As filed with the Securities and Exchange Commission on May 11, 2000
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
OR
|_| 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 04-2976299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
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 (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, 2000:
COMMON STOCK - PAR VALUE $1.00 11,702,513 SHARES
------------------------------ -----------------
(class) (outstanding)
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 - 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 10 - 16
Item 3 Quantitative and Qualitative Disclosures about Market Risk......... 17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings ................................................. 17
Item 2 Changes in Securities and Use of Proceeds ......................... 17
Item 3 Defaults upon Senior Securities ................................... 17
Item 4 Submission of Matters to a Vote of Security Holders ............... 17
Item 5 Other Information ................................................. 17
Item 6 Exhibits and Reports on Form 8-K .................................. 17
Signature Page .................................................... 18
2
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999
---------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS:
Cash and due from banks ............................................... $ 25,244 $ 11,190
Federal funds sold .................................................... 29,000 --
Investment securities available for sale (amortized cost of $86,665
and $75,424, respectively) .......................................... 84,913 73,605
Mortgage-backed securities available for sale (amortized cost of $4,951
and $5,627, respectively) ........................................... 4,832 5,510
Loans receivable:
Commercial .......................................................... 194,604 190,817
Residential mortgage ................................................ 245,547 234,185
Home equity ......................................................... 23,815 25,039
Other ............................................................... 368 347
--------- ---------
Total loans....................................................... 464,334 450,388
Less allowance for loan losses ......................................... (5,666) (5,336)
--------- ---------
Net loans ........................................................ 458,668 445,052
Stock in the Federal Home Loan Bank of Boston ......................... 4,830 4,830
Premises and equipment, net ........................................... 5,085 4,739
Excess of cost over net assets acquired, net .......................... 2,944 3,015
Fees receivable ....................................................... 5,260 6,320
Accrued interest receivable ........................................... 3,520 3,597
Other assets .......................................................... 7,222 9,515
--------- ---------
Total assets ..................................................... $ 631,518 $ 567,373
========= =========
LIABILITIES:
Deposits .............................................................. $ 482,000 $ 420,535
Securities sold under agreements to repurchase ........................ 27,227 16,551
FHLB borrowings ....................................................... 74,613 80,672
Accrued interest payable .............................................. 1,261 1,281
Other liabilities ..................................................... 5,031 9,189
--------- ---------
Total liabilities ................................................ 590,132 528,228
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 30,000,000 shares
issued: 11,693,813 shares in 2000 and 11,616,070 shares in 1999 .... 11,694 11,616
Additional paid-in capital ............................................ 12,864 12,341
Retained earnings ..................................................... 18,180 16,747
Stock subscriptions receivable ........................................ (154) (320)
Accumulated other comprehensive income (loss) ......................... (1,198) (1,239)
--------- ---------
Total stockholders' equity ....................................... 41,386 39,145
--------- ---------
Total liabilities and stockholders' equity .......................... $ 631,518 $ 567,373
========= =========
3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------------------------------
2000 1999
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Interest and dividend income:
Loans .................................................................... $ 8,869 $ 6,960
Taxable investment securities ............................................ 592 358
Non-taxable investment securities ........................................ 376 252
Mortgage-backed securities ............................................... 75 169
FHLB stock dividends ..................................................... 81 76
Federal funds sold ....................................................... 440 132
Deposits in banks ........................................................ 35 28
------------ ------------
Total interest and dividend income ................................... 10,468 7,975
------------ ------------
Interest expense:
Deposits ................................................................. 3,887 2,760
FHLB borrowings .......................................................... 1,174 1,072
Securities sold under agreements to repurchase ........................... 252 79
Federal funds purchased and other ........................................ 9 38
------------ ------------
