1
As filed with the Securities and Exchange Commission on May 14, 1998
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the quarterly period ended MARCH 31, 1998
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______.
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2976299
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 912-1900
BOSTON PRIVATE BANCORP, INC.
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of APRIL 30, 1998:
Common Stock - Par Value $1.00 10,694,669 Shares
- ------------------------------ -----------------
(class) (outstanding)
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 15
Item 3 Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signature Page 17
3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS:
Cash and due from banks $ 10,298 $ 12,361
Federal funds sold 21,450 1,200
Investment securities available for sale
(amortized cost of $39,749
and $36,740, respectively) 39,688 36,776
Investment securities held to maturity
(market value of $9,146
and $9,678, respectively) 9,120 9,654
Mortgage-backed securities held to maturity
(market value of $16,150
and $18,141, respectively) 16,083 18,123
Loans receivable:
Commercial 131,951 134,685
Residential mortgage 133,255 124,865
Home equity 14,311 16,969
Other 262 306
-------- --------
Total loans 279,779 276,825
Less allowance for loan losses (3,555) (3,645)
-------- --------
Net loans 276,224 273,180
Stock in the Federal Home Loan Bank of Boston 4,027 3,511
Other real estate owned 127 85
Premises and equipment, net 3,029 2,857
Excess of cost over net assets acquired, net 3,666 3,746
Management fees receivable 3,298 2,750
Accrued interest receivable 2,301 2,169
Other assets 3,270 2,530
-------- --------
Total assets $392,581 $368,942
======== ========
LIABILITIES:
Deposits $279,684 $258,301
Securities sold under agreements to repurchase 9,640 5,366
Federal funds purchased -- 13,255
FHLB borrowings 70,114 60,226
Other short-term borrowings 320 837
Accrued interest payable 665 609
Other liabilities 4,573 4,413
-------- --------
Total liabilities 364,996 343,007
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 18,000,000 shares
issued: 10,685,450 shares in 1998 and
10,641,100 shares in 1997 10,685 10,641
Additional paid-in capital 12,455 12,140
Retained earnings 4,988 3,800
Stock subscriptions receivable (504) (669)
Accumulated other comprehensive income (loss) (39) 23
-------- --------
Total stockholders' equity 27,585 25,935
-------- --------
Total liabilities and stockholders' equity $392,581 $368,942
======== ========
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------- -----------
1998 1997
----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Interest and dividend income:
Commercial loans $ 3,076 $ 2,219
Residential mortgage loans 2,348 1,799
Home equity and other loans 332 251
Investment securities 570 409
Mortgage-backed securities 266 370
FHLB stock dividends 64 52
Federal funds sold 86 45
Deposits in banks 40 38
----------- -----------
Total interest and dividend income 6,782 5,183
----------- -----------
Interest expense:
Savings and NOW 102 88
Money market 1,139 809
Certificates of deposit 1,065 856
Federal funds purchased 39 49
Securities sold under agreements to repurchase 52 89
FHLB borrowings 1,101 685
Other short-term borrowings 14 7
----------- -----------
Total interest expense 3,512 2,583
----------- -----------
Net interest income 3,270 2,600
Provision for loan losses 284 38
----------- -----------
Net interest income after provision for loan losses 2,986 2,562
----------- -----------
Fees and other income:
Investment management and trust 3,740 2,961
Equity in earnings of partnerships 205 (37)
Deposit account service charges 51 40
Gain on sale of loans 39 16
Gain on sale of investment securities 55 --
Other 55 71
----------- -----------
Total fees and other income 4,145 3,051
----------- -----------
Operating expense:
Salaries and employee benefits 3,826 3,087
Occupancy 329 216
Equipment 157 131
Professional services 368 499
Marketing 94 71
Business development 128 113
Amortization of intangibles 81 81
Merger expenses -- 92
Other 351 249
----------- -----------
Total operating expense 5,334 4,539
----------- -----------
Income before income taxes 1,797 1,074
Income tax expense 609 264
----------- -----------
Net income $ 1,188 $ 810
=========== ===========
Per share data:
=========== ===========
