Boston Private Financial 10Q 2002 Q1 Quarterly report

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC FORM 10-Q TABLE OF CONTENTS

As filed with the Securities and Exchange Commission on May 15, 2002

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 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 (State or other jurisdiction of incorporation or organization)		04-2976299 (I.R.S. Employer Identification Number)
Ten Post Office Square Boston, Massachusetts (Address of principal executive offices)		02109 (Zip Code)

Registrant's telephone number, including area code:(617) 912-1900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 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 ý No o

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of April 30, 2002:

Common Stock—Par Value $1.00		22,368,363 shares
(class)		(outstanding)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC

FORM 10-Q

TABLE OF CONTENTS


		PART I—FINANCIAL INFORMATION
Item 1		Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Changes in Stockholders' Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
Item 2		Management's Discussion and Analysis of Financial Condition and Results of Operations
		Risk Factors and Factors Affecting Forward-Looking Statements
Item 3		Quantitative and Qualitative Disclosures about Market Risk
PART II—OTHER INFORMATION
Item 1		Legal Proceedings
Item 2		Changes in Securities and Use of Proceeds
Item 3		Defaults upon Senior Securities
Item 4		Submission of Matters to a Vote of Security Holders
Item 5		Other Information
Item 6		Exhibits and Reports on Form 8-K
		Signature Page

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

				March 31, 2002			December 31, 2001
				(Unaudited)
				(In thousands, except share data)
Assets:
	Cash and due from banks			$	39,338		$	43,581
	Federal funds sold				56,200			14,700
	Investment securities available for sale (cost of $261,463 and $280,108, respectively)				261,260			282,017
	Mortgage-backed securities available for sale (cost of $1,947 and $2,263, respectively)				1,967			2,292
	Loans receivable:
		Commercial			562,039			538,144
		Residential mortgage			514,550			487,267
		Home equity and other consumer loans			79,343			79,678

			Total loans		1,155,932			1,105,089
	Less: allowance for loan losses				(15,201	)		(14,521	)

			Net loans		1,140,731			1,090,568
	Stock in the Federal Home Loan Bank of Boston				6,950			6,882
	Premises and equipment, net				11,032			10,365
	Goodwill				15,988			17,048
	Fees receivable				7,147			7,198
	Accrued interest receivable				8,174			7,894
	Other assets				28,536			26,934

			Total assets	$	1,577,323		$	1,509,479

Liabilities:
	Deposits			$	1,224,060		$	1,145,329
	Federal funds purchased				—			5,500
	FHLB borrowings				116,289			124,217
	Securities sold under agreements to repurchase				65,407			61,261
	Accrued interest payable				2,261			2,574
	Other liabilities				24,550			30,967

			Total liabilities		1,432,567			1,369,848

Stockholders' equity:
	Common stock, $1.00 par value per share; authorized: 70,000,000 shares issued: 22,341,358 shares at March 31, 2002 and 22,240,575 shares at December 31, 2001				22,341			22,241
	Additional paid-in capital				72,078			70,611
	Retained earnings				50,455			45,562
	Accumulated other comprehensive (loss) income				(118	)		1,217

			Total stockholders' equity		144,756			139,631

			Total liabilities and stockholders' equity	$	1,577,323		$	1,509,479

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

			Three Months Ended March 31,
			2002			2001
			(in thousands, except share data)
Interest and dividend income:
	Loans		$	18,700		$	18,643
	Taxable investment securities			1,818			2,220
	Non-taxable investment securities			913			1,263
	Mortgage-backed securities			30			53
	FHLB stock dividends			68			96
	Federal funds sold and other			112			1,586

		Total interest and dividend income		21,641			23,861

Interest expense:
	Deposits			4,647			9,022
	FHLB borrowings			1,577			1,459
	Securities sold under agreements to repurchase			205			392
	Federal funds purchased and other			13			—

		Total interest expense		6,442			10,873

		Net interest income		15,199			12,988
Provision for loan losses				680			640

		Net interest income after provision for loan losses		14,519			12,348

Fees and other income:
	Investment management and trust			9,895			9,642
	Financial planning fees			1,475			1,161
	Equity in earnings (losses) of partnerships			(18	)		(87	)
	Deposit account service charges			189			203
	Gain on sale of loans			271			185
	Gain on sale of investment securities			415			490
	Cash administration fees			221			84
	Other			607			288

		Total fees and other income		13,055			11,966

Operating expense:
	Salaries and employee benefits			12,811			11,134
	Occupancy and equipment			2,424			1,783
	Professional services			823			954
	Marketing and business development			868			634
	Contract services and processing			465			364
	Amortization of goodwill			—			345
	Merger expenses			—			127
	Other			1,705			1,333

		Total operating expense		19,096			16,674

		Income before income taxes		8,477			7,640
	Income tax expense			2,695			2,518

		Net income		5,783			5,122

Per share data:
	Basic earnings per share		$	0.26		$	0.23

	Diluted earnings per share		$	0.25		$	0.22

	Average common shares outstanding			22,307,596			22,004,558
	Average diluted shares outstanding			23,332,355			22,905,594

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDARIES

Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

		Common Stock		Additional Paid-in Capital		Retained Earnings			Stock Subscriptions			Accumulated Comprehensive Income (Loss)			Total
		(In thousands, except share data)
Balance at December 31, 2000		$	21,941	$	66,536	$	39,185		$	(146	)	$	1,109		$	128,625
	Net income		—		—		5,122			—			—			5,122
	Comprehensive income, net:
	Change in unrealized gain (loss) on securities available for sale		—		—		—			—			1,489			1,489

	Total comprehensive income															6,611
	Dividends paid to shareholders						(1,282	)								(1,282	)
	Proceeds from issuance of 54,140 shares of common stock		54		960		—			—			—			1,014
	Stock options exercised		42		400		—			—			—			442
	Stock subscription payments		—		—		—			146			—			146
	S corporation dividends paid						(482	)								(482	)

Balance at March 31, 2001		$	22,037	$	67,896	$	42,543		$	—		$	2,598		$	135,074

Balance at December 31, 2001		$	22,241	$	70,611	$	45,562		$	—		$	1,217		$	139,631
	Net income		—		—		5,783			—			—			5,783
	Comprehensive income, net:
	Change in unrealized gain (loss) on securities available for sale		—		—		—			—			(1,335	)		(1,335	)

