<PAGE> 1
As filed with the Securities and Exchange Commission on August 12, 1999
================================================================================
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 June 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 JULY 31, 1999:
COMMON STOCK - PAR VALUE $1.00 10,846,963 SHARES
------------------------------ -----------------
(class) (outstanding)
================================================================================
<PAGE> 2
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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 23
Signature Page 24
</TABLE>
2
<PAGE> 3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 13,700 $ 12,924
Federal funds sold 35,000 11,000
Investment securities available for sale (amortized cost of
$61,485 and $53,996, respectively) 60,415 54,102
Mortgage-backed securities available for sale (amortized cost of
$6,833 and $11,840, respectively) 6,736 11,909
Loans receivable:
Commercial 166,505 154,940
Residential mortgage 201,635 173,810
Home equity 26,387 19,866
Other 325 335
-------- --------
Total loans 394,852 348,951
Less allowance for loan losses (4,833) (4,386)
-------- --------
Net loans 390,019 344,565
Stock in the Federal Home Loan Bank of Boston 4,830 4,718
Premises and equipment, net 3,534 3,627
Excess of cost over net assets acquired, net 3,157 3,424
Management fees receivable 3,425 3,288
Accrued interest receivable 2,963 2,405
Other assets 4,554 5,285
-------- --------
Total assets $528,333 $457,247
======== ========
LIABILITIES:
Deposits $ 392,607 $334,852
Securities sold under agreements to repurchase 8,127 6,241
FHLB borrowings 85,691 76,329
Accrued interest payable 1,218 651
Other liabilities 5,609 6,883
-------- --------
Total liabilities 493,252 424,956
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value per share;
authorized: 18,000,000 shares
issued: 10,846,963 shares in 1999 and 10,747,744 shares in 1998 10,847 10,748
Additional paid-in capital 13,092 12,680
Retained earnings 12,216 9,246
Stock subscriptions receivable (328) (495)
Accumulated other comprehensive income (loss) (746) 112
-------- --------
Total stockholders' equity 35,081 32,291
-------- --------
Total liabilities and stockholders' equity $528,333 $457,247
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
-------------- --------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income:
Commercial loans $3,650 $3,208 $ 7,175 $ 6,284
Residential mortgage loans 3,325 2,483 6,381 4,830
Home equity and other loans 434 321 813 653
Investment securities 642 664 1,252 1,234
Mortgage-backed securities 102 230 272 496
FHLB stock dividends 75 65 150 128
Federal funds sold 94 143 226 230
Deposits in banks 44 36 72 76
-------------- --------------- ------------- ---------------
Total interest and dividend income 8,366 7,150 16,341 13,931
-------------- --------------- ------------- ---------------
Interest expense:
Savings and NOW 151 110 261 211
Money market 1,626 1,384 3,167 2,523
Certificates of deposit 1,078 1,070 2,187 2,135
Federal funds purchased 25 9 63 48
Securities sold under agreements to repurchase 106 63 185 115
FHLB borrowings 1,105 1,058 2,177 2,159
Other short-term borrowings -- 5 -- 19
-------------- --------------- ------------- ---------------
Total interest expense 4,091 3,699 8,040 7,210
-------------- --------------- ------------- ---------------
Net interest income 4,275 3,451 8,301 6,721
Provision for loan losses 186 331 424 615
-------------- --------------- ------------- ---------------
Net interest income after provision for loan losses 4,089 3,120 7,877 6,106
-------------- --------------- ------------- ---------------
Fees and other income:
Trust and investment management 4,381 3,989 8,589 7,728
Equity in earnings of partnerships -- -- 90 205
Deposit account service charges 84 58 153 109
Gain (loss) on sale of loans 39 60 83 99
Gain (loss) on sale of investment securities -- 1 46 56
Other 143 121 246 177
-------------- --------------- ------------- --------------
Total fees and other income 4,647 4,229 9,207 8,374
-------------- --------------- ------------- --------------
Operating expense:
Salaries and employee benefits 4,238 3,793 8,495 7,619
Occupancy and equipment 608 535 1,195 1,021
Professional services 624 452 1,246 821
Marketing 159 87 301 181
Business development 161 159 329 286
Amortization of intangibles 71 80 142 161
Other 450 346 851 696
-------------- --------------- ------------- ---------------
Total operating expense 6,311 5,452 12,559 10,785
-------------- --------------- ------------- ---------------
Income before income taxes 2,425 1,897 4,525 3,695
Income tax expense 782 635 1,430 1,244
-------------- --------------- ------------- --------------