Basic earnings per share $ 0.11 $ 0.08
=========== ===========
Diluted earnings per share $ 0.11 $ 0.07
=========== ===========
Average common shares outstanding 10,671,213 10,548,749
=========== ===========
Average diluted shares outstanding 11,081,198 10,868,020
=========== ===========
Proforma information:
Net income $ 1,188 $ 810
Proforma adjustment for income taxes of acquired entity
previously filing as an S-Corporation -- 69
----------- -----------
Proforma net income after adjustment for income taxes $ 1,188 $ 741
=========== ===========
Proforma basic earnings per share $ 0.11 $ 0.07
=========== ===========
Proforma diluted earnings per share $ 0.11 $ 0.07
=========== ===========
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED STOCK COMPREHENSIVE
STOCK CAPITAL EARNINGS SUBSCRIPTIONS INCOME (LOSS) TOTAL
------- ----------- ------------- ------------- ------------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 1996 $10,321 $11,991 $ 4,400 $(847) $ (64) $25,801
Net income -- -- 810 -- -- 810
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale -- -- -- -- (73)
(73)
-------
Total other comprehensive income 737
Proceeds from issuance of
231,000 shares of common stock 231 (82) -- -- -- 149
Stock subscription payments -- -- -- 166 -- 166
S-Corporation dividends paid -- -- (2,088) -- -- (2,088)
------- ------- ------- ----- ----- -------
Balance at March 31, 1997 10,552 11,909 3,122 (681) (137) 24,765
Balance at December 31, 1997 10,641 12,140 3,800 (669) 23 25,935
Net income -- -- 1,188 -- -- 1,188
Other comprehensive income, net:
Change in unrealized gain (loss) on
securities available for sale -- -- -- -- (62) (62)
-------
Total other comprehensive income 1,126
Stock options exercised 44 315 -- -- -- 359
Stock subscription payments -- -- -- 165 -- 165
======= ======= ======= ===== ===== =======
Balance at March 31, 1998 $10,685 $12,455 $ 4,988 $(504) $ (39) $27,585
======= ======= ======= ===== ===== =======
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 1,188 $ 810
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 292 207
Gain on sale of loans (39) (16)
Gain on sale of investment securities (55) --
Provision for loan losses 284 38
Distributed (undistributed) earnings of partnership investments (205) 1,127
Loans originated for sale (5,495) (1,373)
Proceeds from sale of loans 5,534 1,389
(Increase) decrease in:
Accrued interest receivable (132) (208)
Investment management fees receivable (548) (56)
Other assets (535) (694)
Increase (decrease) in:
Accrued interest payable 56 93
Other liabilities 160 208
-------- --------
Net cash provided (used) by operating activities 505 1,525
-------- --------
Cash flows from investing activities:
Net decrease (increase) in fed funds sold (20,250) 2,250
Investment securities available for sale:
Purchases (20,480) (2,160)
Sales 14,583 --
Maturities 2,880 55
Investment securities held to maturity:
Purchases (874) --
Maturities 1,400 --
Mortgage-backed securities held to maturity:
Principal payments 2,028 1,922
Net decrease (increase) in loans (3,309) 461
Purchase of FHLB stock (516) --
Recoveries on loans previously charged off 2 31
Capital expenditures (329) (824)
-------- --------
Net cash provided (used) by investing activities (24,865) 1,735
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 21,383 (2,062)
Net increase (decrease) in repurchase agreements 4,274 2,776
Net increase (decrease) in federal funds purchased (13,255) --
FHLB advances:
Proceeds 24,180 23,120
Repayments (14,292) (24,606)
Net increase (decrease) in other short-term borrowings (517) (377)
S-corporation dividends paid -- (2,089)
Proceeds from stock subscriptions receivable 165 165
Proceeds from issuance of common stock 359 --
-------- --------
Net cash provided (used) by financing activities 22,297 (3,073)
-------- --------
Net increase (decrease) in cash and due from banks (2,063) 187
Cash and due from banks at beginning of year 12,361 8,709
-------- --------
Cash and due from banks at end of period $ 10,298 $ 8,896
======== ========
Supplementary disclosures of cash flow information:
Cash paid during the period for interest $ 3,455 $ 2,483
Cash paid during the period for income taxes 700 266
Supplementary disclosures of non-cash activities:
Transfer of loans to other real estate owned 42 --
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of Boston Private Financial Holdings, Inc.