	Total comprehensive income															4,448
	Dividends paid to shareholders		—		—		(890	)		—			—			(890	)
	Proceeds from issuance of 46,000 shares of common stock		46		489		—			—			—			535
	Stock options exercised		54		978		—			—			—			1,032

Balance at March 31, 2002		$	22,341	$	72,078	$	50,455		$	—		$	(118	)	$	144,756

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

					Three Months Ended March 31,
					2002			2001
					(In thousands)
Cash flows from operating activities:
	Net income				$	5,783		$	5,122
	Adjustments to reconcile net income to net cash from operating activities:
		Depreciation and amortization				565			156
		Gain on sale of loans				(271	)		(185	)
		Gain on sale of investment securities				(415	)		(490	)
		Provision for loan losses				680			640
		Distributed (undistributed) earnings of partnership investments				113			97
		Shares issued as compensation				535			1,014
		Loans originated for sale				(36,689	)		(23,680	)
		Proceeds from sale of loans				36,960			23,865
		(Increase) decrease in:
			Fees receivable			51			(26	)
			Accrued interest receivable			(280	)		(63	)
			Other assets			(932	)		(2,313	)
		Increase (decrease) in:
			Accrued interest payable			(313	)		688
			Other liabilities			(5,357	)		7,440

				Net cash provided (used) by operating activities		430			12,265

Cash flows from investing activities:
	Net decrease (increase) in federal funds sold					(41,500	)		(36,000	)
	Net decrease (increase) in money market mutual fund					17,646			—
	Investment securities available for sale:
		Purchases				(44,584	)		(61,998	)
		Sales				22,440			—
		Maturities				23,360			50,936
	Mortgage-backed securities available for sale:
		Principal payments				315			245
	Net decrease (increase) in loans					(50,534	)		(39,399	)
	Purchase of FHLB stock					(68	)		(574	)
	Recoveries on loans previously charged off					—			29
	Capital expenditures					(1,339	)		(1,005	)

				Net cash provided (used) by investing activities		(74,264	)		(87,766	)

Cash flows from financing activities:
	Net increase (decrease) in deposits					78,731			45,165
	Net increase (decrease) in repurchase agreements					4,146			(3,726	)
	Net increase (decrease) in federal funds purchased					(5,500	)		—
	FHLB advance proceeds					6,362			23,000
	FHLB advance repayments					(14,290	)		(5,152	)
	Proceeds from stock subscriptions receivable					—			146
	Dividends paid to stockholders					(890	)		(1,353	)
	S-corporation dividends paid					—			(411	)
	Proceeds from issuance of common stock					1,032			442

				Net cash provided (used) by financing activities		69,591			58,111

	Net increase (decrease) in cash and due from banks					(4,243	)		(17,390	)
	Cash and due from banks at beginning of year					43,581			79,767

	Cash and due from banks at end of period				$	39,338		$	62,377

Supplementary disclosures of cash flow information:
	Cash paid during the period for interest				$	11,277		$	10,185
	Cash paid during the period for income taxes					3,175			2,725

See accompanying notes to consolidated financial statements.

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 ("Boston Private Bank"), Borel Private Bank & Trust Company ("Borel"), Westfield Capital Management Company, LLC ("WCM"), RINET Company, LLC, ("RINET"), Sand Hill Advisors, Inc, ("Sand Hill") and Boston Private Value Investors ("BPVI"). Boston Private Bank's consolidated financial statements include the accounts of its wholly-owned subsidiaries, BPB Securities Corporation, Boston Private Asset Management Corporation, and Boston Private Preferred Capital Corporation. 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 these 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 accounting principles generally accepted in the United States of America, 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, 2001 Annual Report to Shareholders. Certain prior year information has been reclassified to conform to current year presentation and restated to reflect certain pooling of interest transactions.

(2) 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 earnings per share calculation is based upon the weighted average number of common shares and common share equivalents outstanding during the period. Stock options, when dilutive, are included as common stock equivalents using the treasury stock method.

The following tables are a reconciliation of the numerators and denominators of basic and diluted earnings per share computations:

		Three Months Ended March 31,						Three Months Ended March 31,
		2002						2001
		Income		Shares	Per Share Amount			Income		Shares	Per Share Amount
		(In thousands, except per share amounts)
Basic EPS
	Net Income	$	5,783	22,308	$	0.26		$	5,122	22,005	$	0.23

Effect of Dilutive Securities
	Stock Options		—	1,024	$	(0.01	)		—	901	$	(.01	)
Diluted EPS

	Net Income	$	5,783	23,332	$	0.25		$	5,122	22,906	$	0.22

(3) Business Segments

Management Reporting

The Company has six reportable segments, Boston Private Bank, Borel, Westfield, RINET, Sand Hill and BPVI. The financial performance of the Company is managed and evaluated by business segment. The segments are managed separately because each business is an individual company with different clients, employees, systems, risks, and marketing strategies.

Description of Business Segments

Boston Private 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. Boston Private 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. Boston Private 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. Boston Private Bank's investment management emphasis is on large-cap equity and actively managed fixed income portfolios.

Borel serves the financial needs of individuals, their families and their businesses in Northern California. Borel conducts a commercial banking business which includes accepting demand, savings and time deposits and making commercial, real estate and consumer loans. Borel offers various savings plans and provides safe deposit boxes as well as other customary banking services and facilities, except international operations. Additionally, Borel offers trust services and provides a variety of other fiduciary services including management, advisory and administrative services to individuals.

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 growth equity portfolios, and also acts as the investment manager for six 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 asset allocation 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. It also provides an independent mutual fund rating service.

Sand Hill provides investment management services to high net worth individuals primarily in Silicon Valley and Northern California. Sand Hill specializes in balanced portfolios with an equity discipline, and also uses its expertise to plan and execute diversification programs for concentrated stock positions.

BPVI serves the investment management needs of high net worth individuals primarily in New England and the Northeast. The firm is a large-cap value style investor headquartered in Concord, NH, with an office in Boston, MA.

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 management reviews separate financial statements. 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.

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 quarters ended March 31, 2002 and 2001.