Income before cumulative effect of change in
accounting principle 1,643 1,262 3,095 2,451
Cumulative effect of change in accounting principle -- -- 125 --
-------------- --------------- ------------- --------------
Net income $1,643 $1,262 $ 2,970 $ 2,451
============== =============== ============= ==============
Per share data:
Basic earnings per share
Income before cumulative effect of change in
accounting principle $ 0.15 $ 0.12 $ 0.28 $ 0.23
Cumulative effect of change in accounting
principle -- -- 0.01 --
-------------- --------------- ------------- ---------------
Net Income $ 0.15 $ 0.12 $ 0.27 $ 0.23
============== =============== ============= ===============
Diluted earnings per share
Income before cumulative effect of change in
accounting principle $ 0.15 $ 0.11 $ 0.28 $ 0.22
Cumulative effect of change in accounting principle -- -- 0.01 --
-------------- --------------- ------------- ---------------
Net Income $ 0.15 $ 0.11 $ 0.27 $ 0.22
============== =============== ============= ===============
Average common shares outstanding 10,828,029 10,714,611 10,802,973 10,692,912
============== =============== ============= ===============
Average diluted shares outstanding 11,130,162 11,186,923 11,124,256 11,135,675
============== =============== ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED STOCK COMPREHENSIVE
STOCK CAPITAL EARNINGS SUBSCRIPTIONS INCOME (LOSS) TOTAL
------------ ------------- -------------- ------------- --------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 10,641 $12,140 $ 3,800 $ (669) $ 23 $ 25,935
Net income -- -- 2,451 -- -- 2,451
Other comprehensive income:
Change in unrealized gain (loss) on
securities available for sale, net -- -- -- -- (16) (16)
-------------
Total other comprehensive income 2,435
Stock options exercised 97 75 -- -- -- 572
Stock subscription payments -- -- -- 167 -- 167
------------ ------------- -------------- ------------- -------------- -------------
Balance at June 30, 1998 $ 10,738 $12,615 $ 6,251 $ (502) $ 7 $ 29,109
============ ============= ============== ============= =============== =============
Balance at December 31, 1998 $ 10,748 $12,680 $ 9,246 $ (495) $ 112 $ 32,291
Net income -- -- 2,970 -- -- 2,970
Other comprehensive income:
Change in unrealized gain
(loss) on securities available
for sale, net -- -- -- -- (858) (858)
-------------
Total other comprehensive income 2,112
Proceeds from issuance of
47,769 shares of common stock 48 328 -- -- -- 376
Stock options exercised 51 84 -- -- -- 135
Stock subscription payments -- -- -- 167 -- 167
------------ ------------- -------------- ------------- -------------- -------------
Balance at June 30, 1999 $ 10,847 $13,092 $ 12,216 $ (328) $ (746) $ 35,081
============ ============= ============== ============= =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------
1999 1998
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,970 $ 2,451
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 779 803
Gain on sale of loans (83) (99)
Gain on sale of other real estate owned -- (4)
Gain on sale of investment securities (46) (56)
Provision for loan losses 424 615
Distributed (undistributed) earnings of partnership investments 1,738 (231)
Loans originated for sale (8,377) (8,811)
Proceeds from sale of loans 8,460 8,910
(Increase) decrease in:
Accrued interest receivable (558) (521)
Investment management fees receivable (137) (736)
Other assets (525) (1,262)
Increase (decrease) in:
Accrued interest payable 567 (24)
Other liabilities (1,274) 1,053
---------------- ----------------
Net cash provided (used) by operating activities 3,938 2,088
---------------- ----------------
Cash flows from investing activities:
Net decrease (increase) in federal funds sold (24,000) (11,200)
Investment securities available for sale:
Purchases (45,042) (40,712)
Sales 31,255 30,917
Maturities 6,040 3,480
Mortgage-backed securities available for sale:
Sales 1,606 --
Principal payments 3,387 --
Investment securities held to maturity:
Purchases -- (874)
Maturities -- 2,400
Mortgage-backed securities held to maturity:
Principal payments -- 3,921
Net decrease (increase) in loans (45,750) (37,971)
Purchase of FHLB stock (112) (516)
Recoveries on loans previously charged off 101 47
Proceeds from sales of other real estate owned -- 38
Capital expenditures (329) (505)
---------------- ----------------
Net cash provided (used) by investing activities (72,844) (50,975)
---------------- ----------------
Cash flows from financing activities:
Net increase (decrease) in deposits 57,755 46,458
Net increase (decrease) in repurchase agreements 1,886 (261)
Net increase (decrease) in federal funds purchased -- (10,755)
FHLB advances:
Proceeds 51,129 26,480
