10-Q 1 a2056695z10-q.txt 10-Q AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 0-17089 ------------------------ BOSTON PRIVATE FINANCIAL HOLDINGS, INC. (Exact name of registrant as specified in its charter) COMMONWEALTH OF MASSACHUSETTS 04-2976299 (State or other jurisdiction of incorporation (I.R.S. Employer Identification Number) or organization) TEN POST OFFICE SQUARE BOSTON, MASSACHUSETTS 02109 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 912-1900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 31, 2001: Common Stock--Par Value $1.00 16,406,355 shares ------------------------------------------ ------------------------------------------ (class) (outstanding)
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- BOSTON PRIVATE FINANCIAL HOLDINGS, INC FORM 10-Q TABLE OF CONTENTS
PAGE -------- Cover Page.................................................. 1 Index....................................................... 2 PART I--FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets................................. 3 Consolidated Statements of Operations....................... 4 Consolidated Statements of Changes in Stockholders' Equity...................................................... 5 Consolidated Statements of Cash Flows....................... 6 Notes to Consolidated Financial Statements.................. 7-11 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12-21 Risk Factors and Factors Affecting Forward-Looking Statements.................................................. 21-26 Item 3 Quantitative and Qualitative Disclosures about Market Risk........................................................ 27 PART II--OTHER INFORMATION Item 1 Legal Proceedings........................................... 27 Item 2 Changes in Securities and Use of Proceeds................... 27 Item 3 Defaults upon Senior Securities............................. 27 Item 4 Submission of Matters to a Vote of Security Holders......... 27 Item 5 Other Information........................................... 28 Item 6 Exhibits and Reports on Form 8-K............................ 28 Signature Page.............................................. 29 Item 7 Exhibit Index............................................... 30
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 ---------- ------------ (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS: Cash and due from banks................................... $ 25,001 $ 47,625 Federal funds sold........................................ 95,100 10,000 Investment securities available for sale (amortized cost of $189,463 and $173,265, respectively)................. 191,562 174,885 Mortgage-backed securities available for sale (amortized cost of $2,820 and $3,274, respectively)................ 2,850 3,267 Loans receivable: Commercial.............................................. 296,543 271,784 Residential mortgage.................................... 413,341 345,643 Home equity............................................. 28,504 27,128 Other................................................... 554 518 ---------- -------- Total loans........................................... 738,942 645,073 Less: allowance for loan losses........................... (8,521) (7,342) ---------- -------- Net loans............................................... 730,421 637,731 Stock in the Federal Home Loan Bank of Boston............. 5,593 4,830 Premises and equipment, net............................... 8,175 6,841 Excess of cost over net assets acquired, net.............. 17,730 18,371 Fees receivable........................................... 7,258 6,816 Accrued interest receivable............................... 7,236 6,305 Other assets.............................................. 16,061 6,515 ---------- -------- Total assets............................................ $1,106,987 $923,186 ========== ======== LIABILITIES: Deposits.................................................. $ 812,192 $665,047 FHLB borrowings........................................... 111,866 90,172 Securities sold under agreements to repurchase............ 49,414 49,706 Accrued interest payable.................................. 2,726 1,998 Other liabilities......................................... 22,429 16,646 ---------- -------- Total liabilities....................................... 998,627 823,569 ========== ======== STOCKHOLDERS' EQUITY: Common stock, $1.00 par value per share; authorized: 30,000,000 shares issued: 16,406,366 shares at June 30, 2001 and 16,210,636 shares at December 31, 2000......... 16,406 16,211 Additional paid-in capital................................ 59,754 57,456 Retained earnings......................................... 30,838 25,064 Stock subscriptions receivable............................ -- (146) Accumulated other comprehensive income.................... 1,362 1,032 ---------- -------- Total stockholders' equity.............................. 108,360 99,617 ---------- -------- Total liabilities and stockholders' equity.............. $1,106,987 $923,186 ========== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2001 2000 2001 2000 ----------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Interest and dividend income: Loans.......................................... $ 13,251 $ 10,019 $ 26,423 $ 18,888 Taxable investment securities.................. 1,509 778 2,804 1,371 Non-taxable investment securities.............. 1,002 449 2,248 824 Mortgage-backed securities..................... 43 60 96 134 FHLB stock dividends........................... 89 87 186 168 Federal funds sold and other................... 765 692 1,934 1,167 ----------- ---------- ----------- ----------- Total interest and dividend income......... 16,659 12,085 33,691 22,552 ----------- ---------- ----------- ----------- Interest expense: Deposits....................................... 5,502 4,682 12,062 8,568 FHLB borrowings................................ 1,622 1,106 3,081 587 Securities sold under agreements to repurchase................................... 405 335 798 2,280 Federal funds purchased and other.............. 1 1 1 10 ----------- ---------- ----------- ----------- Total interest expense..................... 7,530 6,124 15,942 11,445 ----------- ---------- ----------- ----------- Net interest income........................ 9,129 5,961 17,749 11,107 Provision for loan losses........................ 600 500 1,150 800 ----------- ---------- ----------- ----------- Net interest income after provision for loan losses.............................. 8,529 5,461 16,599 10,307 ----------- ---------- ----------- ----------- Fees and other income: Investment management and trust................ 9,122 6,901 18,183 13,741 Financial planning fees........................ 989 844 2,075 1,638 Equity in earnings (losses) of partnerships.... (26) (66) (112) (241) Deposit account service charges................ 110 73 210 130 Gain on sale of loans.......................... 151 4 335 10 Gain on sale of investment securities.......... 670 -- 1,160 -- Other.......................................... 694 180 914 265 ----------- ---------- ----------- ----------- Total fees and other income................ 11,710 7,936 22,765 15,543 ----------- ---------- ----------- ----------- Operating expense: Salaries and employee benefits................. 9,440 6,799 19,062 13,408 Occupancy and equipment........................ 1,585 1,139 3,020 2,247 Professional services.......................... 884 466 1,631 813 Marketing and business development............. 1,074 534 1,653 1,076 Contract services and processing............... 590 354 949 718 Merger expenses................................ 12 -- 139 -- Amortization of intangibles.................... 345 127 689 233 Other.......................................... 860 692 1,805 1,306 ----------- ---------- ----------- ----------- Total operating expense.................... 14,790 10,111 28,948 19,801 ----------- ---------- ----------- ----------- Income before income taxes................. 5,449 3,286 10,416 6,049 Income tax expense............................. 1,693 1,003 3,117 1,820 ----------- ---------- ----------- ----------- Net income................................. $ 3,756 $ 2,283 7,299 4,229 =========== ========== =========== =========== Per share data: Basic earnings per share....................... $ 0.23 $ 0.18 $ 0.45 $ 0.34 =========== ========== =========== =========== Diluted earnings per share..................... $ 0.22 $ 0.18 $ 0.43 $ 0.33 =========== ========== =========== =========== Average common shares outstanding.............. 16,369,371 12,348,982 16,321,885 12,326,569 Average diluted shares outstanding............. 17,195,666 12,784,817 17,126,160 12,718,831