		For the three months ended March 31, 2002
		Boston Private Bank		Borel		Westfield		RINET			Sand Hill		BPVI		Other			Inter- segment			Total
		(thousands)
Income Statement Data:
Revenues from External Customers:
	Net Interest Income	$	10,965	$	4,220	$	9	$	(5	)	$	4	$	1	$	5		$	—		$	15,199
	Non-Interest Income		3,633		1,011		4,865		1,474			1,134		938		—			—			13,055

	Total Revenues		14,598		5,231		4,874		1,469			1,138		939		5			—			28,254

Provision for Loan Losses			500		180		—		—			—		—		—			—			680
Operating Expense			8,050		2,429		3,187		1,245			1,063		711		2,411			—			19,096
Income Tax Expense			1,678		1,076		706		92			18		88		(963	)		—			2,695

Segment Profit		$	4,370	$	1,546	$	981	$	132		$	57	$	140	$	(1,443	)	$	—		$	5,783

Balance Sheet Data:
Total Segment Assets		$	1,150,598	$	401,065	$	8,161	$	2,465		$	14,530	$	1,381	$	17,342		$	(18,219	)	$	1,577,323

		For the three months ended March 31, 2001
		Boston Private Bank		Borel		Westfield		RINET			Sand Hill		BPVI		Other		Inter- segment			Total
		(thousands)
Income Statement Data:
Revenues from External Customers:
	Net Interest Income	$	8,591	$	4,368	$	23	$	(6	)	$	20	$	9	$	7	$	(24	)	$	12,988
	Non-Interest Income		3,454		837		4,214		1,152			1,277		1,031		1		—			11,966

	Total Revenues		12,045		5,205		4,237		1,146			1,297		1,040		8		(24	)		24,954
Provision for Loan Losses			550		90		—		—			—		—		—		—			640
Operating Expense			8,091		2,402		3,161		1,010			1,196		806		8		—			16,674
Income Tax Expense			759		1,095		450		72			42		100		—		—			2,518

Segment Profit		$	2,645	$	1,618	$	626	$	64		$	59	$	134	$	—	$	(24	)	$	5,122

Balance Sheet Data:
Total Segment Assets		$	983,074	$	358,758	$	8,052	$	1,865		$	16,886	$	1,514	$	21,474	$	(23,195	)	$	1,368,428

4) Recent Accounting Developments

In June, 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards Nos. 141 "Business Combinations" (Statement 141), and 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations and eliminated the use of pooling of interests for transactions initiated subsequent to June 30, 2001. Statement 142 eliminates the amortization to expense of goodwill recorded as a result of such combinations, but requires periodic evaluation of the

goodwill for impairment. Write-downs of the balance, if necessary, are to be charged to results of operations. Goodwill existing prior to the issuance of the statement was required to be amortized through December 31, 2001.

The Company evaluated its recorded goodwill under Statement 142 as of January 1, 2002, and concluded that there was no impairment as of that date. Under Statement 142, goodwill and identifiable intangible assets with indefinite lives will no longer be amortized, but will be reviewed at least annually for impairment. Identifiable intangible assets with discrete useful lives will be amortized over their useful lives. The estimated deferred purchase price for Sand Hill is contingent upon performance hurdles and other factors. An adjustment was made to reduce the estimated purchase price based on current performance and market conditions and the estimated impact that has on future payments.

The amortization and changes in the carrying amount of goodwill by segment are as follows:

	Total			Boston Private Bank			Sand Hill			BPVI
Balance as of December 31, 2001	$	17,048		$	2,287		$	14,448		$	313
Amortization		—
Adjust estimated deferred purchase price		(1,060	)					(1,060	)

Balance as of March 31, 2002	$	15,988		$	2,287		$	13,388		$	313

Balance as of December 31, 2000	$	18,195		$	2,552		$	15,278		$	365
Amortization		(340	)		(66	)		(260	)		(14	)

Balance as of March 31, 2001	$	17,855		$	2,486		$	15,018		$	351

The net income and earnings per share would have been as follows if there had been no amortization in 2001.

		Three Months Ended March 31,
		2002		2001
Reported net income		$	5,783	$	5,122
Add back: Goodwill amortization			—		340

Adjusted net income		$	5,783	$	5,462

Basic earnings per share
	Reported net income	$	0.26	$	0.23
	Goodwill amortization		—		0.02

	Adjusted net income	$	0.26	$	0.25

Diluted earnings per share
	Reported net income	$	0.25	$	0.22
	Goodwill amortization		—		0.02

	Adjusted net income	$	0.25	$	0.24

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarter Ended March 31, 2002

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. All statements, other than statements of historical facts, including statements regarding our strategy, effectiveness of investment programs, evaluations of future interest rate trends and company liquidity, expectations as to growth in assets, deposits and results of operations, success of acquisitions, future operations, market position, financial position, and prospects, plans and objectives of management are forward-looking statements. These forward looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company's actual results could differ materially from those projected in the forward-looking statements as the result of, among other factors, changes in interest rates, changes in the securities or financial markets, a deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers' ability to service and repay our loans, changes in loan defaults and charge-off rates, reduction in deposit levels necessitating increased borrowing to fund loans and investments, the risk that difficulties will arise in connection with the integration of the operations of acquired businesses with the operations of our banking or investment management businesses, the passing of adverse government regulation, changes in assumptions used in making such forward looking statements, as well as those factors set forth below under the heading "Risk Factors and Factors Affecting Forward-Looking Statements." These forward-looking statements are made as of the date of this report and the company does not intent or undertake to update any such forward-looking statement.

General

Boston Private Financial Holdings, Inc. 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, a trust company chartered by the Commonwealth of Massachusetts and insured by the Federal Deposit Insurance Corporation (the "FDIC").

On November 30, 2001, the Company acquired by merger Borel, a $375 million private bank located in San Mateo, California, in exchange for 5,629,872 newly issued shares of the Company's common stock. In addition, Borel's previously outstanding stock options were converted into options to acquire 229,998 shares of the Company's common stock. The number of the Company's shares was calculated using an exchange ratio of 1.8996 shares of the Company's stock for each share of Borel common stock. In connection with the Borel merger, the Company recorded approximately $12 million of merger expenses which are non-recurring operating expenses. On October 1, 2001, RINET acquired by merger Kanon Bloch Carré, a Boston-based independent mutual fund rating service and investment advisor, in exchange for 100,288 newly issued shares of the Company's common stock. On February 28, 2001, the Company acquired by merger BPVI, formerly E. R. Taylor Investments, Inc., a New Hampshire corporation engaged in providing value-style investment advisory services to the wealth management market, in exchange for 629,731 newly issued shares of the Company's common stock. These mergers were initiated prior to June 30, 2001 and were accounted for as "poolings of interests".