(the "Company") include the accounts of the Company and its wholly-owned
subsidiaries, Boston Private Bank & Trust Company (the "Bank"), and Boston
Private Investment Management, Inc. ("BPIM"). The Bank's consolidated financial
statements include the accounts of its wholly-owned subsidiaries, BPB Securities
Corporation and Boston Private Asset Management Corporation, and BPIM's
consolidated financial statements include the accounts of its wholly-owned
subsidiary, Westfield Capital Management, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties.
The unaudited interim consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles and include
all necessary adjustments of a normal recurring nature, which in the opinion of
management, are required for a fair presentation of the results and financial
condition of the Company. The interim results of consolidated operations are not
necessarily indicative of the results for the entire year.
The information in this report should be read in conjunction with the
consolidated financial statements and accompanying notes included in the
December 31, 1997 Annual Report to Shareholders.
(2) EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS 128, "Earnings Per Share."
This Statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. The earnings per
share calculation is based upon the weighted average number of common shares and
common share equivalents outstanding during the period. Stock options, when
dilutive, are included as common stock equivalents using the treasury stock
method.
The following table is a reconciliation of the numerators and denominators of
basic and diluted earnings per share computations for the three months ended
March 31:
1998 1997
------------------------ ------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------------------------ ------------------------
(In thousands, except per share amounts)
BASIC EPS
Net Income $1,188 10,671 $0.11 $810 10,549 $0.08
===== =====
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 410 -- 319
------ -------- --------------
DILUTED EPS
------------------------ ------------------------
Net Income $1,188 11,081 $0.11 $810 10,868 $0.07
======================== ========================
(3) RECLASSIFICATIONS
Certain fiscal 1997 information has been reclassified to conform with the 1998
presentation.
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(4) RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") 130, "Reporting Comprehensive Income."
SFAS 130 requires the inclusion of comprehensive income, either in a separate
statement for comprehensive income, or as part of a combined statement of income
and comprehensive income in a full-set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. The Company has
adopted SFAS 130 effective for the current quarter. SFAS 130 requires the
presentation of information already contained in the Company's financial
statements and therefore adoption did not have an impact on the Company's
financial position or result of operations.
Also in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". This Statement establishes standards for
the way that public entities report information about operating segments in
annual financial statements, and requires that selected information about
operating segments be reported in interim financial reports issued to
shareholders. Operating segments are components of an entity about which
separate financial information is available and is evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires that public entities report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It also requires reconciliation of the amounts disclosed for segments to
corresponding amounts in the consolidated financial statements. However, this
Statement does not require an entity to report information that is not prepared
for internal use if reporting it would be impracticable. The Statement is
effective for annual periods beginning after December 15, 1997, and for interim
periods beginning after December 15, 1998. This Statement only affects
presentation in the financial statements, it will have no impact on the
Company's results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
This quarterly report contains certain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in the
forward-looking statements as a result of, among other factors, changes in loan
defaults and charge-off rates, reduction in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
fluctuations in assets under management and other sources of fee income, and
changes in assumptions used in making such forward-looking statements.
GENERAL
Boston Private Financial Holdings, Inc. (the "Company") is incorporated under
the laws of the Commonwealth of Massachusetts and is registered with the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board") as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). On July 1, 1988, the Company became the parent holding company of
Boston Private Bank & Trust Company (the "Bank"), a trust company chartered by
the Commonwealth of Massachusetts and insured by the Federal Deposit Insurance
Corporation (the "FDIC"). Effective April 22, 1998, the Company changed its name
from Boston Private Bancorp, Inc. to Boston Private Financial Holdings, Inc.
On October 31, 1997, the Company acquired Westfield Capital Management Company
Inc. ("Westfield"), a Massachusetts corporation engaged in providing a range of
investment management services to individual and institutional clients, in
exchange for 3,918,367 newly issued shares of the Company's common stock.
Concurrent with the acquisition, the Company formed a subsidiary, Boston Private
Investment Management, Inc., as a holding company for Westfield. The acquisition
was accounted for as a "pooling of interests." Accordingly, the current and
prior period results of operations of the Company have been restated to reflect
the results of operations on a consolidated basis.