Total interest expense ............................................... 5,322 3,949
------------ ------------
Net interest income .................................................. 5,146 4,026
Provision for loan losses ................................................ 300 238
------------ ------------
Net interest income after provision for loan losses .................. 4,846 3,788
------------ ------------
Fees and other income:
Investment management and trust .......................................... 5,736 4,207
Financial planning fees .................................................. 795 746
Equity in earnings (losses) of partnerships .............................. (174) 90
Deposit account service charges .......................................... 57 69
Gain on sale of loans .................................................... 6 44
Gain on sale of investment securities .................................... -- 46
Other .................................................................... 85 116
------------ ------------
Total fees and other income .......................................... 6,505 5,318
------------ ------------
Operating expense:
Salaries and employee benefits ........................................... 5,974 4,833
Occupancy and equipment .................................................. 1,082 656
Professional services .................................................... 319 372
Marketing and business development ....................................... 517 320
Contract services and processing ......................................... 322 253
Amortization of intangibles .............................................. 71 70
Other .................................................................... 491 437
------------ ------------
Total operating expense .............................................. 8,776 6,941
------------ ------------
Income before income taxes ........................................... 2,575 2,165
Income tax expense ....................................................... 794 676
------------ ------------
Income before cumulative effect of change in accounting principle .... 1,781 1,489
Cumulative effect of change in accounting principle ...................... -- 125
------------ ------------
Net income ........................................................ $ 1,781 $ 1,364
============ ============
Per share data:
Basic earnings per share:
Income before cumulative effect of change in accounting principle $ 0.15 $ 0.13
Cumulative effect of change in accounting principle ............. (0.00) (0.01)
------------ ------------
Net income ...................................................... $ 0.15 $ 0.12
============ ============
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.15 $ 0.12
Cumulative effect of change in accounting principle ............. (0.00) (0.01)
============ ============
Net income ...................................................... $ 0.15 $ 0.11
============ ============
Average common shares outstanding ...................................... 11,674,426 11,543,615
============ ============
Average diluted shares outstanding ..................................... 12,025,502 11,883,695
============ ============
4
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, 1998 ..... $ 11,513 $ 11,932 $ 9,551 $ (495) $ 112 $32,613
Net income ..................... -- -- 1,364 -- -- 1,364
Other comprehensive income, net:
Change in unrealized gain
(loss) on securities available
for sale ....................... -- -- -- -- (304) (304)
--------
Total other comprehensive income 1,060
Proceeds from issuance of
47,769 shares of common stock 48 328 -- -- -- 376
Stock options exercised ......... 18 36 -- -- -- 54
Stock subscription payments ..... -- -- -- 163 -- 163
======== ======== ======== ======== ======== ========
Balance at March 31, 1999 ......... $ 11,579 $ 12,296 $ 10,915 $ (332) $ (192) $ 34,266
======== ======== ======== ======== ======== ========
Balance at December 31, 1999 ...... $ 11,616 $ 12,341 $ 16,747 $ (320) $ (1,239) $ 39,145
Net income ...................... -- -- 1,781 -- -- 1,781
Other comprehensive income, net:
Change in unrealized gain (loss)
on securities available
for sale ...................... -- -- -- -- 41 41
--------
Total other comprehensive
income ........................ 1,822
Dividends paid to shareholders .. -- -- (348) -- -- (348)
Proceeds from issuance of
66,793 shares of common
stock ......................... 67 505 -- -- -- 572
Stock options exercised ......... 11 18 -- -- -- 29
Stock subscription payments ..... -- -- -- 166 -- 166
======== ======== ======== ======== ======== ========
Balance at March 31, 2000 ........ $ 11,694 $ 12,864 $ 18,180 $ (154) $ (1,198) $ 41,386
======== ======== ======== ======== ======== ========
5
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income ............................................................... $ 1,781 $ 1,364
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization ........................................ 414 439
Gain on sale of loans ................................................ (6) (44)
Gain on sale of investment securities ................................ -- (46)
Provision for loan losses ............................................ 300 238
Distributed (undistributed) earnings of partnership investments ...... 2,231 1,738
Loans originated for sale ............................................ (1,000) (5,487)
Proceeds from sale of loans .......................................... 1,006 5,531
(Increase) decrease in:
Accrued interest receivable ..................................... 77 (160)
Investment management fees receivable ........................... 1,060 (18)
