a quorum of the Directors is present, there shall be a meeting of
the Directors without notice; but if such a quorum of the Directors is not
present, or if present do not proceed immediately thereafter to hold a meeting
of the Directors, the annual meeting of the Directors shall be called in the
manner hereinafter provided with respect to the call of special meetings of
Directors.
SECTION 10. REGULAR MEETINGS. Regular meetings of the Directors may be held
at such times and places as shall from time to time be fixed by resolution of
the Board or the By-laws and no notice need be given of regular meetings held at
times and places so fixed, PROVIDED, HOWEVER, that any resolution relating to
the holding of regular meetings shall remain in force only until the next annual
meeting of stockholders, or the special meeting held in lieu thereof, and that
if at any meeting of Directors at which a resolution is adopted fixing the times
or places for any regular meetings any Director is absent, no meeting shall be
held pursuant to such resolution without notice or waiver by such absent
Director pursuant to Section 12 of this Article Second.
SECTION 11. SPECIAL MEETINGS. Special meetings of the Directors may be
called by the Chairman of the Board, if one is elected, or by the President, the
Clerk or at the request of three Directors and shall be held at the place
designated in the call thereof.
SECTION 12. NOTICES. Notice of the time, date and place of all special
meetings of the Board of Directors shall be given to each Director in person or
by telephone or sent to his business or home address by telegram at least
twenty-four (24) hours in advance of such meeting, or by written notice mailed
to his business or home address at least forty-eight (48) hours in advance of
such meeting. Such notice shall be deemed to be delivered when deposited in the
mail so addressed, with postage prepaid, or when delivered to the telegraph
company if sent by telegram. Any Director may waive notice of any meeting by a
writing executed by him either before or after the meeting and filed with the
records of the meeting. The attendance of a Director at a meeting, except where
a Director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Directors need be specified in the notice or waiver of
notice of such meeting. When any Board of Directors' meeting, either regular or
special, is adjourned for thirty (30) days or more, notice of the adjourned
meeting shall be given as in the case of a original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
less than thirty (30) days or of the business to be transacted thereat, other
than an announcement at the meeting at which such adjournment is taken.
SECTION 13. QUORUM. Unless the Article of Organization otherwise provide,
at any meeting of the Directors a majority of the number of Directors then in
office shall constitute a quorum for the transaction of business; provided
always that any number of Directors (whether one or more and whether or not
constituting a quorum) present at any meeting or at any adjourned meeting may
make any reasonable adjournment thereof provided that all absent directors
receive or waive notice pursuant to Section 12 of this Article Second of any
such adjournment provided that all absent directors receive or waive notice
pursuant to Section 12 of this Article Second of any such adjournment that
exceeds four business days.
SECTION 14. ACTION AT MEETING. At any meeting of the Directors at which a
quorum is present, the action of the Directors on any matter brought before the
meeting shall be decided by a vote of a majority of those present, unless a
different vote is required by law, the Articles of Organization, or these
By-laws.
SECTION 15. ACTION BY WRITTEN CONSENT. Any action by the Directors may be
taken without a meeting if a written consent thereto is signed by all the
Directors and filed with the records of the Directors' meetings.
Such consent shall be treated as a vote of the Directors for all purposes.
SECTION 16. COMMITTEES. The Directors may, by vote of a majority of the
number of Directors required to constitute a full Board as fixed in or
determined pursuant to these By-laws as then in effect, elect from their number
an executive committee and/or other committees and may be like vote delegate
thereto some or all of their powers, except those which by law, the Articles of
Organization or these By-laws they are prohibited from delegating. Except as the
Directors may otherwise determine, any such committee may make rules for the
conduct of its business, but unless otherwise provided by the Directors or in
such rules, its business shall be conducted as
<PAGE>
nearly as may be in the same manner as is provided by these By-laws for the
Directors.
SECTION 17. TELEPHONE CONFERENCE MEETINGS. Members of the Board of
Directors, or members of any committee thereof, may participate in a meeting of
the Directors of such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time, and participation by such means
shall constitute presence in person at a meeting.
SECTION 18. COMPENSATION OF DIRECTORS. The Board of Directors shall
have authority to fix the compensation of Directors from time to time.
ARTICLE THIRD
OFFICERS
SECTION 1. ENUMERATION. The officers of the Corporation shall be a
President, a Treasurer, a Clerk, and such Vice Presidents, Assistant Treasurers,
Assistant Clerks, Secretary, Assistant Secretaries and other officers as may
from time to time define the powers and duties of these offices notwithstanding
any other provisions of these By-laws.
SECTION 2. ELECTION AND VACANCIES. The President, Treasurer and Clerk shall
be elected annually by the Directors at their first meeting following the annual
meeting of stockholders, or the special meeting held in lieu thereof. Other
officers may be chosen by the Directors at such meeting or at any other meeting.
Except as otherwise provided by the Articles of Organization, any vacancy at any
time existing in any office may be filled by the Directors at any meeting, and
such successor in office shall hold office for the unexpired term of his
predecessor and until his successor is chosen and qualified, or until he sooner
dies, resigns or is removed.
SECTION 3. QUALIFICATION. The President may, but need not be, a Director.
No officer need be a stockholder. Any two or more offices may be held by the
same person, provided that the President and Clerk shall not be the same person.
The Clerk shall be a resident of Massachusetts unless the Corporation has a
resident agent appointed for the purpose of service of process. Any officer may
be required by the Directors to give bond for the faithful performance of his
duties to the corporation in such amount and with such sureties as the Directors
may determine.
SECTION 4. TENURE. Except as otherwise provided by law, by the Articles of
Organization, or by these By-laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders, or the special meeting held in lieu thereof, and
thereafter until his successor is chosen and qualified. Other officers shall
hold office until the first meeting of the Directors following the next annual
meeting of stockholders, or the special meeting held in lieu thereof, unless a
shorter term is specified in the vote choosing or appointing them. Officers
elected by the Board of Directors shall hold their respective offices at the
pleasure of the Board of Directors. Election or appointment of an officer,
employee or agent shall not in and of itself create contract rights. The Board
of Directors may, however, authorize the Corporation to enter into an employment
contract with any officer in accordance with applicable law, but no contract
right shall impair the right of the Board of Directors to remove any officer at
any time in accordance with this Section 4 of Article Third.
SECTION 5. RESIGNATION. Any officer may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Clerk, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 6. REMOVAL. The Directors may remove any officer with or without
cause by a vote of a majority of the entire number of Directors then in office,
provided, however, that such removal, other than for cause shall be without
prejudice to the contract rights, if any, of the persons involved, and provided
further that an officer may be removed for cause only after reasonable notice
and opportunity to be heard by the Board of Directors prior to action thereon.
