1
As filed with the Securities and Exchange Commission on November 10, 1999
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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(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2976299
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 912-1900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of OCTOBER 31, 1999:
Common Stock - Par Value $1.00 11,611,160 Shares
------------------------------ -----------------
(class) (outstanding)
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2
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 - 21
Item 3 Quantitative and Qualitative Disclosures about Market Risk 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
Signature Page 23
2
3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS:
Cash and due from banks $ 14,714 $ 12,924
Federal funds sold -- 11,000
Investment securities available for sale (amortized cost of
$71,295 and $53,996, respectively) 70,065 54,102
Mortgage-backed securities available for sale (amortized cost of
$6,096 and $11,840, respectively) 6,007 11,909
Loans receivable:
Commercial 172,443 154,940
Residential mortgage 222,670 173,810
Home equity 24,759 19,866
Other 288 335
-------- --------
Total loans 420,160 348,951
Less allowance for loan losses (5,106) (4,386)
-------- --------
Net loans 415,054 344,565
Stock in the Federal Home Loan Bank of Boston 4,830 4,718
Premises and equipment, net 3,770 3,627
Excess of cost over net assets acquired, net 3,086 3,424
Management fees receivable 3,459 3,288
Accrued interest receivable 2,992 2,405
Other assets 5,497 5,285
-------- --------
Total assets $529,474 $457,247
======== ========
LIABILITIES:
Deposits $377,773 $334,852
Federal funds purchased 8,000 --
Securities sold under agreements to repurchase 8,385 6,241
FHLB borrowings 90,806 76,329
Accrued interest payable 1,251 651
Other liabilities 6,791 6,883
-------- --------
Total liabilities 493,006 424,956
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 18,000,000 shares
issued: 10,845,863 shares in 1999 and 10,747,744 shares in 1998 10,846 10,748
Additional paid-in capital 13,060 12,680
Retained earnings 13,730 9,246
Stock subscriptions receivable (324) (495)
Accumulated other comprehensive income (loss) (844) 112
-------- --------
Total stockholders' equity 36,468 32,291
-------- --------
Total liabilities and stockholders' equity $529,474 $457,247
======== ========
See accompanying notes to consolidated financial statements.
3
4
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1999 1998 1999 1998
------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and dividend income:
Commercial loans $3,792 $3,350 $10,967 $ 9,634
Residential mortgage loans 3,570 2,903 9,951 7,733
Home equity and other loans 485 349 1,298 1,002
Investment securities 720 638 1,972 1,871
Mortgage-backed securities 93 209 365 705
FHLB stock dividends 89 64 239 193
Federal funds sold 135 77 360 307
Deposits in banks 38 34 110 110
------ ------ ------- -------
Total interest and dividend income 8,922 7,624 25,262 21,555
------ ------ ------- -------
Interest expense:
Savings and NOW 102 110 364 321
Money market 1,872 1,550 5,038 4,073
Certificates of deposit 1,154 1,123 3,341 3,259
Federal funds purchased 45 44 108 91
Securities sold under agreements to repurchase 151 47 336 162
FHLB borrowings 1,113 1,096 3,290 3,255
Other short-term borrowings -- -- -- 19
------ ------ ------- -------
Total interest expense 4,437 3,970 12,477 11,180
------ ------ ------- -------
Net interest income 4,485 3,654 12,785 10,375
Provision for loan losses 325 242 749 857
------ ------ ------- -------
Net interest income after provision for loan losses 4,160 3,412 12,036 9,518
------ ------ ------- -------
Fees and other income:
Trust and investment management 4,392 3,510 13,071 11,444
Deposit account service charges 64 64 216 172
Gain (loss) on sale of loans 25 97 108 197
Gain (loss) on sale of investment securities 2 29 48 84
Other 141 181 389 358
------ ------ ------- -------
Total fees and other income 4,624 3,881 13,832 12,255
------ ------ ------- -------
Operating expense:
Salaries and employee benefits 4,551 3,640 13,047 11,260
Occupancy and equipment 693 535 1,888 1,556
Professional services 718 441 1,963 1,261
Marketing 125 88 427 269
Business development 110 122 439 408
Amortization of intangibles 71 81 213 242
Other 396 395 1,245 1,092
------ ------ ------- -------
Total operating expense 6,664 5,302 19,222 16,088
------ ------ ------- -------
Income before income taxes 2,120 1,991 6,646 5,685
Income tax expense 606 671 2,037 1,915
------ ------ ------- -------
Income before cumulative effect of change in accounting 1,514 1,320 4,609 3,770
principle
Cumulative effect of change in accounting principle -- -- 125 --
------ ------ ------- -------
Net income $1,514 $1,320 $4,484 $3,770
====== ====== ======= =======
Per share data:
Basic earnings per share
Income before cumulative effect of change in accounting $ 0.14 $ 0.12 $ 0.42 $ 0.35
principle
Cumulative effect of change in accounting principle -- -- (0.01) --
---------- ---------- ---------- ----------
Net Income $ 0.14 $ 0.12 $ 0.41 $ 0.35
========== ========== ========== ==========
Diluted earnings per share
Income before cumulative effect of change in accounting $ 0.14 $ 0.12 $ 0.41 $ 0.34
principle
Cumulative effect of change in accounting principle -- -- (0.01) --
---------- ---------- ---------- ----------
Net Income $ 0.14 $ 0.12 $ 0.40 $ 0.34
========== ========== ========== ==========
Average basic common shares outstanding 10,846,144 10,741,991 10,817,364 10,709,272
========== ========== ========== ==========
Average diluted common shares outstanding 11,154,304 11,125,513 11,135,923 11,129,874
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
5
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, 1997 $10,641 $12,140 $ 3,800 $(669) $ 23 $25,935
Net income -- -- 3,770 -- -- 3,770
Other comprehensive income:
Change in unrealized gain
(loss) on securities
available for sale, net -- -- -- -- 265 265
-------
Total other comprehensive income 4,035
Stock options exercised 103 504 -- -- -- 607
Proceeds from issuance of
Stock subscription payments -- -- -- 170 -- 170
S-Corporation dividends paid -- -- (60) -- -- (60)
------- ------- ------- ----- ----- -------
Balance at September 30, 1998 $10,744 $12,644 $ 7,510 $(499) $ 288 $30,687
======= ======= ======= ===== ===== =======
Balance at December 31, 1998 $10,748 $12,680 $ 9,246 $(495) $ 112 $32,291
Net income -- -- 4,484 -- -- 4,484
Other comprehensive income:
Change in unrealized gain
(loss) on securities
available for sale, net -- -- -- -- (956) (956)
-------
Total other comprehensive income 3,528
Proceeds from issuance of
40,769 shares of common stock 41 280 -- -- -- 321
Stock options exercised 57 100 -- -- -- 157
Stock subscription payments -- -- -- 171 -- 171
------- ------- ------- ----- ----- -------
Balance at September 30, 1999 $10,846 $13,060 $13,730 $(324) $(844) $36,468
======= ======= ======= ===== ===== =======
See accompanying notes to consolidated financial statements.
