As filed with the Securities and Exchange Commission on August 14, 2000
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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 JUNE 30, 2000
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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 of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of July 31, 2000:
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Common Stock - Par Value $1.00 11,779,088 shares
------------------------------ -----------------
(class) (outstanding)
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 18
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities and Use of Proceeds 19
Item 3 Defaults upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 20
Signature Page 21
2
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS:
Cash and due from banks $ 39,426 $ 11,190
Federal funds sold 25,000 --
Investment securities available for sale (amortized cost of
$117,681 and $75,424, respectively) 116,056 73,605
Mortgage-backed securities available for sale (amortized cost of
$4,002 and $5,627, respectively) 3,916 5,510
Loans receivable:
Commercial 225,576 190,817
Residential mortgage 270,282 234,185
Home equity 24,556 25,039
Other 408 347
--------- ---------
Total loans 520,822 450,388
Less allowance for loan losses (6,224) (5,336)
--------- ---------
Net loans 514,598 445,052
Stock in the Federal Home Loan Bank of Boston 4,830 4,830
Premises and equipment, net 5,452 4,739
Excess of cost over net assets acquired, net 2,873 3,015
Fees receivable 5,564 6,320
Accrued interest receivable 4,812 3,597
Other assets 8,009 9,515
--------- ---------
Total assets $ 730,536 $ 567,373
========= =========
LIABILITIES:
Deposits $ 575,525 $ 420,535
Securities sold under agreements to repurchase 29,420 16,551
FHLB borrowings 74,468 80,672
Accrued interest payable 1,340 1,281
Other liabilities 6,162 9,189
--------- ---------
Total liabilities 686,915 528,228
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 30,000,000 shares
issued: 11,776,488 shares at June 30, 2000 and
11,616,070 shares at December 31, 1999 11,776 11,616
Additional paid-in capital 13,077 12,341
Retained earnings 20,016 16,747
Stock subscriptions receivable (153) (320)
Accumulated other comprehensive income (loss) (1,095) (1,239)
--------- ---------
Total stockholders' equity 43,621 39,145
--------- ---------
Total liabilities and stockholders' equity $ 730,536 $ 567,373
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and dividend income:
Loans $ 10,019 $ 7,409 $ 18,888 $ 14,369
Taxable investment securities 793 346 1,385 704
Non-taxable investment securities 434 296 810 548
Mortgage-backed securities 60 102 134 272
FHLB stock dividends 87 75 168 150
Federal funds sold and other 692 138 1,167 298
------------ ------------ ------------ ------------
Total interest and dividend income 12,085 8,366 22,552 16,341
------------ ------------ ------------ ------------
Interest expense:
Deposits 4,682 2,855 8,568 5,615
FHLB borrowings 1,106 1,105 2,280 2,177
Securities sold under agreements to repurchase 335 106 587 185
Federal funds purchased and other 1 25 10 63
------------ ------------ ------------ ------------
Total interest expense 6,124 4,091 11,445 8,040
------------ ------------ ------------ ------------
Net interest income 5,961 4,275 11,107 8,301
Provision for loan losses 500 186 800 424
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 5,461 4,089 10,307 7,877
------------ ------------ ------------ ------------
Fees and other income:
Investment management and trust 5,856 4,381 11,593 8,589
Financial planning fees 844 650 1,638 1,396
Equity in earnings (losses) of partnerships (66) -- (241) 90
Deposit account service charges 73 84 130 153
Gain on sale of loans 4 39 10 83
Gain on sale of investment securities -- -- -- 46
Other 180 152 265 267
------------ ------------ ------------ ------------
Total fees and other income 6,891 5,306 13,395 10,624
------------ ------------ ------------ ------------
Operating expense:
Salaries and employee benefits 6,148 4,773 12,122 9,605
Occupancy and equipment 1,111 674 2,193 1,329
Professional services 443 362 761 734
Marketing and business development 503 329 1,021 648