Repayments (41,767) (16,406)
Net increase (decrease) in other short-term borrowings -- (837)
Proceeds from stock subscriptions receivable 167 167
Proceeds from issuance of common stock 512 572
---------------- ----------------
Net cash provided (used) by financing activities 69,682 45,418
---------------- ----------------
Net increase (decrease) in cash and due from banks 776 (3,469)
Cash and due from banks at beginning of year 12,924 12,361
---------------- ----------------
Cash and due from banks at end of period $ 13,700 $ 8,892
================ ================
Supplementary disclosures of cash flow information:
Cash paid during the period for interest $ 7,473 $ 7,244
Cash paid during the period for income taxes 674 2,068
Supplementary disclosures of non-cash activities:
Transfer of loans to other real estate owned -- 42
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 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 to Shareholders. Certain fiscal 1998 information
has been reclassified to conform with the 1999 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1999 1998
------------------------------ -----------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------------------------- -----------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income $1,643 10,828 $0.15 $1,262 10,715 $0.12
======== =======
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 302 -- 472
--------------------- ---------------------
DILUTED EPS
----------------------------- -----------------------------
Net Income $1,643 11,130 $0.15 $1,262 11,187 $0.11
============================= =============================
</TABLE>
7
<PAGE> 8
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1999 1998
------------------------------ -----------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------------------------- -----------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income $2,970 10,803 $0.27 $2,451 10,693 $0.23
======== ========
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 321 -- 443
--------------------- ---------------------
DILUTED EPS
----------------------------- -----------------------------
Net Income $2,970 11,124 $0.27 $2,451 11,136 $0.22
============================= =============================
</TABLE>
(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, 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
<PAGE> 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 June 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
----------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 4,275 $ 16 $ -- $ (16) $ 4,275
Non-Interest Income 2,170 2,477 -- -- 4,647
----------- ------------- ------------- ------------- -------------
Total Revenues 6,445 2,493 -- (16) 8,922
Provision for Loan Losses 186 -- -- -- 186
Non-Interest Expense 4,490 1,821 -- -- 6,311
Income Taxes 507 275 -- _ 782
----------- ------------- ------------- ------------- -------------
Segment Profit $ 1,262 $ 397 -- $ (16) $ 1,643
=========== ============= ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $524,764 $ 4,919 $ 1,893 $ (3,243) $528,333
=========== ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
----------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 3,456 $ 7 $ 4 $ (16) $ 3,451
Non-Interest Income 1,687 2,542 -- -- 4,229
----------- ------------- ------------- ------------- -------------
Total Revenues 5,143 2,549 4 (16) 7,680
Provision for Loan Losses 331 -- -- -- 331
Non-Interest Expense 3,679 1,769 4 -- 5,452
Income Taxes 315 320 -- -- 635
----------- ------------- ------------- ------------- -------------
Segment Profit $ 818 $ 460 $ -- $ (16) $ 1,262
=========== ============= ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $413,880 $4,291 $930 $(1,277) $417,824
=========== ============= ============= ============= =============
</TABLE>
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, 1999 and 1998.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
----------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 8,301 $ 47 $ -- $ (47) $ 8,301
Non-Interest Income 4,222 4,985 -- -- 9,207
----------- ------------- ------------- ------------- -------------
Total Revenues 12,523 5,032 -- (47) 17,508
Provision for Loan Losses 424 -- -- -- 424
Non-Interest Expense 8,930 3,754 -- -- 12,684
Income Taxes 907 523 -- -- 1,430
----------- ------------- ------------- ------------- -------------
Segment Profit $ 2,262 $ 755 -- $ (47) $ 2,970
=========== ============= ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $524,764 $4,919 $1,893 $(3,243) $528,333
=========== ============= ============= ============= =============
</TABLE>
9
<PAGE> 10
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