Other assets .................................................... 38 (382)
Increase (decrease) in:
Accrued interest payable ........................................ (20) 527
Other liabilities ............................................... (4,158) (2,773)
-------- --------
Net cash provided (used) by operating activities ............ 1,723 927
-------- --------
Cash flows from investing activities:
Net decrease (increase) in fed funds sold ................................ (29,000) 4,000
Investment securities available for sale:
Purchases ............................................................ (14,016) (40,444)
Sales ................................................................ -- 27,105
Maturities ........................................................... 2,635 6,040
Mortgage-backed securities available for sale:
Sales ................................................................ -- 3,387
Principal payments ................................................... 669 895
Net decrease (increase) in loans ......................................... (13,880) (25,247)
Recoveries on loans previously charged off ............................... 36 24
Capital expenditures ..................................................... (614) (145)
-------- --------
Net cash provided (used) by investing activities ............ (54,170) (24,385)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits ...................................... 61,465 28,834
Net increase (decrease) in repurchase agreements ......................... 10,676 3,785
FHLB advances:
Proceeds ............................................................. -- 3,629
Repayments ........................................................... (6,059) (8,636)
Proceeds from stock subscriptions receivable ............................. 166 163
Dividends paid to stockholders ........................................... (348) --
Proceeds from issuance of common stock ................................... 601 430
-------- --------
Net cash provided (used) by financing activities ............ 66,501 28,205
-------- --------
Net increase (decrease) in cash and due from banks ....................... 14,054 4,747
Cash and due from banks at beginning of year ............................. 11,190 12,949
-------- --------
Cash and due from banks at end of period ................................. $ 25,244 $ 17,696
======== ========
Supplementary disclosures of cash flow information:
Cash paid during the period for interest ................................. $ 5,345 $ 3,422
Cash paid during the period for income taxes ............................. 1,040 313
6
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"), Boston Private
Investment Management, Inc. ("BPIM"), and RINET Company ("RINET"). The 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. BPIM's
consolidated financial statements include the accounts of its wholly owned
subsidiary, Westfield Capital Management Company ("Westfield"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from 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 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, 1999 Annual Report to Shareholders. Certain fiscal 1999 information
has been reclassified to conform to the 2000 presentation.
(2) EARNINGS PER SHARE
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 Company. 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:
2000 1999
------------------------------ -----------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------------------------- -----------------------------
(In thousands, except per share amounts)
BASIC EPS
Net Income ..... $1,781 11,674 $0.15 $1,364 $11,544 $0.12
======= =======
EFFECT OF DILUTIVE SECURITIES
Stock Options .. -- 352 -- 340
-------------------- -------------------
DILUTED EPS
----------------------------- -----------------------------
Net Income ..... $1,781 $12,026 $0.15 $1,364 $11,884 $0.11
7
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) BUSINESS SEGMENTS
MANAGEMENT REPORTING
The Company has three reportable segments, the Bank, Westfield, and RINET.
The financial performance of the Company is managed and evaluated by business
segment. The segments are managed separately because each business is a company
with different clients, employees, systems, risks, and marketing strategies.
DESCRIPTION OF BUSINESS SEGMENTS
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products to high net
worth individuals, their families and businesses in the greater Boston area and
New England and, to a lesser extent, Europe and Latin America. The Bank offers
its clients a broad range of basic deposit services, including checking and
savings accounts, with automated teller machine ("ATM") access, and cash
management services through sweep accounts and repurchase agreements. The Bank
also offers commercial, residential mortgage, home equity and consumer loans. In
addition, it provides investment advisory and asset management services,
securities custody and safekeeping services, trust and estate administration and
IRA and Keogh accounts. The Bank's investment management emphasis is on
large-cap equity and actively managed fixed income portfolios.
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 five
limited partnerships. Its investment services include a particular focus on
identifying and managing small and mid cap equity positions as well as balanced
growth accounts.
RINET provides fee-only financial planning, tax planning and 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,
and alternative investment analysis.
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, 2000 and 1999.