The Company conducts substantially all of its business through its wholly-owned
operating subsidiaries, the Bank and Westfield. The Company's and the Bank's
principal office is located at Ten Post Office Square, Boston, Massachusetts,
and Westfield is located at One Financial Center, Boston, Massachusetts.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products and services to
high net worth individuals, their families and businesses in the greater Boston
area and New England and, to a lesser extent, Europe and Latin America. The Bank
offers its clients a broad range of basic deposit services, including checking
and savings accounts, with automated teller machine ("ATM") access, and cash
management services through sweep accounts and repurchase agreements. The Bank
also offers commercial, residential mortgage, home equity and personal loans. In
addition, it provides investment advisory and asset management services,
securities custody and safekeeping services, trust and estate administration and
IRA and Keogh accounts.
Westfield is an investment management firm serving the investment needs of high
net worth individuals and institutions with endowments, pensions and
profit-sharing or 401(k) plans. Westfield primarily manages individually
invested accounts and also acts as managing general partner for two limited
partnerships, one of which invests primarily in technology stocks, and the other
of which invests primarily in small capitalization equities.
FINANCIAL CONDITION
TOTAL ASSETS Total assets increased $23.7 million, or 6.4% from $368.9 million
at December 31, 1997 to $392.6 million at March 31, 1998. Strong deposit growth
and a corresponding increase in short-term federal funds sold funded most of
this increase. Increases in both the loan and investment portfolios were funded
by deposit growth, and to a lesser extent, borrowings.
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INVESTMENTS Total investments (consisting of cash, federal funds sold,
investment securities, mortgage-backed securities, and stock in the FHLB of
Boston) totaled $100.7 million, or 25.6% of total assets, at March 31, 1998,
compared to $81.6 million, or 22.1% of total assets, at December 31, 1997. Funds
from the sale of $14.6 million of municipal securities, the maturity of
$4.2 million of U.S. government and agency obligations, and $2.0 million of
principal repayments on mortgage-backed securities were reinvested in
$21.3 million of municipal securities and U.S. government and agency
obligations. Management evaluates investment alternatives in order to properly
manage the overall balance sheet. The timing of sales and reinvestments is based
on various factors, including the expectation of movements in market interest
rates and loan demand.
The following table is a summary of investment and mortgage-backed securities as
of March 31, 1998 and December 31, 1997:
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------------ ------------------------------------
Unrealized Unrealized
Amortized -------------- Market Amortized -------------- Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ----- ------ ------- --------- ----- ------ -------
(In thousands)
AT MARCH 31, 1998
U.S. Government and agencies $19,094 $ 2 $(53) $19,043 $ 3,655 $ 3 $ -- $ 3,658
Municipal bonds 20,655 11 (21) 20,645 5,465 24 (1) 5,488
Mortgage-backed securities -- -- -- -- 16,083 140 (73) 16,150
======= === ==== ======= ======= ==== ===== =======
Total investments $39,749 $13 $(74) $39,688 $25,203 $167 $ (74) $25,296
======= === ==== ======= ======= ==== ===== =======
AT DECEMBER 31, 1997
U.S. Government and agencies $17,589 $12 $(18) $17,583 $ 4,654 $ 2 $ -- $ 4,656
Municipal bonds 19,151 42 -- 19,193 5,000 22 -- 5,022
Mortgage-backed securities -- -- -- -- 18,123 157 (139) 18,141
======= === ==== ======== ======= ==== ===== =======
Total investments $36,740 $54 $(18) $36,776 $27,777 $181 $(139) $27,819
======= === ==== ======== ======= ==== ===== =======
LOANS Total loans increased $3.0 million during the first quarter of 1998 from
$273.2 million, or 74.0% of total assets, at December 31, 1997, to
$276.2 million, or 70.4% of total assets, at March 31, 1998. This increase was
due to increases in residential mortgage loans, partially offset by decreases in
the commercial and home equity portfolios.
Interest rates affect both the level of new loan originations and refinances or
paydowns of existing loans. During the first quarter of 1998, interest rates
were at fairly stable, low levels, and competition for new residential and
commercial loans and refinances was very strong. Residential mortgage loans
increased $8.4 million, or 6.7% as a result of new loan originations. The
decreases in the commercial loan and home equity portfolios during the first
quarter of 1998 were mainly due to paydowns on lines of credit.
RISK ELEMENTS The following table sets forth information regarding
non-performing loans, non-performing assets, and delinquent loans 30-89 days
past due as to interest or principal at the dates indicated.