BANK WESTFIELD OTHER INTERSEGMENT TOTAL
----------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues from External Customers:
Net Interest Income $ 6,740 $ 7 $ 5 $ (31) $ 6,721
Non-Interest Income 3,102 5,272 -- -- 8,374
----------- ------------- ------------- ------------- -------------
Total Revenues 9,842 5,279 5 (31) $ 15,095
Provision for Loan Losses 615 -- -- -- 615
Non-Interest Expense 7,128 3,652 5 -- 10,785
Income Taxes 578 666 -- -- 1,244
----------- ------------- ------------- ------------- -------------
Segment Profit $ 1,521 $ 961 $ -- $ (31) $ 2,451
=========== ============= ============= ============= =============
BALANCE SHEET DATA:
Total Segment Assets $ 413,880 $ 4,291 $ 930 $ (1,277) $ 417,824
=========== ============= ============= ============= =============
</TABLE>
(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 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. 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.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 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, 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"). Effective April 22, 1998, the Company changed its name from Boston
Private Bancorp, Inc. to Boston Private Financial Holdings, Inc.
Westfield Capital Management Company, Inc. ("Westfield"), is a
Massachusetts corporation engaged in providing a range of investment management
services to individual and institutional clients. Boston Private Investment
Management, Inc., a subsidiary of the Company, is the holding company for
Westfield.
The Company conducts substantially all of its business through its
wholly-owned operating subsidiaries, the Bank and Westfield. The Company's and
the Bank's principal office is located at Ten Post Office Square, Boston,
Massachusetts, and Westfield is located at One Financial Center, Boston,
Massachusetts.
The Bank pursues a "private banking" business strategy and is principally
engaged in providing banking, investment and fiduciary products and services to
high net worth individuals, their families and businesses in the greater Boston
area and New England and, to a lesser extent, Europe and Latin America. The Bank
offers its clients a broad range of basic deposit services, including checking
and savings accounts with automated teller machine ("ATM") access, and cash
management services through sweep accounts and repurchase agreements. The Bank
also offers commercial, residential mortgage, home equity and personal loans. In
addition, it provides investment advisory and asset management services,
securities custody and safekeeping services, trust and estate administration and
IRA and Keogh accounts.
Westfield 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 a third, started
in June 1998, invests primarily in midcap equities.
11
<PAGE> 12
FINANCIAL CONDITION
TOTAL ASSETS Total assets increased $71.1 million, or 15.6%, from $457.2
million at December 31, 1998 to $528.3 million at June 30, 1999. This increase
is primarily due to continued loan 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 FHLB of
Boston) totaled $102.7 million, or 22.8% of total assets, at June 30, 1999,
compared to $94.7 million, or 20.7% of total assets, at December 31, 1998.
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, deposit
balances and loan demand.
The following table is a summary of investment and mortgage-backed
securities available for sale as of June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT JUNE 30, 1999
U.S. Government and agencies $ 24,893 $ -- $ (712) $ 24,181
Municipal bonds 36,592 27 (385) 36,234
Mortgage-backed securities 6,833 5 (102) 6,736
------------- ---------- ---------- -------------
Total investments $ 68,318 $ 32 $ (1,199) $ 67,151
============= ========== ========== =============
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
============= ========== ========== =============
</TABLE>
LOANS Total loans increased $45.9 million, or 13.2%, during the first half
of 1999 from $349.0 million, or 76.3% of total assets, at December 31, 1998, to
$394.9 million, or 74.7% of total assets, at June 30, 1999. Both the commercial
and residential mortgage loan portfolios experienced significant growth due to
the strong local economy and low interest rate environment. Interest rates
affect both the level of new loan originations and refinances or paydowns of
existing loans. During the first half of 1999, interest rates were at fairly
stable, low levels, and demand for new residential and commercial loans and
refinances was strong. Commercial loans increased $11.6 million, or 7.5%, and
residential mortgage loans increased $27.8 million, or 16.0%, during the first
half of 1999 as a result of net new loan originations.