Contract services and processing 325 270 647 523
Amortization of intangibles 71 71 142 142
Other 575 479 1,066 918
------------ ------------ ------------ ------------
Total operating expense 9,176 6,958 17,952 13,899
------------ ------------ ------------ ------------
Income before income taxes 3,176 2,437 5,750 4,602
Income tax expense 989 787 1,782 1,462
------------ ------------ ------------ ------------
Income before cumulative effect of change in accounting
principle 2,187 1,650 3,968 3,140
Cumulative effect of change in accounting principle -- -- -- 125
------------ ------------ ------------ ------------
Net income $ 2,187 $ 1,650 $ 3,968 $ 3,015
============ ============ ============ ============
Per share data:
Basic earnings per share
Income before cumulative effect of change in accounting
principle $ 0.19 $ 0.14 $ 0.34 $ 0.27
Cumulative effect of change in accounting principle -- -- -- 0.01
------------ ------------ ------------ ------------
Net Income $ 0.19 $ 0.14 $ 0.34 $ 0.26
============ ============ ============ ============
Diluted earnings per share
Income before cumulative effect of change in accounting
principle $ 0.18 $ 0.14 $ 0.33 $ 0.26
Cumulative effect of change in accounting principle -- -- -- 0.01
------------ ------------ ------------ ------------
Net Income $ 0.18 $ 0.14 $ 0.33 $ 0.25
============ ============ ============ ============
Average common shares outstanding 11,719,251 11,593,726 11,696,838 11,568,670
Average diluted shares outstanding 12,155,086 11,895,859 12,089,100 11,889,953
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
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 -- -- 3,015 -- -- 3,015
Other comprehensive income, net:
Change in unrealized gain (loss)
on securities available for sale -- -- -- -- (858) (858)
-----------
Total other comprehensive income 2,157
Proceeds from issuance of
47,769 shares of common stock 48 328 -- -- -- 376
Stock options exercised 52 83 -- -- -- 135
Stock subscription payments -- -- -- 167 -- 167
============ ============= ============== ============= ================ ===========
Balance at June 30, 1999 $ 11,613 $ 12,343 $ 12,566 $ (328) $ (746) $ 35,448
============ ============= ============== ============= ================ ===========
Balance at December 31, 1999 $ 11,616 $ 12,341 $ 16,747 $ (320) $ (1,239) $ 39,145
Net income -- -- 3,968 -- -- 3,968
Other comprehensive income, net:
Change in unrealized gain
(loss) on securities
available for sale -- -- -- -- 144 144
-----------
Total other comprehensive income 4,112
Dividends paid to shareholders -- -- (699) -- -- (699)
Proceeds from issuance of
66,793 shares of common stock 67 505 -- -- -- 572
Stock options exercised 93 231 -- -- -- 324
Stock subscription payments -- -- -- 167 -- 167
============ ============= ============== ============= ================ ===========
Balance at June 30, 2000 $ 11,776 $ 13,077 $ 20,016 $ (153) $ (1,095) $ 43,621
============ ============= ============== ============= ================ ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
--------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 3,968 $ 3,015
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 845 797
Gain on sale of loans (10) (83)
Gain on sale of investment securities -- (46)
Provision for loan losses 800 424
Distributed (undistributed) earnings of partnership investments 2,289 1,738
Loans originated for sale (1,029) (8,377)
Proceeds from sale of loans 1,039 8,460
(Increase) decrease in:
Fees receivable 756 (137)
Accrued interest receivable (1,215) (606)
Other assets (864) (532)
Increase (decrease) in:
Accrued interest payable 59 567
Other liabilities (3,027) (1,110)
--------- ---------
Net cash provided (used) by operating activities 3,611 4,110
--------- ---------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold (25,000) (24,000)
Investment securities available for sale:
Purchases (53,305) (45,042)
Sales -- 31,255
Maturities 10,730 6,040
Mortgage-backed securities available for sale:
Sales -- 1,606
Principal payments 1,608 3,387
Net decrease (increase) in loans (70,283) (45,750)
Purchase of FHLB stock -- (112)
Recoveries on loans previously charged off 107 101
Capital expenditures (1,251) (336)
--------- ---------