2000
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income .......... $ 5,146 $ 13 $ -- $ -- $ (13) $ 5,146
Non-Interest Income .......... 2,399 3,310 796 -- -- 6,505
-------- -------- -------- ---------- -------- --------
Total Revenues .............. 7,545 3,323 796 -- (13) 11,651
Provision for Loan Losses ....... 300 -- -- -- -- 300
Non-Interest Expense ............ 5,776 2,379 621 -- -- 8,776
Income Taxes .................... 336 387 71 -- -- 794
======== ======== ======== ========== ======== ========
Segment Profit .................. $ 1,133 $ 557 $ 104 $ -- $ (13) $ 1,781
======== ======== ======== ========== ======== ========
BALANCE SHEET DATA:
Total Segment Assets ............ $625,061 $ 6,686 $ 996 $ 1,500 $ (2,725) $631,518
======== ======== ======== ========== ======== ========
8
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income .......... $ 4,026 $ 31 $ -- $ -- $ (31) $ 4,026
Non-Interest Income .......... 2,052 2,508 758 -- -- 5,318
--------- --------- --------- ---------- ---------- ---------
Total Revenues .............. 6,078 2,539 758 -- (31) 9,344
Provision for Loan Losses ....... 238 -- -- -- -- 238
Non-Interest Expense ............ 4,440 1,933 693 -- -- 7,066
Income Taxes .................... 401 248 27 -- -- 676
========= ========= ========= ========== ========== =========
Segment Profit .................. $ 999 $ 358 $ 38 $ -- $ (31) $ 1,364
========= ========= ========= ========== ========== =========
BALANCE SHEET DATA:
Total Segment Assets ............ $ 480,673 $ 3,821 $ 685 $ 1,805 $ (2,149) $ 484,935
========= ========= ========= ========== ========== =========
(4) RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. Under this Statement, an entity that elects
to apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No.137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". The Statements are effective for fiscal years beginning
after June 15, 2000, and are not expected to have a material impact on the
Company's consolidated financial statements.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2000
THIS QUARTERLY REPORT CONTAINS CERTAIN STATEMENTS THAT MAY BE CONSIDERED
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER FACTORS,
CHANGES IN LOAN DEFAULTS AND CHARGE-OFF RATES, REDUCTION IN DEPOSIT LEVELS
NECESSITATING INCREASED BORROWING TO FUND LOANS AND INVESTMENTS, CHANGES IN
INTEREST RATES, FLUCTUATIONS IN ASSETS UNDER MANAGEMENT AND OTHER SOURCES OF FEE
INCOME, CHANGES IN ASSUMPTIONS USED IN MAKING SUCH FORWARD-LOOKING STATEMENTS,
AS WELL AS THE FACTORS LISTED UNDER "RISK FACTORS AND FACTORS AFFECTING FORWARD
LOOKING STATEMENTS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999.
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. On
October 15, 1999, the Company acquired RINET, a Massachusetts corporation
engaged in providing financial planning and asset allocation services to high
net worth individuals and families, in exchange for 765,697 newly issued shares
of the Company's common stock. Each acquisition was accounted for as a "pooling
of interests." Accordingly, the results of operations of the Company reflect the
financial position and the results of operations including Westfield and RINET
on a consolidated basis for all periods presented.
The Company conducts substantially all of its business through its wholly
owned operating subsidiaries, the Bank, Westfield, and RINET. A description of
each subsidiary is provided in Note 3 to the Consolidated Financial Statements.
FINANCIAL CONDITION
TOTAL ASSETS. Total assets increased $64.1 million, or 11.3% from $567.4
million at December 31, 1999 to $631.5 million at March 31, 2000. This increase
is due to deposit growth, which was used to fund new loans and purchase
investment securities.
INVESTMENTS. Total investments (consisting of cash, federal funds sold,
investment securities, mortgage-backed securities, and stock in the FHLB of
Boston) were $148.8 million, or 23.6% of total assets, at March 31, 2000,
compared to $95.1 million, or 16.8% of total assets, at December 31, 1999. Of
the $53.7 million increase in investments during the first quarter of 2000,
$43.1 million was due to higher deposit balances, which resulted in an increase
in cash and federal funds sold at quarter end. The remaining $10.6 million
increase is due to funding of the investment portfolio. 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 bank liquidity.