On August 31, 2000, the Company acquired Sand Hill, an investment advisory firm servicing the wealth management market, primarily in Northern California. The estimated purchase price at closing was $16.5 million, with 70% paid at close, and the remainder to be paid in four annual payments contingent upon performance using a combination of approximately 73% cash and 27% common stock

for each payment. At closing, the Company issued 258,395 shares of its common stock in connection with the transaction. In the fourth quarter of 2001, the Company issued an additional 15,933 shares of its common stock in connection with the first annual contingent payment. The estimated purchase price was reduced by $1.1 million due to a reduction is the amount of the estimated remaining deferred purchase payments. This acquisition was accounted for as a "purchase" and, accordingly, the Company's results of operations and financial position include Sand Hill on a consolidated basis since the date of the acquisition.

On October 15, 1999, the Company acquired by merger RINET, a Massachusetts company 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."

The results of operations of the Company have been restated to reflect the financial position and results of operations on a consolidated basis for all of the mergers accounted for as a pooling of interests for all years presented.

The Company conducts substantially all of its business through its wholly owned operating subsidiaries, Boston Private Bank, Borel, Westfield, RINET, Sand Hill and BPVI. A description of each subsidiary is provided in Note 3 to the Consolidated Financial Statements.

Financial Condition

Total Assets. Total assets increased $67.8 million, or 4.5%, to $1.6 billion at March 31, 2002 from $1.5 billion at December 31, 2001. This increase was primarily driven by deposit growth, which was used to fund new loans.

Investments. Total investments (consisting of cash, federal funds sold, investment securities, mortgage-backed securities, and stock in the FHLB of Boston) were $365.7 million, or 23.2% of total assets, at March 31, 2002, compared to $349.5 million, or 23.2% of total assets, at December 31, 2001. Cash and fed funds sold increased $37.3 million while the investment portfolio decreased by $21.1 million. Management periodically evaluates investment alternatives to properly manage the overall balance sheet. The timing of sales and reinvestments is based on various factors, including management's evaluation of interest rate trends and total Company liquidity.

The following table is a summary of investment and mortgage-backed securities available for sale as of March 31, 2002 and December 31, 2001:

				Unrealized
		Amortized Cost		Unrealized					Market Value
		Amortized Cost		Gains		Losses			Market Value
		(in thousands)
At March 31, 2002
Money market mutual funds		$	26,505	$	—	$	—		$	26,505
U.S. Government and agencies			113,840		608		(1,292	)		113,156
Corporate bonds			20,649		298		(52	)		20,895
Municipal bonds			100,469		849		(614	)		100,704
Mortgage-backed securities			1,947		20		—			1,967

	Total investments	$	263,410	$	1,775	$	(1,958	)	$	263,227

At December 31, 2001
Money market mutual funds		$	44,151	$	—	$	—		$	44,151
U.S. Government and agencies			105,273		1,493		(749	)		106,017
Corporate bonds			33,854		556		(42	)		34,368
Municipal bonds			96,830		1,123		(472	)		97,481
Mortgage-backed securities			2,263		29		—			2,292

	Total investments	$	282,371	$	3,201	$	(1,263	)	$	284,309

Loans. Total loans increased $50.8 million, or 4.6%, during the first three months of 2002 to $1.156 billion, or 73.3% of total assets, at March 31, 2002, from $1.105 billion, or 73.2% of total assets, at December 31, 2001. Both the commercial and residential mortgage loan portfolios continued to experience growth due to the Company's strong client relationships and the demand for financing. Commercial loans increased $23.9 million, or 4.4%, and residential mortgage loans increased $27.3 million, or 5.6%, during the first three months of 2002.

Risk Elements. Total non-performing assets, which consist of non-accrual loans and other real estate owned, increased by $554,000 during the first three months of 2002 to $1.5 million, or 0.09% of total assets, at March 31, 2002, from $904,000, or 0.06% of total assets, at December 31, 2001. 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, 2002, loans with an aggregate balance of $4.5 million, or 0.39% of total loans, were 30 to 89 days past due, an increase of $864,000 as compared to $3.6 million, or 0.33% of total loans, as of December 31, 2001. Most of these loans are adequately secured and management's success in keeping these borrowers current varies from month to month.

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 management believes that full principal and interest due on the loan is collectible.

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 that 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 judgment. 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 judgment 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 judgment 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.

The following table is an analysis of the Company's allowance for loan losses for the periods indicated:

		Three Months Ended March 31,
		2002			2001
		(Dollars in thousands)
Ending gross loans		$	1,155,932		$	916,285

Allowance for loan losses, beginning of period		$	14,521		$	11,500
	Provision for loan losses		680			640
	Charge-offs		(2	)		—
	Recoveries		2			32

Allowance for loan losses, end of period		$	15,201		$	12,172

Allowance for loan losses to ending gross loans			1.31	%		1.33	%

Deposits. The Company experienced an increase in total deposits of $78.7 million, or 6.9%, during the first three months of 2002, to $1.224 billion, or 77.6% of total assets, at March 31, 2002, from $1.145 billion, or 75.9% of total assets, at December 31, 2001. This increase was due to higher average balances in existing client accounts, as well as a significant number of new accounts opened during the

first three months of 2002. The following table shows the composition of the Company's deposits at March 31, 2002 and December 31, 2001:

		March 31, 2002				December 31, 2001
		Balance		As a % of Total		Balance		As a % of Total
Demand deposits		$	199,638	16.3	%	$	201,001	17.5	%
NOW			140,207	11.5	%		146,454	12.8	%
Savings			23,664	1.9	%		22,710	2.0	%
Money Market			606,596	49.6	%		541,905	47.3	%
Certificates of deposit under $100,000			86,144	7.0	%		82,631	7.2	%
Certificates of deposit $100,000 or greater			167,811	13.7	%		150,628	13.2	%

	Total	$	1,224,060	100.0	%	$	1,145,329	100.0	%

Borrowings. Total borrowings (consisting of federal funds purchased, securities sold under agreements to repurchase ("repurchase agreements"), and FHLB borrowings) decreased $9.3 million, or 4.9%, during the first three months of 2002 to $181.7 million from $191.0 million at December 31, 2001. 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. Boston Private Bank strategically repositioned its balance sheet during the fourth quarter of 2001 by retiring $15.5 million of borrowings. As a result Boston Private Bank incurred a prepayment penalty which was treated as an extraordinary item.