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS IN THOUSANDS)
Loans accounted for on a nonaccrual basis $ 635 $ 722
Loans past due 90 days or more, but still accruing 13 25
------ ------
Total non-performing loans 648 747
Other real estate owned 127 85
====== ======
Total non-performing assets $ 775 $ 832
====== ======
Delinquent loans 30-89 days past due 1,314 1,632
Non-performing loans as a percent of gross loans .23% .27%
Non-performing assets as a percent of total assets .20% .23%
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The Company discontinues the accrual of interest on a loan when the
collectibility of principal or interest is in doubt. In certain instances, loans
that have become 90 days past due may remain on accrual status if the value of
the collateral securing the loan is sufficient to cover principal and interest
and the loan is in the process of collection. Other real estate owned consists
of real estate acquired through foreclosure proceedings and real estate acquired
through acceptance of a deed in lieu of foreclosure. In addition, the Company
may, under certain circumstances, restructure loans as a concession to a
borrower.
Total non-performing assets decreased by $57,000, or 6.8% during the first
quarter of 1998 due to several non-accruing loans moving back to performing
status, as well as principal payments received on non-performing loans. During
the first quarter of 1998, one loan with an outstanding balance of $42,000 was
reclassified out of loans and into other real estate owned. The Company
continues to evaluate the underlying collateral and value of each of its
non-performing assets and pursues the collection of all amounts due.
At March 31, 1998, loans with an aggregate balance of $1.3 million were 30 to 89
days past due, an decrease of $318,000, or 19.5%, from $1.6 million reported at
December 31, 1997. Most of these loans are adequately secured and management's
success in keeping these borrowers current varies from month to month.
ALLOWANCE FOR LOAN LOSSES Assessing the adequacy of the allowance for loan
losses involves substantial uncertainties and is based upon management's
evaluation of the amounts required to meet estimated charge-offs in the loan
portfolio after weighing various factors. Among these factors are the risk
characteristics of the loan portfolio, the quality of specific loans, the level
of nonaccruing loans, current economic conditions, trends in delinquencies and
charge-offs, and the value of underlying collateral, all of which can change
frequently. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant properties.
While management evaluates currently available information in establishing the
allowance for loan losses, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in making
the evaluations. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review a financial institution's
allowance for loan losses and carrying amounts of other real estate owned. Such
agencies may require the financial institution to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
As the Company continues to be affected by changes in the risk characteristics
of the loan portfolio, levels of non-performing loans, trends in delinquencies
and charge-offs, and current economic conditions, it will continue to evaluate
the adequacy of the allowance for loan losses. Notwithstanding these future
evaluations, management believes that the allowance for loan losses as of
March 31, 1998 is adequate based upon the information currently available.
The following table is an analysis of the Bank's allowance for loan losses for
the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- ---------
(DOLLARS IN THOUSANDS)
Ending gross loans $279,779 $205,667
============ ========
Allowance for loan losses, beginning of period $ 3,645 $ 2,566
Provision for loan losses 284 38
Charge-offs (376) (13)
Recoveries 2 31
======== ========
Allowance for loan losses, end of period $ 3,555 $ 2,622
======== ========
Allowance for loan losses to ending gross loans 1.27% 1.27%
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DEPOSITS AND BORROWINGS The Company experienced an increase in total deposits
of $21.4 million, or 8.3%, during the first quarter of 1998, from $258.3
million, or 70.0% of total assets, at December 31, 1997, to $279.7 million, or
71.2% of total assets, at March 31, 1998. This increase was most pronounced in
certificates of deposit $100,000 or greater, NOW accounts, and money market
accounts.
The following table shows the composition of the Company's deposits at March 31,
1998 and December 31, 1997:
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
Demand deposits $ 38,895 $ 36,848
NOW 30,068 24,938
Savings 5,222 5,787
Money market 123,065 117,984
Certificates of deposit under $100,000 24,486 22,956
Certificates of deposit $100,000 or greater 57,948 49,788
-------- ---------
Total $279,684 $ 258,301
======== =========
Total borrowings (consisting of securities sold under agreements to repurchase
("repurchase agreements"), federal funds purchased, FHLB borrowings, and other
short-term borrowings) increased by $390,000, or 0.5%, during the first three
months of 1998. This increase was primarily attributable to an increase in
repurchase agreements with cash management customers of the Bank, partially
offset by a decrease in federal funds purchased and FHLB borrowings, and paydown
of other short-term borrowings. Management will from time to time take advantage
of opportunities to fund asset growth with borrowings, but on a long-term basis,
the Company intends to replace a portion of its borrowings with core deposits.