5
6
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 4,484 $ 3,770
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,127 1,314
Gain on sale of loans (108) (197)
Gain on sale of other real estate owned -- (4)
Gain on sale of investment securities (48) (84)
Provision for loan losses 749 857
Distributed (undistributed) earnings of partnership investments 1,732 (108)
Loans originated for sale (10,980) (16,600)
Proceeds from sale of loans 11,088 16,797
(Increase) decrease in:
Accrued interest receivable (587) (566)
Investment management fees receivable (171) (354)
Other assets (1,406) (1,170)
Increase (decrease) in:
Accrued interest payable 600 278
Other liabilities (92) 529
------- -------
Net cash provided (used) by operating activities 6,388 4,462
------- -------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold 11,000 (400)
Investment securities available for sale:
Purchases (55,980) (54,389)
Sales 6,402 37,654
Maturities 31,905 11,155
Mortgage-backed securities available for sale:
Sales 3,334 --
Principal payments 2,366 5,034
Net decrease (increase) in loans (71,040) (57,731)
Purchase of FHLB stock (112) (661)
Recoveries on loans previously charged off 113 --
Proceeds from sales of other real estate owned -- 38
Capital expenditures (777) (1,209)
------- -------
Net cash provided (used) by investing activities (72,789) (60,509)
------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits 42,921 41,366
Net increase (decrease) in repurchase agreements 2,144 (1,746)
Net increase (decrease) in federal funds purchased 8,000 (4,755)
FHLB advances:
Proceeds 91,629 38,646
Repayments (77,152) (19,781)
Net increase (decrease) in other short-term borrowings -- (837)
S-corporation dividends paid -- (60)
Proceeds from stock subscriptions receivable 171 170
Proceeds from issuance of common stock 478 607
------- -------
Net cash provided (used) by financing activities 68,191 53,610
------- -------
Net increase (decrease) in cash and due from banks 1,790 (2,437)
Cash and due from banks at beginning of year 12,924 12,361
------- -------
Cash and due from banks at end of period $14,714 $ 9,924
======= =======
Supplementary disclosures of cash flow information:
Cash paid during the period for interest $11,877 $10,902
Cash paid during the period for income taxes 1,059 3,346
Supplementary disclosures of non-cash activities:
Transfer of loans to other real estate owned -- 42
Transfer of investments to available for sale -- 17,865
See accompanying notes to consolidated financial statements.
6
7
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of Boston Private Financial Holdings,
Inc. (the "Company") include the accounts of the Company and its wholly-owned
subsidiaries, Boston Private Bank & Trust Company (the "Bank") and Boston
Private Investment Management, Inc. ("BPIM"). The Bank's consolidated financial
statements include the accounts of its wholly-owned subsidiaries, BPB Securities
Corporation, 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, Inc. ("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 those estimates. Material estimates
that are particularly susceptible to change relate to the determination of the
allowance for loan losses. In connection with the determination of the allowance
for loan losses, management obtains independent appraisals for significant
properties.
The unaudited interim consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles and
include all necessary adjustments of a normal recurring nature, which in the
opinion of management, are required for a fair presentation of the results and
financial condition of the Company. The interim results of consolidated
operations are not necessarily indicative of the results for the entire year.
The information in this report should be read in conjunction with the
consolidated financial statements and accompanying notes included in the
December 31, 1998 Annual Report on Form 10-K. Certain fiscal 1998 information
has been reclassified to conform with the 1999 presentation.
(2) EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
earnings per share calculation is based upon the weighted average number of
common shares and common share equivalents outstanding during the period. Stock
options, when dilutive, are included as common stock equivalents using the
treasury stock method.
The following tables are a reconciliation of the numerators and
denominators of basic and diluted earnings per share computations:
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1999 1998
------------------------- -----------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------------------------- -----------------------
(In thousands, except per share amounts)
BASIC EPS
Net Income $1,514 10,846 $0.14 $1,320 10,715 $0.12
===== =====
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 308 -- 411
------ ------ ------ ------
DILUTED EPS
------ ------ ----- ------ ------ -----
Net Income $1,514 11,154 $0.14 $1,320 11,126 $0.12
====== ====== ===== ====== ====== =====
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8
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1999 1998
------------------------- -----------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------------------------- -----------------------
(In thousands, except per share amounts)
BASIC EPS
Net Income $4,484 10,817 $0.41 $3,770 10,709 $0.35
===== =====
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 319 -- 421
--------------- ---------------
DILUTED EPS
------ ------ ----- ------ ------ -----
Net Income $4,484 11,136 $0.40 $3,770 11,130 $0.34
====== ====== ===== ====== ====== =====
(3) BUSINESS SEGMENTS
Management Reporting
The financial performance of the Company is managed and evaluated by
business segment. The Company has two reportable segments, the Bank and
Westfield. The segments are managed separately because each business is a
company with different clients, products, services, 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 nationwide. Westfield specializes in
growth equity portfolios with a particular focus on identifying and managing
small and mid-cap equity positions. It also acts as the managing general partner
for three limited partnerships, one invests primarily in technology stocks,
another invests primarily in small capitalization equities and the third invests
primarily in midcap equities.