Net cash provided (used) by investing activities (137,394) (72,851)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 154,990 57,755
Net increase (decrease) in repurchase agreements 12,869 1,886
Net increase (decrease) in federal funds purchased -- --
FHLB advances:
Proceeds 3,000 51,129
Repayments (9,204) (41,825)
Proceeds from stock subscriptions receivable 167 167
Dividends paid to stockholders (699) --
Proceeds from issuance of common stock 896 512
--------- ---------
Net cash provided (used) by financing activities 162,019 69,624
--------- ---------
Net increase (decrease) in cash and due from banks 28,236 883
Cash and due from banks at beginning of year 11,190 12,949
--------- ---------
Cash and due from banks at end of period $ 39,426 $ 13,832
========= =========
Supplementary disclosures of cash flow information:
Cash paid during the period for interest $ 11,445 $ 7,473
Cash paid during the period for income taxes 2,736 674
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 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, 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 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 THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2000 1999
------------------------------ -----------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------------------------- -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC EPS
Net Income $2,187 11,719 $0.19 $1,650 11,594 $0.14
======== ========
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 436 -- 302
--------------------- ---------------------
DILUTED EPS
----------------------------- -----------------------------
Net Income $2,187 12,155 $0.18 $1,650 11,896 $0.14
============================= =============================
7
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2000 1999
------------------------------ -----------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------------------------- -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC EPS
Net Income $3,968 11,697 $0.34 $3,015 11,569 $0.26
======== ========
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 392 -- 321
--------------------- ---------------------
DILUTED EPS
----------------------------- -----------------------------
Net Income $3,968 12,089 $0.33 $3,015 11,890 $0.25
============================= =============================
(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.
8
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2000 and 1999.
FOR THE THREE MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 5,961 $ 25 $ 1 $ -- $ (26) $ 5,961
Non-Interest Income 2,546 3,495 850 -- -- 6,891
----------- ------------ ------------ ------------- ------------- -------------
Total Revenues 8,507 3,520 851 -- (26) 12,852
Provision for Loan Losses 500 -- -- -- -- 500
Non-Interest Expense 5,964 2,497 715 -- -- 9,176
Income Taxes 514 420 55 -- -- 989
----------- ------------ ------------ ------------- ------------- -------------
Segment Profit $ 1,529 $ 603 $ 81 $ -- $ (26) $ 2,187
=========== ============ ============ ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $ 723,826 $ 7,282 $ 958 $ 896 $ (2,425) $ 730,537
=========== ============ ============ ============= ============= =============
FOR THE THREE MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 4,275 $ 16 $ -- $ -- $ (16) $ 4,275
Non-Interest Income 2,170 2,477 659 -- -- 5,306
----------- ------------ ------------ ------------- ------------- -------------
Total Revenues 6,445 2,493 659 -- (16) 9,581
Provision for Loan Losses 186 -- -- -- -- 186
Non-Interest Expense 4,490 1,821 647 -- -- 6,958
Income Taxes 507 275 5 -- -- 787
----------- ------------ ------------ ------------- ------------- -------------
Segment Profit $ 1,262 $ 397 $ 7 $ -- $ (16) $ 1,650
=========== ============ ============ ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $ 524,764 $ 4,919 $ 719 $ 1,893 $ (3,243) $ 529,052
=========== ============ ============ ============= ============= =============
The following tables are a reconciliation of the revenues, net income, assets,
and other significant items of reportable segments as of and for the year to
date periods ended June 30, 2000 and 1999.