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
ADDITIONAL ACCUMULATED COMMON PAID-IN RETAINED STOCK COMPREHENSIVE STOCK CAPITAL EARNINGS SUBSCRIPTIONS INCOME (LOSS) TOTAL -------- ---------- -------- ------------- ------------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1999......... $12,246 $12,744 $16,815 $(320) $(1,239) $ 40,246 Net income......................... -- -- 4,229 -- -- 4,229 Comprehensive income, net: Change in unrealized gain (loss) on securities available for sale.... -- -- -- -- 144 144 -------- Total comprehensive income......... 4,373 Dividends paid to shareholders..... (699) (699) Proceeds from issuance of 66,793 shares of common stock........... 67 505 -- -- -- 572 Stock options exercised............ 93 231 -- -- -- 324 Stock subscription payments........ -- -- -- 167 -- 167 S corporation dividends paid (363) (363) ------- ------- ------- ----- ------- -------- Balance at June 30, 2000............. $12,406 $13,480 $19,982 $(153) $(1,095) $ 44,620 ======= ======= ======= ===== ======= ======== Balance at December 31, 2000......... $16,211 $57,456 $25,064 $(146) $ 1,032 $ 99,617 Net income......................... -- -- 7,299 -- -- 7,299 Comprehensive income, net: Change in unrealized gain (loss) on securities available for sale.... -- -- -- -- 330 330 -------- Total comprehensive income......... 7,629 Dividends paid to shareholders..... -- -- (1,120) -- -- (1,120) Proceeds from issuance of 59,976 shares of common stock........... 60 1,081 -- -- -- 1,141 Stock options exercised............ 135 1,217 -- -- -- 1,352 Stock subscription payments........ -- -- -- 146 -- 146 S corporation dividends paid....... -- -- (405) -- -- (405) ------- ------- ------- ----- ------- -------- Balance at June 30, 2001............. $16,406 $59,754 $30,838 $ -- $ 1,362 $108,360 ======= ======= ======= ===== ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------- 2001 2000 --------- --------- (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 7,299 $ 4,229 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization........................... (36) 948 Gain on sale of loans................................... (335) (10) Gain on sale of investment securities................... (1,160) -- Provision for loan losses............................... 1,150 800 Distributed (undistributed) earnings of partnership investments............................................ 123 2,289 Loans originated for sale............................... (21,261) (1,029) Proceeds from sale of loans............................. 21,596 1,039 (Increase) decrease in: Fees receivable....................................... (442) 755 Accrued interest receivable........................... (931) (1,215) Other assets.......................................... (9,903) (864) Increase (decrease) in: Accrued interest payable.............................. 728 59 Other liabilities..................................... 5,783 (2,447) --------- --------- Net cash provided (used) by operating activities.... 2,611 4,554 --------- --------- Cash flows from investing activities: Net decrease (increase) in federal funds sold............. (85,100) (25,000) Investment securities available for sale: Purchases............................................... (87,850) (53,305) Sales................................................... -- -- Maturities.............................................. 74,098 10,730 Mortgage-backed securities available for sale: Sales................................................... -- -- Principal payments...................................... 450 1,608 Net decrease (increase) in loans.......................... (93,657) (70,283) Purchase of FHLB stock.................................... (763) -- Recoveries on loans previously charged off................ 40 107 Capital expenditures...................................... (2,114) (1,251) Cash and cash equivalents for acquisition................. -- -- --------- --------- Net cash provided (used) by investing activities.... (194,896) (137,394) --------- --------- Cash flows from financing activities: Net increase (decrease) in deposits....................... 147,145 154,990 Net increase (decrease) in repurchase agreements.......... (292) 12,869 Net increase (decrease) in federal funds purchased........ -- -- FHLB advance proceeds..................................... 27,000 3,000 FHLB advance repayments................................... (5,306) (9,204) Proceeds from stock subscriptions receivable.............. 146 167 Dividends paid to stockholders............................ (1,120) (699) S-corporation dividends paid.............................. (405) (363) Proceeds from issuance of common stock.................... 2,493 896 --------- --------- Net cash provided (used) by financing activities.... 169,661 161,656 --------- --------- Net increase (decrease) in cash and due from banks........ (22,624) 28,816 Cash and due from banks at beginning of year.............. 47,625 11,661 --------- --------- Cash and due from banks at end of period.................. $ 25,001 $ 40,477 ========= ========= Supplementary disclosures of cash flow information: Cash paid during the period for interest.................. $ 6,802 $ 11,445 Cash paid during the period for income taxes.............. 3,453 2,736
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, Inc, ("RINET"), Sand Hill Advisors, Inc, ("Sand Hill") and Boston Private Value Investors ("BPVI"). 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, 2000 Annual Report to Shareholders. Certain prior year information has been reclassified to conform to current year presentation. (2) EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The earnings per share calculation is based upon the weighted average number of common shares and common share equivalents outstanding during the period. Stock options, when dilutive, are included as common stock equivalents using the treasury stock method. 7 BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables are a reconciliation of the numerators and denominators of basic and diluted earnings per share computations:
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2001 2000 ------------------------------ ------------------------------ PER PER SHARE SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Basic EPS Net Income....................................... $3,756 16,369 $0.23 $2,283 12,349 $0.18 ===== ===== Effect of Dilutive Securities Stock Options.................................... -- 827 -- 436 Diluted EPS ------ ------ ----- ------ ------ ----- Net Income....................................... $3,756 17,196 $0.22 $2,283 12,785 $0.18 ====== ====== ===== ====== ====== =====
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2001 2000 ------------------------------ ------------------------------ PER PER SHARE SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Basic EPS Net Income....................................... $7,299 16,322 $0.45 $4,229 12,327 $0.34 Effect of Dilutive Securities Stock Options.................................... -- 804 -- 392 Diluted EPS ------ ------ ----- ------ ------ ----- Net Income....................................... $7,299 17,126 $0.43 $4,229 12,719 $0.33 ====== ====== ===== ====== ====== =====
(3) BUSINESS SEGMENTS MANAGEMENT REPORTING The Company has five reportable segments, the Bank, Westfield, RINET, Sand Hill and BPVI. The financial performance of the Company is managed and evaluated by business segment. The segments are managed separately because each business is an individual 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. 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, and trust and 8 BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) estate administration. 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 seven 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, alternative investment analysis and mutual fund investing. 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 uses its expertise to plan and execute diversification programs for concentrated stock positions. BPVI serves the investment management needs of high net worth individuals primarily in New England and the Northeast. The firm is a large-cap value style investor headquartered in Concord, NH, with an office at 10 Post Office Square in Boston, MA. 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. Sand Hill was acquired in a business combination accounted for as a purchase, accordingly information pertaining to Sand Hill is excluded from the segment disclosures prior to August 31, 2000. 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, 2001 and 2000.