Measurement of Segment Profit and Assets
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Revenues, expenses, and assets
are recorded by each segment, and separate financial statements are reviewed by
management. In addition to direct expenses, each business segment is allocated a
share of holding company expenses based on the segment's percentage of
consolidated net income.
8
9
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 September 30, 1999 and 1998.
1999
--------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
-------- --------- ----- ------------ --------
(in thousands)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 4,485 $ 26 $ -- $ (26) $ 4,485
Non-Interest Income 2,220 2,405 -- -- 4,625
-------- ------ ---- ------- --------
Total Revenues 6,705 2,431 -- (26) 9,110
Provision for Loan Losses 325 -- -- -- 325
Non-Interest Expense 4,658 2,006 -- -- 6,664
Income Taxes 432 174 -- 606
-------- ------ ---- ------- --------
Segment Profit $ 1,290 $ 251 -- $ (26) $ 1,514
-------- ------ ---- ------- --------
BALANCE SHEET DATA:
Total Segment Assets $525,619 $5,792 $944 $(2,881) $529,474
======== ====== ==== ======= ========
1998
--------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
-------- --------- ----- ------------ --------
(in thousands)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 3,654 $ 18 $ 3 $ (21) $ 3,654
Non-Interest Income 1,819 2,062 -- -- 3,881
-------- ------ ------ ------- --------
Total Revenues 5,473 2,080 3 (21) 7,535
Provision for Loan Losses 242 -- -- -- 242
Non-Interest Expense 3,742 1,557 3 -- 5,302
Income Taxes 457 214 -- -- 671
-------- ------ ------ ------- --------
Segment Profit $ 1,032 $ 309 -- $ (21) $ 1,320
-------- ------ ------ ------- --------
BALANCE SHEET DATA:
Total Segment Assets $424,052 $4,728 $1,064 $(2,450) $427,394
======== ====== ====== ======= ========
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 September 30, 1999 and 1998.
1999
--------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
-------- --------- ----- ------------ --------
(in thousands)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 12,785 $ 73 $ -- $ (73) $ 12,785
Non-Interest Income 6,442 7,390 -- -- 13,832
-------- ------ ---- ------- --------
Total Revenues 19,227 7,463 -- (73) 26,617
Provision for Loan Losses 749 -- -- -- 749
Non-Interest Expense 13,588 5,759 -- -- 19,347
Income Taxes 1,340 697 -- -- 2,037
-------- ------ ---- ------- --------
Segment Profit $ 3,550 $1,007 -- $ (73) $ 4,484
-------- ------ ---- ------- --------
BALANCE SHEET DATA:
Total Segment Assets $525,619 $5,792 $944 $(2,881) $529,474
======== ====== ==== ======= ========
9
10
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1998
--------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
-------- --------- ----- ------------ --------
(in thousands)
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 10,374 $ 25 $ 8 $ (33) $ 10,374
Non-Interest Income 4,921 7,334 -- -- 12,255
-------- ------ ------ ------- --------
Total Revenues 15,295 7,359 8 (33) $ 22,629
Provision for Loan Losses 857 -- -- -- 857
Non-Interest Expense 10,870 5,209 8 -- 16,087
Income Taxes 1,035 880 -- -- 1,915
-------- ------ ------ ------- --------
Segment Profit $ 2,533 $1,270 $ -- $ (33) $ 3,770
-------- ------ ------ ------- --------
BALANCE SHEET DATA:
Total Segment Assets $424,052 $4,728 $1,064 $(2,450) $427,394
======== ====== ====== ======= ========
(4) RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as "derivatives") and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
market value. 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. This
statement will not have a material effect on the Company's consolidated
financial statements. In June, 1999 SFAS 133 was amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement defers the effective
date for SFAS 133 until all fiscal quarters of all fiscal years beginning after
June 15, 2000.
(5) SUBSEQUENT EVENTS
On October 15, 1999, the Company effected a merger with RINET Company, Inc.
("RINET"), an integrated tax, financial and investment consulting firm located
in Boston. At the close, RINET's stockholders received 765,697 newly issued
shares of the Company's common stock. The Company expects to recognize merger
expenses of approximately $250,000 in the fourth quarter of 1999. This
transaction has been accounted for as a pooling of interests, therefore the
current and prior period results of operations of the Company will be restated
to reflect the results of operations on a consolidated basis. RINET is an
independent subsidiary of the Company and will continue to operate under its own
name, with no changes to existing staff expected.
Founded in 1975, RINET is primarily engaged in financial planning and asset
allocation for very affluent individuals and families. RINET has approximately
seventy-five (75) clients, had revenues of $2.8 million in 1998 and employs
nineteen (19) people, four of whom are principals. As a result of the
transaction, the Company has acquired such capabilities as tax planning and
preparation, asset allocation, estate planning, charitable planning, business
acquisition consulting, planning for employment benefit plans, 401(k) plan
management, business valuation and liquidation strategies, business ownership
strategies, alternative investment analysis and mutual fund investing.
10
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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, general economic conditions in
the Company's markets, 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, the impact of year
2000 issues on the Company, its clients and its vendors, 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, 1998.