SECTION 7. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall
be one, shall preside at all meetings of the Board of Directors. The Chairman of
the Board shall perform such duties and have such powers and perform such duties
as the Board of Directors may from time to time designate.
<PAGE>
SECTION 8. PRESIDENT. The President when present shall preside at all
meetings of the stockholders and of the Directors. He shall be the chief
executive officer of the Corporation except as the Board of Directors may
otherwise provide. It shall be his duty and he shall have the power to see that
all orders and resolutions of the Directors are carried into effect. He shall
from time to time report to the Directors all matters within his knowledge which
the interests of the corporation may require to be brought to its notice. The
President shall perform such duties had have such powers additional to the
foregoing as the Directors shall designate.
SECTION 9. VICE PRESIDENTS. In the absence or disability of the President,
his powers and duties shall be performed by the Vice President, if only one, or
if more than one, by the one designated for the purpose by the Directors. Each
Vice President shall have such other powers and perform such other duties as the
Directors shall from time to time designate.
SECTION 10. TREASURER. The Treasurer shall, subject to the direction of the
Directors, have general charge of the financial affairs of the Corporation and
shall cause to be kept accurate books of accounts. He shall have custody of all
funds, securities, and valuable documents of the corporation, except as the
Directors may otherwise provide. He shall promptly render to the President and
to the Directors such statements of his transactions and accounts as the
President and Directors respectively may from time to time require. The
Treasurer shall perform such duties and have such powers additional to the
foregoing as the Directors may designate.
SECTION 11. ASSISTANT TREASURERS. In the absence or disability of the
Treasurer, his powers and duties shall be performed by the Assistant Treasurer,
if only one, or, if more than one, by the one designated for the purpose by the
Directors. Each assistant Treasurer shall have such other powers and perform
such other duties as the Directors shall from time to time designate.
SECTION 12. CLERK. The Clerk shall record in books kept for the purpose all
votes and proceedings of the stockholders and, if there be no Secretary or
Assistant Secretary, of the Directors at their meetings. Unless the Directors
shall appoint a transfer agent and/or registrar or other officer or officers for
the purpose, the Clerk shall be charged with the duty of keeping, or causing to
be kept, accurate records of all stack outstanding, stock certificates issued
and stock transfers; and, subject to such other or different rules as shall be
adopted from time to time by the Directors, such records may be kept solely in
the stock certificate books. The Clerk shall perform such duties and have such
powers additional to the foregoing as the Directors shall designate.
SECTION 13. ASSISTANT CLERKS. In the absence of the Clerk from any meeting
of the stockholders or, if there be no Secretary or Assistant Secretary, from
any meeting of the Directors, the Assistant Clerk, if one be elected, or, if
there be more than one designated for the purpose by the Directors, otherwise a
Temporary Clerk designated by the person presiding at the meeting, shall perform
the duties of the Clerk. Each Assistant Clerk shall have such other powers and
perform such other duties as the Directors may from time to time designate.
SECTION 14. SECRETARY AND ASSISTANT SECRETARIES. If a Secretary is elected,
he shall keep a record of the meetings of the Directors and in his absence, an
Assistant Secretary, if one be elected, or, if there be more than one, the one
designated for the purpose of by the Directors, otherwise a Temporary Secretary
designated by the person presiding at the meeting, shall perform the duties of
the Secretary. Each Assistant Secretary shall have such other powers and perform
such other duties as the Directors may from time to time designate.
SECTION 15. SALARIES. The salaries and other compensation of officers,
agents and employees of the Corporation shall be fixed from to time by or under
authority from the Board of Directors. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that he is also a
Director of the Corporation.
ARTICLE FOURTH
PROVISIONS RELATING TO CAPITAL STOCK
SECTION 1. ISSUANCE AND CONSIDERATION. Unless the Articles of Organization
provide otherwise, any unissued capital stock from time to time authorized under
the Articles of Organization may be issued by vote of the stockholders or by
vote of the Directors. No stock shall be issued unless the cash, so far as due,
or the property, services or debts or notes for which it was authorized to be
issued, has been actually received or incurred by, or conveyed, transferred, or
rendered to, the Corporation, or is in its possession as surplus.
<PAGE>
SECTION 2. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a
certificate or certificates representing in the aggregate the shares owned by
him certifying the number and class thereof, which shall be in such form as the
Directors shall adopt. Each certificate of stock shall be signed by the
President or a Vice President and by the Treasurer or an Assistant Treasurer,
but when a certificate is countersigned by a transfer agent or a registrar,
other than a Director, officer or employee of the Corporation, such signatures
may be facsimiles. In case any officer who has signed or whose facsimile
signature has been placed on such certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer at the time of its issue. Every
certificate for shares of stock which are subject to any restriction on transfer
pursuant to the Articles of Organization, the By-laws or any agreement to which
the Corporation is a party, shall have the restriction noted conspicuously on
the certificate and shall also set forth on the face or back either the full
text of the restriction or a statement of the existence of such restriction and
a statement that the Corporation will furnish a copy to the holder of such
certificate upon written request and without charge. Every certificate issued
when the Corporation is authorized to be issued or a statement of the existence
of such preferences, powers, qualifications and rights, and a statement that the
Corporation will furnish a copy thereof to the holder of such certificates upon
written request and without charge.
SECTION 3. TRANSFER OF STOCK. The stock of the Corporation shall be
transferable, so as to affect the rights of the Corporation, only by transfer
recorded on the books of the Corporation or its transfer agent, in person or by
duly authorized attorney, and upon the surrender of the certificate or
certificates properly endorsed or assigned.
SECTION 4. EQUITABLE INTERESTS NOT RECOGNIZED. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person except as may be otherwise expressly provided by law, by these By-laws or
by the Articles of Organization.
SECTION 5. LOST OR DESTROYED CERTIFICATES. The Directors of the Corporation
may, subject to Massachusetts General Laws, Chapter 156B, Section 29, as amended
from time to time, determine the conditions upon which a new certificate of
stock may be issued in place of any certificate alleged to have been lost,
destroyed, or mutilated.
SECTION 6. DIVIDENDS. Subject to applicable law, the Articles of
Organization and these By-laws, the Board of Directors may from time to time
declare, and the Corporation may pay, dividends on outstanding shares of its
capital stock.
ARTICLE FIFTH
STOCK IN OTHER CORPORATIONS
Except as the Directors may otherwise designate, the President or Treasurer
may waive notice of, and appoint any person or persons to act as proxy or
attorney in fact for this Corporation (with or without power of substitution) at
any meeting of stockholders or shareholders of any other corporation or
organization, the securities of which may be held by this Corporation.