2001 ---------------------------------------------------------------------------------------------- BANK WESTFIELD RINET SHA BPVI OTHER INTERSEGMENT TOTAL ---------- --------- -------- -------- -------- -------- ------------ ---------- (IN THOUSANDS) Income Statement Data: Revenues from External Customers: Net Interest Income............ $ 9,113 $ 13 $ (4) $ 14 $ 2 $ 7 $ (16) $ 9,129 Non-Interest Income............ 3,860 4,735 1,008 1,140 966 1 -- 11,710 ---------- ------ ------ ------- ------ ------- -------- ---------- Total Revenues................. 12,973 4,748 1,004 1,154 968 8 (16) 20,839 Provision for Loan Losses........ 600 -- -- -- -- -- -- 600 Non-Interest Expense............. 8,755 3,279 868 1,180 700 8 -- 14,790 Income Taxes..................... 886 612 56 (11) 150 -- -- 1,693 ---------- ------ ------ ------- ------ ------- -------- ---------- Segment Profit................... $ 2,732 $ 857 $ 80 $ (15) $ 118 -- $ (16) $ 3,756 ========== ====== ====== ======= ====== ======= ======== ========== Balance Sheet Data: Total Segment Assets............. $1,079,260 $9,049 $1,742 $17,052 $1,622 $22,615 $(24,353) $1,106,987 ========== ====== ====== ======= ====== ======= ======== ==========
9 BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000 ------------------------------------------------------------------------------- BANK WESTFIELD RINET BPVI OTHER INTERSEGMENT TOTAL -------- --------- -------- -------- -------- ------------ -------- (IN THOUSANDS) Income Statement Data: Revenues from External Customers: Net Interest Income........................... $ 5,961 $ 25 $ 1 -- -- $ (26) $ 5,961 Non-Interest Income........................... 2,546 3,495 850 1,045 -- -- 7,936 -------- ------ ---- ------ ---- ------- -------- Total Revenues................................ 8,507 3,520 851 1,045 -- $ (26) 13,897 Provision for Loan Losses....................... 500 -- -- -- -- -- 500 Non-Interest Expense............................ 5,964 2,497 715 935 -- -- 10,111 Income Taxes.................................... 514 420 55 14 -- -- 1,003 -------- ------ ---- ------ ---- ------- -------- Segment Profit.................................. $ 1,529 $ 603 $ 81 $ 96 -- $ (26) $ 2,238 ======== ====== ==== ====== ==== ======= ======== Balance Sheet Data: Total Segment Assets............................ $723,826 $7,282 $958 $2,050 $896 $(2,426) $732,586 ======== ====== ==== ====== ==== ======= ========
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, 2001 and 2000.