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"). The Company is 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"), Westfield Capital Management Company, Inc. ("Westfield"), a
Massachusetts corporation engaged in providing a range of investment management
services to individual and institutional clients, and RINET Company, a
Massachusetts corporation engaged in providing financial planning and asset
allocation for very affluent individuals and families. The Company conducts
substantially all of its business through its wholly-owned operating
subsidiaries, the Bank, Westfield, and RINET.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products and services to
high net worth individuals, their families and businesses in the greater Boston
area and New England and, to a lesser extent, Europe and Latin America. The Bank
offers its clients a broad range of basic deposit services, including checking
and savings accounts with automated teller machine ("ATM") access, and cash
management services through sweep accounts and repurchase agreements. The Bank
also offers commercial, residential mortgage, home equity and personal loans. In
addition, it provides investment advisory and asset management services,
securities custody and safekeeping services, trust and estate administration and
IRA and Keogh accounts.
Westfield 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 nationwide. Westfield specializes in
growth equity portfolios with a particular focus on identifying and managing
small and mid-cap equity positions. It also acts as the managing general partner
for five limited partnerships, two invest primarily in technology stocks, two
invest primarily in equities, and one invests primarily in small capitalization
equities.
On October 15, 1999, the Company effected a merger with RINET Company, Inc.
("RINET"), an integrated tax, financial and investment consulting firm located
in Boston. RINET is primarily engaged in financial planning and asset allocation
for very affluent individuals and families. As a result of the transaction, the
Company has acquired such capabilities as tax planning and preparation, asset
allocation, estate planning, charitable planning, business acquisition
consulting, planning for employment benefit plans, 401(k) plan management,
business valuation and liquidation strategies, business ownership strategies,
alternative investment analysis and mutual fund investing.
The Company's and the Bank's principal office is located at Ten Post Office
Square, Boston, Massachusetts, Westfield is located at One Financial Center,
Boston, Massachusetts, and RINET is located at 213 Union Wharf, Boston,
Massachusetts.
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FINANCIAL CONDITION
TOTAL ASSETS Total assets increased $72.2 million, or 15.8%, from $457.2
million at December 31, 1998 to $529.5 million at September 30, 1999. This
increase was primarily due to continued loan and investment growth funded by
deposit balances and FHLB borrowings.
INVESTMENTS Total investments (consisting of cash, federal funds sold,
investment securities, mortgage-backed securities, and stock in the Federal Home
Loan Bank of Boston) totaled $95.6 million, or 18.1% of total assets, at
September 30, 1999, compared to $94.7 million, or 20.7% of total assets, at
December 31, 1998. Management periodically evaluates investment alternatives to
manage the overall balance sheet. The timing of sales and reinvestments is based
on various factors, including management's evaluation of interest rate trends,
deposit balances and loan demand.
The following table is a summary of investment and mortgage-backed
securities available for sale as of September 30, 1999 and December 31, 1998:
AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ----- ------- -------
(IN THOUSANDS)
AT SEPTEMBER 30, 1999
U.S. Government and agencies $33,215 $ 3 $ (889) $32,329
Municipal bonds 38,080 9 (353) 37,736
Mortgage-backed securities 6,096 2 (91) 6,007
------- ---- ------- -------
Total investments $77,391 $ 14 $(1,333) $76,072
======= ==== ======= =======
AT DECEMBER 31, 1998
U.S. Government and agencies $35,074 $ 10 $ (34) $35,050
Municipal bonds 18,922 132 (2) 19,052
Mortgage-backed securities 11,840 83 (14) 11,909
------- ---- ------- -------
Total investments $65,836 $225 $ (50) $66,011
======= ==== ======= =======
LOANS Total loans increased $71.2 million, or 20.4%, during the first nine
months of 1999 from $349.0 million, or 76.3% of total assets, at December 31,
1998, to $420.2 million, or 79.4% of total assets, at September 30, 1999. Both
the commercial and residential mortgage loan portfolios experienced significant
growth due to the demand for new loans and refinancings and the favorable
interest rate environment. Interest rates affect both the level of new loan
originations and refinances or paydowns of existing loans. During the first nine
months of 1999, interest rates were at favorable levels, and demand for new
residential and commercial loans and refinances was high. Commercial loans
increased $17.5 million, or 11.3%, and residential mortgage and home equity
loans increased $53.8 million, or 27.8%, during the first nine months of 1999.
RISK ELEMENTS Total non-performing assets, which consist of non-accrual
loans and other real estate owned, increased by $1.2 million during the first
nine months of 1999 from $565,000, or 0.12% of total assets at December 31,
1998, to $1.8 million, or 0.34% of total assets at September 30, 1999. The
majority of this increase was due to two loans. 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 September 30, 1999, loans with an aggregate balance of $2.1 million, or
0.50% of total loans, were 30 to 89 days past due, a decrease of $1.2 million,
or 35.2%, from $3.3 million, or 0.95%, of total loans at December 31, 1998. Most
of these loans are adequately secured and management's success in keeping these
borrowers current varies from month to month.
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The Company discontinues the accrual of interest on a loan when the
collectibility of principal or interest is in doubt. In certain instances, loans
that have become 90 days past due may remain on accrual status if 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 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 relies to a great extent on the judgement and experience of
management.
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review 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.
The following table is an analysis of the Bank's allowance for loan losses
for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning
of period $ 4,833 $ 3,931 $ 4,386 $ 3,645
Provision for loan losses 325 242 749 857
Charge-offs (64) (3) (142) (379)
Recoveries 12 30 113 77
-------- -------- -------- --------
Allowance for loan losses, end of
period $ 5,106 $ 4,200 $ 5,106 $ 4,200
======== ======== ======== ========
Ending total loans $420,160 $333,957 $420,160 $333,957
-------- -------- -------- --------
Allowance for loan losses to ending
total loans 1.22% 1.26% 1.22% 1.26%
======== ======== ======== ========
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DEPOSITS AND BORROWINGS The Company experienced an increase in total
deposits of $42.9 million, or 12.8%, during the first nine months of 1999, from
$334.9 million, or 73.2% of total assets, at December 31, 1998, to $377.8
million, or 71.3% of total assets, at September 30, 1999. This increase was most
pronounced in money market accounts and certificates of deposit of $100,000 or
greater.