ARTICLE SIXTH
INSPECTION OF RECORDS
Books, accounts, documents and records of the Corporation shall be open to
inspection by any Director at all times during the usual hours of business. The
original, or attested copies, of the Articles of Organization, By-laws and
records of all meetings of the incorporators and stockholders, and the stock and
transfer records, which shall contain the names of all stockholders and the
record address and the amount of stock held by each, shall be kept in
Massachusetts at the principal office of the Corporation, or at an office of its
transfer agent or of the Clerk. Said copies and records need not all be kept in
the same office. They shall be available at all reasonable times to the
inspection of any stockholder for any proper purpose but not to secure a list of
stockholders for the purpose of selling said list or copies thereof or of using
the same for a purpose other than in the interest of the applicant, as a
stockholder, relative to the affairs of the Corporation.
<PAGE>
ARTICLE SEVENTH
CHECKS, NOTES, DRAFTS AND OTHER INSTRUMENTS
Checks, notes, drafts and other instruments for the payment of money drawn
or endorsed in the name of the Corporation may be signed by any officers or
persons authorized by the Directors to sign the same. No officer or person shall
sign any such instrument as aforesaid unless authorized by the Directors to do
so.
ARTICLE EIGHTH
SEAL
The seal of the Corporation shall be circular in form, bearing its name,
the word "Massachusetts", and the year of its incorporation. The Treasurer shall
have custody of the seal and may affix it (as may any other officer if
authorized by the Directors) to any instrument requiring the corporate seal.
ARTICLE NINTH
FISCAL YEAR
The fiscal year of the Corporation shall be the year ending with December
31 in each year.
ARTICLE TENTH
AMENDMENTS
The By-laws may be amended at any time by a majority of the full Board of
Directors subject to repeal or change by vote of the holders of a majority of
the shares of capital stock issued and outstanding.
ARTICLE ELEVENTH
SEPARABILITY
In any term or provision of the By-laws, or the application thereof to any
person or circumstance or period of time, shall to any extent be invalid or
unenforceable, the remainder of the By-laws shall be valid and enforced to the
fullest extent permitted by law.
<PAGE>
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") is made as of July 22, 1999 (the
"Effective Date"), by and among RINET Company, Inc., a Massachusetts corporation
(the "Employer"), Boston Private Financial Holdings, Inc., a Massachusetts
corporation ("BPFH") and Richard N. Thielen (the "Executive").
W I T N E S S E T H
WHEREAS, on July 22, 1999 Employer, BPFH, Boston Private Financial
Planning, Inc., a Massachusetts corporation and wholly-owned subsidiary of BPFH
("BPFP") and all the stockholders of Employer (including Executive) entered into
an Agreement and Plan of Merger (the "Plan of Merger") whereby among other
things, (a) BPFP will merge with and into Employer, (b) all shares of Class A
Common Stock, $.01 par value per share, of Employer and all shares of Class B
Common Stock, $.01 par value per share, of Employer owned by the stockholders of
Employer will at the Effective Time (as defined in the Plan of Merger) be
converted into shares of common stock, $1.00 par value per share, of BPFH (the
"BPFH Common Stock") as set forth in the Plan of Merger and (c) Employer will
continue to exist as a wholly owned subsidiary of BPFH;
WHEREAS, BPFH has adopted the BPFH Long Term Incentive Compensation
Plan, providing, among other things, for the grant to employees of BPFH or
certain of its affiliates options to purchase from shares of BPFH Common Stock;
WHEREAS, the Executive is a stockholder of the Employer and will
receive substantial economic and other benefits if the transactions contemplated
by the Plan of Merger are consummated;
WHEREAS, it is a condition precedent to the obligation of BPFH to
consummate the transactions contemplated by the Plan of Merger that the
Executive enter into and on the Closing Date (as defined in the Plan of Merger)
be bound by an employment agreement with the Employer in the form hereof,
supplanting any previous employment agreement or arrangement that Executive may
have had with the Employer
WHEREAS, the Employer recognizes the importance of the Executive to the
Employer and to the Employer's ability to retain the client relationships
referred to in the Plan of Merger, and desire that the Employer employ the
Executive for the period of employment and upon and subject to the terms herein
provided;
WHEREAS, the Employer wishes to be assured that the Executive will not
solicit any of the Employer's or any of its affiliated and related entities'
Customers (as hereinafter defined) and will not, by such solicitation, damage
the Employer's goodwill among its clients and the general public; and
1
<PAGE>
WHEREAS, the Executive desires to be employed by the Employer and to
refrain from competing with the Employer or soliciting its clients for the
periods and upon and subject to the terms herein provided.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, the Employer and the Executive agree as follows:
1. EMPLOYMENT/EFFECTIVE DATE.
(a) The Employer agrees to employ the Executive and the
Executive agrees to be employed by the Employer on the terms and
conditions set forth in this Agreement.
(b) This Agreement shall take effect as of the Effective Date
(as defined in the Plan of Merger), PROVIDED THAT if the Plan of Merger
terminates or otherwise fails to close in accordance with its terms,
this Agreement shall automatically, and without any further action on
the part of any parties hereto, terminate and be of no further force or
effect.
2. CAPACITY. The Executive shall initially serve the Employer as
President and Chief Executive Officer, subject to election by the Board of
Directors of the Employer (the "Board of Directors"). The Executive shall also
serve the Employer in such other or additional offices as the Executive may be
requested to serve by the Board of Directors. In such capacity or capacities,
the Executive shall perform such services and duties in connection with the
business, affairs and operations of the Employer as may be assigned or delegated
to the Executive from time to time by or under the authority of the Board of
Directors.
3. TERM. Subject to the provisions of Section 6, the term of employment
pursuant to this Agreement (the "Term") shall be six (6) years from the
Effective Date and shall be renewed automatically for periods of one (1) year
commencing at the sixth (6th) anniversary of the Effective Date and on each
subsequent anniversary thereafter, unless either the Executive or the Employer
gives written notice to the other not less than ninety (90) days prior to the
date of any such anniversary of such party's election not to extend the Term.
4. COMPENSATION AND BENEFITS. The regular compensation and benefits
payable to the Executive under this Agreement shall be as follows:
(a) SALARY. For all services rendered by the Executive under
this Agreement, the Employer shall pay the Executive a salary (the
"Salary") at the annual rate of Two Hundred Fifty-Eight Thousand Five
Hundred Dollars ($258,500.00), subject to increase (i) in the
discretion of the Chief Executive Officer of BPFH for annual cost of
living adjustments and (ii) from time to time in the discretion of the
Board of Directors or the Compensation Committee of the Board of
Directors (the
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"Compensation Committee"). The Salary shall be payable in periodic
installments in accordance with the Employer's usual practice for its
senior executives.