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 11,107 $ 39 $ 2 $ -- $ (41) $ 11,107
Non-Interest Income 4,943 6,805 1,647 -- -- 13,395
----------- ------------ ------------ ------------- ------------- -------------
Total Revenues 16,050 6,844 1,649 -- (41) 24,502
Provision for Loan Losses 800 -- -- -- -- 800
Non-Interest Expense 11,738 4,876 1,338 -- -- 17,952
Income Taxes 848 808 126 -- -- 1,782
----------- ------------ ------------ ------------- ------------- -------------
Segment Profit $ 2,664 $ 1,160 $ 185 $ -- $ (41) $ 3,968
=========== ============ ============ ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $ 723,826 $ 7,282 $ 958 $ 896 $ (2,425) $ 730,537
=========== ============ ============ ============= ============= =============
9
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
BANK WESTFIELD RINET OTHER INTERSEGMENT TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 8,301 $ 47 $ -- $ -- $ (47) $ 8,301
Non-Interest Income 4,222 4,985 1,417 -- -- 10,624
----------- ------------ ------------ ------------- ------------- -------------
Total Revenues 12,523 5,032 1,417 -- (47) 18,925
Provision for Loan Losses 424 -- -- -- -- 424
Non-Interest Expense 8,930 3,754 1,340 -- -- 14,024
Income Taxes 907 523 32 -- -- 1,462
----------- ------------ ------------ ------------- ------------- -------------
Segment Profit $ 2,262 $ 755 $ 45 $ -- $ (47) $ 3,015
=========== ============ ============ ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $ 524,764 $ 4,919 $ 719 $ 1,893 $ (3,243) $ 529,052
=========== ============ ============ ============= ============= =============
(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." In June, 2000, the FASB issued SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", which further
amends SFAS No. 133 and addresses a limited number of issues causing
implementation difficulties for entities that apply SFAS 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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 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 THE VALUE OF 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").
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 Company, Inc. ("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 Company's 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 $163.2 million, or 28.8%, to $730.5
million at June 30, 2000 from $567.4 million at December 31, 1999. This increase
was primarily driven by 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 $189.2 million, or 25.9% of total assets, at June 30, 2000,
compared to $95.1 million, or 16.8% of total assets, at December 31, 1999. Of
the $94.1 million increase in investments during the first half of 2000, $53.2
million was due to higher deposit balances, which resulted in an increase in
cash and federal funds sold at quarter end. The remaining $40.9 million of this
increase was 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.
The following table is a summary of investment and mortgage-backed
securities available for sale as of June 30, 2000 and December 31, 1999:
11
AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ---------- ---------- --------------
(IN THOUSANDS)
AT JUNE 30, 2000
U.S. Government and agencies $ 69,919 $ 27 $ (1,288) $ 68,658
Municipal bonds 47,762 27 (391) 47,398
Mortgage-backed securities 4,002 -- (86) 3,916
------------- ---------- ---------- --------------
Total investments $ 121,683 $ 54 $ (1,765) $ 119,972
============= ========== ========== ==============
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 $70.4 million, or 15.6%, during the first half
of 2000 to $520.8 million, or 71.3% of total assets, at June 30, 2000, from
$450.4 million, or 79.4% of total assets, at December 31, 1999. Both the
commercial and residential mortgage loan portfolios continued to experience
growth due to the strong local economy and the demand for financing. Commercial
loans increased $34.8 million, or 18.2%, and residential mortgage loans
increased $36.1 million, or 15.4%, during the first half of 2000.
RISK ELEMENTS. Total non-performing assets, which consist of non-accrual
loans and other real estate owned, decreased by $207,000 during the first six
months of 2000 to $1.1 million, or 0.15% of total assets at June 30, 2000, from
$1.3 million, or 0.23% of total assets at 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 June 30, 2000, loans with an aggregate balance of $2.0 million, or 0.39%
of total loans, were 30 to 89 days past due, a decrease of $26,000, or 1.3%, as
compared to December 31, 1999. 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 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. A system of periodic loan reviews is performed to
individually assess the inherent risk and assign risk ratings to each loan. The
allowance is calculated based on management's judgment 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 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 the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
12
The following table is an analysis of the Bank's allowance for loan losses
for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- ---------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Ending gross loans $ 520,822 $ 394,852 $ 520,822 $ 394,852
=============== ================ ================ ===============
Allowance for loan losses, beginning of period $ 5,666 $ 4,641 $ 5,336 $ 4,386
Provision for loan losses 500 186 800 424
Charge-offs (12) (71) (19) (78)
Recoveries 70 77 107 101
--------------- ---------------- ---------------- ---------------
Allowance for loan losses, end of period $ 6,224 $ 4,833 $ 6,224 $ 4,833
=============== ================ ================ ===============
Allowance for loan losses to ending gross loans 1.20% 1.22% 1.20% 1.22%
=============== ================ ================ ===============
DEPOSITS AND BORROWINGS. The Company experienced an increase in total
deposits of $155.0 million, or 36.9%, during the first half of 2000, to $575.5
million, or 78.8% of total assets, at June 30, 2000, from $420.5 million, or
74.1% of total assets, at December 31, 1999. 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 half of 2000. Most of the deposit increase
was in demand deposits, NOW accounts, and money market accounts. The following
table shows the composition of the Company's deposits at June 30, 2000 and
December 31, 1999:
JUNE 30, 2000 DECEMBER 31, 1999
------------------------------ ------------------------------
AS A % OF AS A % OF
BALANCE TOTAL BALANCE TOTAL
--------------- -------------- --------------- --------------
Demand deposits $ 88,682 15.4% $ 53,058 12.6%
NOW 61,120 10.6 40,875 9.7
Savings 5,844 1.0 4,607 1.1
Money Market 320,840 55.8 238,513 56.7
Certificates of deposit under $100,000 19,954 3.5 22,394 5.3
Certificates of deposit $100,000 or greater 79,085 13.7 61,088 14.6
--------------- -------------- --------------- --------------
Total $ 575,525 100.0% $ 420,535 100.0%
=============== ============ =============== ==============
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 June 30, 2000, cash, federal
funds sold and securities available for sale amounted to $184.4 million, or
25.2% 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 $242.0 million as of June 30, 2000.