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, financial planning fees, deposit inflows, loan repayments, borrowed funds, and cash flows from 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. At March 31, 2002, cash, federal funds sold and securities available for sale amounted to $358.8 million, or 22.7% of total assets of the Company. This compares to $342.6 million, or 22.7% of total assets, at December 31, 2001.

In general, Boston Private Bank maintains a liquidity target of 15% to 20% of total assets. Boston Private Bank is a member of the FHLB of Boston and as such has access to both short and long-term borrowings of up to $393.2 million as of March 31, 2002. In addition, Boston Private Bank maintains short-term lines of credit at the Federal Reserve Bank and other correspondent banks totaling $89.0 million, and has established brokered certificate of deposit lines with several institutions aggregating $120.0 million. Management believes that at March 31, 2002, Boston Private Bank had adequate liquidity to meet its commitments for the foreseeable future.

In general, Borel maintains a minimum liquidity target of 20%. Borel is a member of the FHLB of San Francisco, and as such has access to both short and long-term borrowings of up to $8.0 million as of March 31, 2002. Borel manages its cash position in a way that avoids reliance on short-term borrowings or brokered deposits. Concentrations of deposits from any one source are also avoided. Management believes that at March 31, 2002, Borel had 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 March 31, 2002 Westfield had working capital of approximately $4.3 million.

Management believes that at March 31, 2002, Westfield had adequate liquidity to meet its commitments for the foreseeable future.

RINET's primary source of liquidity consists of financial planning fees that are collected on a quarterly basis. At March 31, 2002, RINET had working capital of approximately $926,000. Management believes that at March 31, 2002, RINET had adequate liquidity to meet its commitments for the foreseeable future.

Sand Hill's primary source of liquidity consists of investment management fees that are collected on a quarterly basis. At March 31, 2002 Sand Hill had working capital of approximately $461,000. Management believes that at March 31, 2002, Sand Hill had adequate liquidity to meet its commitments for the foreseeable future.

BPVI's primary source of liquidity consists of investment management fees that are collected on a quarterly basis. At March 31, 2002 BPVI had working capital of approximately $332,000. Management believes that at March 31, 2002, BPVI had 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. 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 March 31, 2002 was $144.8 million, or 9.2% of total assets, compared to $139.6 million, or 9.2% of total assets at December 31, 2001. The increase was the result of the Company's net income for the first three months of 2002 of $5.8 million, combined with common stock issued in connection with stock grants to employees and proceeds from options exercised, less dividends paid to shareholders and the change in accumulated other comprehensive income.

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, Boston Private Bank and Borel (together, the "Banks"), which are wholly-owned subsidiaries of the Company, must each meet specific capital guidelines that involve quantitative measures of each of the Banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' respective capital amounts and classifications 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. The following table presents actual capital amounts and regulatory capital requirements as of March 31, 2002 and December 31, 2001:

			Actual			For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provisions
			Amount	Ratio		Amount	Ratio		Amount	Ratio
			(Dollars in thousands)
*As of March 31, 2002:*
	Total risk-based capital
		Company	142,127	13.21	%	86,092	> 8.0	%	107,615	> 10.0	%
		Boston Private Bank	82,925	11.59		57,241	8.0		71,551	10.0
		Borel	36,022	10.74		26,837	8.0		33,547	10.0
	Tier I risk-based
		Company	128,654	11.95		43,046	4.0		64,569	6.0
		Boston Private Bank	73,962	10.34		28,620	4.0		42,931	6.0
		Borel	31,823	9.49		26,837	4.0		33,547	6.0
	Tier I leverage capital
		Company	128,654	8.44		60,952	4.0		76,190	5.0
		Boston Private Bank	73,962	6.52		45,352	4.0		56,690	5.0
		Borel	31,823	8.40		15,148	4.0		18,935	5.0
*As of December 31, 2001:*
	Total risk-based capital
		Company	133,673	13.43	%	79,637	> 8.0	%	99,547	> 10.0	%
		Boston Private Bank	78,045	11.56		54,008	8.0		67,510	10.0
		Borel	30,147	9.76		24,718	8.0		30,897	10.0
	Tier I risk-based
		Company	121,199	12.18		39,819	4.0		59,728	6.0
		Boston Private Bank	69,587	10.31		27,004	4.0		40,506	6.0
		Borel	26,277	8.50		12,359	4.0		18,538	6.0
	Tier I leverage capital
		Company	121,199	8.05		60,186	4.0		75,233	5.0
		Boston Private Bank	69,587	6.30		44,167	4.0		55,209	5.0
		Borel	26,277	6.83		15,396	4.0		19,245	5.0

Results of Operations for the Three Months Ended March 31, 2002.

Net Income. The Company recorded net income of $5.8 million, or $0.25 per diluted share, for the quarter ended March 31, 2002 compared to $5.1 million, or $0.22 per diluted share for the quarter ended March 31, 2001. This represented a 12.9% increase in net income and a 13.6% increase in earnings per share.

Net Interest Income. For the quarter ended March 31, 2002, net interest income was $15.2 million, an increase of $2.2 million, or 17.0%, over the same period in 2001. This increase was attributable to an increase in the average balance of earning assets and a decrease in the average cost of interest earning liabilities. The Company's net interest margin was 4.31% for the first quarter of 2002, an increase of 4 basis points compared to the same period last year.

Interest Income. During the first quarter of 2002, interest income was $21.6 million, a decrease of $2.2 million, or 9.3%, compared to $23.9 million for the same period in 2001. Interest income on commercial loans decreased 12.7% to $9.3 million for the quarter ended March 31, 2002, compared to $10.7 million for the same period in 2001. Interest income from residential mortgage loans increased

28.4% to $8.2 million for the first quarter of 2002, compared to $6.4 million for the same period in 2001, and interest on home equity and other loans decreased 24.1% to $1.2 million for the first quarter of 2002, compared to $1.6 million, for the same period in 2001. The average balance of commercial loans increased 16.1% and the average rate decreased 24.8%, or 231 basis points to 7.00% for the quarter ended March 31, 2002. The average balance of residential mortgage loans increased 42.3%, and the average rate decreased 9.8%, or 70 basis points to 6.50% for the same period. The average balance of home equity and other consumer loans increased 10.5% and the average rate decreased 31.3%, or 284 basis points, to 6.23%.

