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As filed with the Securities and Exchange Commission on November 13, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2000
OR
/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Commonwealth of Massachusetts (State or other jurisdiction of incorporation or organization) |
04-2976299 (I.R.S. Employer Identification Number) |
|
Ten Post Office Square Boston, Massachusetts (Address of principal executive offices) |
|
02109 (Zip Code) |
(617) 912-1900
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 31, 2000:
Common StockPar Value $1.00 | 15,560,119 shares | |
(class) | (outstanding) |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC
FORM 10-Q
TABLE OF CONTENTS
|
PAGE |
|
---|---|---|
Cover Page | 1 | |
Index | 2 |
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 | 7-11 | |||
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12-20 | ||
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 20 |
Item 1 | Legal Proceedings | 21 | ||
Item 2 | Changes in Securities and Use of Proceeds | 21 | ||
Item 3 | Defaults upon Senior Securities | 21 | ||
Item 4 | Submission of Matters to a Vote of Security Holders | 21 | ||
Item 5 | Other Information | 21 | ||
Item 6 | Exhibits and Reports on Form 8-K | 21 | ||
Signature Page | 22 |
2
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
(Unaudited) September 30, 2000 |
December 31, 1999 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands, except share data) |
|||||||||
Assets: | ||||||||||
Cash and due from banks | $ | 46,993 | $ | 11,190 | ||||||
Federal funds sold | 62,000 | | ||||||||
Investment securities available for sale (amortized cost of $110,527 and $75,424, respectively) | 109,338 | 73,605 | ||||||||
Mortgage-backed securities available for sale (amortized cost of $3,593 and $5,627, respectively) | 3,558 | 5,510 | ||||||||
Loans receivable: | ||||||||||
Commercial | 247,649 | 190,817 | ||||||||
Residential mortgage | 313,434 | 234,185 | ||||||||
Home equity | 25,844 | 25,039 | ||||||||
Other | 444 | 347 | ||||||||
Total loans | 587,371 | 450,388 | ||||||||
Less allowance for loan losses | (6,733 | ) | (5,336 | ) | ||||||
Net loans | 580,638 | 445,052 | ||||||||
Stock in the Federal Home Loan Bank of Boston | 4,830 | 4,830 | ||||||||
Premises and equipment, net | 6,326 | 4,739 | ||||||||
Excess of cost over net assets acquired, net | 18,338 | 3,015 | ||||||||
Fees receivable | 6,685 | 6,320 | ||||||||
Accrued interest receivable | 4,754 | 3,597 | ||||||||
Other assets | 8,061 | 9,515 | ||||||||
Total assets | $ | 851,521 | $ | 567,373 | ||||||
Liabilities: |
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Deposits | $ | 648,815 | $ | 420,535 | ||||||
Securities sold under agreements to repurchase | 28,610 | 16,551 | ||||||||
FHLB borrowings | 65,322 | 80,672 | ||||||||
Accrued interest payable | 1,531 | 1,281 | ||||||||
Other liabilities | 13,701 | 9,189 | ||||||||
Total liabilities | 757,979 | 528,228 | ||||||||
Stockholders' equity: |
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Common stock, $1.00 par value per share; authorized: 30,000,000 shares issued: 15,551,344 shares at September 30, 2000 and 11,616,070 shares at December 31, 1999 | 15,551 | 11,616 | ||||||||
Additional paid-in capital | 56,761 | 12,341 | ||||||||
Retained earnings | 22,164 | 16,747 | ||||||||
Stock subscriptions receivable | (150 | ) | (320 | ) | ||||||
Accumulated other comprehensive income (loss) | (784 | ) | (1,239 | ) | ||||||
Total stockholders' equity | 93,542 | 39,145 | ||||||||
Total liabilities and stockholders' equity | $ | 851,521 | $ | 567,373 | ||||||
See accompanying notes to consolidated financial statements.
3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
1999 |
2000 |
1999 |
||||||||||
|
|
(In thousands, except per share data) |
|
|||||||||||
Interest and dividend income: | ||||||||||||||
Loans | $ | 11,337 | $ | 7,847 | $ | 30,224 | $ | 22,216 | ||||||
Taxable investment securities | 899 | 359 | 2,284 | 1,063 | ||||||||||
Non-taxable investment securities | 505 | 361 | 1,315 | 909 | ||||||||||
Mortgage-backed securities | 61 | 93 | 196 | 365 | ||||||||||
FHLB stock dividends | 96 | 89 | 264 | 239 | ||||||||||
Federal funds sold and other | 660 | 173 | 1,826 | 470 | ||||||||||
Total interest and dividend income | 13,558 | 8,922 | 36,109 | 25,262 | ||||||||||
Interest expense: | ||||||||||||||
Deposits | 5,592 | 3,128 | 14,160 | 8,743 | ||||||||||
FHLB borrowings | 1,123 | 1,113 | 3,403 | 3,290 | ||||||||||
Securities sold under agreements to repurchase | 346 | 151 | 933 | 336 | ||||||||||
Federal funds purchased and other | 69 | 45 | 78 | 108 | ||||||||||
Total interest expense | 7,130 | 4,437 | 18,574 | 12,477 | ||||||||||
Net interest income | 6,428 | 4,485 | 17,535 | 12,785 | ||||||||||
Provision for loan losses | 500 | 325 | 1,300 | 749 | ||||||||||
Net interest income after provision for loan losses | 5,928 | 4,160 | 16,235 | 12,036 | ||||||||||
Fees and other income: | ||||||||||||||
Investment management and trust | 7,004 | 4,392 | 18,596 | 12,981 | ||||||||||
Financial planning fees | 947 | 937 | 2,585 | 2,333 | ||||||||||
Equity in earnings (losses) of partnerships | 38 | | (203 | ) | 90 | |||||||||
Deposit account service charges | 77 | 64 | 207 | 216 | ||||||||||
Gain on sale of loans | 26 | 25 | 37 | 108 | ||||||||||
Gain on sale of investment securities | 27 | 2 | 27 | 48 | ||||||||||
Other | 154 | 162 | 419 | 431 | ||||||||||
Total fees and other income | 8,273 | 5,582 | 21,668 | 16,207 | ||||||||||
Operating expense: | ||||||||||||||
Salaries and employee benefits | 7,003 | 5,336 | 19,125 | 14,942 | ||||||||||
Occupancy and equipment | 1,192 | 759 | 3,385 | 2,088 | ||||||||||
Professional services | 648 | 450 | 1,409 | 1,184 | ||||||||||
Marketing and business development | 447 | 247 | 1,467 | 896 | ||||||||||
Contract services and processing | 337 | 275 | 984 | 797 | ||||||||||
Amortization of intangibles | 158 | 71 | 300 | 213 | ||||||||||
Other | 746 | 429 | 1,812 | 1,345 | ||||||||||
Total operating expense | 10,531 | 7,567 | 28,482 | 21,465 | ||||||||||
Income before income taxes | 3,670 | 2,175 | 9,421 | 6,778 | ||||||||||
Income tax expense | 1,169 | 628 | 2,952 | 2,091 | ||||||||||
Income before cumulative effect of change in accounting principle | 2,501 | 1,547 | 6,469 | 4,687 | ||||||||||
Cumulative effect of change in accounting principle | | | | 125 | ||||||||||
Net income | $ | 2,501 | $ | 1,547 | $ | 6,469 | $ | 4,562 | ||||||
Per share data: | ||||||||||||||
Basic earnings per share | ||||||||||||||
Income before cumulative effect of change in accounting principle | $ | 0.21 | $ | 0.13 | $ | 0.55 | $ | 0.40 | ||||||
Cumulative effect of change in accounting principle | | | | 0.01 | ||||||||||
Net Income | $ | 0.21 | $ | 0.13 | $ | 0.55 | $ | 0.39 | ||||||
Diluted earnings per share | ||||||||||||||
Income before cumulative effect of change in accounting principle | $ | 0.20 | $ | 0.13 | $ | 0.53 | $ | 0.39 | ||||||
Cumulative effect of change in accounting principle | | | | 0.01 | ||||||||||
Net Income | $ | 0.20 | $ | 0.13 | $ | 0.53 | $ | 0.38 | ||||||
Average common shares outstanding | 11,971,893 | 11,611,841 | 11,788,523 | 11,583,061 | ||||||||||
Average diluted shares outstanding | 12,581,881 | 11,920,001 | 12,277,366 | 11,901,620 |
See accompanying notes to consolidated financial statements.