(b) ANNUAL STOCK OPTION POOL. As additional compensation for
Executive's performance of services under this Employment Agreement,
Executive shall be entitled to participate in the stock option pool
(the "Annual Stock Option Pool") established by BPFH for the benefit of
certain employees of Employer, the terms of which are attached hereto
as EXHIBIT A.
(c) BONUS POOL. As additional compensation for Executive's
performance of services under this Employment Agreement, Executive
shall be entitled to participate in the Bonus Pool (the "Bonus Pool")
established by Employer for the benefit of its executive officers, the
terms of which are attached hereto as EXHIBIT B.
(d) REGULAR BENEFITS. The Executive shall also be entitled to
participate in any employee benefit plans, medical insurance plans,
life insurance plans, disability income plans, retirement plans,
vacation plans, expense reimbursement plans and other benefit plans
(collectively referred to as "Benefit Plans") which the Employer may
from time to time have in effect for all or most of its senior
executives provided, that such Benefit Plans shall be, in the
aggregate, comparable to those Benefit Plans that were offered to
senior executives of RCI as of July 22, 1999. Such participation shall
be subject to the terms of the applicable plan documents, generally
applicable policies of the Employer, applicable law and the discretion
of the Board of Directors, the Compensation Committee or any
administrative or other committee provided for in or contemplated by
any such plan. Nothing contained in this Agreement shall be construed
to create any obligation on the part of the Employer to establish any
such plan or to maintain the effectiveness of any such plan which may
be in effect from time to time.
(e) TAXATION OF PAYMENTS AND BENEFITS. The Employer shall
undertake to make deductions, withholdings and tax reports with respect
to payments and benefits under this Agreement to the extent that it
reasonably and in good faith believes that it is required to make such
deductions, withholdings and tax reports. Any payments under this
Agreement shall be reduced by any such deductions or withholdings.
Nothing in this Agreement shall be construed to require the Employer to
make any payments to compensate the Executive for any adverse tax
effect associated with any payments or benefits or for any deduction or
withholding from any payment or benefit.
(f) EXPENSES. During the term of this Agreement, the Company
shall reimburse the Executive for all reasonable travel and other
business expenses incurred by the Executive in the performance of his
or her duties and responsibilities, subject to such reasonable
requirements with respect to substantiation and documentation as may be
specified by the Company.
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(f) EXCLUSIVITY OF SALARY AND BENEFITS. The Executive shall
not be entitled to any payments or benefits other than those provided
under this Agreement.
5. EXTENT OF SERVICE. During the Executive's employment under this
Agreement, the Executive shall, subject to the direction and supervision of the
Board of Directors, devote the Executive's full business time, best efforts and
business judgment, skill and knowledge to the advancement of the Employer's
interests and to the discharge of the Executive's duties and responsibilities
under this Agreement. The Executive shall not engage in any other business
activity, except as may be approved by the Board of Directors; PROVIDED THAT
nothing in this Agreement shall be construed as preventing the Executive from:
(a) investing the Executive's assets in any company or other
entity in a manner not prohibited by Section 5.11 of the Plan of Merger
and in such form or manner as shall not require any material activities
on the Executive's part in connection with the operations or affairs of
the companies or other entities in which such investments are made; or
(b) engaging in religious, charitable or other community or
non-profit activities that do not impair the Executive's ability to
fulfill the Executive's duties and responsibilities under this
Agreement.
6. TERMINATION AND TERMINATION BENEFITS. Notwithstanding the provisions
of Section 3, the Executive's employment under this Agreement shall terminate
under the following circumstances set forth in this Section 6.
(a) TERMINATION BY THE EMPLOYER FOR CAUSE. The Executive's
employment under this Agreement may be terminated for cause without
further liability on the part of the Employer effective immediately
upon a vote of the Board of Directors and written notice to the
Executive. Only the following shall constitute "cause" for such
termination:
(i) dishonest statements or acts of the Executive
with respect to a material matter concerning the Employer or
any affiliate of the Employer;
(ii) the commission by or indictment of the Executive
for (A) a felony or (B) any misdemeanor involving moral
turpitude, deceit, dishonesty or fraud ("indictment," for
these purposes, meaning an indictment, probable cause hearing
or any other procedure pursuant to which an initial
determination of probable or reasonable cause with respect to
such offense is made);
(iii) failure to perform, as determined by a court of
law, a substantial portion of the Executive's duties and
responsibilities assigned or delegated under this Agreement,
which failure continues after written notice given to the
Executive by the Board of Directors;
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(iv) gross negligence, willful misconduct or
insubordination of the Executive with respect to the Employer
or any affiliate of the Employer; or
(v) material breach by the Executive of any of the
Executive's obligations under this Agreement.
(b) TERMINATION BY THE EXECUTIVE. The Executive's employment
under this Agreement may be terminated by the Executive by written
notice to the Board of Directors at least thirty (30) days prior to
such termination.
(c) TERMINATION BY THE EMPLOYER WITHOUT CAUSE. Subject to the
payment of Termination Benefits pursuant to Section 6(d), the
Executive's employment under this Agreement may be terminated by the
Employer without cause ("Termination Without Cause") upon written
notice to the Executive by a vote of the Board of Directors.
(d) CERTAIN TERMINATION BENEFITS. Unless otherwise
specifically provided in this Agreement or otherwise required by law,
all compensation and benefits payable to the Executive under this
Agreement shall terminate on the date of termination of the Executive's
employment under this Agreement. Notwithstanding the foregoing, in the
event of termination of the Executive's employment with the Employer
pursuant to Section 6(c) above, the Employer shall provide to the
Executive the following termination benefits ("Termination Benefits"):
(i) continuation of the Executive's Salary at the
rate then in effect pursuant to Section 4(a); and
(ii) continuation of group health plan benefits to
the extent authorized by and consistent with 29 U.S.C. ss.
1161 ET Seq. (commonly known as "COBRA"), with the cost of the
regular premium for such benefits shared in the same relative
proportion by the Employer and the Executive as in effect on
the date of termination.
The Termination Benefits set forth in (i) and (ii) above shall continue
effective until the earlier of (A) the expiration of the Term or (B)
twelve (12) months after the date of termination; PROVIDED THAT in the
event that the Executive commences any employment or self-employment
during the period during which the Executive is entitled to receive
Termination Benefits (the "Termination Benefits Period"), as of the
date of commencement of such employment or self-employment, the
remaining amount of Salary due pursuant to Section 6(d)(i) for the
period from the commencement of such employment or self-employment to
the end of the Termination Benefits Period shall be reduced by one-half
and the payments provided under Section 6(d)(ii) shall cease entirely.