RISK ELEMENTS Total non-performing assets, which consist of non-accrual
loans and other real estate owned, increased by $381,000, or 67.4%, during the
first half of 1999 from $565,000, or 0.12% of total assets at December 31, 1998,
to $946,000, or 0.18% of total assets at June 30, 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, 1999, loans with an aggregate balance of $3.0 million, or 0.76%
of total loans, were 30 to 89 days past due, a decrease of $317,000, or 9.6%,
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.
The Company discontinues the accrual of interest on a loan when the
collectibility of principal or interest is in doubt. In certain instances, loans
that have become 90 days past due may remain on accrual status if the value of
the collateral securing the loan is sufficient to cover principal and interest
and the loan is in the process of collection.
12
<PAGE> 13
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 a financial
institution's allowance for loan losses. Such agencies may require the financial
institution to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
The following table is an analysis of the Bank's allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------
1999 1998 1999 1998
--------------- ---------------- ---------------- ---------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Ending gross loans $ 394,852 $ 314,162 $ 394,852 $ 314,162
=============== ================ ================ ===============
Allowance for loan losses, beginning of period $ 4,641 $ 3,555 $ 4,386 $ 3,645
Provision for loan losses 186 331 424 615
Charge-offs (71) -- (78) (376)
Recoveries 77 45 101 47
--------------- ---------------- ---------------- ---------------
Allowance for loan losses, end of period $ 4,833 $ 3,931 $ 4,833 $ 3,931
=============== ================ ================ ===============
Allowance for loan losses to ending gross loans 1.22% 1.25% 1.22% 1.25%
=============== ================ ================ ===============
</TABLE>
13
<PAGE> 14
DEPOSITS AND BORROWINGS The Company experienced an increase in total
deposits of $57.8 million, or 17.2%, during the first half of 1999, from $334.9
million, or 73.2% of total assets, at December 31, 1998, to $392.7 million, or
74.3% of total assets, at June 30, 1999. This increase was most pronounced in
NOW and money market accounts.
The following table shows the composition of the Company's deposits at June
30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Demand deposits $ 46,109 $ 47,766
NOW 43,307 35,735
Savings 5,370 4,235
Money market 212,253 164,626
Certificates of deposit under $100,000 26,018 29,874
Certificates of deposit $100,000 or greater 59,550 52,616
--------------- ----------------
Total $ 392,607 $ 334,852
=============== ================
</TABLE>
Total borrowings (consisting of securities sold under agreements to
repurchase ("repurchase agreements"), federal funds purchased, FHLB borrowings
and other short-term borrowings) increased $11.2 million, or 13.6%, during the
first half 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. Management
will from time to time take advantage of opportunities to fund asset growth with
borrowings, but on a long-term basis the Company intends to replace a portion of
its borrowings with core deposits.
LIQUIDITY Liquidity is defined as the ability to meet current and future
financial obligations of a short-term nature. The Company further defines
liquidity as the ability to respond to the needs of depositors and borrowers as
well as to earnings enhancement opportunities in a changing marketplace. Primary
sources of liquidity consist of investment management fees, 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, 1999, cash, federal
funds sold and securities available for sale amounted to $115.9 million, or
21.9% of total assets. This compares 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 $169 million at the current time.
In addition, the Bank maintains a line of credit at the FHLB of Boston as well
as other lines of credit with several correspondent banks. Management believes
that the Bank has adequate liquidity to meet its commitments for the foreseeable
future.
Westfield's primary source of liquidity consists of investment management
fees that are collected on a quarterly basis. At June 30, 1999 Westfield had
working capital of approximately $2.3 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.
14
<PAGE> 15
CAPITAL RESOURCES Total stockholders' equity of the Company at June 30,
1999 was $35.1 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 $3.0
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 June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTUAL FOR CAPITAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------- ------------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- --------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1999:
-------------------
Total risk-based capital
Company $36,560 11.79% $24,815 > 8.0% $31,019 > 10.0%
Bank 32,120 10.48 24,526 8.0 30,658 10.0
Tier I risk-based
Company 32,671 10.53 12,408 4.0 18,611 6.0
Bank 28,275 9.22 12,263 4.0 18,395 6.0
Tier I leverage capital
Company 32,671 6.69 19,531 4.0 24,414 5.0
Bank 28,275 5.83 19,390 4.0 24,238 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
</TABLE>
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 all 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.