4
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
|
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Stock Subscriptions |
Accumulated Other Comprehensive Income (Loss) |
Total |
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(In thousands, except share data) |
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Balance at December 31, 1998 | $ | 11,513 | $ | 11,932 | $ | 9,551 | $ | (495 | ) | $ | 112 | $ | 32,613 | ||||||||
Net income | | | 4,562 | | | 4,562 | |||||||||||||||
Other comprehensive income, net: | |||||||||||||||||||||
Change in unrealized gain (loss) on securities available for sale | | | | | (956 | ) | (956 | ) | |||||||||||||
Total other comprehensive income | 3,606 | ||||||||||||||||||||
Proceeds from issuance of 40,769 shares of common stock | 41 | 279 | | | | 320 | |||||||||||||||
Stock options exercised | 57 | 100 | | | | 157 | |||||||||||||||
Stock subscription payments | | | | 171 | | 171 | |||||||||||||||
Balance at September 30, 1999 | $ | 11,611 | $ | 12,311 | $ | 14,113 | $ | (324 | ) | $ | (844 | ) | $ | 36,867 | |||||||
Balance at December 31, 1999 | $ | 11,616 | $ | 12,341 | $ | 16,747 | $ | (320 | ) | $ | (1,239 | ) | $ | 39,145 | |||||||
Net income | | | 6,469 | | | 6,469 | |||||||||||||||
Other comprehensive income, net: | |||||||||||||||||||||
Change in unrealized gain (loss) on securities available for sale | | | | | 455 | 455 | |||||||||||||||
Total other comprehensive income | 6,924 | ||||||||||||||||||||
Dividends paid to shareholders | | | (1,052 | ) | | | (1,052 | ) | |||||||||||||
Proceeds from issuance of 3,935,274 shares of common stock | 3,777 | 43,978 | | | | 47,755 | |||||||||||||||
Stock options exercised | 158 | 442 | | | | 600 | |||||||||||||||
Stock subscription payments | | | | 170 | | 170 | |||||||||||||||
Balance at September 30, 2000 | $ | 15,551 | $ | 56,761 | $ | 22,164 | $ | (150 | ) | $ | (784 | ) | $ | 93,542 | |||||||
See accompanying notes to consolidated financial statements.
5
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
Nine Months Ended September 30, |
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2000 |
1999 |
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(In thousands) |
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Cash flows from operating activities: | |||||||||||
Net income | $ | 6,469 | $ | 4,562 | |||||||
Adjustments to reconcile net income to net cash from operating activities: | |||||||||||
Depreciation and amortization | 1,761 | 1,154 | |||||||||
Gain on sale of loans | (37 | ) | (108 | ) | |||||||
Gain on sale of investment securities | (27 | ) | (48 | ) | |||||||
Provision for loan losses | 1,300 | 749 | |||||||||
Distributed (undistributed) earnings of partnership investments | 2,259 | 1,732 | |||||||||
Loans originated for sale | (1,904 | ) | (10,980 | ) | |||||||
Proceeds from sale of loans | 1,941 | 11,088 | |||||||||
(Increase) decrease in: | |||||||||||
Fees receivable | (365 | ) | (264 | ) | |||||||
Accrued interest receivable | (1,157 | ) | (587 | ) | |||||||
Other assets | (561 | ) | (1,413 | ) | |||||||
Increase (decrease) in: | |||||||||||
Accrued interest payable | 250 | 600 | |||||||||
Other liabilities | 628 | 466 | |||||||||
Net cash provided (used) by operating activities | 10,557 | 6,951 | |||||||||
Cash flows from investing activities: | |||||||||||
Net decrease (increase) in federal funds sold | (62,000 | ) | 11,000 | ||||||||
Investment securities available for sale: | |||||||||||
Purchases | (68,507 | ) | (55,980 | ) | |||||||
Sales | 2,027 | 6,402 | |||||||||
Maturities | 31,120 | 31,905 | |||||||||
Mortgage-backed securities available for sale: | |||||||||||
Sales | | 3,334 | |||||||||
Principal payments | 2,015 | 2,366 | |||||||||
Net decrease (increase) in loans | (137,294 | ) | (71,040 | ) | |||||||
Purchase of FHLB stock | | (112 | ) | ||||||||
Recoveries on loans previously charged off | 116 | 113 | |||||||||
Capital expenditures | (2,454 | ) | (791 | ) | |||||||
Cash and cash equivalents for acquisition | (9,268 | ) | | ||||||||
Net cash provided (used) by investing activities | (244,245 | ) | (72,803 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Net increase (decrease) in deposits | 228,280 | 42,921 | |||||||||
Net increase (decrease) in repurchase agreements | 12,059 | 2,144 | |||||||||
Net increase (decrease) in federal funds purchased | | 8,000 | |||||||||
FHLB advances: | |||||||||||
Proceeds | 3,000 | 91,629 | |||||||||
Repayments | (18,350 | ) | (77,219 | ) | |||||||
Proceeds from stock subscriptions receivable | 170 | 171 | |||||||||
Dividends paid to stockholders | (1,052 | ) | | ||||||||
Proceeds from issuance of common stock | 45,384 | 477 | |||||||||
Net cash provided (used) by financing activities | 269,491 | 68,123 | |||||||||
Net increase (decrease) in cash and due from banks | 35,803 | 2,271 | |||||||||
Cash and due from banks at beginning of year | 11,190 | 12,949 | |||||||||
Cash and due from banks at end of period | $ | 46,993 | $ | 15,220 | |||||||
Supplementary disclosures of cash flow information: | |||||||||||
Cash paid during the period for interest | $ | 18,333 | $ | 11,877 | |||||||
Cash paid during the period for income taxes | 3,631 | 1,059 | |||||||||
Supplemental schedule of noncash investing and financing activities: | |||||||||||
The Company purchased all of the assets of Sand Hill Advisors for $16.5 million. In conjunction with the acquisition, liabilities were assumed as follows: | |||||||||||
Fair value of assets acquired | $ | 16,124 | | ||||||||
Cash paid at close | (12,240 | ) | | ||||||||
Liabilities assumed | $ | 3,884 | | ||||||||
See accompanying notes to consolidated financial statements.