The Employer's liability for Salary continuation pursuant to Section
6(d)(i) shall be reduced by the amount of any severance pay due or
otherwise paid to the Executive pursuant to any severance pay plan or
stay bonus plan of the Employer.
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Notwithstanding the foregoing, nothing in this Section 6(d) shall be
construed to affect the Executive's right to receive COBRA continuation
entirely at the Executive's own cost to the extent that the Executive
may continue to be entitled to COBRA continuation after the Executive's
right to cost sharing under Section 6(d)(ii) ceases. The Executive
shall be obligated to give prompt notice of the date of commencement of
any employment or self-employment during the Termination Benefits
Period and shall respond promptly to any reasonable inquiries
concerning any employment or self-employment in which the Executive
engages during the Termination Benefits Period.
(e) DISABILITY. If the Executive shall be disabled so as to
be unable to perform the essential functions of the Executive's then
existing position or positions under this Agreement with or without
reasonable accommodation, or the Board of Directors may remove the
Executive from any responsibilities and/or reassign the Executive to
another position with the Employer for the remainder of the Term or
during the period of such disability. Notwithstanding any such
removal or reassignment, the Executive shall continue to receive the
Executive's full Salary (less any disability pay or sick pay
benefits to which the Executive may be entitled under the Employer's
policies) and benefits under Section 4 of this Agreement (except to
the extent that the Executive may be ineligible for one or more such
benefits under applicable plan terms) for a period of time equal to
the lesser of (i) six (6) months; or (ii) the remainder of the Term.
If any question shall arise as to whether during any period the
Executive is disabled so as to be unable to perform the essential
functions of the Executive's then existing position or positions
with or without reasonable accommodation, the Executive may, and at
the request of the Employer shall, submit to the Employer a
certification in reasonable detail by a physician selected by the
Employer to whom the Executive or the Executive's guardian has no
reasonable objection as to whether the Executive is so disabled or
how long such disability is expected to continue, and such
certification shall for the purposes of this Agreement be conclusive
of the issue. The Executive shall cooperate with any reasonable
request of the physician in connection with such certification. If
such question shall arise and the Executive shall fail to submit
such certification, the Employer's determination of such issue shall
be binding on the Executive. Nothing in this Section 6(e) shall be
construed to waive the Executive's rights, if any, under existing
law including, without limitation, the Family and Medical Leave Act
of 1993, 29 U.S.C. Section 2601 ET SEQ. and the Americans with
Disabilities Act, 42 U.S.C. Section 12101 ET SEQ.
7. CONFIDENTIAL INFORMATION AND COOPERATION.
(a) DEFINITIONS. For purposes of this Section 7, the following
terms shall have the following meanings:
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(i) "Employer" means the Employer and its affiliated
and related entities (including, without limitation, BPFH and
its affiliated and related entities).
(ii) "Confidential Information" means information
belonging to the Employer whether reduced to writing (or in a
form from which such information can be obtained, translated,
or derived into reasonably usable form), or maintained in the
Executive's mind or memory, which derives independent economic
value from not being readily known to or ascertainable by
proper means by others who can obtain economic value from the
disclosure or use of such information, including without
limitation, financial information, reports, and forecasts;
inventions, improvements and other intellectual property;
trade secrets; know-how; designs, processes or formulae;
software or related code; market or sales information or
plans; customer lists; and business plans, prospects and
opportunities (such as possible acquisitions or dispositions
of businesses or facilities) which have been discussed or
considered by the management of the Employer. Confidential
Information includes information developed by the Executive in
the course of the Executive's employment by the Employer, as
well as other information to which the Executive may have
access in connection with the Executive's employment.
Confidential Information also includes the confidential
information of others with which the Employer have a business
relationship. Notwithstanding the foregoing, Confidential
Information does not include information in the public domain,
unless due to breach of the Executive's duties under Section
7(c).
(iii) "Services" means financial planning, tax
consulting, investment advisory and investment counseling
services related to financial management for individuals,
families, and other entities.
(iv) "Customer" means any person or entity, or
affiliate or member of the immediate family of such person or
entity, who (A) is receiving Services from the Employer on the
date of termination of the Executive's employment with the
Employer ("Termination Date"), (B) received Services from the
Employer or the Executive at any time during the one (1) year
period immediately preceding the Termination Date, (C) the
Executive solicited, directly or indirectly, in whole or in
part, on behalf of the Employer to provide Services within one
(1) year preceding the Termination Date, (D) anyone solicited,
directly or indirectly, in whole or in part, on behalf of the
Employer to provide Services within one (1) year preceding the
Termination Date, or (E) has received an in person
presentation within twelve (12) months prior to or has been
scheduled by the Company, to the knowledge of Executive, to
receive such a presentation within one (1) month after such
Termination Date, provided that any restriction as to such
person under this Section 7(a)(iv)(E) shall terminate as of
the first anniversary of such Termination Date unless as of
such anniversary
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the person has become an actual client of Employer, BPFH or
any of their affiliates.
(v) "Restricted Term" means the period commencing on
the Effective Date and ending two (2) years following the
Termination Date, regardless of reason for termination.
(b) ALL BUSINESS TO BE THE PROPERTY OF THE EMPLOYER. The
Executive agrees that any and all presently existing financial planning
and related businesses of the Employer, and all businesses developed by
the Employer, including by such Executive or any other employee or
agent of the Employer, including, without limitation, all investment
methodologies, all investment advisory contracts, fees and fee
schedules, commissions, records, data, client lists, agreements, trade
secrets, and any other incident of any business developed by the
Employer or earned or carried on by the Executive for the Employer, and
all trade names, service marks and logos under which the Employer does
business, and any combinations or variations thereof and all related
logos, are and shall be the exclusive property of the Employer for its
sole use, and (where applicable) shall be payable directly to the
Employer. In addition, the Executive acknowledges and agrees that the
investment performance of the accounts managed by the Employer was
attributable to the efforts of the team of professionals at the
Employer and not to the efforts of any single individual, and that
therefore, the investment performance records of each account managed
by the Employer is and shall be the exclusive property of the Employer.
(c) CONFIDENTIALITY. The Executive understands and agrees that
the Executive's employment creates a relationship of confidence and
trust between the Executive and the Employer with respect to all
Confidential Information. At all times, both during the Executive's
employment with the Employer and after its termination, the Executive
will keep in confidence and trust all such Confidential Information,
and will not use or disclose any such Confidential Information without
the written consent of the Employer, except as may be necessary in the
ordinary course of performing the Executive's duties to the Employer.