Total investment income (consisting of interest and dividend income from cash, federal funds sold, investment securities, mortgage-backed securities, and stock in the FHLB of Boston) decreased $2.3 million, or 43.6%, to $2.9 million for the quarter ended March 31, 2002, compared to $5.2 million for the same period in 2001. This decrease was primarily attributable to a decrease in the average yield on investments of 200 basis points, or 36.0%, to 3.55% offset by an increase in the average balance of $45.2 million, or 12.0%, for the quarter ended March 31, 2002.

Interest Expense. During the first quarter of 2002, interest expense was $6.4 million, a decrease of $4.4 million, or 40.8%, compared to $10.9 million for the same period in 2001. This decrease in the Company's interest expense was the result of a decrease in the average cost of interest-bearing liabilities of 210 basis points, or 49.1%, to 2.18% for the quarter ended March 31, 2002. This decrease was partially offset by an increase in the average balance of interest-bearing liabilities of $167.6 million, or 16.5%, between the two periods.

Provision for Loan Losses. The provision for loan losses was $680,000 for the quarter ended March 31, 2002, compared to $640,000 for the same period in 2001. Management evaluates several factors including new loan originations, estimated charge-offs, and risk characteristics of the loan portfolio when determining the provision for loan losses. These factors include the level and mix of loan growth, the level of non-accrual and delinquent loans, and the level of charge-offs and recoveries. Also see discussion under "Financial Condition—Allowance for Loan Losses." Recoveries net of charge-offs were less than $1,000 during the first quarter of 2002, compared to $32,000 for the same period in 2001.

Fees and Other Income. Fees and other income increased $1.1 million, or 9.1%, to $13.1 million for the three-month period ending March 31, 2002, compared to $12.0 million for the same period in 2001. The majority of fee income was attributable to investment management and trust fees earned on assets under management. These fees increased $253,000, or 2.6% to $9.9 million for the first quarter of 2002, compared to $9.6 million for the same period in 2001. Total assets under management increased $665.0 million or 10.9% to $6.750 billion as of March 31, 2002 compared to $6.085 billion as of March 31, 2001.

Financial planning fees increased $314,000, or 27.0%, to $1.5 million for the first quarter of 2002, compared to $1.2 million for the same period in 2001. Equity in losses of partnerships was $18,000 for the three months ended March 31, 2002 due to a decrease in the market value of Westfield's general partnership interest in its hedge funds.

Gain on sale of investment securities was $415,000 for the first quarter of 2002 compared to $490,000 for the first quarter of 2001. Gain on sale of loans increased $86,000 to $271,000 for the first quarter of 2002 as a result of increased market demand for fixed rate loans, which are generally sold on the secondary market.

Deposit account service charges decreased $14,000, or 6.9%, to $189,000 for the first quarter of 2002. Cash administration fees, which consists primarily of cash management fees and liquid asset management fees, were $221,000 for the first quarter ended March 31, 2002 compared to $84,000 for

the first quarter of 2001. Other fee income, which consists primarily of loan fees and banking fees, increased $319,000 to $607,000 for the first quarter of 2002.

Operating Expense. Total operating expense for the first quarter of 2002 increased $2.4 million, or 14.5%, to $19.1 million compared to $16.7 million for the same period in 2001. This increase was attributable to the Company's continued growth and expansion. The Company experienced a 4.5% increase in total balance sheet assets and a 11.0% increase in the number of employees from March 31, 2001 to March 31, 2002.

Salaries and benefits, the largest component of operating expense, increased $1.7 million, or 15.1%, to $12.8 million for the quarter ended March 31, 2002, from $11.1 million for the same period in 2001. This increase was due to a 11.0% increase in the number of employees, a higher level of employee incentive-based compensation, normal salary increases, and the related taxes and benefits thereon.

Occupancy and equipment expense increased $641,000, or 35.9%, to $2.4 million for the first quarter of 2002, from $1.8 million for the same period last year. The increase was primarily attributable to the increased occupancy expenses related to expansion at Ten Post Office Square, Boston, Massachusetts, and the new banking office in Cambridge, Massachusetts, as well as the Company's continued investments in technology.

Professional services include legal fees, consulting fees, and other professional services such as audit and tax preparation. These expenses decreased $131,000, or 13.7%.

Marketing and business development increased $234,000, or 36.9%, to $868,000 for the first quarter of 2002 as a result of increased business development activity due to growth in sales staff.

Contract services and processing includes outsourced systems, data processing and custody expense. These expenses increased $101,000, or 27.8%.

Amortization of goodwill and intangibles decreased $340,000 to $5,000 for the first quarter of 2002, from $345,000. On January 1, 2002 the company adopted statement 142. Statement 142 requires that goodwill no longer be amortized to earnings and that other indefinite life intangibles also not be amortized.

Other expenses include insurance, supplies, telephone, mailing expense, publications and subscriptions, employee training, interest on deferred acquisition payments and other miscellaneous business expenses. These expenses have increased $367,000, or 27.5% to $1.7 million, as a result of various items, including increased business volume and an increase in the number of employees.

Income Tax Expense. The Company recorded income tax expense of $2.7 million for the first quarter of 2002 as compared to $2.5 million for the same period last year. The effective tax rate was 31.8% for the first quarter of 2002, compared to 33.0% for the same period in 2001. The decrease in the Company's effective tax rate is a result of a lower percentage of fully taxable income.

Risk Factors and Factors Affecting Forward-Looking Statements

This Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. Reference to "we", "our" and "us" refer to the company and its subsidiaries on a consolidated basis.

We May Not Be Able to Attract and Retain Banking Customers at Current Levels

Competition in local banking industries coupled with our relatively small size may limit the ability of the Banks to attract and retain banking customers. The Banks face competition from the following:

•: other banking institutions (including larger Boston and Northern California and suburban commercial banking organizations);
•: savings banks;
•: credit unions;
•: other financial institutions; and
•: non-bank financial service companies serving eastern Massachusetts, Northern California and their respective adjoining areas.

In particular, the Banks' 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. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit and investment needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range and quality of services provided. The Banks also face competition from out-of-state financial intermediaries which have opened low-end production offices or which solicit deposits in their respective market areas.