6
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The consolidated financial statements of Boston Private Financial Holdings, Inc. (the "Company") include the accounts of the Company and its wholly-owned subsidiaries, Boston Private Bank & Trust Company (the "Bank"), Boston Private Investment Management, Inc. ("BPIM"), RINET Company ("RINET"), and Sand Hill Advisors, Inc. ("Sand Hill"). The Bank's consolidated financial statements include the accounts of its wholly-owned subsidiaries, BPB Securities Corporation, Boston Private Asset Management Corporation, and Boston Private Preferred Capital Corporation. BPIM's consolidated financial statements include the accounts of its wholly owned subsidiary, Westfield Capital Management Company ("Westfield"). All significant intercompany accounts and transactions have been eliminated in consolidation.
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.
The unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, and include all necessary adjustments of a normal recurring nature, which in the opinion of management, are required for a fair presentation of the results and financial condition of the Company. The interim results of consolidated operations are not necessarily indicative of the results for the entire year.
The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the December 31, 1999 Annual Report to Shareholders. Certain fiscal 1999 information has been reclassified to conform to the 2000 presentation.
(2) Earnings Per Share
Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The earnings per share calculation is based upon the weighted average number of common shares and common share equivalents outstanding during the period. Stock options, when dilutive, are included as common stock equivalents using the treasury stock method.
The following tables are a reconciliation of the numerators and denominators of basic and diluted earnings per share computations:
|
Three Months Ended September 30, |
Three Months Ended September 30, |
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2000 |
1999 |
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Income |
Shares |
Per Share Amount |
Income |
Shares |
Per Share Amount |
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(In thousands, except per share amounts) |
|||||||||||||||||
Basic EPS | ||||||||||||||||||
Net Income | $ | 2,501 | 11,972 | $ | 0.21 | $ | 1,547 | 11,612 | $ | 0.13 | ||||||||
Effect of Dilutive Securities | ||||||||||||||||||
Stock Options | | 610 | | 308 | ||||||||||||||
Diluted EPS | ||||||||||||||||||
Net Income | $ | 2,501 | 12,582 | $ | 0.20 | $ | 1,547 | 11,920 | $ | 0.13 | ||||||||
7
|
Nine Months Ended September 30, |
Nine Months Ended September 30, |
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2000 |
1999 |
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Income |
Shares |
Per Share Amount |
Income |
Shares |
Per Share Amount |
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|
(In thousands, except per share amounts) |
|||||||||||||||||
Basic EPS | ||||||||||||||||||
Net Income | $ | 6,469 | 11,789 | $ | 0.55 | $ | 4,562 | 11,583 | $ | 0.39 | ||||||||
Effect of Dilutive Securities | ||||||||||||||||||
Stock Options | | 488 | | 319 | ||||||||||||||
Diluted EPS | ||||||||||||||||||
Net Income | $ | 6,469 | 12,277 | $ | 0.53 | $ | 4,562 | 11,902 | $ | 0.38 | ||||||||
(3) Business Segments
Management Reporting
The Company has four reportable segments, the Bank, Westfield, RINET, and Sand Hill. The financial performance of the Company is managed and evaluated by business segment. The segments are managed separately because each business is a company with different clients, employees, systems, risks, and marketing strategies.
Description of Business Segments
The Bank pursues a "private banking" business strategy and is principally engaged in providing banking, investment and fiduciary products to high net worth individuals, their families and businesses in the greater Boston area and New England and, to a lesser extent, Europe and Latin America. The Bank offers its clients a broad range of basic deposit services, including checking and savings accounts with automated teller machine ("ATM") access, and cash management services through sweep accounts and repurchase agreements. The Bank also offers commercial, residential mortgage, home equity and consumer loans. In addition, it provides investment advisory and asset management services, securities custody and safekeeping services, trust and estate administration and IRA and Keogh accounts. The Bank's investment management emphasis is on large-cap equity and actively managed fixed income portfolios.
Westfield serves the investment management needs of high net worth individuals and institutions with endowments or retirement plans in the greater Boston area, New England, and other areas of the U.S. Westfield specializes in growth equity portfolios, and also acts as the investment manager for six limited partnerships. Its investment services include a particular focus on identifying and managing small and mid cap equity positions as well as balanced growth accounts.
RINET provides fee-only financial planning, tax planning and asset allocation services to high net worth individuals and their families in the greater Boston area, New England, and other areas of the U.S. Its capabilities include tax planning and preparation, asset allocation, estate planning, charitable planning, planning for employment benefits, including 401(k) plans and alternative investment analysis.
Sand Hill provides investment management services to high net worth individuals primarily in Silicon Valley and Northern California. Sand Hill specializes in balanced portfolios with an equity discipline, and also manages concentrated or single-stock positions.
Measurement of Segment Profit and Assets
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Revenues, expenses, and assets are recorded by each segment, and management reviews separate financial statements. In addition to direct expenses, each business segment is allocated a share of holding company expenses based on the segment's percentage of consolidated net income.
8
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, 2000 and 1999.