10
The following table is a summary of investment and mortgage-backed
securities available for sale as of March 31, 2000 and December 31, 1999:
Amortized Unrealized Market
---------------------
Cost Gains Losses Value
------------ ---------- ---------- -------------
AT MARCH 31, 2000
U.S. Government and agencies ........ $ 42,169 $ 4 $ (1,305) $ 40,868
Municipal bonds ..................... 44,496 5 (456) 44,045
Mortgage-backed securities .......... 4,951 -- (119) 4,832
============ ========= =========== =============
Total investments ................ $ 91,616 $ 9 $ (1,880) $ 89,745
============ ========= =========== =============
AT DECEMBER 31, 1999
U.S. Government and agencies $ 36,174 $ -- $ (1,362) $ 34,812
Municipal bonds 39,250 2 (459) 38,793
Mortgage-backed securities 5,627 -- (117) 5,510
============ ========= =========== =============
Total investments $ 81,051 $ 2 $ (1,938) $ 79,115
============ ========= =========== =============
LOANS. Total loans increased $13.9 million, or 3.1%, during the first
quarter of 2000 from $450.4 million, or 79.4% of total assets, at December 31,
1999, to $464.3 million, or 73.5% of total assets, at March 31, 2000. Both the
commercial and residential mortgage loan portfolios continued to experience
growth due to the strong local economy and demand for financing. Commercial
loans increased $3.8 million, or 2.0%, and residential mortgage loans increased
$11.4 million, or 4.9%, during the first quarter of 2000 as a result of net new
loan originations.
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, DECEMBER 31,
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
Loans accounted for on a nonaccrual basis ........ $1,707 $1,317
Loans past due 90 days or more, but still accruing -- --
------ ------
Total non-performing loans ....................... 1,707 1,317
Other real estate owned .......................... -- --
====== ======
Total non-performing assets ...................... $1,707 $1,317
====== ======
Delinquent loans 30-89 days past due ............. $2,438 $2,042
====== ======
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.
Total non-performing assets increased by $390,000, or 29.6% during the
first quarter of 2000. However, the percentage of non-performing assets to total
assets remained fairly stable at 0.27% as of March 31, 2000, compared to 0.23%
as of December 31, 1999. 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, 2000, loans with an aggregate balance of $2.4 million, or
0.53% of total loans, were 30 to 89 days past due, an increase of $396,000, or
19.4%, from $2.0 million, or 0.45% of total loans, reported at December 31,
1999. Most of these loans are adequately secured and management's success in
keeping these borrowers current varies from month to month.
11
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a charge to operations. When management believes that the collectibility
of a loan's principal balance is unlikely, the principal amount is charged
against the allowance. Recoveries on loans which have been previously charged
off are credited to the allowance as received.
The allowance for loan losses is 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. Periodic loan reviews are performed to individually assess the
inherent risk and assign risk ratings to each loan. Coverage percentages applied
are determined based on industry practice and management's judgement. The
specific component is established by allocating a portion of the allowance for
loan losses to individual classified loans on the basis of specific
circumstances and assessments. The unallocated component supplements the first
two components based on management's judgement of the effect of current and
forecasted economic conditions on the borrowers' abilities to repay, an
evaluation of the allowance for loan losses in relation to the size of the
overall loan portfolio, and consideration of the relationship of the allowance
for loan losses to non-performing 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 rely to a great extent on the judgement and experience of
management.
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review a financial
institution's allowance for loan losses. Such agencies may require the financial
institution to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
The following table is an analysis of the Bank's allowance for loan losses
for the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
Ending gross loans ........................... $ 464,334 $ 374,305
========= =========
Allowance for loan losses, beginning of period $ 5,336 $ 4,386
Provision for loan losses ................. 300 238
Charge-offs ............................... (6) (7)
Recoveries ................................ 36 24
========= =========
Allowance for loan losses, end of period ..... $ 5,666 $ 4,641
========= =========
DEPOSITS AND BORROWINGS. The Company experienced an increase in total
deposits of $61.5 million, or 14.6%, during the first quarter of 2000, from
$420.5 million, or 74.1% of total assets, at December 31, 1999, to $482.0
million, or 76.3% of total assets, at March 31, 2000. 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 quarter of 2000. Most of the
deposit increase was in demand deposits, NOW accounts, and money market
accounts.