15
<PAGE> 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,
Personal, Contingency Plans for Information Systems and Contingency Plans for
Business Continuation. Awareness and Assessment, Project Planning for all
aspects and User Acceptance Test Plans for mission critical systems have been
completed. Mission critical systems are defined by the Company as those vital to
the successful continuance of core business activities. Contingency Planning for
all mission critical information technology systems and for Business
Continuation has been completed and will be updated periodically during 1999.
The Company relies on several third party service providers for key
business processes. It continues to work closely with these companies to monitor
the progress of their Year 2000 efforts. The Company's Year 2000 project team
has contacted all material service providers to discuss and assess their Year
2000 readiness. In addition, the Company is seeking verbal and written
verification from its material third party service providers as to their Year
2000 readiness. The Company began Year 2000 testing with material third party
service providers during the third quarter of 1998, and completed testing by
June 30, 1999. This schedule continues to track in line with the Company's
overall Year 2000 project plan.
The Remediation phase, wherein non-compliant software and hardware are
either modified or replaced, was 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 initial portion of the Commercial phase, which includes the
evaluation of credit risk stemming from problems borrowers may have in resolving
their own Year 2000 issues, has been completed; 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. During
this phase 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 own Year 2000 issues. Also encompassed in this phase, are
in-process evaluation, assessment and monitoring of the state of readiness of
the Company's funds providers and the capital markets. The Personal phase is
largely focused on customer communications as to the state of the Company's Year
2000 readiness.
Initial communications have been distributed and the process is ongoing.
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, there could be an adverse effect on the
Company's business. In addition, since 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.
Since 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
<PAGE> 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 June 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 $100,000. 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
borrower 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.
17
<PAGE> 18
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
NET INCOME. The Company recorded net income of $1.6 million, or $0.15 per
diluted share, for the quarter ended June 30, 1999. This represents a 30.2%
increase over the net income of $1.3 million, or $0.11 per diluted share, for
the same period in 1998.
NET INTEREST INCOME. For the quarter ended June 30, 1999, net interest
income was $4.3 million, an increase of $824,000, or 23.9%, over the same period
in 1998. This increase was primarily attributable to an increase of $90.5
million, or 23.9%, in the average balance of earning assets. The Company's net
interest margin was relatively flat at 3.72% for the second quarter of 1999,
compared to 3.71% for the same period last year.
INTEREST INCOME. During the second quarter of 1999, interest income was
$8.4 million, an increase of $1.2 million, or 17.0%, over the same period in
1998. Interest income on commercial loans increased 13.8% to $3.7 million for
the quarter ended June 30, 1999, compared to $3.2 million for the same period in
1998. Interest income from residential mortgage loans increased 33.9% to $3.3
million compared to $2.5 million, and home equity and other loans increased
35.2% to $434,000 compared to $321,000, 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
25.5% while the average rate decreased 9.3%, or 87 basis points to 8.51% for the
quarter ended June 30, 1999. The average balance of residential mortgage loans
increased 36.1%, while the average rate decreased 1.6%, or 12 basis points to
6.97% for the same period, and the average balance of home equity and other
loans increased 46.5%, while the average rate decreased 7.7%, or 64 basis points
to 7.71%.
Total investment income decreased $181,000, or 15.9%, to $957,000 for the
quarter ended June 30, 1999, compared to $1.1 million for the same period in
1998. This decrease was primarily attributable to a reduction in the average
yield on investments of 63 basis points, or 10.7%.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased
$392,000, or 10.6%, to $4.1 million for the quarter ended June 30, 1999, from
$3.7 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 $80.6 million, or 24.5% between the two periods, partially offset
by a 10.8% decrease in the average cost of interest-bearing liabilities from
4.49% for the second quarter of 1998, to 4.00% for the second quarter of 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $186,000 for
the quarter ended June 30, 1999, compared to $331,000 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 recoveries were $6,000 during the second quarter
of 1999, compared to net recoveries of $45,000 for the same period in 1998.
FEES AND OTHER INCOME. Fees and other income increased $418,000, or 9.9%,
to $4.6 million for the three month period ending June 30, 1999, compared to
$4.2 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 $392,000, or 9.8%, to $4.4 million for the second quarter of 1999
compared to $4.0 million for the same period in 1998. This increase is primarily
due to a 8.8% increase in assets under management from $2.5 billion on June 30,
1998 to $2.8 billion on June 30, 1999.