|
For the Three Months Ended September 30, 2000 |
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Bank |
Westfield |
RINET |
SHA |
Other |
Intersegment |
Total |
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(In thousands) |
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Income Statement Data: | |||||||||||||||||||||||
Revenues from External Customers: | |||||||||||||||||||||||
Net Interest Income | $ | 6,490 | $ | 23 | $ | | $ | | $ | (62 | ) | $ | (23 | ) | $ | 6,428 | |||||||
Non-Interest Income | 2,701 | 4,202 | 938 | 431 | 1 | | 8,273 | ||||||||||||||||
Total Revenues | 9,191 | 4,225 | 938 | 431 | (61 | ) | (23 | ) | 14,701 | ||||||||||||||
Provision for Loan Losses | 500 | | | | | | 500 | ||||||||||||||||
Non-Interest Expense | 6,567 | 2,885 | 772 | 368 | (61 | ) | | 10,531 | |||||||||||||||
Income Taxes | 525 | 550 | 68 | 26 | | | 1,169 | ||||||||||||||||
Segment Profit | $ | 1,599 | $ | 790 | $ | 98 | $ | 37 | $ | | $ | (23 | ) | $ | 2,501 | ||||||||
Balance Sheet Data: | |||||||||||||||||||||||
Total Segment Assets | $ | 826,878 | $ | 9,268 | $ | 1,762 | $ | 16,684 | $ | 29,608 | $ | (32,679 | ) | $ | 851,521 | ||||||||
|
For the Three Months Ended September 30, 1999 |
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Bank |
Westfield |
RINET |
Other |
Intersegment |
Total |
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(In thousands) |
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Income Statement Data: | |||||||||||||||||||||
Revenues from External Customers: | |||||||||||||||||||||
Net Interest Income | $ | 4,485 | $ | 26 | $ | | $ | | $ | (26 | ) | $ | 4,485 | ||||||||
Non-Interest Income | 2,220 | 2,405 | 957 | | | 5,582 | |||||||||||||||
Total Revenues | 6,705 | 2,431 | 957 | | (26 | ) | 10,067 | ||||||||||||||
Provision for Loan Losses | 325 | | | | | 325 | |||||||||||||||
Non-Interest Expense | 4,658 | 2,006 | 903 | | | 7,567 | |||||||||||||||
Income Taxes | 432 | 174 | 22 | | | 628 | |||||||||||||||
Segment Profit | $ | 1,290 | $ | 251 | $ | 32 | $ | | $ | (26 | ) | $ | 1,547 | ||||||||
Balance Sheet Data: | |||||||||||||||||||||
Total Segment Assets | $ | 525,619 | $ | 5,792 | $ | 1,136 | $ | 944 | $ | (2,881 | ) | $ | 530,610 | ||||||||
9
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, 2000 and 1999.
|
For the Nine Months Ended September 30, 2000 |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Bank |
Westfield |
RINET |
SHA |
Other |
Intersegment |
Total |
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|
(In thousands) |
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Income Statement Data: | |||||||||||||||||||||||
Revenues from External Customers: | |||||||||||||||||||||||
Net Interest Income | $ | 17,597 | $ | 62 | $ | 1 | $ | | $ | (62 | ) | $ | (63 | ) | $ | 17,535 | |||||||
Non-Interest Income | 7,642 | 11,007 | 2,585 | 431 | 3 | | 21,668 | ||||||||||||||||
Total Revenues | 25,239 | 11,069 | 2,586 | 431 | (59 | ) | (63 | ) | 39,203 | ||||||||||||||
Provision for Loan Losses | 1,300 | | | | | | 1,300 | ||||||||||||||||
Non-Interest Expense | 18,304 | 7,761 | 2,108 | 368 | (59 | ) | | 28,482 | |||||||||||||||
Income Taxes | 1,373 | 1,358 | 195 | 26 | | | 2,952 | ||||||||||||||||
Segment Profit | $ | 4,262 | $ | 1,950 | $ | 283 | 37 | $ | | $ | (63 | ) | $ | 6,469 | |||||||||
Balance Sheet Data: | |||||||||||||||||||||||
Total Segment Assets | $ | 826,878 | $ | 9,268 | $ | 1,762 | $ | 16,684 | $ | 29,608 | $ | (32,679 | ) | $ | 851,521 | ||||||||
|
For the Nine Months Ended September 30, 1999 |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Bank |
Westfield |
RINET |
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 | 2,375 | | | 16,207 | ||||||||||||||
Total Revenues | 19,227 | 7,463 | 2,375 | | (73 | ) | 28,992 | |||||||||||||
Provision for Loan Losses | 749 | | | | | 749 | ||||||||||||||
Non-Interest Expense | 13,588 | 5,759 | 2,243 | | | 21,590 | ||||||||||||||
Income Taxes | 1,340 | 697 | 54 | | | 2,091 | ||||||||||||||
Segment Profit | $ | 3,550 | $ | 1,007 | $ | 78 | $ | | $ | (73 | ) | $ | 4,562 | |||||||
Balance Sheet Data: | ||||||||||||||||||||
Total Segment Assets | $ | 525,619 | $ | 5,792 | $ | 1,136 | $ | 944 | $ | (2,881 | ) | $ | 530,610 | |||||||
(4) Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective
10
aspect of the hedge. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133." In June, 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which further amends SFAS No. 133 and addresses a limited number of issues causing implementation difficulties for entities that apply SFAS No. 133. The Statements are effective for fiscal years beginning after June 15, 2000, and are not expected to have a material impact on the Company's consolidated financial statements.
In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which supercedes the guidance of SFAS No. 125. The provisions of SFAS No. 140 will become effective for certain transactions occurring after March 21, 2001 and for disclosures relating to certain transactions for fiscal years ending after December 15, 2000. Management does not expect SFAS No. 140 to have a material impact on the Company's consolidated financial statements.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarter Ended September 30, 2000
This quarterly report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, changes in loan defaults and charge-off rates, reduction in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, fluctuations in the value of assets under management and other sources of fee income, changes in assumptions used in making such forward-looking statements, as well as the factors listed under "Risk Factors and Factors Affecting Forward Looking Statements" in the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
General
Boston Private Financial Holdings, Inc. (the "Company") is incorporated under the laws of the Commonwealth of Massachusetts and is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). On July 1, 1988, the Company became the parent holding company of Boston Private Bank & Trust Company (the "Bank"), a trust company chartered by the Commonwealth of Massachusetts and insured by the Federal Deposit Insurance Corporation (the "FDIC").
On October 31, 1997, the Company acquired Westfield Capital Management Company, Inc. ("Westfield"), a Massachusetts corporation engaged in providing a range of investment management services to individual and institutional clients, in exchange for 3,918,367 newly issued shares of the Company's common stock. On October 15, 1999, the Company acquired RINET Company, Inc. ("RINET"), a Massachusetts corporation engaged in providing financial planning and asset allocation services to high net worth individuals and families, in exchange for 765,697 newly issued shares of the Company's common stock. Each of these acquisitions were accounted for as a "pooling of interests." Accordingly, the results of operations of the Company reflect the Company's financial position and the results of operations including Westfield and RINET on a consolidated basis for all periods presented.
On August 31, 2000, the Company acquired Sand Hill Advisors, Inc. ("Sand Hill"), an 18-year old investment advisory firm servicing the wealth management market, primarily in Northern California. The estimated purchase price at closing was $16.5 million, with 70% paid at close, and the remainder paid in four annual payments contingent upon performance using a combination of approximately 73% cash and 27% common stock for each payment. At closing, the Company issued 258,395 shares of its common stock in connection with the transaction. This acquisition was accounted for as a "purchase of assets". Accordingly, the results of operations of the Company reflect the Company's financial position and the results of operations including Sand Hill on a consolidated basis since the date of the acquisition.
The Company conducts substantially all of its business through its wholly owned operating subsidiaries, the Bank, Westfield, RINET, and Sand Hill. A description of each subsidiary is provided in Note 3 to the Consolidated Financial Statements.