Because the Banks maintain smaller staffs and have fewer financial and other resources than larger institutions with which they compete, they may be limited in their ability to attract customers. In addition, some of the Banks' current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than the Banks can accommodate.

If the banks are unable to attract and retain banking customers, they may be unable to continue their loan growth and their results of operations and financial condition may otherwise be negatively impacted.

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, Boston Private Bank, Borel and our investment management subsidiaries, Westfield, Sand Hill, BPVI, 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:

•: commercial banks and trust companies;
•: mutual fund companies;

•: investment advisory firms;
•: stock brokerage firms;
•: law firms; and
•: other financial services companies.

Competition is especially keen in our geographic market area, because there are numerous well-established and successful investment management firms in Boston, New England and in Northern California. Many of our competitors have greater resources than we have.

Our ability to successfully attract and retain investment management clients is dependent upon our ability to compete with our 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. For the year ended December 31, 2001, approximately 36% of our revenues were derived from investment management contracts which are typically terminable upon 30 days' notice or less. 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 six 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, BPVI, Rinet, and Sand Hill are our major investment management subsidiaries, and their financial performance is a significant factor in our overall results of operations and financial condition.

Defaults in the Repayment of Loans May Negatively Impact Our Business

Defaults in the repayment of loans by the Banks' customers may negatively impact their businesses. A borrower's default on its obligations under one or more of the Banks' 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 Banks may have to write-off the loan in whole or in part. In such situations, the Banks 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 Banks' respective 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 Banks may incur additional expenses.

In addition, bank regulatory agencies periodically review the Banks' allowances for loan losses and the values they attribute to real estate acquired through foreclosure or other similar remedies. Such regulatory agencies may require the Banks to adjust their determination of the value for these items. These adjustments could negatively impact the Banks' results of operations or financial position.

A Downturn in the Local Economies or Real Estate Markets Could Negatively Impact Our Banking Business

A downturn in the local economies or real estate markets could negatively impact our banking business. Because the Banks serve primarily individuals and smaller businesses located in eastern Massachusetts and adjoining areas, with a particular concentration in the Greater Boston Metropolitan Area and Northern California, the ability of the Banks' customers to repay their loans is impacted by the economic conditions in these areas. Furthermore, current negative economic trends, including uncertainty regarding an economic recovery, increased unemployment and recently announced significant layoffs of employees announced by companies in Northern California and New England, as well as continuing economic uncertainty created by September 11, 2001 terrorist attacks on the World Trade Center and the Pentagon, and the United States' war on terrorism in Afghanistan and elsewhere, may negatively impact businesses in Northern California and New England. We are currently uncertain as to the extent of such an impact or whether such an impact would harm the banking business of the Banks. The Banks' commercial loans are generally concentrated in the following customer groups:

•: real estate developers and investors;
•: financial service providers;
•: technology companies;
•: manufacturing and communications companies;
•: professional service providers;
•: general commercial and industrial companies; and
•: individuals.

The Banks' 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). Consequently, the Banks' ability to continue to originate real estate loans may be impaired by adverse changes in local and regional economic conditions in the real estate markets, or by acts of nature, including earthquakes and flooding. Due to the concentration of real estate collateral, these events could have a material adverse impact on the value of the collateral resulting in losses to either or both of the Banks. Substantially all of the Banks' residential mortgage and home equity loans are secured by residential property in eastern Massachusetts and Northern California. Also, due to the recent concerns with power supplies in the State of California, Borel could be materially and adversely affected either directly or indirectly by a severe power shortage, if any of its critical computer systems or equipment fails, if the local infrastructure, such as electric power, phone system, or water system, fails, if its significant vendors are adversely impacted, or it its borrowers or depositors are adversely impacted by their internal systems or those of their customers and suppliers. As a result, conditions in the real estate markets specifically, and the Massachusetts and California economies generally, can materially impact the ability of the Banks' borrowers to repay their loans and affect the value of the collateral securing these loans.

Environmental Liability Associated with Commercial Lending Could Result in Losses

In the course of business, the Banks may in the future acquire, through foreclosure, properties securing loans they have originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we, or the respective Bank, might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible

parties could find it difficult or impossible to sell the affected properties, which could have a material adverse affect on our business, financial condition and operating results.

Fluctuations in Interest Rates May Negatively Impact Our Banking Business

Fluctuations in interest rates may negatively impact the business of the Banks. The Banks' 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). These rates are highly sensitive to many factors beyond the Banks' control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. The Banks' net interest income can be affected significantly by changes in market interest rates. Changes in relative interest rates may reduce the Banks' net interest income as the difference between interest income and interest expense decreases. As a result, the Banks have 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, even with these policies in place, we cannot assure you that a decrease in interest rates will not negatively impact our results from operations or financial position. Specifically, Borel is currently asset sensitive, which means that its interest bearing liabilities mature, or otherwise reprice, at a slower rate than its interest earning assets. As a result, in a period of declining interest rates, Borel will experience a shrinking of its interest margin as its floating rate loans will reprice immediately, while its fixed rate deposits will reprice over the course of a year. This reduction in interest rate may adversely affect Borel's earnings.

An increase in interest rates could also have a negative impact on the Banks' 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 Banks' allowances 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 Banks have 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 Banks have 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 Banks decrease relative to their overall banking operations, the Banks may have to rely more heavily on borrowings as a source of funds in the future, which may negatively impact our net interest margin.

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. In particular, the financial and securities markets have experienced a significant downturn since March 2000. This decline has impacted our investment management business, in particular, performance fees we earn on mutual funds for which Westfield acts as a subadvisor. In addition, following the September 11, 2001 terrorist attacks on the World Trade Center and the Pentagon, the world financial and securities markets experienced significant and precipitous decline in value and will likely continue to experience significant volatility as a result of, among other things, world economic and political conditions. Continued 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, BPVI's, Sand Hill's and a portion of RINET's management contracts generally provide for fees payable for investment management services based on the market value of assets under management, although a portion of Westfield's contracts 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.

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, four of our subsidiaries, namely Westfield, Sand Hill, BPVI, 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 and Sand Hill act as sub-advisers to mutual funds which are registered under the 1940 Act and are 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 or less.