In addition, the Bank maintains short-term lines of credit at the Federal
Reserve Bank and other correspondent banks totaling $75.0 million, and has
established brokered certificate of deposit lines with several institutions
aggregating $120.0 million. Management believes that at June 30, 2000, the Bank
had adequate liquidity to meet its commitments for the foreseeable future.
13
Westfield's primary source of liquidity consists of investment management
fees that are collected on a quarterly basis. At June 30, 2000 Westfield had
working capital of approximately $3.2 million. Management believes that at June
30, 2000, 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 June 30, 2000 RINET had working
capital of approximately $468,000. Management believes that at June 30, 2000,
RINET 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 June 30,
2000 was $43.6 million, or 5.97% 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 first six months of 2000 of $4.0 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, 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 June 30, 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 JUNE 30, 2000:
Total risk-based capital
Company $ 47,056 11.31% $ 33,284 > 8.0% $ 41,605 > 10.0%
Bank 41,452 10.07 32,930 8.0 41,163 10.0
Tier I risk-based
Company 41,843 10.06 16,642 4.0 24,963 6.0
Bank 36,293 8.82 16,465 4.0 24,698 6.0
Tier I leverage capital
Company 41,843 6.20 27,004 4.0 33,755 5.0
Bank 36,293 5.43 26,739 4.0 33,424 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 FOR THE THREE MONTHS ENDED JUNE 30, 2000
NET INCOME. The Company recorded net income of $2.2 million, or $0.18 per
diluted share, for the quarter ended June 30, 2000. This represented a 32.5%
increase over the net income of $1.7 million, or $0.14 per diluted share, for
the same period in 1999.
NET INTEREST INCOME. For the quarter ended June 30, 2000, net interest
income was $6.0 million, an increase of $1.7 million, or 39.4%, over the same
period in 1999. This increase was primarily attributable to an increase of
$172.0 million, or 36.7%, in the average balance of earning assets. The
Company's net interest margin was 3.81% for the second quarter of 2000, an
increase of 9 basis points, or 2.4% compared to the same period last year.
INTEREST INCOME. During the second quarter of 2000, interest income was
$12.1 million, an increase of $3.7 million, or 44.5%, compared to $8.4 million
for the same period in 1999. Interest income on commercial loans increased 39.0%
to $5.1 million for the quarter ended June 30, 2000, compared to $3.7 million
for the same period in 1999. Interest income from residential mortgage loans
increased 32.1% to $4.4 million for the second quarter of 2000, compared to $3.3
million for the same period in 1999, and home equity and other loans increased
27.4% to $553,000 for the second quarter of 2000, compared to $434,000, for the
same period in 1999. These increases were primarily due to an increase in loan
volume, and to a lesser extent an increase in the average yield earned on
commercial loans and home equity and other loans. The average balance of
commercial loans increased 24.4% and the average rate increased 11.8%, or 100
basis points to 9.51% for the quarter ended June 30, 2000. The average balance
of residential mortgage loans increased 33.5%, while the average rate decreased
1.0%, or 7 basis points to 6.90% for the same period, and the average balance of
home equity and other loans increased 6.1%, and the average rate increased
20.1%, or 155 basis points to 9.26%.