Financial Condition
Total Assets. Total assets increased $284.1 million, or 50.1%, to $851.5 million at September 30, 2000 from $567.4 million at December 31, 1999. This increase was primarily driven by deposit growth, which was used to fund new loans and purchase investment securities. In addition, the increase includes net proceeds of $44.2 million from the Company's common stock offering completed on September 29, 2000.
12
Investments. Total investments (consisting of cash, federal funds sold, investment securities, mortgage-backed securities, and stock in the FHLB of Boston) were $226.7 million, or 26.6% of total assets, at September 30, 2000, compared to $95.1 million, or 16.8% of total assets, at December 31, 1999. Of the $131.6 million increase in investments during the first nine months of 2000, $97.8 million was due to higher deposit balances, which resulted in an increase in cash and federal funds sold at quarter end. The remaining $33.8 million of this increase was due to funding of the investment portfolio. Management periodically evaluates investment alternatives to properly manage the overall balance sheet. The timing of sales and reinvestments is based on various factors, including management's evaluation of interest rate trends and total bank liquidity.
The following table is a summary of investment and mortgage-backed securities available for sale as of September 30, 2000 and December 31, 1999:
|
|
Unrealized |
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost |
Market Value |
||||||||||||
|
Gains |
Losses |
||||||||||||
|
(In thousands) |
|||||||||||||
At September 30, 2000 | ||||||||||||||
U.S. Government and agencies | $ | 55,016 | $ | 141 | $ | (997 | ) | $ | 54,160 | |||||
Municipal bonds | 55,511 | 32 | (365 | ) | 55,178 | |||||||||
Mortgage-backed securities | 3,593 | | (35 | ) | 3,558 | |||||||||
Total investments | $ | 114,120 | $ | 173 | $ | (1,397 | ) | $ | 112,896 | |||||
At December 31, 1999 | ||||||||||||||
U.S. Government and agencies | $ | 36,174 | $ | | $ | (1,362 | ) | $ | 34,812 | |||||
Municipal bonds | 39,250 | 2 | (459 | ) | 38,793 | |||||||||
Mortgage-backed securities | 5,627 | | (117 | ) | 5,510 | |||||||||
Total investments | $ | 81,051 | $ | 2 | $ | (1,938 | ) | $ | 79,115 | |||||
Loans. Total loans increased $137.0 million, or 30.4%, during the first nine months of 2000 to $587.4 million, or 69.0% of total assets, at September 30, 2000, from $450.4 million, or 79.4% of total assets, at December 31, 1999. Both the commercial and residential mortgage loan portfolios continued to experience growth due to the strong local economy and the demand for financing. Commercial loans increased $56.8 million, or 29.8%, and residential mortgage loans increased $79.2 million, or 33.8%, during the first nine months of 2000.
Risk Elements. Total non-performing assets, which consist of non-accrual loans and other real estate owned, increased by $623,000 during the first nine months of 2000 to $1.9 million, or 0.23% of total assets at September 30, 2000, from $1.3 million, or 0.23% of total assets at December 31, 1999. The Company continues to evaluate the underlying collateral and value of each of its non-performing assets and pursues the collection of all amounts due.
At September 30, 2000, loans with an aggregate balance of $316,000, or 0.05% of total loans, were 30 to 89 days past due, a decrease of $1.7 million as compared to $2.0 million, or 0.45% of total loans as of December 31, 1999. Most of these loans are adequately secured and management's success in keeping these borrowers current varies from month to month.
The Company discontinues the accrual of interest on a loan when the collectibility of principal or interest is in doubt. In certain instances, loans that have become 90 days past due may remain on accrual status if management believes that full principal and interest due on the loan is collectible.
Allowance for Loan Losses. The allowance for loan losses is established through a charge to operations. When management believes that the collectibility of a loan's principal balance is unlikely, the
13
principal amount is charged against the allowance. Recoveries on loans which have been previously charged off are credited to the allowance as received.
The allowance for loan losses is determined using a systematic analysis and procedural discipline based on historical experience, product types, and industry benchmarks. A system of periodic loan reviews is performed to individually assess the inherent risk and assign risk ratings to each loan. The allowance is calculated based on management's judgment of the effect of current and forecasted economic conditions on the borrowers' abilities to repay, an evaluation of the allowance for loan losses in relation to the size of the overall loan portfolio, and consideration of the relationship of the allowance for loan losses to non-performing loans, net charge-off trends, and other factors. While this evaluation process utilizes historical and other objective information, the classification of loans and the establishment of the allowance for loan losses relies to a great extent on the judgment and experience of management.
While management evaluates currently available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The following table is an analysis of the Bank's allowance for loan losses for the periods indicated:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000 |
1999 |
2000 |
1999 |
|||||||||||
|
(Dollars in thousands) |
(Dollars in thousands) |
|||||||||||||
Ending gross loans | $ | 587,371 | $ | 420,160 | $ | 587,371 | $ | 420,160 | |||||||
Allowance for loan losses, beginning of period | $ | 6,224 | $ | 4,833 | $ | 5,336 | $ | 4,386 | |||||||
Provision for loan losses | 500 | 325 | 1,300 | 749 | |||||||||||
Charge-offs | 0 | (64 | ) | (19 | ) | (142 | ) | ||||||||
Recoveries | 9 | 12 | 116 | 113 | |||||||||||
Allowance for loan losses, end of period | $ | 6,733 | $ | 5,106 | $ | 6,733 | $ | 5,106 | |||||||
Allowance for loan losses to ending gross loans | 1.15 | % | 1.22 | % | 1.15 | % | 1.22 | % | |||||||
Deposits and Borrowings. The Company experienced an increase in total deposits of $228.3 million, or 54.3%, during the first nine months of 2000, to $648.8 million, or 76.2% of total assets, at September 30, 2000, from $420.5 million, or 74.1% of total assets, at December 31, 1999. This increase was due to higher average balances in existing client accounts, as well as a significant number of new accounts opened during the first nine months of 2000. The following table shows the composition of the Company's deposits at September 30, 2000 and December 31, 1999:
|
September 30, 2000 |
December 31, 1999 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance |
As a % of Total |
Balance |
As a % of Total |
|||||||||
Demand deposits | $ | 98,603 | 15.2 | % | $ | 53,058 | 12.6 | % | |||||
NOW | 63,180 | 9.7 | 40,875 | 9.7 | |||||||||
Savings | 6,928 | 1.1 | 4,607 | 1.1 | |||||||||
Money Market | 359,735 | 55.5 | 238,513 | 56.7 | |||||||||
Certificates of deposit under $100,000 | 21,039 | 3.2 | 22,394 | 5.3 | |||||||||
Certificates of deposit $100,000 or greater | 99,330 | 15.3 | 61,088 | 14.6 | |||||||||
Total | $ | 648,815 | 100.0 | % | $ | 420,535 | 100.0 | % | |||||
14
Liquidity. Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers as well as to earnings enhancement opportunities in a changing marketplace. Primary sources of liquidity consist of investment management fees, financial planning fees, deposit inflows, loan repayments, borrowed funds, and cash flows from investment securities. These sources fund the Company's lending and investment activities.