The following table shows the composition of the Company's deposits as of
September 30, 1999 and December 31, 1998:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
(IN THOUSANDS)
Demand deposits $ 47,034 $ 47,766
NOW 35,694 35,735
Savings 4,354 4,235
Money market 193,696 164,626
Certificates of deposit under $100,000 25,895 29,874
Certificates of deposit $100,000 or greater 71,100 52,616
-------- --------
Total $377,773 $334,852
======== ========
Total borrowings (consisting of securities sold under agreements to
repurchase ("repurchase agreements"), federal funds purchased, FHLB borrowings
and other short-term borrowings) increased $24.6 million, or 29.8%, during the
first nine months of 1999. This increase was attributable to the use of
additional FHLB borrowings to help fund asset growth, as well as to an increase
in the level of repurchase agreements with cash management customers of the
Bank. The Company 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 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, 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 September 30, 1999, cash,
federal funds sold and securities available for sale amounted to $90.8 million,
or 17.1% of total assets, compared to $89.9 million, or 19.7%, of total assets
at December 31, 1998.
In general, the Bank maintains a liquidity target of 10% to 20% of total
assets. The Bank is a member of the FHLB of Boston and as such has access to
both short and long-term borrowings of up to $195 million at the current time.
In addition, the Bank maintains a line of credit at several correspondent banks.
Management believes that the Bank has adequate liquidity to meet its commitments
for the foreseeable future.
Westfield's primary source of liquidity consists of investment management
fees that are collected on a quarterly basis. At September 30, 1999 Westfield
had working capital of approximately $2.5 million. Management believes that
Westfield has adequate liquidity to meet its commitments for the foreseeable
future.
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.
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CAPITAL RESOURCES Total stockholders' equity of the Company at September
30, 1999 was $36.5 million, as compared to $32.3 million at December 31, 1998.
This increase was the result of the Company's net income for the period of $4.5
million, plus the exercise of stock options, less the change in accumulated
other comprehensive income.
The following table presents actual capital amounts and regulatory capital
requirements as of September 30, 1999 and December 31, 1998:
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------------- ------------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------------- --------------- -------------- -------------- --------------
AS OF SEPTEMBER 30, 1999:
Total risk-based capital
Company $38,256 11.91% $25,706 > 8.0% $32,1339 > 10.0%
Bank 34,596 10.88 25,439 8.0 31,799 10.0
Tier I risk-based
Company 34,226 10.65% 12,853 4.0 19,280 6.0
Bank 30,607 9.63 12,719 4.0 19,079 6.0
Tier I leverage capital
Company 34,226 6.68% 20,509 4.0 25,636 5.0
Bank 30,607 6.01 20,361 4.0 25,451 5.0
AS OF DECEMBER 31, 1998:
Total risk-based capital
Company $32,185 11.77% $21,873 > 8.0% $27,341 > 10.0%
Bank 29,157 10.87 21,452 8.0 26,815 10.0
Tier I risk-based
Company 28,755 10.52 10,936 4.0 16,405 6.0
Bank 25,792 9.62 10,726 4.0 16,089 6.0
Tier I leverage capital
Company 28,755 6.57 17,509 4.0 21,886 5.0
Bank 25,792 5.96 17,318 4.0 21,647 5.0
YEAR 2000 READINESS DISCLOSURE
Scope and Overview. In 1996, the Company formed a Year 2000 project team
to identify information technology and non-information technology systems,
procedures, and practices that require modification or replacement. The Year
2000 problem concerns the inability of computer-based systems, including among
others, computer hardware, embedded chips, and computer software programs, to
recognize properly and process date-sensitive information involving 20th and
21st century dates. Data processing for the Company's major operating systems
(investment management, custody, loans and deposits) is conducted through third
party vendors using on-site computer interfaces. Inventory and Year 2000
readiness assessment of all information technology and non-information
technology systems and applications has been completed and critical third party
vendors who service the Company have been contacted. Efforts to bring the major
operating systems, and certain outsourced applications, into compliance with
Year 2000 requirements have been accomplished primarily through the installation
of updated or replacement hardware or programs developed by third parties. In
addition, the status of all Company facilities and all significant third-party
providers of goods and services to the Company has been assessed.
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16
State of Readiness. The Company's Year 2000 Readiness Program contains a
number of discrete segments, including Awareness and Assessment, Project
Planning, Remediation, User Acceptance Test Plans, Unit Testing, Commercial
Business Assessment, Personal Business Assessment, Contingency Plans for
Information Systems and Contingency Plans for Business Continuation. As of
September 30, 1999 the Company has completed the work of assessing, project plan
definition, testing of systems, remediation, writing and testing of contingency
plans, reviewing test data of vendors and their contingency plans and assessing
the capability of integrating vendor contingency plans with those of the
Company. During the fourth quarter of 1999 the Company will continue to monitor
its businesses and its business operations in order to anticipate and control
risk associated with Year 2000 events. Management is also planning in detail for
the operational activities necessary during the weekend of December 31, 1999 to
January 3, 2000 and the time frame immediately following to monitor the impact
of the date conversion on the Company's business activities.