2001 ---------------------------------------------------------------------------------------------- BANK WESTFIELD RINET SHA BPVI OTHER INTERSEGMENT TOTAL ---------- --------- -------- -------- -------- -------- ------------ ---------- (IN THOUSANDS) Income Statement Data: Revenues from External Customers: Net Interest Income............ $ 17,704 $ 36 $ (10) $ 34 $ 11 $ 14 $ (40) $ 17,749 Non-Interest Income............ 7,315 8,949 2,085 2,417 1,997 2 -- 22,765 ---------- ------ ------ ------- ------ ------- -------- ---------- Total Revenues................. 25,019 8,985 2,075 2,451 2,008 16 (40) 40,514 Provision for Loan Losses........ 1,150 -- -- -- -- -- -- 1,150 Non-Interest Expense............. 16,848 6,440 1,762 2,376 1,506 16 -- 28,948 ---------- ------ ------ ------- ------ ------- -------- ---------- Income Taxes..................... 1,646 1,062 128 31 250 -- -- 3,117 ========== ====== ====== ======= ====== ======= ======== ========== Segment Profit................... $ 5,375 $1,483 $ 185 $ 44 $ 252 -- $ (40) $ 7,299 Balance Sheet Data: Total Segment Assets............. $1,079,260 $9,049 $1,742 $17,052 $1,622 $22,615 $(24,353) $1,106,987 ========== ====== ====== ======= ====== ======= ======== ==========
2000 ------------------------------------------------------------------------------- BANK WESTFIELD RINET BPVI OTHER INTERSEGMENT TOTAL -------- --------- -------- -------- -------- ------------ -------- (IN THOUSANDS) Income Statement Data: Revenues from External Customers: Net Interest Income........................... $ 11,107 $ 39 $ 2 -- -- $ (41) $ 11,107 Non-Interest Income........................... 4,943 6,805 1,647 2,148 -- -- 15,543 -------- ------ ------ ------ ---- ------- -------- Total Revenues................................ 16,050 6,844 1,649 2,148 -- (41) 26,650 Provision for Loan Losses....................... 800 -- -- -- -- -- 800 Non-Interest Expense............................ 11,738 4,876 1,338 1,849 -- -- 19,801 Income Taxes.................................... 848 808 126 38 -- -- 1,820 -------- ------ ------ ------ ---- ------- -------- Segment Profit.................................. $ 2,664 $1,160 $ 185 $ 261 -- $ (41) 4,229 ======== ====== ====== ====== ==== ======= ======== Balance Sheet Data: Total Segment Assets............................ $723,826 $7,282 $ 958 $2,050 $896 $(2,426) $732,586 ======== ====== ====== ====== ==== ======= ========
(4) RECENT ACCOUNTING DEVELOPMENTS On July 20, 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires that all business combinations 10 BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) consummated after June 30, 2001 be accounted for under a single accounting method--the purchase method. Use of the pooling-of-interests method for transactions initiated after June 30, 2001 will no longer be permitted. Statement 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which for calendar year-end companies, will be January 1, 2002. At June 30, 2001 the company had $17.7 million of goodwill on the balance sheet that is being amortized at $1.4 million per year. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2001 The discussions set forth below and elsewhere herein contain 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. All statements, other than statements of historical facts, including statements regarding our strategy, effectiveness of investment programs, expectations as to growth in assets, deposits and results of operations, success of acquisitions, future operations, market position, financial position, and prospects, plans and objectives of management are forward-looking statements. The Company's actual results could differ materially from those projected in the forward-looking statements as the result of, among other factors, changes in interest rates, changes in the securities or financial markets, a deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers' ability to service and repay our loans, changes in loan defaults and charge-off rates, reduction in deposit levels necessitating increased borrowing to fund loans and investments, the risk that difficulties will arise in connection with the integration of the operations of acquired businesses with the operations of our banking or investment management businesses, the passing of adverse government regulation, changes in assumptions used in making such forward looking statements, as well as those factors set forth below under the heading "Risk Factors and Factors Affecting Forward-Looking Statements." These forward-looking statements are made as of the date of this report and the company does not intent or undertake to update any such forward-looking statement. GENERAL Boston Private Financial Holdings, Inc. 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, a trust company chartered by the Commonwealth of Massachusetts and insured by the Federal Deposit Insurance Corporation (the "FDIC"). During 1997, the Company merged with Westfield, a Massachusetts corporation engaged in providing a range of investment management services to individual and institutional clients. During October 1999, the Company merged with 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. On February 28, 2001 the Company merged with Boston Private Value Investors, formerly E. R. Taylor Investments, Inc., a New Hampshire corporation engaged in providing value-style investment advisory services to the wealth management market, in exchange for 629,731 newly issued shares of the Company's common stock. These mergers were accounted for as "pooling of interests". Accordingly, the results of operations of the Company reflect the financial position and results of operations including Westfield, RINET, and BPVI on a consolidated basis for all periods presented. On August 31, 2000, the Company acquired Sand Hill Advisors, Inc., 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 the closing, 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 12 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, Sand Hill and BPVI. A description of each subsidiary is provided in Note 3 to the Consolidated Financial Statements. FINANCIAL CONDITION TOTAL ASSETS. Total assets increased $183.8 million, or 19.9%, to $1.1 billion at June 30, 2001 from $923.2 million at December 31, 2000. This increase was primarily driven by deposit growth, which was used to fund new loans and purchase investment securities. INVESTMENTS. Total investments (consisting of cash, federal funds sold, investment securities, mortgage-backed securities, and stock in the FHLB of Boston) were $320.1 million, or 28.9% of total assets, at June 30, 2001, compared to $240.6 million, or 26.1% of total assets, at December 31, 2000. Of the $79.5 million increase in investments during the first half of 2001, $62.5 million in cash and federal funds sold was driven by higher deposit balances. The remaining $17.0 million of this increase was due to funding of the investment portfolio. Management periodically evaluates investment alternatives to properly manage the overall balance sheet. The timing of sales and reinvestments is based on various factors, including management's evaluation of interest rate trends and total bank liquidity. The following table is a summary of investment and mortgage-backed securities available for sale as of June 30, 2001 and December 31, 2000:
AMORTIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- -------- -------- -------- (IN THOUSANDS) AT JUNE 30, 2001 U.S. Government and agencies............................. $ 82,385 $1,111 $(288) $ 83,208 Corporate bonds.......................................... 12,109 257 (23) 12,343 Municipal bonds.......................................... 94,969 1,231 (189) 96,011 Mortgage-backed securities............................... 2,820 30 -- 2,850 -------- ------ ----- -------- Total investments...................................... $192,283 $2,629 $(500) $194,412 ======== ====== ===== ======== AT DECEMBER 31, 2000 U.S. Government and agencies............................. $ 74,753 $ 819 $(379) $ 75,193 Corporate bonds.......................................... 12,029 214 -- 12,243 Municipal bonds.......................................... 86,483 1,086 (120) 87,449 Mortgage-backed securities............................... 3,274 2 (9) 3,267 -------- ------ ----- -------- Total investments...................................... $176,539 $2,121 $(508) $178,152 ======== ====== ===== ========
LOANS. Total loans increased $93.9 million, or 14.6%, during the first half of 2001 to $738.9 million, or 66.8% of total assets, at June 30, 2001, from $645.1 million, or 69.9% of total assets, at December 31, 2000. Both the commercial and residential mortgage loan portfolios continued to experience growth due to the Company's strong client relationships and the demand for financing. Commercial loans increased $24.8 million, or 9.1%, and residential mortgage loans increased $67.7 million, or 19.6%, during the first half of 2001. RISK ELEMENTS. Total non-performing assets, which consist of non-accrual loans and other real estate owned, decreased by $217,000 during the first six months of 2001 to $1.1 million, or 0.10% of total assets, at June 30, 2001, from $1.3 million, or 0.14% of total assets, at December 31, 2000. The 13 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, 2001, loans with an aggregate balance of $2.7 million, or 0.37% of total loans, were 30 to 89 days past due, a decrease of $372,000 as compared to $3.1 million, or 0.48% of total loans, as of December 31, 2000. Most of these loans are adequately secured and management's success in keeping these borrowers current varies from month to month. The Company discontinues the accrual of interest on a loan when the collectibility of principal or interest is in doubt. In certain instances, loans that have become 90 days past due may remain on accrual status if management believes that full principal and interest due on the loan is collectible. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a charge to operations. When management believes that the collectibility of a loan's principal balance is unlikely, the principal amount is charged against the allowance. Recoveries on loans which have been previously charged off are credited to the allowance as received. The allowance for loan losses is determined using a systematic analysis and procedural discipline based on historical experience, product types, and industry benchmarks. A system of periodic loan reviews is performed to individually assess the inherent risk and assign risk ratings to each loan. The allowance is calculated based on management's judgment of the effect of current and forecasted economic conditions on the borrowers' abilities to repay, an evaluation of the allowance for loan losses in relation to the size of the overall loan portfolio, and consideration of the relationship of the allowance for loan losses to non-performing loans, net charge-off trends, and other factors. While this evaluation process utilizes historical and other objective information, the classification of loans and the establishment of the allowance for loan losses relies to a great extent on the judgment and experience of management. While management evaluates currently available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The following table is an analysis of the Bank's allowance for loan losses for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) Ending gross loans.................................. $738,942 $520,822 $738,942 $520,822 Allowance for loan losses, beginning of period...... $ 7,921 $ 5,666 $ 7,342 $ 5,336 Provision for loan losses......................... 600 500 1,150 800 Charge- offs...................................... (11) (12) (11) (19) Recoveries........................................ 11 70 40 107 -------- -------- -------- -------- Allowance for loan losses, end of period............ $ 8,521 $ 6,244 $ 8,521 $ 6,224 -------- -------- -------- -------- Allowance for loan losses to ending gross loans..... 1.15% 1.20% 1.15% 1.20% ======== ======== ======== ========
DEPOSITS AND BORROWINGS. The Company experienced an increase in total deposits of $147.1 million, or 22.1%, during the first six months of 2001, to $812.2 million, or 73.4% of total assets, at June 30, 2001, from $665.0 million, or 72.0% of total assets, at December 31, 2000. This increase was due to higher average balances in existing client accounts, as well as a significant number of new 14 accounts opened during the first six months of 2001. The following table shows the composition of the Company's deposits at June 30, 2001 and December 31, 2000:
JUNE 30, 2001 DECEMBER 31, 2000 -------------------- -------------------- AS A % OF AS A % OF BALANCE TOTAL BALANCE TOTAL -------- --------- -------- --------- Demand deposits....................................... $ 92,610 11.4% $111,846 16.8% NOW................................................... 99,777 12.3 86,868 13.0 Savings............................................... 7,081 0.9 5,997 0.9 Money Market.......................................... 481,385 59.3 347,641 52.3 Certificates of deposit under $100,000................ 23,039 2.8 21,754 3.3 Certificates of deposit $100,000 or greater........... 108,300 13.3 90,941 13.7 -------- ----- -------- ----- Total........................................... $812,192 100.0% $665,047 100.0% ======== ===== ======== =====
LIQUIDITY. Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers as well as to earnings enhancement opportunities in a changing marketplace. Primary sources of liquidity consist of investment management fees, financial planning fees, deposit inflows, loan repayments, borrowed funds, and 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 June 30, 2001, cash, federal funds sold and securities available for sale amounted to $314.5 million, or 28.4% of total assets of the Company. This compares to $235.8 million, or 25.5% of total assets, at December 31, 2000. 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 $308.5 million as of June 30, 2001. In addition, the Bank maintains short-term lines of credit at the Federal Reserve Bank and other correspondent banks totaling $89.0 million, and has established brokered certificate of deposit lines with several institutions aggregating $120.0 million. Management believes that at June 30, 2001, 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 June 30, 2001 Westfield had working capital of approximately $3.7 million. Management believes that at June 30, 2001, Westfield had adequate liquidity to meet its commitments for the foreseeable future. RINET's primary source of liquidity consists of financial planning fees that are collected on a quarterly basis. At June 30, 2001 RINET had working capital of approximately $615,000. Management believes that at June 30, 2001, RINET had adequate liquidity to meet its commitments for the foreseeable future. Sand Hill's primary source of liquidity consists of investment management fees that are collected on a quarterly basis. At June 30, 2001 Sand Hill had working capital of approximately $1.1 million. Management believes that at June 30, 2001, Sand Hill had adequate liquidity to meet its commitments for the foreseeable future. BPVI's primary source of liquidity consists of investment management fees that are collected on a quarterly basis. At June 30, 2001 BPVI had working capital of approximately $162,000. Management believes that at June 30, 2001, BPVI had adequate liquidity to meet its commitments for the foreseeable future. 