Deposit account service fees have increased $26,000, or 44.8%, to $84,000
for the second quarter of 1999 as a result of an increase in the number of
deposit accounts and transactions. Gain on sale of loans has decreased $21,000
to $39,000 due to a lower volume of fixed rate loans sold in the secondary
market. Other fee income increased $22,000 to $143,000 due to a higher level of
non-amortized loan fees.
OPERATING EXPENSE. Total operating expense for the second quarter of 1999
increased $859,000, or 15.8%, to $6.3 million compared to $5.5 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 a 13.2% increase in the number
of employees from June 30, 1998 to June 30, 1999. In April, 1998, the Company
opened a new banking office in Wellesley, Massachusetts.
18
<PAGE> 19
Salaries and benefits, the largest component of operating expense,
increased $445,000, or 11.7%, to $4.2 million for the quarter ended June 30,
1999, from $3.8 million for the same period in 1998. This increase was primarily
due to a 13.2% increase in the number of employees, normal salary increases, and
the related taxes thereon.
Occupancy and equipment expense increased $73,000, or 13.6%, to $608,000
for the second 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, 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 $172,000, or 38.1%, as a result of
legal and consulting expenses incurred for strategic projects, and increased
service and volume related charges for data processing and custody.
Marketing expenses increased $72,000, or 82.8%, to $159,000 for the second
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. The
Company also experienced a $2,000, or 1.3%, 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 $104,000, or 30.1%, to $450,000, 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 $782,000 for
the second quarter of 1999 as compared to $635,000 for the same period last
year. The effective tax rate was 32.2% and 33.5% 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.
19
<PAGE> 20
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
NET INCOME. The Company recorded net income of $3.0 million, or $0.27 per
diluted share, for the six months ended June 30, 1999. This represents a 21.2%
increase over the net income of $2.5 million, or $0.22 per diluted share, for
the same period in 1998. During the first half 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
$3.1 million, or $0.28 per diluted share, an increase of 26.3% over last year.
NET INTEREST INCOME. For the six months ended June 30, 1999, net interest
income was $8.3 million, an increase of $1.6 million, or 23.5%, over the same
period in 1998. This increase was primarily attributable to an increase of $90.7
million, or 24.7%, in the average balance of earning assets. The Company's net
interest margin declined 4 basis points, or 1.1% to 3.68% for the six months
ended June 30, 1999, compared to 3.72% for the same period last year.
INTEREST INCOME. During the first half of 1999, interest income was $16.3
million, an increase of $2.4 million, or 17.3%, over the same period in 1998.
Interest income on commercial loans increased 14.2% to $7.2 million for the six
months ended June 30, 1999, compared to $6.3 million for the same period in
1998. Interest income from residential mortgage loans increased 32.1% to $6.4
million compared to $4.8 million, and home equity and other loans increased
24.5% to $813,000 compared to $653,000, 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
25.5% while the average rate decreased 9.0%, or 85 basis points to 8.51% for the
six months ended June 30, 1999. The average balance of residential mortgage
loans increased 36.1%, while the average rate decreased 3.0%, or 21 basis
points, to 6.94% for the same period, and the average balance of home equity and
other loans increased 35.2%, while the average rate decreased 7.9%, or 66 basis
points, to 7.64%.
Total investment income decreased $192,000, or 8.9%, to $2.0 million for
the six months ended June 30, 1999, compared to $2.2 million for the same period
in 1998. This decrease was primarily attributable to a reduction in the average
yield on investments.
INTEREST EXPENSE. Interest paid on deposits and borrowings increased
$830,000, or 11.5%, to $8.0 million for the six months ended June 30, 1999, from
$7.2 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 $81.2 million, or 25.4%, between the two periods, partially
offset by a 10.4% decrease in the average cost of interest-bearing liabilities
to 4.03% for the first half of 1999, compared to 4.50% for the first half of
1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $424,000 for
the six months ended June 30, 1999, compared to $615,000 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 recoveries were $23,000 during the first half of
1999, compared to $329,000 of net charge-offs for the same period in 1998.