Remediation efforts, wherein non-compliant software and hardware are
either modified or replaced, were substantially completed by December 31, 1998
for mission critical applications and by March 31, 1999 for non-mission critical
applications. The Company has yet to identify any operating system which appears
unlikely to be Year 2000 compliant or for which a suitable alternative cannot be
implemented. The Company completed User Acceptance Testing for mission critical
information and non-information technology systems by June 30, 1999. The Company
continues to monitor its systems to insure that non-compliant software and
hardware are not inadvertently introduced into the Company.
The Company has completed its the evaluation of credit risk stemming
from problems borrowers may have in resolving their own Year 2000 issues;
however, monitoring of the remediation efforts of high risk customers will be
ongoing. During the monitoring stage the Company is taking steps designed to
reduce any increased potential credit risk as a result of borrowers' Year 2000
issues. Assessment of Year 2000 risk has been incorporated into the loan
underwriting process. The Company is also evaluating investments made on behalf
of investment management and trust clients and in the Company's own investment
portfolio to determine risk stemming from problems securities issuers may have
in resolving their Year 2000 issues. The Company has also completed and
continues to monitor an evaluation and assessment of the state of readiness of
the Company's funds providers and the capital markets and its impact on the
Company's funding activities. The Company continues to make its customers aware
of Year 2000 risks and the Company's steps to mitigate such risks through
information mailed to customers, personal contact by client service officers,
disclosure in its financial statements and communication through its web page.
Risks of Year 2000 Issues. The Company's businesses are substantially
dependent upon its data processing software and hardware systems, and on its
ability to process information. If the Company failed to be Year 2000 compliant,
as compared to its competitors or otherwise, there could be an adverse effect on
the Company's business. In addition, because the Company is regulated by various
regulatory agencies of state and federal banking authorities, failure to be Year
2000 compliant could subject the Company to formal supervisory or enforcement
actions, which could have an adverse impact on the Company's business.
Because the Company relies on third parties for software and other
support, there are risks that the Company's operations could be disrupted by
adverse developments affecting the operations of these third parties. Such risks
include, among others, an inability to process and underwrite loan applications,
to credit deposits and withdrawals from deposit accounts, to credit loan
payments or track delinquencies, to properly reconcile and record daily activity
or to engage in normal banking activities. The Company continues to discuss
these matters with, obtain written certification from, and test the systems of
third party service providers as to Year 2000 compliance. However, there can be
no assurance that any potential impact associated with incompatible systems
after December 31, 1999 would not have a material adverse effect on the
Company's business, financial condition or results of operation.
Additionally, if those commercial borrowers whose operations depend heavily
on automated systems experience Year 2000 compliance problems affecting their
ability to repay, the Company's financial condition and results of operations
could be adversely affected by requirements to record additional loan loss
provision. Furthermore, the Company faces financial risk from its fund providers
as the Year 2000 problem may produce some deposit contraction forcing a change
to alternative and higher costing funding sources. Finally, to the extent that
certain utility and communication services utilized by the Company face Year
2000 problems, the Company's operations could be disrupted.
16
17
Contingency Plans. The Company believes that, with modifications to
existing systems and conversions to new systems, the Year 2000 problem will not
pose significant operational problems for the Company's systems as so modified
and converted. In the event that there is a Year 2000 disruption, the Company
has developed contingency plans. However, there can be no assurance that these
plans will fully mitigate any failures or problems. Furthermore, there may be
certain mission critical third party services where alternative arrangements are
limited or unavailable.
Expenses. Year 2000 Readiness Program expenses are absorbed within
normal spending levels. The Company upgrades its hardware and associated
software and invests in new information technology systems as part of its
ongoing operations. Neither the upgrades, nor new investments made to date
through September 30, 1999, have been accelerated due to the Year 2000 Readiness
Program. Management currently estimates that out-of-pocket costs related to the
Year 2000 Readiness Program will be less than $200,000. Expenses incurred for
the first nine months of 1999 were $108,000. The Company's credit risk
associated with borrowers may increase to the extent that borrowers fail to
adequately address Year 2000 issues. As part of the Company's Year 2000 project,
existing loans have been evaluated to identify and monitor loans to those
borrowers with the highest Year 2000 risk.
The Company currently expects that the total aggregate expenses to
address the Year 2000 issue will not be material to the Company's consolidated
results of operations, although as the Company proceeds with its implementation
plan, there may be additional unforeseen costs, which may be significant.
The preceding "Year 2000 Readiness Disclosure" discussion contains
various forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1933. These forward-looking statements represent the
Company's beliefs or expectations regarding future events. When used in the
"Year 2000 Readiness Disclosure" discussion, the words "believes," "expects,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation, the
Company's expectations as to when it will complete the modification and testing
phases of its Year 2000 project plan as well as its Year 2000 contingency plans;
its estimated cost of achieving Year 2000 readiness; and the Company's belief
that its internal systems will be Year 2000 compliant in a timely manner. All
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected results.
Factors that may cause these differences include, but are not limited to, the
availability of qualified personnel and other information technology resources;
the ability to identify and remediate all date sensitive lines of computer code
or to replace embedded computer chips in affected systems or equipment; and the
actions of governmental agencies or other third parties with respect to Year
2000 problems.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
NET INCOME. The Company recorded net income of $1.5 million, or $0.14 per
diluted share, for the quarter ended September 30, 1999. This represents a 14.7%
increase over the net income of $1.3 million, or $0.12 per diluted share, for
the same period in 1998.
NET INTEREST INCOME. For the quarter ended September 30, 1999, net interest
income was $4.5 million, an increase of $831,000, or 22.7%, over the same period
in 1998. This increase was primarily attributable to an increase of $91.1
million, or 22.7%, in the average balance of earning assets. The Company's net
interest margin was relatively flat at 3.73% for the third quarter of 1999,
compared to 3.70% for the same period last year.
INTEREST INCOME. During the third quarter of 1999, interest income was $8.9
million, an increase of $1.3 million, or 17.0%, over the same period in 1998.