The Company does not directly manage investments for clients, does not directly provide any investment management services and, therefore, is not a registered investment adviser. Boston Private Bank and Borel are exempt from the regulatory requirements of the Investment Advisors Act, but are subject to extensive regulation by the FDIC and the Commissioner of Banks of the Commonwealth of Massachusetts and the California Department of Financial Institutions.

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. The Company is subject to the Bank Holding Company Act, and to regulation and supervision by the Federal Reserve Board. Boston Private 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. Borel, as a California banking corporation, is subject to regulation and supervision by the DFI 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, the DFI 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 we and the Banks 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 Banks must offer to attract deposits and the interest rates they must charge on their 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 Banks.

To the Extent that We Acquire Other Companies in the Future, Our Business May Be Negatively Impacted by Certain Risks Inherent with such Acquisitions

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.

These risks include the following:

•: the risk that the acquired business will not perform in accordance with management's expectations;
•: 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;
•: the risk that management will divert its attention from other aspects of our business;
•: the risk that we may lose key employees of the acquired business;
•: the risks associated with entering into geographic and product markets in which we have limited or no direct prior experience; and
•: the risks of the acquired company which we may assume as a result of the acquisition.

Adverse developments in litigation could negatively impact our business.

Since 1984, Borel has served as the trustee of a private trust that has been the subject of protracted litigation. During the last seven years there have been three actions filed in the Superior Court for San Mateo County, California, by certain beneficiaries of the trust relating to the management and proposed sale of certain real property. These beneficiaries have claimed, among other

things, that Borel breached its fiduciary duties as the trustee. Borel has prevailed in the first action and final judgment has been entered in its favor. Borel has prevailed in the trial court in the second action and a final decision was issued in favor of Borel; however, on April 23, 2002, these beneficiaries moved for a new trial. The third case has been held in abeyance by the trial court for several years pending disposition of the first two matters. Adverse developments in these lawsuits could have a material adverse effect on Borel's business or the combined business of the Banks. For a more detailed description of this litigation, see "Legal Proceedings."

Item 3. Qualitative and Quantitative Disclosures about Market Risk

For information related to this item, see the Company's December 31, 2001 Form 10-K, Item 7A—Interest Rate Sensitivity and Market Risk. No material changes have occurred since that date.

PART II. Other Information

Item 1. Legal Proceedings

On June 7, 2000, one of the Company's subsidiaries (Westfield Capital Management Company, Inc.) (the "subsidiary") received correspondence on behalf of a former client, the Retirement Board of Allegheny County (the "plaintiff"), claiming that the subsidiary is responsible for underperformance of allegedly $5.1 million when compared to the plaintiff's performance targets. On January 11, 2001, a pleading was filed in Pennsylvania state court on behalf of the plaintiff stating that an action has been commenced against the subsidiary, but containing no allegations.

On or about May 3, 2002, a complaint was filed against the subsidiary in the Allegheny County Court of Common Pleas in Pittsburgh, Pennsylvania, on behalf of the plaintiff. The complaint alleges that the subsidiary's management of the plaintiff's assets resulted in underperformance resulting in a loss of "more than $4 million." The complaint purports to state claims of common law breach of contract, professional negligence, and breach of fiduciary duty, as well as a claim under the Pennsylvania unfair trade practices statute, and seeks an award of damages. The complaint also raises claims against a third party investment monitor arising out of the same facts. We intend to defend this matter vigorously.

Since 1984, Borel has served as the trustee of a private family trust known as the Andre LeRoy Trust. There have been three actions involving Borel relating to the management and proposed sale of certain real property (known as the Guadalupe Oil Field), owned by the Andre LeRoy Trust and another private family trust (for which Bankers Trust is the trustee). In the first action ("Removal Action"), certain beneficiaries of the Andre LeRoy Trust, petitioned for removal of Borel as trustee, claiming that Borel had breached its fiduciary duties concerning the management of oil and gas leases, and, following discovery of environmental contamination of the property, negotiating a proposed Settlement Agreement and Purchase and Sale Agreement to sell the Guadalupe Oil Field to Union Oil Company of California (d/b/a UNOCAL), the operator of the Guadalupe Oil Field.

In the second action ("Approval Action"), Borel requested court approval of the proposed Settlement Agreement and Purchase and Sale Agreement. Borel prevailed in both the Removal Action and Approval Action in the trial court, and plaintiffs appealed those decisions. In February 2001, the California Court of Appeal affirmed the findings and decisions of the trial court in the Removal Action and remanded the Approval Action for limited reconsideration by the trial court. Final judgment in the Removal Action was entered in favor of Borel in March 2001. On March 18, 2002, on remand in the Approval Action, the trial court issued a statement of decision confirming its decision in favor of Borel approving the proposed Settlement Agreement and Purchase and Sale Agreement. On April 23, 2002, the plantif beneficiaries filed a notice of intention to file for a new trial. No date for a hearing and decision has been scheduled.

In the third matter ("Damages Action"), the same plaintiff beneficiaries claimed damages against Borel and Bankers Trust for alleged mismanagement of the Andre LeRoy Trust and the other family trust in connection with oil and gas leases and the proposed sale of the Guadalupe Oil Field. In the Damages Action, plaintiffs claimed damages of $234.2 million, but that amount was unsubstantiated and the component elements of damages plaintiffs identified did not total that amount. In the trial of the Approval Action, plaintiffs submitted expert testimony of damages in the amount of $102 million, but the court found such evidence unpersuasive.

Borel will continue to vigorously litigate the remaining matters. While the ultimate results of these proceedings cannot be predicted with certainty, at the present time, Borel's management, based on consultation with legal counsel, believes there is no basis to conclude that liability with respect to these matters is probable or that such liability can be reasonably estimated.

The Company is also involved in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, final disposition of these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company.

We also incorporate by reference all of the discussions concerning legal proceedings included in our Registration Statement on Form S-4 originally filed with the SEC on August 16, 2001. (SEC File No. 333-67746), as amended through the date hereof.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of the Security Holders

None.

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits.

None.

(b): Reports on Form 8-K

None.

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 15, 2002				/s/ TIMOTHY L. VAILL Timothy L. Vaill Chairman and Chief Executive Officer
May 15, 2002				/s/ WALTER M. PRESSEY Walter M. Pressey President and Chief Financial Officer

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Boston Private Financial (BPFH) 10-Q2002 Q1 Quarterly report

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