Management is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. At September 30, 2000, cash, federal funds sold and securities available for sale amounted to $221.9 million, or 26.1% of total assets of the Company. This compares to $90.3 million, or 15.9% of total assets, at December 31, 1999.
In general, the Bank maintains a liquidity target of 10% to 20% of total assets. The Bank is a member of the FHLB of Boston and as such has access to both short and long-term borrowings of up to $262.0 million as of September 30, 2000. In addition, the Bank maintains short-term lines of credit at the Federal Reserve Bank and other correspondent banks totaling $71.0 million, and has established brokered certificate of deposit lines with several institutions aggregating $120.0 million. Management believes that at September 30, 2000, the Bank had adequate liquidity to meet its commitments for the foreseeable future.
Westfield's primary source of liquidity consists of investment management fees that are collected on a quarterly basis. At September 30, 2000 Westfield had working capital of approximately $3.5 million. Management believes that at September 30, 2000, Westfield had adequate liquidity to meet its commitments for the foreseeable future.
RINET's primary source of liquidity consists of financial planning fees that are collected on a quarterly basis. At September 30, 2000 RINET had working capital of approximately $500,000. Management believes that at September 30, 2000, RINET had adequate liquidity to meet its commitments for the foreseeable future.
Sand Hill's primary source of liquidity consists of financial planning fees that are collected on a quarterly basis. At September 30, 2000 Sand Hill had working capital of approximately $300,000. Management believes that at September 30, 2000, Sand Hill had adequate liquidity to meet its commitments for the foreseeable future.
The Company's primary sources of funds are dividends from its subsidiaries, issuance of its Common Stock and borrowings. Management believes that the Company has adequate liquidity to meet its commitments for the foreseeable future.
Capital Resources. Total stockholders' equity of the Company at September 30, 2000 was $93.5 million, or 11.0% of total assets, compared to $39.1 million, or 6.90% of total assets at December 31, 1999. Of this increase, $44.2 million was due to the net proceeds of a common stock offering on September 29, 2000. The remaining increase was the result of the Company's net income for the first nine months of 2000 of $6.5 million, combined with common stock issued in connection with stock grants to employees and proceeds from options exercised, less dividends paid to shareholders and the change in accumulated other comprehensive income.
The Company is subject to various regulatory capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company's financial statements. For example, under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Similarly, the Company is also subject to capital requirements administered by the Federal Reserve Bank with respect to certain
15
non-banking activities, including adjustments in connection with off-balance sheet items. The following table presents actual capital amounts and regulatory capital requirements as of September 30, 2000 and December 31, 1999:
|
Actual |
For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||
As of September 30, 2000: | |||||||||||||||||
Total risk-based capital | |||||||||||||||||
Company | $ | 81,914 | 17.30 | % | $ | 37,870 | > 8.0 | % | $ | 47,337 | > 10.0 | % | |||||
Bank | 50,780 | 10.89 | 37,293 | 8.0 | 46,616 | 10.0 | |||||||||||
Tier I risk-based | |||||||||||||||||
Company | 75,987 | 16.05 | 18,935 | 4.0 | 28,402 | 6.0 | |||||||||||
Bank | 44,942 | 9.64 | 18,647 | 4.0 | 27,970 | 6.0 | |||||||||||
Tier I leverage capital | |||||||||||||||||
Company | 75,987 | 10.36 | 29,334 | 4.0 | 36,667 | 5.0 | |||||||||||
Bank | 44,942 | 6.11 | 29,425 | 4.0 | 36,781 | 5.0 | |||||||||||
As of December 31, 1999: | |||||||||||||||||
Total risk-based capital | |||||||||||||||||
Company | $ | 41,792 | 11.84 | % | $ | 28,232 | > 8.0 | % | $ | 35,290 | > 10.0 | % | |||||
Bank | 36,837 | 10.72 | 27,495 | 8.0 | 34,368 | 10.0 | |||||||||||
Tier I risk-based | |||||||||||||||||
Company | 37,369 | 10.59 | 14,116 | 4.0 | 21,174 | 6.0 | |||||||||||
Bank | 32,528 | 9.46 | 13,747 | 4.0 | 20,621 | 6.0 | |||||||||||
Tier I leverage capital | |||||||||||||||||
Company | 37,369 | 6.79 | 22,006 | 4.0 | 27,507 | 5.0 | |||||||||||
Bank | 32,528 | 5.99 | 21,720 | 4.0 | 27,150 | 5.0 |
Results of Operations for the Three Months Ended September 30, 2000
Net Income. The Company recorded net income of $2.5 million, or $0.20 per diluted share, for the quarter ended September 30, 2000. This represented a 61.7% increase over the net income of $1.5 million, or $0.13 per diluted share, for the same period in 1999.
Net Interest Income. For the quarter ended September 30, 2000, net interest income was $6.4 million, an increase of $1.9 million, or 43.3%, over the same period in 1999. This increase was primarily attributable to an increase of $210.9 million, or 42.9%, in the average balance of earning assets. The Company's net interest margin was 3.75% for the third quarter of 2000, an increase of 2 basis points compared to the same period last year.
Interest Income. During the third quarter of 2000, interest income was $13.6 million, an increase of $4.6 million, or 52.0%, compared to $8.9 million for the same period in 1999. Interest income on commercial loans increased 46.4% to $5.6 million for the quarter ended September 30, 2000, compared to $3.8 million for the same period in 1999. Interest income from residential mortgage loans increased 45.7% to $5.2 million for the third quarter of 2000, compared to $3.6 million for the same period in 1999, and home equity and other loans increased 20.6% to $585,000 for the third quarter of 2000, compared to $485,000, for the same period in 1999. These increases were primarily due to an increase in loan volume, and to a lesser extent an increase in the average yield. The average balance of commercial loans increased 32.1% and the average rate increased 10.9%, or 95 basis points to 9.74% for the quarter ended September 30, 2000. The average balance of residential mortgage loans increased 40.8%, and the average
16
rate increased 3.4%, or 24 basis points to 7.06% for the same period. The average balance of home equity and other loans was flat, while the average rate increased 20.6%, or 167 basis points to 9.77%.
Total investment income (consisting of interest and dividend income from cash, federal funds sold, investment securities, mortgage-backed securities, and stock in the FHLB of Boston) increased $1.1 million, or 106.6%, to $2.2 million for the quarter ended September 30, 2000, compared to $1.1 million for the same period in 1999. This increase was primarily attributable to an increase in the average balance of $70.2 million, or 81.3%, combined with an increase in the average yield on investments of 50 basis points, or 8.5%.