12
The following table shows the composition of the Company's deposits at
March 31, 2000 and December 31, 1999:
MARCH 31, 2000 DECEMBER 31, 1999
--------------------- ---------------------
AS A % OF AS A % OF
BALANCE TOTAL BALANCE TOTAL
------- --------- ------- ---------
Demand deposits ........................... $ 87,397 18.1% $ 53,058 12.6%
NOW ....................................... 52,482 10.9 40,875 9.7
Savings ................................... 4,169 0.9 4,607 1.1
Money Market .............................. 251,352 52.1 238,513 56.7
Certificates of deposit under $100,000 .... 20,968 4.4 22,394 5.3
Certificates of deposit $100,000 or greater 65,632 13.6 61,088 14.5
-------- ----- -------- -----
Total ................................... $482,000 100.1% $420,535 100.1%
======== ===== ======== =====
Total borrowings (consisting of securities sold under agreements to
repurchase ("repurchase agreements"), federal funds purchased, and FHLB
borrowings) increased by $4.6 million or 4.7%, during the first three months of
2000. This increase was attributable to an increase in repurchase agreements
with cash management customers of the Bank, partially offset by paydowns of FHLB
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 investment management fees, financial planning
fees, deposit inflows, loan repayments, borrowed funds, and maturity and sales
of investment securities. These sources fund the Company's lending and
investment activities.
Management is responsible for establishing and monitoring liquidity targets
as well as strategies to meet these targets. At March 31, 2000, cash, federal
funds sold and securities available for sale amounted to $144.0 million, or
22.8% of total assets of the Company. This compares to $90.3 million, or 15.9%
of total assets, at December 31, 1999.
In general, the Bank maintains a liquidity target of 10% to 20% of total
assets. The Bank is a member of the FHLB of Boston and as such has access to
both short and long-term borrowings of up to $195.3 million as of March 31,
2000. In addition, the Bank maintains short-term lines of credit at the Federal
Reserve Bank and other correspondent banks totaling $79.0 million, and has
established brokered certificate of deposit lines with several institutions
aggregating $120.0 million. Management believes that the Bank has adequate
liquidity to meet its commitments for the foreseeable future.
Westfield's primary source of liquidity consists of investment management
fees that are collected on a quarterly basis. At March 31, 2000 Westfield had
working capital of approximately $3.2 million. Management believes that
Westfield has adequate liquidity to meet its commitments for the foreseeable
future.
RINET's primary source of liquidity consists of financial planning fees
that are collected on a quarterly basis. At March 31, 2000 RINET had working
capital of approximately $300,000. Management believes that RINET has adequate
liquidity to meet its commitments for the foreseeable future.
The Company's primary sources of funds are dividends from its subsidiaries,
issuance of its Common Stock and borrowings. Management believes that the
Company has adequate liquidity to meet its commitments for the foreseeable
future.
13
CAPITAL RESOURCES. Total stockholders' equity of the Company at March 31,
2000 was $41.4 million or 6.55% of total assets, compared to $39.1 million, or
6.90% of total assets at December 31, 1999. This increase was the result of the
Company's net income for the quarter of $1.8 million, combined with common stock
issued in connection with stock grants 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, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Similarly, the Company is also subject to capital
requirements administered by the Federal Reserve Bank with respect to certain
non-banking activities, including adjustments in connection with off-balance
sheet items.
The following table presents actual capital amounts and regulatory capital
requirements as of March 31, 2000 and December 31, 1999:
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
AS OF MARCH 31, 2000:
Total risk-based capital
Company ............ $34,548 11.78% $23,462 >8.0% $29,328 >10.0
Bank ............... 38,277 10.53 29,078 8.0 36,347 10.0
Tier I risk-based
Company ............ 30,870 10.53 11,731 4.0 17,597 6.0
Bank ............... 33,720 9.28 14,539 4.0 21,808 6.0
Tier I leverage capital
Company ............ 30,870 6.60 18,706 4.0 23,383 5.0
Bank ............... 33,720 5.72 23,574 4.0 29,468 5.0
AS OF DECEMBER 31, 1999:
Total risk-based capital
Company ............ $41,792 11.84% $28,232 >8.0% $35,290 >10.0
Bank ............... 36,837 10.72 27,495 8.0 34,368 10.0
Tier I risk-based
Company ............ 37,369 10.59 14,116 4.0 21,174 6.0
Bank ............... 32,528 9.46 13,747 4.0 20,621 6.0
Tier I leverage capital
Company ............ 37,369 6.79 22,006 4.0 27,507 5.0
Bank ............... 32,528 5.99 21,720 4.0 27,150 5.0
14
RESULTS OF OPERATIONS
NET INCOME. The Company recorded net income of $1.8 million, or $0.15 per
diluted share, for the quarter ended March 31, 2000. This represents a 30.6%
increase over the net income of $1.4 million, or $0.11 per diluted share, for
the same period in 1999. During the quarter ended March 31, 1999, the Company
implemented an accounting change that resulted in a non-recurring charge of
$125,000. Excluding the impact of this non-recurring charge, net income would
have been $1.5 million, or $0.12 per diluted share for the first quarter of
1999.