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) increased $1.1 million, or 115.9%, to $2.1 million
for the quarter ended June 30, 2000, compared to $957,000 for the same period in
1999. This increase was primarily attributable to an increase in the average
balance of $65.0 million, or 77.4%, combined with an increase in the average
yield on investments of 98 basis points, or 21.7%.
INTEREST EXPENSE. During the second quarter of 2000, interest expense was
$6.1 million, an increase of $2.0 million, or 49.7%, compared to $4.1 million
for the same period in 1999. This increase in the Company's interest expense was
the result of an increase in the average balance of interest-bearing liabilities
of $141.3 million, or 34.4% between the two periods, combined with a 10.9%
increase in the average cost of interest-bearing liabilities to 4.44% for the
second quarter of 2000, from 4.00% for the second quarter of 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $500,000 for
the quarter ended June 30, 2000, compared to $186,000 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 $58,000 during the second
quarter of 2000, compared to $6,000 for the same period in 1999.
FEES AND OTHER INCOME. Fees and other income increased $1.6 million, or
29.9%, to $6.9 million for the three month period ending June 30, 2000, compared
to $5.3 million for the same period in 1999. The majority of fee income was
attributable to advisory fees earned on assets under management. These fees
increased $1.5 million, or 33.7% to $5.9 million for the second quarter of 2000,
compared to $4.4 million for the same period in 1999. This increase was
primarily due to a 31.6% increase in assets under management, which were $3.0
billion on June 30, 1999, compared to $3.9 billion on June 30, 2000.
Financial planning fees increased $194,000, or 29.8%, to $844,000 for the
second quarter of 2000, compared to $650,000 for the same period in 1999. This
increase was due to a combination of new clients, increased services to existing
clients, and annual fee increases. Equity in losses of partnerships was $66,000
for the three months ended June 30, 2000 due to a reduction in the value of
Westfield's general partnership interest in its hedge funds.
15
Deposit account service fees decreased $11,000, or 13.1%, to $73,000 for
the second quarter of 2000 as a result of higher average balances maintained in
deposit accounts, which results in reduction or elimination of service fees.
Gain on sale of loans decreased $35,000 to $4,000 for the second quarter of 2000
due to a lower volume of fixed rate loans sold in the secondary market. Other
fee income increased $28,000 to $180,000 for the second quarter of 2000 due to a
higher level of non-amortized loan fees.
OPERATING EXPENSE. Total operating expense for the first half of 2000
increased $2.2 million, or 31.9% to $9.2 million compared to $7.0 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 38.1% increase in total balance sheet assets, a 31.6% increase in
client assets under management, and a 16.6% increase in the number of employees
from June 30, 1999 to June 30, 2000. In addition, the Company expanded its
facilities at its Boston headquarters, and opened a new banking office as of
February 1, 2000.
Salaries and benefits, the largest component of operating expense,
increased $1.4 million, or 28.8%, to $6.1 million for the quarter ended June 30,
2000, from $4.8 million for the same period in 1999. This increase was due to a
16.6% increase in the number of employees, a higher level of employee
incentive-based compensation, normal salary increases, and the related taxes
thereon.
Occupancy and equipment expense increased $437,000, or 64.8%, to $1.1
million for the second quarter of 2000, from $674,000 for the same period last
year. This 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 the Back Bay area of Boston, 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
increased $81,000, or 22.4% due to legal and consulting expenses incurred for
strategic projects incurred during the second quarter of 2000, as well as higher
audit fees as a result of the Company's continued growth.
Marketing and business development increased $174,000, or 52.9%, to
$503,000 for the second quarter of 2000. Of this increase $68,000 was a result
of increased image advertising designed to increase the visibility of the
Company and its products and services. The remaining increase of $107,000 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 $55,000, or 20.4%, as a
result of increased service and volume-related charges for processing banking
transactions and maintaining custody of client assets under management.