15 The Company's primary sources of funds are dividends from its subsidiaries, issuance of its Common Stock and borrowings. Management believes that the Company has adequate liquidity to meet its commitments for the foreseeable future. CAPITAL RESOURCES. Total stockholders' equity of the Company at June 30, 2001 was $108.4 million, or 9.8% of total assets, compared to $99.6 million, or 10.8% of total assets at December 31, 2000. The increase was the result of the Company's net income for the first six months of 2001 of $7.3 million, combined with common stock issued in connection with stock grants to employees and proceeds from options exercised, less dividends paid to shareholders and the change in accumulated other comprehensive income. The Company is subject to various regulatory capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company's financial statements. For example, under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Similarly, the Company is also subject to capital requirements administered by the Federal Reserve Bank with respect to certain non-banking activities, including adjustments in connection with off-balance sheet items. The following table presents actual capital amounts and regulatory capital requirements as of June 30, 2001 and December 31, 2000:
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES PROVISIONS ------------------- ------------------------- ------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- -------- -------- -------------- -------- -------------- (DOLLARS IN THOUSANDS) AS OF JUNE 30, 2001: Total risk-based capital Company......................... $97,094 15.53% $50,028 > 8.0% $62,535 > 10.0% Bank............................ 70,577 11.48 49,162 8.0 61,452 10.0 Tier I risk-based Company......................... 89,268 14.27 25,014 4.0 37,521 6.0 Bank............................ 62,885 10.23 24,581 4.0 36,871 6.0 Tier I leverage capital Company......................... 89,268 8.88 40,203 4.0 50,253 5.0 Bank............................ 62,885 6.21 40,532 4.0 50,665 5.0 AS OF DECEMBER 31, 2000: Total risk-based capital Company......................... $86,691 16.76% $41,384 > 8.0% $51,729 > 10.0% Bank............................ 63,821 12.55 40,668 8.0 50,835 10.0 Tier I risk-based Company......................... 80,214 15.51 20,692 4.0 31,038 6.0 Bank............................ 57,454 11.30 20,334 4.0 30,501 6.0 Tier I leverage capital Company......................... 80,214 9.09 35,312 4.0 44,140 5.0 Bank............................ 57,454 6.59 34,879 4.0 43,598 5.0
16 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 NET INCOME. The Company recorded net income of $3.8 million, or $0.22 per diluted share, for the quarter ended June 30, 2001 compared to $2.3 million, or $0.18 per diluted share for the quarter ended June 30, 2000. This represented a 64.5% increase in net income and a 22.2% increase in earnings per share. The difference in growth rates between net income and earnings per share results from having issued 3.5 million shares of the company's common stock in September 2000 to fund expansion and business growth. NET INTEREST INCOME. For the quarter ended June 30, 2001, net interest income was $9.1 million, an increase of $3.2 million, or 53.1%, over the same period in 2000. This increase was primarily attributable to an increase of $330.0 million, or 51.4%, in the average balance of earning assets. The Company's net interest margin was 3.95% for the second quarter of 2001, an increase of 23 basis points compared to the same period last year. INTEREST INCOME. During the second quarter of 2001, interest income was $16.7 million, an increase of $4.6 million, or 37.9%, compared to $12.1 million for the same period in 2000. Interest income on commercial loans increased 15.3% to $5.9 million for the quarter ended June 30, 2001, compared to $5.1 million for the same period in 2000. Interest income from residential mortgage loans increased 56.6% to $6.9 million for the second quarter of 2001, compared to $4.4 million for the same period in 2000, and interest on home equity and other loans decreased 6.3% to $518,000 for the second quarter of 2001, compared to $553,000, for the same period in 2000. The average balance of commercial loans increased 31.4% and the average rate decreased 3.3%, or 75 basis points to 8.35% for the quarter ended June 30, 2001. The average balance of residential mortgage loans increased 52.9%, and the average rate increased 2.5%, or 17 basis points to 7.09% for the same period. The average balance of home equity and other loans increased 15.8% and the average rate decreased 19.1%, or 177 basis points, to 7.49%. 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 $1.3 million, or 65.0%, to $3.4 million for the quarter ended June 30, 2001, compared to $2.1 million for the same period in 2000. This increase was primarily attributable to an increase in the average balance of $124.6 million, or 83.0%, offset by a decrease in the average yield on investments of 54 basis points, or 9.8%, to 5.00% for the quarter ended June 30, 2001. INTEREST EXPENSE. During the second quarter of 2001, interest expense was $7.5 million, an increase of $1.4 million, or 23.0%, compared to $6.1 million for the same period in 2000. This increase in the Company's interest expense was the result of an increase in the average balance of interest-bearing liabilities of $258.4 million, or 46.8%, increase between the two periods. The average cost of interest-bearing liabilities decreased 72 basis points, or 16.3%, to 3.72% for the quarter ended June 30, 2001. PROVISION FOR LOAN LOSSES. The provision for loan losses was $600,000 for the quarter ended June 30, 2001, compared to $500,000 for the same period in 2000. 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 $0 during the second quarter of 2001, compared to $58,000 for the same period in 2000. FEES AND OTHER INCOME. Fees and other income increased $3.8 million, or 47.6%, to $11.7 million for the three month period ending June 30, 2001, compared to $7.9 million for the same period in 2000. The majority of fee income was attributable to advisory fees earned on assets under management. These fees increased $2.2 million, or 32.2% to $9.1 million for the second quarter of 2001, compared to 17 $6.9 million for the same period in 2000. Of this increase in fee income, $1.1 million, or 51.2% was due to the purchase acquisition of Sand Hill on August 31, 2000. The remaining increase was primarily due to a 22.2% increase in assets under management, which were $5.4 billion on June 30, 2001, compared to $4.5 billion on June 30, 2000. This increase does not include the assets under management of Sand Hill, which were $784 million on June 30, 2001. Financial planning fees increased $145,000, or 17.2%, to $1.0 million for the second quarter of 2001, compared to $844,000 for the same period in 2000. Equity in losses of partnerships was $26,000 for the three months ended June 30, 2001 due to a decrease in the market value of Westfield's general partnership interest in its hedge funds. Deposit account service fees increased $37,000, or 50.7%, to $110,000 for the second quarter of 2001 as a result of a larger number of deposit accounts and an increased level of transaction-based fees. Gain on sale of investment securities was $670,000 for the second quarter of 2001. Gain on sale of loans increased $147,000 to $151,000 for the second quarter of 2001 as a result of increased market demand for fixed rate loans, which are generally sold on the secondary market. Other fee income, which consists primarily of non-amortizing loan fees and cash management fees increased $514,000 to $694,000 for the second quarter of 2001. OPERATING EXPENSE. Total operating expense for the second quarter of 2001 increased $4.7 million, or 46.3%, to $14.8 million compared to $10.1 