Interest income on commercial loans increased 13.2% to $3.8 million for the
quarter ended September 30, 1999, compared to $3.4 million for the same period
in 1998. Interest income from residential mortgage loans increased 23.0% to $3.6
million compared to $2.9 million, and home equity and other loans increased
39.0% to $485,000 compared to $349,000, for the same periods, respectively.
These increases were primarily due to an increase in loan volume, partially
offset by a decrease in yield. The average balance of commercial loans increased
22.2% while the average rate decreased 7.4%, or 70 basis points, to 8.79% for
the quarter ended September 30, 1999. The average balance of residential
mortgage loans increased 26.8%, while the average rate decreased 3.0%, or 21
basis points, to 6.83% for the same period, and the average balance of home
equity and other loans increased 42.4%, while the average rate decreased 2.1%,
or 17 basis points, to 8.10%.
Total investment income, consisting of interest and dividends on cash,
federal funds sold, investment securities, mortgage-backed securities, and stock
in the FHLB of Boston, increased $53,000, or 5.2%, to $1.1 million for the
quarter ended September 30, 1999, compared to $1.0 million for the same period
in 1998. This increase was primarily attributable to a 10.6% increase in the
average balance, partially offset by a reduction in the average yield on
investments of 11 basis points, or 1.8%.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased
$467,000, or 11.8%, to $4.4 million for the quarter ended September 30, 1999,
from $4.0 million for the same period during 1998. This increase in the
Company's interest expense reflects an increase in the average balance of
interest-bearing liabilities of $74.0 million, or 21.1%, between the two
periods, partially offset by a 7.7% decrease in the average cost of
interest-bearing liabilities from 4.56% for the third quarter of 1998, to 4.21%
for the third quarter of 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $325,000 for
the quarter ended September 30, 1999, compared to $242,000 for the same period
in 1998. 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 charge offs were $52,000 during the third
quarter of 1999, compared to net recoveries of $27,000 for the same period in
1998.
FEES AND OTHER INCOME. Fees and other income increased $743,000, or 19.1%,
to $4.6 million for the three month period ending September 30, 1999, compared
to $3.9 million for the same period in 1998. The majority of fee income is
attributable to advisory fees earned on assets under management. These fees
increased $882,000, or 25.1%, to $4.4 million for the third quarter of 1999
compared to $3.5 million for the same period in 1998. This increase is primarily
due to a 22.4% increase in assets under management from $2.2 billion on
September 30, 1998 to $2.7 billion on September 30, 1999.
Gain on sale of loans has decreased $72,000, or 74.2%, to $25,000 for the
quarter ended September 30, 1999, compared to $97,000 for the same period in
1998 due to a lower volume of fixed rate loans sold in the secondary market.
Other fee income decreased $40,000 to $141,000 due to the fact that an insurance
recovery of $55,000 was recorded in the third quarter of 1998. Not including the
effect of the insurance recovery, other fee income increased $15,000, or 11.1%
for the third quarter of 1999 compared to $126,000 for the same period in 1998.
18
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OPERATING EXPENSE. Total operating expense for the third quarter of 1999
increased $1.4 million, or 25.7%, to $6.7 million compared to $5.3 million for
the same period in 1998. This increase in total operating expense was primarily
attributable to the Company's continued growth and expansion. The Company has
experienced a 23.9% increase in total assets, and an 8.0% increase in the number
of employees from September 30, 1998 to September 30, 1999.
Salaries and benefits, the largest component of operating expense,
increased $911,000, or 25.0%, to $4.6 million for the quarter ended September
30, 1999, from $3.6 million for the same period in 1998. This increase was
primarily due to an 8.0% increase in the number of employees and normal salary
increases.
Occupancy and equipment expense increased $158,000, or 29.5%, to $693,000
for the third quarter of 1999, from $535,000 for the same period last year. This
increase was primarily attributable to higher depreciation expense as a result
of the Company's investments in technology.
Professional services include such expenses as outsourced data processing
and custody fees, legal and consulting fees, and other fees paid to external
service providers. These expenses increased $277,000, or 62.8%, as a result of
increased legal and consulting expenses, recruitment expenses, and service and
volume related charges for data processing and custody. Of this increase,
$82,000 was due to expenses incurred for the Year 2000 Readiness Program.
Marketing expenses increased $37,000, or 42.0%, to $125,000 for the third
quarter of 1999 as a result of a higher volume of advertising designed to
increase the visibility of the Company and its products and services.
Other expenses include supplies, telephone, postage, publications and
subscriptions, employee training, and other miscellaneous business expenses.
These expenses have remained relatively flat compared to the same period last
year.
INCOME TAX EXPENSE. The Company recorded income tax expense of $606,000 for
the third quarter of 1999 as compared to $671,000 for the same period last year.
The effective tax rate was 28.6% and 33.7% for the two periods, respectively.
The decrease in the Company's effective tax rate is a result of a tax saving
strategy implemented during the first quarter of 1999, as well as a change in
the mix of taxable and tax-exempt revenue in the third quarter of 1999.
19
20
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
NET INCOME. The Company recorded net income of $4.5 million, or $0.40 per
diluted share, for the nine months ended September 30, 1999. This represents an
18.9% increase over the net income of $3.8 million, or $0.34 per diluted share,
for the same period in 1998. During the first nine months of 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 $4.6 million, or $0.41 per diluted share, an increase of 22.3% over
last year.
NET INTEREST INCOME. For the nine months ended September 30, 1999, net
interest income was $12.8 million, an increase of $2.4 million, or 23.2%, over
the same period in 1998. This increase was primarily attributable to an increase
of $91.5 million, or 24.2%, in the average balance of earning assets. The
Company's net interest margin declined 3 basis points, or 1.0%, to 3.69% for the
nine months ended September 30, 1999, compared to 3.72% for the same period last
year.