Interest Expense. During the third quarter of 2000, interest expense was $7.1 million, an increase of $2.7 million, or 60.7%, compared to $4.4 million for the same period in 1999. This increase in the Company's interest expense was the result of an increase in the average balance of interest-bearing liabilities of $178.8 million, or 42.1% between the two periods, combined with a 12.4% increase in the average cost of interest-bearing liabilities to 4.73% for the third quarter of 2000, from 4.21% for the third quarter of 1999.
Provision for Loan Losses. The provision for loan losses was $500,000 for the quarter ended September 30, 2000, compared to $325,000 for the same period in 1999. Management evaluates several factors including new loan originations, estimated charge-offs, and risk characteristics of the loan portfolio when determining the provision for loan losses. These factors include the level and mix of loan growth, the level of non-accrual and delinquent loans, and the level of charge-offs and recoveries. Also see discussion under "Financial ConditionAllowance for Loan Losses." Net recoveries were $9,000 during the third quarter of 2000, compared to net charge-offs of $52,000 for the same period in 1999.
Fees and Other Income. Fees and other income increased $2.7 million, or 48.2%, to $8.3 million for the three month period ending September 30, 2000, compared to $5.6 million for the same period in 1999. The majority of fee income was attributable to advisory fees earned on assets under management. These fees increased $2.6 million, or 59.5% to $7.0 million for the third quarter of 2000, compared to $4.4 million for the same period in 1999. Of this increase in fee income, $431,000, or 9.8% was due to the purchase acquisition of Sand Hill on August 31, 2000. The remaining increase was primarily due to a 95.9% increase in assets under management, which were $3.0 billion on September 30, 1999, compared to $5.8 billion on September 30, 2000. Of this increase in assets under management, $1.2 billion, or 42.6% was due to the acquisition of Sand Hill.
Financial planning fees increased $10,000, or 1.1%, to $947,000 for the third quarter of 2000, compared to $937,000 for the same period in 1999. Equity in earnings of partnerships was $38,000 for the three months ended September 30, 2000 due to an increase in the market value of Westfield's general partnership interest in its hedge funds.
Deposit account service fees increased $13,000, or 20.3%, to $77,000 for the third quarter of 2000 as a result of a larger number of deposit accounts and an increased level of transaction-based charges. Gain on sale of investment securities was $27,000 for the third quarter of 2000 as compared to $2,000 for the same period in 1999. Other fee income, which consists primarily of non-amortizing loan fees and cash management fees decreased $8,000 to $154,000 for the third quarter of 2000 due to a lower level of late fees and servicing fees on commercial loans.
Operating Expense. Total operating expense for the first nine months of 2000 increased $3.0 million, or 39.2% to $10.5 million compared to $7.6 million for the same period in 1999. Of this increase, $368,000, or 4.9% was due to the acquisition of Sand Hill, and the remainder was attributable to the Company's continued growth and expansion. The Company has experienced a 60.5% increase in total balance sheet assets, a 95.9% increase in client assets under management, and a 17.5% increase in the number of employees from September 30, 1999 to September 30, 2000. In addition, the Company expanded its facilities at its Boston headquarters, and opened a new banking office as of February 1, 2000.
17
Salaries and benefits, the largest component of operating expense, increased $1.7 million, or 31.2%, to $7.0 million for the quarter ended September 30, 2000, from $5.3 million for the same period in 1999. Of this increase, $232,000, or 4.3% was due to the acquisition of Sand Hill. The remaining increase was due to a 17.5% increase in the number of employees, a higher level of employee incentive-based compensation, normal salary increases, and the related taxes thereon.
Occupancy and equipment expense increased $433,000, or 57.0%, to $1.2 million for the third quarter of 2000, from $759,000 for the same period last year. Of this increase, $22,000, or 2.9% was due to the acquisition of Sand Hill. The remaining increase was primarily attributable to the increased occupancy expenses related to expansion at Ten Post Office Square, Boston, Massachusetts, and the new banking office in the Back Bay area of Boston, Massachusetts, as well as the Company's continued investments in technology.
Professional services include legal fees, consulting fees, and other professional services such as audit and tax preparation. These expenses increased $198,000, or 44.0% due to legal and consulting expenses incurred for strategic projects during the third quarter of 2000, as well as higher audit fees as a result of the Company's continued growth.
Marketing and business development increased $200,000, or 81.0%, to $447,000 for the third quarter of 2000. Of this increase $78,000 was a result of increased image advertising designed to increase the visibility of the Company and its products and services. The remaining increase of $135,000 was a result of increased business development activity due to growth in sales staff.
Contract services and processing includes outsourced systems, data processing and custody expense. These expenses increased $62,000, or 22.5%, as a result of increased service and volume-related charges for processing banking transactions and maintaining custody of client assets under management.
Other expenses include insurance, supplies, telephone, mailing expense, publications and subscriptions, employee training, and other miscellaneous business expenses. These expenses have increased $317,000, or 73.9% to $746,000, 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 $1.2 million for the third quarter of 2000 as compared to $628,000 for the same period last year. The effective tax rate was 31.9% for the third quarter of 2000, compared to 28.9% for the same period in 1999. The increase in the Company's effective tax rate is a result of a higher percentage of fully taxable income.
Results of Operations for the Nine Months Ended September 30, 2000
Net Income. The Company recorded net income of $6.5 million, or $0.53 per diluted share, for the nine months ended September 30, 2000. This represented a 41.8% increase over net income of $4.6 million, or $0.38 per diluted share, for the same period in 1999. During the first nine months of 1999, the Company implemented an accounting change that resulted in a non-recurring charge of $125,000.
Net Interest Income. For the nine months ended September 30, 2000, net interest income was $17.5 million, an increase of $4.7 million, or 37.2%, over the same period in 1999. This increase was primarily attributable to an increase of $167.2 million, or 35.6%, in the average balance of earning assets. The Company's net interest margin increased 7 basis points, or 1.9%, to 3.76% for the nine months ended September 30, 2000, compared to 3.69% for the same period last year.
Interest Income. During the first nine months of 2000, interest income was $36.1 million, an increase of $10.8 million, or 42.9%, over the same period in 1999. Interest income on commercial loans increased 35.6% to $14.9 million for the nine months ended September 30, 2000, compared to $11.0 million for the same period in 1999. Interest income from residential mortgage loans increased 37.5% to $13.7 million for the first nine months of 2000, compared to $10.0 million for the same period in 1999, and interest income
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on home equity and other loans increased 28.2% to $1.6 million for the first nine months of 2000, compared to $1.3 million for the same period in 1999. These increases were primarily due to an increase in loan volume, and to a lesser extent, an increase in the average yield earned. The average balance of commercial loans increased 22.8%, and the average rate increased 10.4%, or 90 basis points, to 9.50% for the nine months ended September 30, 2000. The average balance of residential mortgage loans increased 36.9%, while the average rate increased 0.5%, or 3 basis points, to 6.93% for the same period, and the average balance of home equity and other loans increased 8.5%, and the average rate increased 18.1%, or 141 basis points, to 9.21%.