(d) DOCUMENTS, RECORDS, ETC. All documents, records, data,
apparatus, equipment and other physical property, whether or not
pertaining to Confidential Information, which are furnished to the
Executive by the Employer or are produced by the Executive in
connection with the Executive's employment will be and remain the sole
property of the Employer. The Executive will return to the Employer all
such materials and property, including any material or medium from
which any Confidential Information may be ascertained or derived, as
and when requested by the Employer. In any event, the Executive will
return all such materials and property immediately upon termination of
the Executive's employment for any reason. The Executive will not
retain with the Executive any such material or property or any copies,
compilations, or analyses thereof after such termination.
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(e) NONSOLICITATION AND NONACCEPTANCE OF CUSTOMERS. During the
Restricted Term, regardless of the reason for termination of his
employment, the Executive will not, directly or indirectly, in any
capacity:
(i) solicit the business or patronage of any Customer
for any person or entity, other than the Employer or any of
its affiliates,
(ii) divert, entice, or otherwise take away from the
Employer the business or patronage of any Customer, or attempt
to do so,
(iii) solicit or induce any Customer to terminate or
reduce its relationship with the Employer,
(iv) provide or assist with the provision of Services
to a Customer (except in his capacity as an employee of the
Employer), or
(v) refer a Customer to another provider of Services,
other than an affiliate of the Employer.
(f) PROHIBITION AGAINST JOINING CERTAIN OTHER EXECUTIVES OF
EMPLOYER. Without limiting an any respect the Executive's obligations
elsewhere hereunder, during the Restricted Term the Executive will not
in any capacity, directly or indirectly, perform any consulting or
other services or duties for, and will not be a party to, any business,
organization or entity which directly or indirectly performs any
Services for any Customers in which any or all of Patrick B. Maraghy,
Valerio Iannalfo, or Mary Ann Rodrigue directly or indirectly
participate.
(g) NONSOLICITATION AND NONACCEPTANCE OF EMPLOYEES. During the
Restricted Term, regardless of the reason for termination of his
employment, the Executive will not directly or indirectly, in any
capacity:
(i) hire, employ, cause to be hired or cause to be
employed, directly or indirectly through any enterprise with
which he is associated, (A) any current employee or consultant
of the Employer, (B) any individual who had been employed by
the Employer within two (2) years preceding the Termination
Date, or (C) any individual to whom an in person interview has
been held within 12 months prior to or one (1) month after
such Termination Date, provided that any restriction as to
such person under this Section 7(g)(i)(C) shall terminate as
of the first anniversary of such Termination Date unless as of
such anniversary the person has become an actual officer,
director or employee of Employer, BPFH or any of their
affiliates; or
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(ii) recruit, solicit or induce (or in any way assist
another person or enterprise in recruiting, soliciting or
inducing) any employee or consultant of the Employer to
terminate his or her employment or other relationship with the
Employer;
(h) ACKNOWLEDGMENTS. The Executive acknowledges and agrees
that the restrictions set forth in Section 7 are intended to protect
the Employer's interest in its Confidential Information and its
commercial relationships and goodwill (with its customers, prospective
customers, vendors, consultants and employees), including, without
limitation, Confidential Information, commercial relationships and
goodwill developed while the executive was employed by the Employer,
and are reasonable and appropriate for these purposes.
(i) DISCLOSURE OF AGREEMENT. For a period of two (2) years
after the date that Executive's employment is terminated, regardless of
the reason for such termination, the Executive will disclose the
existence and terms of this Agreement to any prospective employer,
partner, co-venturer, investor or lender prior to entering into an
employment, partnership or other business relationship with such person
or entity.
(j) THIRD-PARTY AGREEMENTS AND RIGHTS. The Executive hereby
confirms that the Executive is not bound by the terms of any agreement
with any previous employer or other party which restricts in any way
the Executive's use or disclosure of information or the Executive's
engagement in any business. The Executive represents to the Employer
that the Executive's execution of this Agreement, the Executive's
employment with the Employer and the performance of the Executive's
proposed duties for the Employer will not violate any obligations the
Executive may have to any such previous employer or other party. In the
Executive's work for the Employer, the Executive will not disclose or
make use of any information in violation of any agreements with or
rights of any such previous employer or other party, and the Executive
will not bring to the premises of the Employer any copies or other
tangible embodiments of non-public information belonging to or obtained
from any such previous employment or other party.
(k) LITIGATION AND REGULATORY COOPERATION. During and after
the Executive's employment, the Executive shall cooperate fully with
the Employer in the defense or prosecution of any claims or actions now
in existence or which may be brought in the future against or on behalf
of the Employer which relate to events or occurrences that transpired
while the Executive was employed by the Employer. The Executive's full
cooperation in connection with such claims or actions shall include,
but not be limited to, being available to meet with counsel to prepare
for discovery or trial and to act as a witness on behalf of the
Employer at mutually convenient times. During and after the Executive's
employment, the Executive also shall cooperate fully with the Employer
in connection with any investigation or review of any federal, state or
local regulatory authority as any such investigation or review relates
to events or occurrences that
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transpired while the Executive was employed by the Employer. The
Employer shall reimburse the Executive for any reasonable out-of-pocket
expenses (including reasonable legal fees) incurred in connection with
the Executive's performance of obligations pursuant to this Section
7(k).
(l) INJUNCTION. The Executive agrees that it would be
difficult to measure any damages caused to the Employer which might
result from any breach by the Executive of the promises set forth in
this Section 7, and that in any event money damages would be an
inadequate remedy for any such breach. Accordingly the Executive agrees
that if the Executive breaches, or threatens to breach, any portion of
Section 7 of this Agreement, the Employer shall be entitled, in
addition to all other remedies that it may have, to an injunction or
other appropriate equitable relief to restrain any such breach without
showing or proving any actual damage to the Employer.
(m) WAIVER OF NON-COMPETITION PROVISIONS UPON CERTAIN EVENTS.
The Employer and BPFH agree that if either (i) a Termination Without
Cause (as defined in Section 6(c) hereof) occurs, (ii) a Change of
Control (as defined below) occurs AND the Executive terminates his or
her employment for Good Reason (as defined below) upon fourteen (14)
days prior written notice to the Employer, or (iii) Executive is not a
director of BPFH at any time prior to two (2) years from the Effective
Date, except if Executive has been removed as a director of BPFH for
cause pursuant to BPFH's by-laws, then Employer and BPFH shall waive
the non-competition provision contained in Section 5.14 of the Plan of
Merger with respect to the Executive. For purposes of this subsection,
(X) "Change of Control" means any change in the common stock ownership
of BPFH that results in an unaffiliated entity owning or controlling 51
percent or more of the total issued and outstanding common stock of
BPFH and (Y) "Good Reason" means (1) any circumstance(s) that has or
have the effect of materially reducing the Executive's duties or
authority provided for or contemplated herein (a "Material Change") or
(2) a breach by the Employer of its material obligations under the
Agreement (a "Material Breach"). A Material Change or a Material Breach
shall constitute Good Reason only if the Executive has notified the
Board, in writing, setting forth all of the circumstances that the
Executive claims constitute such Material Change or Material Breach and
the Employer has failed to remedy such Material Change or Material
Breach within thirty (30) days of such notice.