million for the same period in 2000. Of this increase, $1.2 million, or 25.2%, was due to the operating expenses of Sand Hill, and the remainder was attributable to the Company's continued growth and expansion. The Company has experienced a 51.1% increase in total balance sheet assets, a 39.8% increase in client assets under management, and a 18.6% increase in the number of employees from June 30, 2000 to June 30, 2001. In addition, the Company expanded its facilities at its Boston headquarters, and opened a new banking office in the Back Bay of boston as of May 1, 2000. Salaries and benefits, the largest component of operating expense, increased $2.6 million, or 38.8%, to $9.4 million for the quarter ended June 30, 2001, from $6.8 million for the same period in 2000. Of this increase, $641,000, or 24.3% was due to the acquisition of Sand Hill. The remaining increase was due to a 18.6% increase in the number of employees, a higher level of employee incentive-based compensation, normal salary increases, and the related taxes and benefits thereon. Occupancy and equipment expense increased $446,000, or 39.2%, to $1.6 million for the second quarter of 2001, from $1.1 million for the same period last year. Of this increase, $85,000, or 19.1% 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 $418,000, or 89.7% due to legal and consulting expenses incurred for strategic projects during the second quarter of 2001, as well as higher audit fees as a result of the Company's continued growth. Marketing and business development increased $540,000, or 101.1%, to $1.1 million for the second quarter of 2001 as 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 $236,000, or 66.7%, as a result of increased service and volume-related charges for processing banking transactions and maintaining custody of client assets under management. Merger expenses of $12,000 for the second quarter of 2001 were a result of the pooling acquisition of BPVI on February 28, 2001. 18 Amortization of intangibles increased $218,000 to $345,000 for the second quarter of 2001, from $127,000 for the same period last year due primarily to the purchase acquisition of Sand Hill on August 31, 2000. Other expenses include insurance, supplies, telephone, mailing expense, publications and subscriptions, employee training and other miscellaneous business expenses. These expenses have increased $168,000, or 24.3% to $860,000, 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 $1.7 million for the second quarter of 2001 as compared to $1.0 million for the same period last year. The effective tax rate was 31.1% for the second quarter of 2001, compared to 30.5% for the same period in 2000. 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 SIX MONTHS ENDED JUNE 30, 2001 NET INCOME. The Company recorded net income of $7.3 million, or $0.43 per diluted share, for the six months ended June 30, 2001 compared to $4.2 million, or $0.33 per diluted share for the six months ended June 30, 2000. This represented a 72.6% increase in net income and a 30.3% increase in earnings per share. The difference in growth rates between net income and earnings per share results from having issued 3.5 million shares of the company's common stock in September 2000 to fund expansion and business growth. NET INTEREST INCOME. For the six months ended June 30, 2001, net interest income was $17.7 million, an increase of $6.6 million, or 59.8%, over the same period in 2000. This increase was primarily attributable to an increase of $316.4 million, or 57.3%, in the average balance of earning assets. The Company's net interest margin was 3.93% for the second quarter of 2001, an increase of 17 basis points compared to the same period last year. INTEREST INCOME. During the first six months of 2001, interest income was $33.7 million, an increase of $11.1 million, or 49.4%, compared to $22.6 million for the same period in 2000. Interest income on commercial loans increased 29.3% to $12.1 million for the six months ended June 30, 2001, compared to $9.3 million for the same period in 2000. Interest income from residential mortgage loans increased 55.9% to $13.2 million for the first six months of 2001, compared to $8.5 million for the same period in 2000, and interest on home equity and other loans increased 5.0% to $1.1 million for the first six months of 2001, compared to $1.1 million for the same period in 2000. These increases were primarily due to an increase in loan volume, offset by decreases in the average yield. The average balance of commercial loans increased 38.7% and the average rate decreased 6.8%, or 63 basis points to 8.73% for the six months ended June 30, 2001. The average balance of residential mortgage loans increased 50.0%, and the average rate increased 4.0%, or 27 basis points to 7.13% for the same period. The average balance of home equity and other loans increased 14.0% and the average rate decreased 7.9% or 70 basis points to 8.23%. 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 $3.6 million, or 98.4%, to $7.3 million for the six months ended June 30, 2001, compared to $3.7 million for the same period in 2000. This increase was primarily attributable to an increase in the average balance of $142.3 million, or 106.0%, offset by a decrease in the average yield on investments of 20 basis points, or 3.7% to 5.26% for the six months ended June 30, 2001. INTEREST EXPENSE. During the first six months of 2001, interest expense was $15.9 million, an increase of $4.5 million, or 39.3%, compared to $11.4 million for the same period in 2000. This increase in the Company's interest expense was the result of an increase in the average balance of interest-bearing liabilities of $271.0 million, or 52.0% increase between the two periods. The average 19 cost of interest-bearing liabilities decreased 8.4%, or 37 basis points to 4.03% for the six months ended June 30, 2001. PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.2 million for the six months ended June 30, 2001, compared to $800,000 for the same period in 2000. 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 $29,000 during the first six months of 2001, compared to $88,000 for the same period in 2000. FEES AND OTHER INCOME. Fees and other income increased $7.2 million, or 46.5%, to $22.8 million for the six month period ending June 30, 2001, compared to $15.5 million for the same period in 2000. The majority of fee income was attributable to advisory fees earned on assets under management. These fees increased $4.4 million, or 32.3% to $18.2 million for the first six months of 2001, compared to $13.7 million for the same period in 2000. Of this increase in fee income, $2.4 million, or 54.1% was due to the purchase acquisition of Sand Hill on August 31, 2000. The remaining increase was primarily due to a 22.2% increase in assets under management, which were $5.4 billion on June 30, 2001, compared to $4.5 billion on June 30, 2000. This increase does not include the assets under management of Sand Hill, which were $784 million on June 30, 2001. Financial planning fees increased $437,000, or 26.7%, to $2.1 million for the first six months of 2001, compared to $1.6 million for the same period in 2000. Equity in losses of partnerships was $112,000 for the six months ended June 30, 2001 due to a decrease in the market value of Westfield's general partnership interest in its hedge funds. Deposit account service fees increased $80,000, or 61.5%, to $210,000 for the first six months of 2001 as a result of a larger number of deposit accounts and an increased level of transaction-based fees. Gain on sale of investment securities was $1.2 million for the first half of 2001. Gain on sale of loans increased $325,000 to $335,000 for the first half of 2001 as a result of increased market demand for fixed rate