NET INTEREST INCOME. For the quarter ended March 31, 2000, net interest
income was $5.1 million, an increase of $1.1 million, or 27.8%, over the same
period in 1999. This increase was primarily attributable to an increase of
$120.5 million, or 27.0%, in the average balance of earning assets. The
Company's net interest margin increased 6 basis points to 3.71% for the first
quarter of 2000, compared to 3.65% for the same period last year.
INTEREST INCOME. During the first three months of 2000, interest income was
$10.5 million, an increase of $2.5 million, or 31.3%, over the same period in
1999. Interest income on commercial loans increased 20.5% to $4.2 million for
the three months ended March 31, 2000, compared to $3.5 million for the same
period in 1999. Interest income from residential mortgage loans increased 33.9%
to $4.1 million compared to $3.1 million, and home equity and other loans
increased 39.2% to $526,000 compared to $379,000, for the same periods,
respectively. These increases were primarily due to an increase in both loan
volume and yield. The average balance of commercial loans increased 11.5% while
the average rate increased 8.1%, or 69 basis points to 9.20% for the quarter
ended March 31, 2000. The average balance of residential mortgage loans
increased 36.0%, while the average rate decreased 1.5%, or 10 basis points to
6.81% for the same period, and the average balance of home equity and other
loans increased 21.8%, while the average rate increased 14.2%, or 107 basis
points to 8.64%.
Total investment income increased $584,000, or 57.5%, to $1.6 million for
the quarter ended March 31, 2000, compared to $1.0 million for the same period
in 1999. This increase was due to a 40.0% increase in the average balance of
investments and an 11.7% increase in the average tax-equivalent yield to 6.09%
for the first quarter of 2000, compared to 5.45% for the same period in 1999.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $1.4
million, or 34.8%, to $5.3 million for the three months ended March 31, 2000,
from $3.9 million for the same period during 1999. This increase in the
Company's interest expense reflects an increase in the average balance of
interest-bearing liabilities of $103.9 million, or 26.9% between the two
periods, combined with a 5.6% increase in the average cost of interest-bearing
liabilities to 4.35% for the first quarter of 2000, compared to 4.12% for the
same period in 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $300,000 for
the quarter ended March 31, 2000, compared to $238,000 for the same period in
1999. Management evaluates several factors including new loan originations,
estimated charge-offs, and risk characteristics of the loan portfolio when
determining the provision for loan losses. These factors include the level and
mix of loan growth, the level of non-accrual and delinquent loans, and the level
of charge-offs and recoveries. Also see discussion under "FINANCIAL CONDITION
ALLOWANCE FOR LOAN LOSSES." Net recoveries were $30,000 during the first quarter
of 2000, compared to $17,000 for the same period in 1999.
FEES AND OTHER INCOME. Fees and other income increased $1.2 million, or
22.3% to $6.5 million for the three-month period ending March 31, 2000, compared
to $5.3 million for the same period in 1999. The majority of fee income is
attributable to advisory fees earned on assets under management. These fees
increased $1.5 million, or 36.3% to $5.7 million for the first quarter of 2000
compared to $4.2 million for the same period in 1999. This increase is primarily
due to a 37.7% increase in assets under management from $2.9 billion on March
31, 1999 to $3.9 billion on March 31, 2000.