LIQUIDITY Liquidity is defined as the ability to meet current and future
financial obligations of a short-term nature. The Company further defines
liquidity as the ability to respond to the needs of depositors and borrowers as
well as to earnings enhancement opportunities in a changing marketplace. Primary
sources of liquidity consist of deposit inflows, loan repayments, borrowed
funds, maturity of investment securities and sales of securities from the
available for sale portfolio. These sources fund the Company's lending and
investment activities.
Management is responsible for establishing and monitoring liquidity targets as
well as strategies and tactics to meet these targets. At March 31, 1998, cash,
federal funds sold and securities available for sale amounted to $71.4 million,
or 18.2% of total assets. This compares to $50.3 million, or 13.6% of total
assets at December 31, 1997.
The Bank is a member of the FHLB of Boston, and as such has access to both short
and long-term borrowings. In addition, the Bank maintains a line of credit at
the FHLB of Boston as well as other lines of credit with several correspondent
banks. Management believes that the Bank has adequate liquidity to meet its
commitments.
Westfield's primary source of liquidity consists of investment management fees
which are collected on a quarterly basis. At March 31, 1998 Westfield had
working capital of approximately $1.3 million. Management believes that
Westfield has adequate liquidity to meet its commitments.
The Company's primary sources of funds are dividends from subsidiaries, issuance
of common stock, and borrowings. Management believes that the Company has
adequate liquidity to meet its commitments.
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CAPITAL RESOURCES Total stockholders' equity of the Company at March 31, 1998
was $27.6 million, as compared to $25.9 million at December 31, 1997. This
increase was the result of the Company's net income for the quarter of
$1.2 million, plus the exercise of stock options, less the change in accumulated
other comprehensive income.
The following table presents actual capital amounts and regulatory capital
requirements as of March 31, 1998 and December 31, 1997:
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------------- ---------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ----- ------- ------
AS OF MARCH 31, 1998:
Total risk-based capital
Company $26,905 11.44% $18,810 >8.0% $23,512 >10.0%
Bank 24,631 10.66% 18,489 >8.0% 23,112 >10.0%
Tier I risk-based
Company 23,958 10.19% 9,405 >4.0% 14,107 > 6.0%
Bank 21,734 9.40% 9,245 >4.0% 13,867 > 6.0%
Tier I leverage capital
Company 23,958 6.50% 14,739 >4.0% 18,424 > 5.0%
Bank 21,734 5.96% 14,585 >4.0% 18,232 > 5.0%
AS OF DECEMBER 31, 1997:
Total risk-based capital
Company $25,000 11.07% $18,073 >8.0% $22,590 >10.0%
Bank 23,756 10.68% 17,788 >8.0% 22,235 >10.0%
Tier I risk-based
Company 22,166 9.81% 9,036 >4.0% 13,554 > 6.0%
Bank 20,966 9.43% 8,894 >4.0% 13,341 > 6.0%
Tier I leverage capital
Company 22,166 6.54% 13,554 >4.0% 16,943 > 5.0%
Bank 20,966 6.28% 13,354 >4.0% 16,693 > 5.0%
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RESULTS OF OPERATIONS
GENERAL. The Company recorded net income of $1.2 million, or $.11 per share, for
the three months ended March 31, 1998, compared to $810,000, or $.07 per share,
for the same period in 1997. The current quarter results include an increase in
net interest income and fee income, partially reduced by increases in the
provision for loan losses, operating expenses, and the Company's effective tax
rate. The Company's annualized return on average assets increased to 1.28% for
the first quarter of 1998, compared to 1.12% for the first quarter of 1997, and
the annualized return on stockholders' equity increased from 12.89% for the
first quarter of 1997 to 17.65% for the quarter ended March 31, 1998.
NET INTEREST INCOME. For the quarter ended March 31, 1998, net interest income
was $3.3 million, an increase of $670,000, or 25.8%, over the same period in
1997. This increase was primarily attributable to an increase of $83.0 million,
or 30.4%, in the average balance of earning assets, as compared to the same
period a year earlier. This increase in average earning assets was primarily
funded by an increase of $73.8 million, or 31.4% in average interest bearing
liabilities.