(n) WAIVER OF NON-DISCLOSURE FOR NON-CONFIDENTIAL INFORMATION.
Nothing contained herein shall be deemed to prohibit the Executive from
using or divulging information which:
(i) is in the public domain, or is generally known or
available at the time of disclosure unless due to breach of
the Executive's duties under Section 7(b) hereof;
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(ii) is information obtained by the Executive on a
non-confidential basis from any person or source (provided
that the Executive does not have actual knowledge or reason to
know that such other person or source acquired and disclosed
such information in an unlawful manner) other than the
Employer unless due to breach of the Executive's duties under
Section 7(b) hereof;
(iii) Executive can demonstrate by clear and
convincing evidence was already owned or possessed by
Executive at the time of disclosure; or
(iv) is required to be disclosed by law or pursuant
to judicial order or a governmental agency, provided the
Executive shall promptly notify the Employer of the proposed
disclosure and give the Employer the opportunity to seek a
protective order, and further that such disclosure shall be
made in a manner to obtain the maximum protection, if made.
8. ARBITRATION OF DISPUTES. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof or otherwise arising out of the
Executive's employment or the termination of that employment (including, without
limitation, any claims of unlawful employment discrimination whether based on
age or otherwise) shall, to the fullest extent permitted by law, be settled by
arbitration in any forum and form agreed upon by the parties or, in the absence
of such an agreement, under the auspices of the American Arbitration Association
("AAA") in Boston, Massachusetts in accordance with the Employment Dispute
Resolution Rules of the AAA, including, but not limited to, the rules and
procedures applicable to the selection of arbitrators. In the event that any
person or entity other than the Executive or the Employer may be a party with
regard to any such controversy or claim, such controversy or claim shall be
submitted to arbitration subject to such other person or entity's agreement.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. This Section 8 shall be specifically enforceable.
Notwithstanding the foregoing, this Section 8 shall not preclude either party
from pursuing a court action for the sole purpose of obtaining a temporary
restraining order or a preliminary injunction in circumstances in which such
relief is appropriate; PROVIDED THAT any other relief shall be pursued through
an arbitration proceeding pursuant to this Section 8.
9. CONSENT TO JURISDICTION. To the extent that any court action is
permitted consistent with or to enforce Section 8 of this Agreement, the parties
hereby consent to the jurisdiction of the Superior Court of the Commonwealth of
Massachusetts and the United States District Court for the District of
Massachusetts. Accordingly, with respect to any such court action, the Executive
(a) submits to the personal jurisdiction of such courts; (b) consents to service
of process; and (c) waives any other requirement (whether imposed by statute,
rule of court, or otherwise) with respect to personal jurisdiction or service of
process.
10. INTEGRATION. This Agreement and the Plan of Merger constitute the
entire agreement between the parties with respect to the subject matter hereof
and supersede all prior agreements between the parties with respect to any
related subject matter.
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11. ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC. Neither the Employer nor
the Executive may make any assignment of this Agreement or any interest herein,
by operation of law or otherwise, without the prior written consent of the other
party; PROVIDED THAT the Employer may assign its rights under this Agreement
without the consent of the Executive in the event that the Employer shall effect
a reorganization, consolidate with or merge into any other corporation,
partnership, organization or other entity, or transfer all or substantially all
of its properties or assets to any other corporation, partnership, organization
or other entity. This Agreement shall inure to the benefit of and be binding
upon the Employer and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns.
12. ENFORCEABILITY. If any portion or provision of this Agreement
(including, without limitation, any portion or provision of any section of this
Agreement) shall to any extent be declared illegal or unenforceable by a court
of competent jurisdiction, then the remainder of this Agreement, or the
application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby,
and each portion and provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
13. WAIVER. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
14. NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by a nationally recognized overnight courier service or by
registered or certified mail, postage prepaid, return receipt requested, to the
Executive at the last address the Executive has filed in writing with the
Employer or, in the case of the Employer or BPFH, at their respective main
offices, attention of the respective Chief Executive Officer, and shall be
effective on the date of delivery in person or by courier or three (3) days
after the date mailed.
15. AMENDMENT. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by a duly authorized
representative of the Employer.
16. GOVERNING LAW. This is a Massachusetts contract and shall be
construed under and be governed in all respects by the laws of the Commonwealth
of Massachusetts, without giving effect to the conflict of laws principles of
such Commonwealth. With respect to any disputes concerning federal law, such
disputes shall be determined in accordance with the law as it would be
interpreted and applied by the United States Court of Appeals for the First
Circuit.
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17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute one and the same
document.
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IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Employer, by its duly authorized officer, and by the
Executive, as of the Effective Date.
RINET COMPANY, INC.
By: /s/ Richard N. Thielen
-----------------------------------
Name: Richard N. Thielen
Title: President
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
By: /s/ Timothy L. Vaill
-----------------------------------
Name: Timothy L. Vaill
Title: President and Chief Executive
Officer
/s/ Richard N. Thielen
-----------------------------------
Richard N. Thielen
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EXHIBIT A
EXECUTIVE OFFICER STOCK OPTION POOL
SECTION 1. REGULAR CONTRIBUTIONS TO THE STOCK OPTION POOL. Boston
Private Financial Holdings, Inc., a Massachusetts corporation ("BPFH") will,
within ninety (90) days after the end of each fiscal year beginning with fiscal
year 2000, contribute options ("Options") to purchase twenty-five thousand
(25,000) shares of common stock, $1.00 par value per share, of BPFH ("BPFH
Common Stock") to a stock option pool (the "Stock Option Pool") for the benefit
of the Initial Participants (as defined below) and the Subsequent Participants
(as defined below), if applicable, if the Pre-Tax Contribution (as defined
below) of RINET Company, Inc., a Massachusetts corporation ("RCI"), for the most
recent fiscal year exceeds RCI's Pre-Tax Contribution for the Base Year (as
defined below) by at least 15%.
SECTION 2. HOLDOVER OF CONTRIBUTION TO THE STOCK OPTION POOL. If RCI's
Pre-Tax Contribution for the most recent fiscal year exceeds RCI's Pre-Tax
Contribution for the Base Year by more than 10% but less than 15%, then BPFH
will hold over its contribution of Options to purchase twenty-five thousand
(25,000) shares of BPFH Common Stock to the Stock Option Pool ("Held Over
Options"). Such Held Over Options shall be included with the following year's
contribution to the Stock Option Pool if in the following year BPFH makes a
contribution of Options pursuant to Section 1 above. In no event, however, shall
the Held Over Options be held over for more than one fiscal year.