INTEREST INCOME. During the first nine months of 1999, interest income was
$25.3 million, an increase of $3.7 million, or 17.2%, over the same period in
1998. Interest income on commercial loans increased 13.8% to $11.0 million for
the nine months ended September 30, 1999, compared to $9.6 million for the same
period in 1998. Interest income from residential mortgage loans increased 28.7%
to $10.0 million compared to $7.7 million, and home equity and other loans
increased 29.5% to $1.3 million compared to $1.0 million, for the same periods,
respectively. These increases were primarily due to an increase in loan volume,
partially offset by a decrease in yield. The average balance of commercial loans
increased 25.4% while the average rate decreased 8.5%, or 80 basis points, to
8.60% for the nine months ended September 30, 1999. The average balance of
residential mortgage loans increased 32.6%, while the average rate decreased
3.0%, or 21 basis points, to 6.90% for the same period, and the average balance
of home equity and other loans increased 37.7%, while the average rate decreased
6.0%, or 50 basis points, to 7.80%.
Total investment income decreased $140,000, or 4.4%, to $3.0 million for
the nine months ended September 30, 1999, compared to $3.2 million for the same
period in 1998. This decrease was primarily attributable to a reduction in the
average yield on investments, partially offset by an increase in average
balance.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased $1.3
million, or 11.6%, to $12.5 million for the nine months ended September 30,
1999, from $11.2 million for the same period during 1998. This increase in the
Company's interest expense reflects an increase in the average balance of
interest-bearing liabilities of $78.9 million, or 23.9%, between the two
periods, partially offset by a 9.5% decrease in the average cost of
interest-bearing liabilities to 4.10% for the first nine months of 1999,
compared to 4.53% for the first nine months of 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $749,000 for
the nine months ended September 30, 1999, compared to $857,000 for the same
period in 1998. 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 charge-offs were $29,000
during the first nine months of 1999, compared to $302,000 for the same period
in 1998.
FEES AND OTHER INCOME. Fees and other income increased $1.6 million, or
12.9%, to $13.8 million for the nine month period ending September 30, 1999,
compared to $12.3 million for the same period in 1998. The majority of fee
income is attributable to advisory fees earned on assets under management. These
fees increased $1.6 million, or 14.2%, to $13.1 million for the first nine
months of 1999 compared to $11.4 million for the same period in 1998. This
increase is primarily due to a 22.4% increase in assets under management from
$2.2 billion on September 30, 1998 to $2.7 billion on September 30, 1999.
Deposit account service fees have increased $44,000, or 25.6%, to $216,000
for the first nine months of 1999 as a result of an increase in the number of
deposit accounts and transactions. Gain on sale of loans has decreased $89,000,
or 45.2% to $108,000 due to a lower volume of fixed rate loans sold in the
secondary market. Other fee income has increased $31,000, or 8.7% to $389,000
due to an increase in non-amortized loan fees.
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OPERATING EXPENSE. Total operating expense for the first nine months of
1999 increased $3.1 million, or 19.5%, to $19.2 million compared to $16.1
million for the same period in 1998. This increase in total operating expense
was primarily attributable to the Company's continued growth and expansion. The
Company has experienced a 26.4% increase in total assets, and an 8.0% increase
in the number of employees from September 30, 1998 to September 30, 1999. In
April, 1998, the Company opened a new banking office in Wellesley,
Massachusetts.
Salaries and benefits, the largest component of operating expense,
increased $1.8 million, or 15.9%, to $13.1 million for the nine months ended
September 30, 1999, compared to $11.3 million for the same period in 1998. This
increase was primarily due to an 8.0% increase in the number of employees,
normal salary increases, and the related taxes thereon.
Occupancy and equipment expense increased $332,000, or 21.3%, to $1.9
million for the first nine months of 1999, from $1.6 million for the same period
last year. This increase was primarily attributable to higher depreciation
expense as a result of the Company's investments in technology, and the
additional occupancy expenses related to the new banking office in Wellesley,
Massachusetts that was opened in April 1998.
Professional services include such expenses as outsourced data processing
and custody fees, legal and consulting fees, and other fees paid to external
service providers. These expenses increased $702,000, or 55.7% as a result of
increased legal and consulting expenses, recruitment expenses, and service and
volume related charges for data processing and custody. Of this increase,
$108,000 was due to expenses incurred for the Year 2000 Readiness Program.
Marketing expenses increased $158,000, or 58.7%, to $427,000 for the first
nine months of 1999 as a result of a higher volume of advertising designed to
increase the visibility of the Company and its products and services. The
Company also experienced a $31,000, or 7.6%, increase in business development
expense as a result of an increase in the number of employees and new business
activity.
Other expenses include supplies, telephone, postage, publications and
subscriptions, employee training, and other miscellaneous business expenses.
These expenses have increased $153,000, or 14.0%, to $1.2 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 $2.0 million
for the first nine months of 1999 as compared to $1.9 million for the same
period last year. The effective tax rate was 30.7% and 33.7% for the two
periods, respectively. The decrease in the Company's effective tax rate is a
result of a tax saving strategy implemented during the first quarter of 1999.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to this item, see the Company's December 31, 1998
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
From time to time, the Company is involved in routine legal proceedings
occurring in the ordinary course of business. In the opinion of management,
final disposition of these proceedings will not have a material adverse effect
on the financial condition or results of operations of the Company.
ITEM 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 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three-month period ended
September 30, 1999.
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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)
November 10 , 1999 /s/ Timothy L. Vaill
- ------------------ ---------------------------------
Timothy L. Vaill
Chairman and Chief
Executive Officer
November 10, 1999 /s/ Walter M. Pressey
- ----------------- ---------------------------------
Walter M. Pressey
Executive Vice President and
Chief Financial Officer
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