INTEREST INCOME. During the first three months of 1998, interest income was
$6.8 million, an increase of $1.6 million, or 30.8%, over the same period in
1997. Interest income on commercial loans increased 38.6% to $3.1 million for
the three months ended March 31, 1998, compared to $2.2 million for the same
period in 1997. Interest income from residential mortgage loans increased 30.0%
to $2.3 million compared to $1.8 million, and home equity and other loans
increased 32.3% to $332,000 compared to $251,000, for the same periods,
respectively. These increases were primarily due to an increase in loan volume.
The average balance of commercial loans increased 39.6% while the average rate
decreased 7 basis points from 9.39% for the quarter ended March 31, 1997, to
9.32% for the quarter ended March 31, 1998. The average balance of residential
mortgage loans increased 31.9%, while the average rate decreased 8 basis points
to 7.23% for the same period, and the average balance of home equity and other
loans increased 28.5%, while the average rate increased 24 basis points to
8.25%.
Total investment income increased $128,000, or 14.3%, to $1.0 million during the
quarter ended March 31, 1998, compared to $898,000 during the same period in
1997. This increase was primarily attributable to an increase in the average
balance of investments of $10.6 million, or 15.7%.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $929,000,
or 36.0%, to $3.5 million for the three months ended March 31, 1998, from
$2.6 million for the same period during 1997. This increase in the Company's
interest expense reflects an increase in the average balance of interest-bearing
liabilities of $73.8 million, or 31.4% between the two periods, and an increase
in the average cost of interest-bearing liabilities from 4.40% for the first
quarter of 1997 to 4.55% for the first quarter of 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $284,000 for the
quarter ended March 31, 1998, compared to $38,000 for the same period in 1997.
Management evaluates several factors including new loan originations, estimated
charge-offs, and risk characteristics of the loan portfolio when determining the
provision for the quarter. These factors include, the level and mix of loan
growth, the level of non-accrual and delinquent loans, as well as the level of
charge-offs and recoveries. Also see discussion under Financial Condition
- -"Allowance for Loan Losses." Total loans increased $3.0 million during the
first quarter of 1998, while the level of non-performing loans decreased 13.2%.
Charge-offs were $376,000 during the first quarter of 1998 compared to $13,000
for the same period in 1997. The majority of the first quarter charge-offs
resulted from a loan which was written off due to concern about the borrower's
ability to repay. The Bank plans to pursue collection of the outstanding
balance. The reserve coverage as a percentage of total loans is 1.27% as of
March 31, 1998 and 1997.
FEES AND OTHER INCOME. Fees and other income increased $1.1 million, or 35.9% to
$4.1 million for the three month period ending March 31, 1998, compared to
$3.1 million for the same period in 1997. The majority of fee income is
attributable to advisory fees earned on assets under management. These fees
increased $779,000, or 26.3% to $3.7 million for the first quarter of 1998
compared to $3.0 million for the same period in 1997. This increase is due to a
31.6% increase in assets under management from $1.9 billion on March 31, 1997 to
$2.5 billion on March 31, 1998.
During the first quarter of 1998, the Company accrued $205,000 of performance
fees as general partner of the limited partnerships it manages. These fees are
not determined until December 31st of each year, therefore, management has
estimated fees for the period based upon information available at the end of the
quarter.
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15
Deposit account service fees have increased $11,000, or 27.5%, to $51,000 as a
result of an increase in the number of deposit accounts, and a revised fee
schedule which went into effect during the third quarter of 1997. Gain on sale
of loans has increased $23,000 to $39,000 due to a higher volume of fixed rate
loans which were sold in the secondary market. During the first quarter of 1998,
the Company realized $55,000 of gains from the sale of investment securities.
There were no sales of investment securities during the first quarter of 1997.
OPERATING EXPENSE. Total operating expense for the first quarter of 1998
increased $795,000, or 17.5% to $5.3 million compared to $4.5 million for the
same period in 1997. This increase in total operating expense was primarily
attributable to the Company's continued growth and expansion. The Company has
experienced a 36.2% increase in total assets, and a 16.5% increase in the number
of full time employees from March 31, 1997 to March 31, 1998. In April, 1998,
the Company opened a new banking office in Wellesley, Massachusetts.