SECTION 3. ELIGIBILITY FOR STOCK OPTION POOL. Richard N. Thielen,
Patrick B. Maraghy, Valerio Iannalfo and Mary Ann Rodrigue (collectively, the
"Initial Participants") shall be eligible to participate in the Stock Option
Pool. In addition, a majority of RCI's Board of Directors may select one or more
other employees of RCI (a "Subsequent Participant") to participate in the Stock
Option Pool; provided that such majority shall include (i) Timothy L. Vaill, or
his duly appointed successor, and (ii) at least two Initial Participants,
provided that at least two Initial Participants are then employed by RCI.
SECTION 4. GRANTS OF OPTIONS.
(a) BPFH and RCI acknowledge and agree that all Options
contributed to the Stock Option Pool shall be granted to the Initial
Participants or any Subsequent Participants, if applicable, upon and
promptly following recommendation of the RCI's Chief Executive Officer
to RCI's Board of Directors, subject to a majority vote of BPFH's Board
of Directors. All Options issued shall be subject to the terms and
conditions of the BPFH Long Term Incentive Compensation Plan.
16
<PAGE>
(b) Any recipient of Options from the Stock Option Pool shall
execute a stock option agreement in form that is satisfactory to BPFH's
Board of Directors.
SECTION 4. EXERCISE OF OPTIONS. The Options will have an exercise price
equal to the per share closing sale price of BPFH Common Stock as reported on
the Nasdaq National Market, or any successor listing entity, on the date such
Options are granted to such executive officer.
SECTION 5. DEFINITIONS.
(a) PRE-TAX CONTRIBUTION. For the purposes herein, "Pre-Tax
Contribution" means RCI's pre-tax income not including (i) BPFH overhead
allocation, (ii) revenue and bonus related to performance fees on alternative
investment products, and (iii) executive bonus pool expense.
(b) BASE YEAR. For purposes herein, "Base Year" means that
fiscal year beginning with fiscal year 1999 (excluding the most recent fiscal
year), in which RCI generated the highest Pre-Tax Contribution.
17
<PAGE>
EXHIBIT B
BONUS POOL
SECTION 1. CONTRIBUTIONS TO BONUS POOL. RINET Company, Inc., a
Massachusetts corporation ("RCI") will establish a bonus pool (the "Bonus Pool")
which shall be funded each year (except for fiscal year 1999) as follows:
(a) RCI will add to the Bonus Pool fifteen percent (15%) of
any Pre-Tax Contribution (as defined below) RCI makes to Boston Private
Financial Holdings, Inc., a Massachusetts corporation ("BPFH") which is
between one hundred percent (100%) and one hundred ten percent (110%)
of RCI's highest year's Pre-Tax Contribution (as defined below) since
fiscal year 1999.
(b) RCI will add to the Bonus Pool thirty percent (30%) of any
Pre-Tax Contribution RCI makes to BPFH which is between one hundred ten
percent (110%) and one hundred fifteen percent (115%) of RCI's highest
year's Pre-Tax Contribution since fiscal year 1999.
(c) RCI will add to the Bonus Pool fifty percent (50%) of any
Pre-Tax Contribution RCI makes to BPFH which is in excess of one
hundred fifteen percent (115%) of RCI's highest year's Pre-Tax
Contribution since fiscal year 1999.
Notwithstanding the foregoing, if the highest year's Pre-Tax
Contribution since fiscal year 1999 contains extraordinary revenues from special
projects, then the BPFH's Chief Executive Officer may, in his sole discretion,
adjust such Pre-Tax Contribution amount down for purposes of funding the Bonus
Pool in accordance with this Section 1.
SECTION 2. ELIGIBILITY FOR BONUS POOL. Richard N. Thielen, Patrick B.
Maraghy, Valerio Iannalfo and Mary Ann Rodrigue (collectively, the "Initial
Participants") shall be eligible to participate in the Bonus Pool. In addition,
a majority of the Board of Directors may select one or more other employees of
RCI to participate in the Bonus Pool; provided that such majority shall include
at least two of the Initial participants, provided that at least two Initial
Participants are then employed by RCI.
SECTION 3. AWARDS UNDER BONUS POOL. Any bonus awarded to an Initial
Participant from the Bonus Pool will be awarded (a) within ninety (90) days
after the end of each fiscal year beginning with fiscal year 2000, and (b) in
such amounts as recommended by RCI's Chief Executive Officer, subject to
approval by RCI's Board of Directors and on the terms and conditions set forth
in such employment agreement with RCI.
SECTION 4. DECLARATION OF DIVIDENDS. Unless otherwise agreed to by RCI
and BPFH, BPFH and RCI agree that if BPFH will not cause RCI to declare
dividends to an extent
18
<PAGE>
which would reduce RCI's working capital below a level equal to RCI's operating
expenses for the prior three (3) months.
SECTION 5. DEFINITIONS. For the purposes herein:
(a) "Pre-Tax Contribution" means RCI's pre-tax income not
including (i) BPFH overhead allocation, (ii) revenue and bonus related
to performance fees on alternative investment products, and (iii)
executive bonus pool expense.
19
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of
Boston Private Financial Holdings, Inc.
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-95161, 333-77069, 333-46391, 333-19823, 33-93634, 33-2617, 33-26133
and 2-98875) on Forms S-8 and in Registration Statements (Nos. 333-30755,
333-06941 and 333-46391) on Form S-3 of Boston Private Financial Holdings, Inc.,
of our report dated January 19, 2000 relating to the consolidated balance sheets
of Boston Private Financial Holdings, Inc., and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1999, which report appears in the December 31, 1999
annual report on Form 10-K of Boston Private Financial Holdings, Inc.
/s/ KPMG LLP
Boston, Massachusetts
March 2, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,190
<INT-BEARING-DEPOSITS> 1,817
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
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<LOANS> 450,388
<ALLOWANCE> (5,336)
<TOTAL-ASSETS> 567,373
<DEPOSITS> 420,535
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<LIABILITIES-OTHER> 10,434
<LONG-TERM> 80,672
0
0
<COMMON> 11,616
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<TOTAL-LIABILITIES-AND-EQUITY> 567,373
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<INCOME-PRETAX> 10,964
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<CHANGES> (125)
<NET-INCOME> 7,196
<EPS-BASIC> 0.62
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<LOANS-NON> 1,317
<LOANS-PAST> 2,042
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