FEES AND OTHER INCOME. Fees and other income increased $833,000, or 9.9%,
to $9.2 million for the six month period ending June 30, 1999, compared to $8.4
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
$861,000, or 11.1%, to $8.6 million for the first half of 1999 compared to $7.7
million for the same period in 1998. This increase is primarily due to a 8.8%
increase in assets under management from $2.5 billion on June 30, 1998 to $2.8
billion on June 30, 1999.
Equity in earnings of partnerships has decreased $115,000, or 56.1%, due
primarily to timing differences in the recognition of hedge fund performance fee
income. Deposit account service fees have increased $44,000, or 40.4%, to
$153,000 for the first half of 1999 as a result of an increase in the number of
deposit accounts and transactions. Gain on sale of loans has decreased $16,000
to $83,000 due to a lower volume of fixed rate loans sold in the secondary
market. Other fee income increased $69,000 to $246,000 due to a higher level of
non-amortized loan fees.
20
<PAGE> 21
OPERATING EXPENSE. Total operating expense for the first half of 1999
increased $1.8 million, or 16.4%, to $12.6 million compared to $10.8 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 a 13.2% increase in the number
of employees from June 30, 1998 to June 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 $876,000, or 11.5%, to $8.5 million for the six months ended June 30,
1999, compared to $7.6 million for the same period in 1998. This increase was
primarily due to a 13.2% increase in the number of employees, normal salary
increases, and the related taxes thereon.
Occupancy and equipment expense increased $174,000, or 17.0%, to $1.2
million for the first half of 1999, from $1.0 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 $425,000, or 51.8% as a result of
legal and consulting expenses incurred for strategic projects, and increased
service and volume related charges for data processing and custody.
Marketing expenses increased $120,000, or 66.3%, to $301,000 for the first
half 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 $43,000, or 15.0% 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 $155,000, or 22.3%, to $851,000, 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 $1.4 million
for the first half of 1999 as compared to $1.2 million for the same period last
year. The effective tax rate was 31.6% 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.
21
<PAGE> 22
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
The Bank has been involved in a dispute among various parties relating to a
December 1994 transaction in which it served as bank of deposit for certain
certificates stated to reflect debt obligations of a foreign bank. The matter
was settled through mediation on June 29, 1999. In return for the plaintiff
dropping all past and future claims related to the disputed transaction, the
Bank agreed to contribute with other parties to the dispute to a settlement
fund. The Bank's contribution to the fund was immaterial. All expenses related
to this matter are fully reflected the Company's second quarter financial
statements.
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
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 23, 1999, stockholders
of the Company approved the proposal to elect three (3) Class II 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
--- ------- --------
Arthur J. Bauernfeind 7,288,064 -- 60,539
C. Michael Hazard 7,338,218 -- 10,385
Peter C. Bennett 7,343,618 -- 4,985
The term of office of each of Herbert S. Alexander, Lynn Thompson Hoffman,
Charles O. Wood, III, Eugene S. Colangelo, Dr. Allen Sinai and Timothy L. Vaill
as a director of the Company continued after the annual meeting.
ITEM 5. OTHER INFORMATION
The Company announced on July 22, 1999 that it will acquire RINET Company,
Inc. ("RINET"), an integrated tax, financial and investment consulting firm
located in Boston. At the closing of this transaction, which is anticipated to
be accounted for as a pooling of interests, RINET's stockholders will receive
newly issued shares of the Company's common stock valued at $6,000,000. As a
result of the transaction, RINET will become 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.
22
<PAGE> 23
As a result of the transaction, the Company will acquire 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 consummation of this acquisition is subject to certain conditions
including, among others, the obtaining of all necessary regulatory approvals and
third party consents, the Company's satisfaction with its due diligence review
of RINET and delivery of certain assurances that the transaction will be
accounted for as a pooling of interests.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
Exhibit 27.1 Financial Data Schedule
No reports on Form 8-K were filed during the three-month period ended June
30, 1999.
23
<PAGE> 24
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 12, 1999 /s/ Timothy L. Vaill
---------------------------------------
Timothy L. Vaill
Chairman and Chief
Executive Officer
August 12, 1999 /s/ Walter M. Pressey
---------------------------------------
Walter M. Pressey
Executive Vice President and
Chief Financial Officer
24
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