Salaries and benefits, the largest component of operating expense, increased
$739,000, or 24.0%, to $3.8 million for the quarter ended March 31, 1998, from
$3.1 million for the same period in 1997. This increase was due to a 16.5%
increase in the number of employees, normal salary increases, and the related
taxes thereon.
Occupancy and equipment expense increased $139,000, or 40.0%, to $486,000 for
the first quarter of 1998, from $347,000 for the same period last year. This
increase was primarily attributable to the renovation of additional office space
at Ten Post Office Square, and the lease expense related to the new banking
office in Wellesley, Massachusetts.
Professional services include outsourced data processing and custody expense,
legal fees, consulting fees, and other professional services such as audit and
tax preparation. These expenses decreased $131,000, or 26.3% as a result of
lower legal and consulting expenses, partially offset by increased volume
related charges for data processing and custody.
Marketing expenses increased $23,000, or 32.4%, to $94,000 for the first quarter
of 1998 as a result of ongoing advertising designed to increase the visibility
of the Company and its products and services. The Company also experienced a
$15,000, or 13.3% increase in business development expense as a result of an
increase in the number of employees and new business activity. There were
$92,000 of merger expenses incurred in the first quarter of 1997 related to the
acquisition of Westfield. There were no such expenses during the first quarter
of 1998.
Other expenses include supplies, telephone, postage, publications and
subscriptions, and other miscellaneous business expenses. These expenses have
increased $102,000, or 40.9% to $331,000, primarily as a result of increased
business volume and an increase in the number of employees.
INCOME TAX EXPENSE. The Company recorded income tax expense of $609,000 for the
first quarter of 1998 as compared to $264,000 for the same period last year. The
effective tax rate was 34.0% and 24.6% for the two periods, respectively. The
increase in the Company's effective tax rate is primarily due to the fact that
Westfield was a tax-exempt S-Corporation during the first quarter of 1997. If
Westfield had been a fully taxable entity, the Company would have incurred
approximately $69,000 of additional income tax expense for the first quarter of
1997, which equates to an effective tax rate of approximately 31.0%.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to this item, see the Company's December 31, 1997 Form
10-KSB, Item 6 - Interest Rate Sensitivity and Market Risk. No material changes
have occurred since that date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information related to this item, see the Company's December 31, 1997 Form
10-KSB. No material changes have occurred since that date.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No changes in security holders' rights have taken place.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No defaults upon senior securities have taken place.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matters submitted to a vote of security holders.
ITEM 5. OTHER INFORMATION
On April 22, 1998, the Company changed its name to Boston Private Financial
Holdings, Inc. The ticker symbol for the Company's common stock on the Nasdaq
SmallCap Market has been changed to "BPFH."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Current Report on Form 8-K filed with the Securities and Exchange Commission
on March 4, 1998, reporting under Item 5 the sale of 778,000 shares of the
Company's Common Stock by certain stockholders.
b) Current Report on Form 8-K filed with the Securities and Exchange Commission
on February 13, 1998, reporting under Item 5 net income results for 1997.
Selected Financial Data for the period ended December 31, 1996 and the period
ended December 31, 1997 (unaudited) was included.
c) Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on January 14, 1998, filing under Item 7 (i) audited Balance Sheets
of Westfield for the years ended December 31, 1996 and 1995 and unaudited
Balance Sheets of Westfield as of September 30, 1997 and 1996; (ii) audited
Statements of Income and Retained Earnings of Westfield for the years ended
December 31, 1996 and 1995, and unaudited Statements of Income and Retained
Earnings of Westfield for the nine month periods ended September 30, 1997 and
1996; (iii) audited Statements of Cash Flows of Westfield for the years ended
December 31, 1996 and 1995 and unaudited Statements of Cash Flows of Westfield
for the nine month periods ended September 30, 1997 and 1996; and (iv) notes to
audited and unaudited financial statements of Westfield.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Registrant)
MAY 14, 1997 /s/ Timothy L. Vaill
---------------------------------------
Timothy L. Vaill
President and Chief
Executive Officer
MAY 14, 1997 /s/ Walter M. Pressey
---------------------------------------
Walter M. Pressey
Senior Vice President and
Chief Financial Officer