Other expenses include supplies, telephone, postage, publications and
subscriptions, and other miscellaneous business expenses. These expenses have
increased $96,000, or 20.0% to $575,000, 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 $989,000 for
the second quarter of 2000 as compared to $787,000 for the same period last
year. The effective tax rate was 31.1% for the second quarter of 2000, compared
to 32.3% for the same period in 1999. 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
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
NET INCOME. The Company recorded net income of $4.0 million, or $0.33 per
diluted share, for the six months ended June 30, 2000. This represented a 31.6%
increase over net income of $3.0 million, or $0.25 per diluted share, for the
same period in 1999. During the first half of 1999, the Company implemented an
accounting change that resulted in a non-recurring charge of $125,000.
NET INTEREST INCOME. For the six months ended June 30, 2000, net interest
income was $11.1 million, an increase of $2.8 million, or 33.8%, over the same
period in 1999. This increase was primarily attributable to an increase of
$146.3 million, or 31.9%, in the average balance of earning assets. The
Company's net interest margin increased 8 basis points, or 2.2%, to 3.76% for
the six months ended June 30, 2000, compared to 3.68% for the same period last
year.
INTEREST INCOME. During the first half of 2000, interest income was $22.6
million, an increase of $6.2 million, or 38.0%, over the same period in 1999.
Interest income on commercial loans increased 30.0% to $9.3 million for the six
months ended June 30, 2000, compared to $7.2 million for the same period in
1999. Interest income from residential mortgage loans increased 33.0% to $8.5
million for the first half of 2000, compared to $6.4 million for the same period
in 1999, and home equity and other loans increased 32.6% to $1.1 million for the
first half of 2000, compared to $813,000, the same period in 1999. These
increases were primarily due to an increase in loan volume, and to a lesser
extent, an increase in the average yield earned on commercial loans and home
equity and other loans. The average balance of commercial loans increased 18.0%,
and the average rate increased 10.1%, or 86 basis points, to 9.37% for the six
months ended June 30, 2000. The average balance of residential mortgage loans
increased 34.6%, while the average rate decreased 1.2%, or 8 basis points, to
6.86% for the same period, and the average balance of home equity and other
loans increased 13.4%, and the average rate increased 16.9%, or 129 basis
points, to 8.94%.
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) increased $1.7 million, or 85.8%, to $3.7 million
for the six months ended June 30, 2000, compared to $2.0 million for the same
period in 1999. This increase was primarily attributable to an increase in the
average balance of $49.3 million, or 58.7%, combined with an increase in the
average yield on investments of 160 basis points, or 17.1%.
INTEREST EXPENSE. During the first half of 2000, interest expense was $11.4
million, an increase of $3.4 million, or 42.4%, compared to $8.0 million for the
same period in 1999. This increase in the Company's interest expense is the
result of an increase in the average balance of interest-bearing liabilities of
$119.3 million, or 29.7%, between the two periods, combined with a 9.7% increase
in the average cost of interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $800,000 for
the six months ended June 30, 2000, compared to $424,000 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 $88,000 during the first half of
2000, compared to $23,000 for the same period in 1999.
FEES AND OTHER INCOME. Fees and other income increased $2.8 million, or
26.1%, to $13.4 million for the six month period ending June 30, 2000, compared
to $10.6 million for the same period in 1999. The majority of fee income was
attributable to advisory fees earned on assets under management. These fees
increased $3.0 million, or 35.0%, to $11.6 million for the first half of 2000
compared to $8.6 million for the same period in 1999. This increase was
primarily due to a 31.6% increase in assets under management, which were $3.0
billion on June 30, 1999, compared to $3.9 billion on June 30, 2000.
Financial planning fees increased $242,000, or 17.3% to $1.6 million for
the first half of 2000, compared to $1.4 million for the same period in 1999.
This increase was due to a combination of new clients, increased services to
existing clients, and annual fee increases. Equity in losses of partnerships was
$241,000 for the six months ended June 30, 2000 due to a reduction in the value
of Westfield's general partnership interest in its hedge funds.
17
Deposit account service fees decreased $23,000, or 15.0%, to $130,000 for
the first half of 2000 as a result of higher average balances maintained in
deposit accounts, which results in reduction or elimination of service fees.