Financial planning fees have increased $49,000, or 6.6% to $795,000 for the
first quarter of 2000, compared to $746,000 for the same period in 1999. This
increase is due to due to a combination of new clients, increased services to
existing clients, and annual fee increases. Equity in earnings (losses) of
partnerships has decreased $264,000 to $(174,000) for the three months ended
March 31, 2000, compared to $90,000 for the same period in 1999. This decrease
is primarily due to a reduction in the value of Westfield's general partnership
interest in its hedge funds.
15
Deposit account service fees have decreased $12,000, or 17.4%, to $57,000
for the first quarter of 2000 as a result of a lower level of overdraft charges
and other fees assessed based on client activity. Gain on sale of loans has
decreased $38,000 to $6,000 due to the fact that interest rates have increased,
reducing the demand for fixed rate mortgage loans that are typically sold in the
secondary market. Other fee income decreased $31,000 to $85,000 due to a lower
level of non-amortized commercial loan fees.
OPERATING EXPENSE. Total operating expense for the first quarter of 2000
increased $1.8 million, or 26.4% to $8.8 million compared to $6.9 million for
the same period in 1999. This increase in total operating expense was
attributable to the Company's continued growth and expansion. The Company has
experienced a 30.2% increase in total balance sheet assets, a 37.7% increase in
client assets under management, and an 11.7% increase in the number of employees
from March 31, 1999 to March 31, 2000. In addition, the Company has expanded its
facilities at its headquarters at Ten Post Office Square, Boston, Massachusetts
and began leasing space for a new banking office as of February 1, 2000.
Salaries and benefits, the largest component of operating expense,
increased $1.1 million, or 23.6%, to $6.0 million for the quarter ended March
31, 2000, from $4.8 million for the same period in 1999. This increase was due
to a higher level of employee incentive compensation, an 11.7% increase in the
number of employees, normal salary increases, and the related taxes thereon.
Occupancy and equipment expense increased $426,000, or 64.9%, to $1.1
million for the first quarter of 2000, from $656,000 for the same period last
year. This increase was primarily attributable to higher depreciation expense as
a result of the Company's continued investments in technology, and the increased
occupancy expenses related to expansion at Ten Post Office Square, Boston,
Massachusetts, and the new banking office in the Back Bay area of Boston,
Massachusetts.
Professional services include legal fees, consulting fees, and other
professional services such as audit and tax preparation. These expenses
decreased $53,000, or 14.2% due to the fact that the Company had one-time legal
and consulting expenses related to Year 2000 readiness during the first quarter
of 1999.
Marketing and business development increased $197,000, or 61.6%, to
$517,000 for the first quarter of 2000. Of this increase $153,000 was as a
result of increased image advertising designed to increase the visibility of the
Company and its products and services. The remaining increase of $43,000 was 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 $69,000, or 27.3% as a
result of increased service and volume related charges for data processing and
custody.
Other expenses include supplies, telephone, postage, publications and
subscriptions, and other miscellaneous business expenses. These expenses have
increased $54,000, or 12.4% to $491,000, 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 $794,000 for
the first quarter of 2000 as compared to $676,000 for the same period last year.
The effective tax rate was 30.8% and 31.2% for the two periods, respectively.
The decrease in the Company's effective tax rate is a result of a higher
percentage of non-taxable investment income, and an increase in the amount of
low income housing tax credits.
16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to this item, see the Company's December 31, 1999
Form 10-K, 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, 1999
Form 10-K. 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
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1 Limited Liability Company Agreement of Westfield Partners,
L.L.C.
Exhibit 10.2 Fist Amendment to Limited Liability Company Agreement of
Westfield Partners, L.L.C.
Exhibit 10.3 Second Amendment to Limited Liability Company Agreement of
Westfield Partners, L.L.C.
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K filed on January 21, 2000.
Items reported: Fourth quarter 1999 results and dividend
17
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 11, 2000 /S/ TIMOTHY L. VAILL
- ------------ -------------------------------------------------
Timothy L. Vaill
Chairman and Chief
Executive Officer
MAY 11, 2000 /S/ WALTER M. PRESSEY
- ------------ -------------------------------------------------
Walter M. Pressey
Executive Vice President and
Chief Financial Officer
18