Total investment income (consisting of interest and dividend income from cash, federal funds sold, investment securities, mortgage-backed securities, and stock in the FHLB of Boston) increased $2.8 million, or 93.2%, to $5.9 million for the nine months ended September 30, 2000, compared to $3.0 million for the same period in 1999. This increase was primarily attributable to an increase in the average balance of $55.6 million, or 65.1%, combined with an increase in the average yield on investments of 215 basis points, or 13.0%.
Interest Expense. During the first nine months of 2000, interest expense was $18.6 million, an increase of $6.1 million, or 48.9%, compared to $12.5 million for the same period in 1999. This increase in the Company's interest expense is the result of an increase in the average balance of interest-bearing liabilities of $139.9 million, or 34.2%, between the two periods, combined with a 10.2% increase in the average cost of interest-bearing liabilities.
Provision for Loan Losses. The provision for loan losses was $1.3 million for the nine months ended September 30, 2000, compared to $749,000 for the same period in 1999. Management evaluates several factors including new loan originations, estimated charge-offs, and risk characteristics of the loan portfolio when determining the provision for loan losses. These factors include the level and mix of loan growth, the level of non-accrual and delinquent loans, and the level of charge-offs and recoveries. Also see discussion under "Financial ConditionAllowance for Loan Losses." Net recoveries were $97,000 during the first nine months of 2000, compared to net charge-offs of $29,000 for the same period in 1999.
Fees and Other Income. Fees and other income increased $5.5 million, or 33.7%, to $21.7 million for the nine month period ending September 30, 2000, compared to $16.2 million for the same period in 1999. The majority of fee income was attributable to advisory fees earned on assets under management. These fees increased $5.6 million, or 43.3%, to $18.6 million for the first nine months of 2000 compared to $13.0 million for the same period in 1999. Of this increase in fee income, $431,000, or 3.3% was due to the purchase acquisition of Sand Hill on August 31, 2000. The remaining increase was primarily due to a 95.9% increase in assets under management, which were $3.0 billion on September 30, 1999, compared to $5.8 billion on September 30, 2000. Of this increase in assets under management, $1.2 billion, or 42.6% was due to the acquisition of Sand Hill.
Financial planning fees increased $252,000, or 10.8% to $2.6 million for the first nine months of 2000, compared to $2.3 million for the same period in 1999. This increase was due to a combination of new clients, increased services to existing clients, and annual fee increases. Equity in losses of partnerships was $203,000 for the nine months ended September 30, 2000 due to a reduction in the market value of Westfield's general partnership interest in its hedge funds.
Deposit account service fees decreased $9,000, or 4.2%, to $207,000 for the first nine months of 2000 as a result of higher average balances maintained in deposit accounts, which resulted in the reduction or elimination of account service fees. Gain on sale of loans decreased $71,000 to $37,000 due to a lower volume of fixed rate loans sold in the secondary market.
Operating Expense. Total operating expense for the first nine months of 2000 increased $7.0 million, or 32.7%, to $28.5 million compared to $21.5 million for the same period in 1999. Of this increase, $368,000, or 1.7% was due to the acquisition of Sand Hill, and the remainder was attributable to the
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Company's continued growth and expansion. The Company has experienced a 60.5% increase in total balance sheet assets, a 95.9% increase in client assets under management, and a 17.5% increase in the number of employees from September 30, 1999 to September 30, 2000. In addition, the Company expanded its facilities at its Boston headquarters, and opened a new banking office as of February 1, 2000.
Salaries and benefits, the largest component of operating expense, increased $4.2 million, or 28.0%, to $19.1 million for the nine months ended September 30, 2000, compared to $14.9 million for the same period in 1999. Of this increase, $232,000, or 1.6% was due to the acquisition of Sand Hill. The remaining increase was primarily due to a 17.5% increase in the number of employees, a higher level of employee incentive-based compensation, normal salary increases, and the related taxes thereon.
Occupancy and equipment expense increased $1.3 million, or 62.1%, to $3.4 million for the first nine months of 2000, from $2.1 million for the same period last year. Of this increase, $22,000, or 1.1% was due to the acquisition of Sand Hill. The remaining increase was primarily attributable to the increased occupancy expenses related to expansion at Ten Post Office Square, Boston, Massachusetts, and the new banking office in the Back Bay area of Boston, Massachusetts, as well as the Company's continued investments in technology.
Professional services include legal fees, consulting fees, and other professional services such as audit and tax preparation. These expenses increased $225,000, or 19.0% due to legal and consulting expenses incurred for strategic projects during the first nine months of 2000, as well as higher audit fees as a result of the Company's continued growth.
Marketing and business development increased $571,000, or 63.7%, to $1.5 million for the nine months of 2000. Of this increase $300,000 was a result of increased image advertising designed to increase the visibility of the Company and its products and services. The remaining increase of $271,000 was a result of increased business development activity due to growth in sales staff.
Contract services and processing includes outsourced systems, data processing and custody expense. These expenses increased $187,000, or 23.5% as a result of increased service and volume related charges for processing banking transactions and maintaining custody of client assets under management.
Other expenses include insurance, supplies, telephone, mailing expense, publications and subscriptions, employee training, and other miscellaneous business expenses. These expenses have increased $467,000, or 34.7%, to $1.8 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 $3.0 million for the first nine months of 2000 as compared to $2.1 million for the same period last year. The effective tax rate was 31.3% for the first nine months of 2000, compared to 30.9% for the same period in 1999. The increase in the Company's effective tax rate is a result of a higher percentage of fully taxable income.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
For information related to this item, see the Company's December 31, 1999 Form 10-K, Item 6Interest Rate Sensitivity and Market Risk. No material changes have occurred since that date.
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We are not currently a party to any material legal proceedings. One of our subsidiaries has recently received correspondence on behalf of one of its former investment management clients claiming that the subsidiary is responsible for underperformance of allegedly $5.1 million when compared to the former client's portfolio performance targets. Our subsidiary disputes the former client's allegations and, if legal action is commenced, we intend to defend the matter vigorously.
Item 2. Changes in Securities and Use of Proceeds
No changes in security holders' rights have taken place.
Item 3. Defaults Upon Senior Securities
No defaults upon senior securities have taken place.
Item 4. Submission of Matters to a Vote of the Security Holders
No matters submitted to a vote of security holders.
No information to report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27.1 | Financial Data Schedule | |
Exhibit 2.1 | Asset Purchase Agreement for Sand Hill Advisors, Inc. Excluding schedules and exhibits, which the Registrant agrees to furnish supplementary to the Commission upon request | |
Exhibit 2.2 | Amendment No. 1 to the Asset Purchase Agreement |
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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) |
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November 13, 2000 |
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By: |
/s/ TIMOTHY L. VAILL Timothy L. Vaill Chairman and Chief Executive Officer |
November 13, 2000 |
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By: |
/s/ WALTER M. PRESSEY Walter M. Pressey Executive Vice President and Chief Financial Officer |
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