Gain on sale of loans decreased $73,000 to $10,000 due to a lower volume of
fixed rate loans sold in the secondary market.
OPERATING EXPENSE. Total operating expense for the first half of 2000
increased $4.1 million, or 29.2%, to $18.0 million compared to $13.9 million for
the same period in 1999. This increase in total operating expense was primarily
attributable to the Company's continued growth and expansion. The Company has
experienced a 38.1% increase in total balance sheet assets, a 31.6% increase in
client assets under management, and a 16.6% increase in the number of employees
from June 30, 1999 to June 30, 2000. In addition, the Company has expanded its
facilities at its Boston headquarters, and opened a new banking office as of
February 1, 2000.
Salaries and benefits, the largest component of operating expense,
increased $2.5 million, or 26.2%, to $12.1 million for the six months ended June
30, 2000, compared to $9.6 million for the same period in 1999. This increase
was primarily due to a 16.6% increase in the number of employees, a higher level
of employee incentive-based compensation, normal salary increases, and the
related taxes thereon.
Occupancy and equipment expense increased $864,000, or 65.0%, to $2.2
million for the first half of 2000, from $1.3 million for the same period last
year. This 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 the Back Bay area of Boston, 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
increased $27,000, or 3.7% due to legal and consulting expenses incurred for
strategic projects incurred during the first half of 2000, as well as higher
audit fees as a result of the Company's continued growth.
Marketing and business development increased $373,000, or 57.6%, to $1.0
million for the first half of 2000. Of this increase $222,000 was a result of
increased image advertising designed to increase the visibility of the Company
and its products and services. The remaining increase of $151,000 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 $124,000, or 23.7% as a
result of increased service and volume related charges for processing banking
transactions and maintaining custody of client assets under management.
Other expenses include supplies, telephone, postage, publications and
subscriptions, employee training, and other miscellaneous business expenses.
These expenses have increased $148,000, or 16.1%, to $1.1 million, primarily as
a result of increased business volume and an increase in the number of
employees.
INCOME TAX EXPENSE. The Company recorded income tax expense of $1.8 million
for the first half of 2000 as compared to $1.5 million for the same period last
year. The effective tax rate was 31.0% for the first half of 2000, compared to
31.8% for the same period in 1999. 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.
18
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
We are not currently a party to any material legal proceedings. One of our
subsidiaries has recently received correspondence on behalf of one of its former
investment management clients claiming that the subsidiary is responsible for
underperformance of allegedly $5.1 million when compared to the former client's
portfolio performance targets. Our subsidiary disputes the former client's
allegations and, if legal action is commenced, we intend to defend the matter
vigorously.
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
At the Annual Meeting of Stockholders held on April 19, 2000, stockholders
of the Company approved the proposals to:
(1) elect four (4) Class III Directors of the Company to serve until the
2002 annual meeting and until their successors are duly elected and
qualified. The votes for such proposal were as follows:
FOR AGAINST WITHHELD
--- ------- --------
Herbert S. Alexander 7,869,125 -- 3,095
Lynn Thompson Hoffman 7,869,125 -- 3,095
Richard N. Thielen 7,868,925 -- 3,295
Charles O. Wood III 7,869,125 -- 3,095
The term of office of each of Arthur J. Bauernfeind, Peter C. Bennett,
Eugene S. Colangelo, C. Michael Hazard Dr. Allen Sinai and Timothy L.
Vaill as a director of the Company continued after the annual meeting.
(2) ratify the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending December 31, 2000. The votes for
such proposal were as follows:
FOR AGAINST WITHHELD
--- ------- --------
KPMG LLP 7,854,515 12,230 5,475
ITEM 5. OTHER INFORMATION
No information to report.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K filed on June 27, 2000.
Items reported: Acquisition of Sand Hill Advisors, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Registrant)
AUGUST 14, 2000 /s/ TIMOTHY L. VAILL
- --------------- ---------------------------------------
Timothy L. Vaill
Chairman and Chief
Executive Officer
AUGUST 14, 2000 /s/ WALTER M. PRESSEY
- --------------- ---------------------------------------
Walter M. Pressey
Executive Vice President and
Chief Financial Officer
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