loans which are generally sold on the secondary market. Other fee income, which consists primarily of non-amortizing loan fees and cash management fees increased $649,000 to $914,000 for the first half of 2001. OPERATING EXPENSE. Total operating expense for the first six months of 2001 increased $9.1 million, or 46.2% to $28.9 million compared to $19.8 million for the same period in 2000. Of this increase, $2.4 million, or 26.0% was due to the operating expenses of Sand Hill, and the remainder was attributable to the Company's continued growth and expansion. The Company has experienced a 51.1% increase in total balance sheet assets, a 39.8% increase in client assets under management, and an 18.6% increase in the number of employees from June 30, 2000 to June 30, 2001. In addition, the Company expanded its facilities at its Boston headquarters, and opened a new banking office as of May 1, 2000. Salaries and benefits, the largest component of operating expense, increased $5.7 million, or 42.2%, to $19.1 million for the six months ended June 30, 2001, from $13.4 million for the same period in 2000. Of this increase, $1.3 million or 23.5% was due to the acquisition of Sand Hill. The remaining increase was due to an 18.6% increase in the number of employees, a higher level of employee incentive-based compensation, normal salary increases, and the related taxes and benefits thereon. Occupancy and equipment expense increased $773,000, or 34.4%, to $3.0 million for the first half of 2001, from $2.2 million for the same period last year. Of this increase, $151,000, or 19.5% 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 20 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 $818,000, or 100.6% due to legal and consulting expenses incurred for strategic projects during the first half of 2001, as well as higher audit fees as a result of the Company's continued growth. Marketing and business development increased $577,000, or 53.6%, to $1.7 million for the first half of 2001 as a result of increased business development activity due to growth in sales staff. Contract services and processing expenses increased $231,000, or 32.2%, as a result of increased service and volume-related charges for processing banking transactions and maintaining custody of client assets under management. Merger expenses of $139,000 for the first half of 2001 were a result of the pooling acquisition of BPVI on February 28, 2001. Amortization of intangibles increased $456,000 to $689,000 for the first half of 2001, from $233,000 for the same period last year due primarily to the purchase acquisition of Sand Hill on August 31, 2000. Other expenses include insurance, supplies, telephone, mailing expense, publications and subscriptions, employee training and other miscellaneous business expenses. These expenses have increased $499,000, or 38.2%, 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 $3.1 million for the first half of 2001 as compared to $1.8 million for the same period last year. The effective tax rate was 29.9% for the first half of 2001, compared to 30.1% for the same period in 2000. The decrease in the Company's effective tax rate is a result of a lower percentage of fully taxable income. RISK FACTORS AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS This Quarterly Report, including the information incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company's actual results could differ materially from those projected in the forward-looking statements set forth in this Report including the information incorporated herein by reference. Factors which may cause such a material difference include those set forth below. Investors in the Company's common stock should carefully consider the discussion of risk factors below, in addition to the other information contained in this Quarterly Report. These forward-looking statements are made as of the date of this report and the company does not undertake to update any such forward-looking statement. WE MAY NOT BE ABLE TO ATTRACT AND RETAIN BANKING CUSTOMERS AT CURRENT LEVELS Competition in the local banking industry coupled with our relatively small size may limit the ability of the Bank to attract and retain banking customers. The Bank faces competition from the following: - other banking institutions (including larger Boston and suburban commercial banking organizations); - savings banks; - credit unions; 21 - other financial institutions; and - non-bank financial service companies serving eastern Massachusetts and adjoining areas. In particular, the Bank's competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range and quality of services provided. Because the Bank maintains a smaller staff and has fewer financial and other resources than larger institutions with which it competes, it may be limited in its ability to attract customers. In addition, some of the Bank's current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than the Bank can accommodate. If the Bank is unable to attract and retain banking customers, it may be unable to continue its loan growth and its results of operations and financial condition may otherwise be negatively impacted. In as much as the Bank is our sole banking subsidiary, its financial performance is very significant to our overall results of operations and financial condition. WE MAY NOT BE ABLE TO ATTRACT AND RETAIN INVESTMENT MANAGEMENT CLIENTS AT CURRENT LEVELS Due to the intense local competition and our relatively short history and limited record of performance in the investment management business, the Bank and our investment management subsidiaries, Westfield, Sand Hill, RINET and BPVI, may not be able to attract and retain investment management clients at current levels. In the investment management industry, we compete primarily with the following: - commercial banks and trust companies; - mutual fund companies; - investment advisory firms; - stock brokerage firms; - law firms; and - other financial services companies. Competition is especially keen in our geographic market area, because there are numerous well-established and successful investment management firms in Boston, New England and in Northern California. Many of our competitors have greater resources than we have. Our ability to successfully attract and retain investment management clients is dependent upon the ability of each to compete with its competitors' investment products, level of investment performance, client services and marketing and distribution capabilities. If we are not successful, our results from operations and financial position may be negatively impacted. In addition, our ability to retain investment management clients may be impaired by the fact that our investment management contracts are typically short-term in nature. Approximately 46% of our revenues are derived from investment management contracts which are typically terminable upon less than 30 days' notice. Most of our clients may withdraw funds from accounts under management generally in their sole discretion. Moreover, Westfield receives performance-based fees resulting from its status as general partner or investment manager of seven limited partnership investment funds. The amount of these fees is impacted directly by the investment performance of Westfield. As a result, the future revenues from 22 such fees may fluctuate and may be affected by conditions in the capital markets and other general economic conditions. Westfield, Sand Hill, and BPVI are our major investment management subsidiaries, and their financial performance is a significant factor in our overall results of operations and financial condition. DEFAULTS IN THE REPAYMENT OF LOANS MAY NEGATIVELY IMPACT OUR BUSINESS Defaults in the repayment of loans by the Bank's customers may negatively impact its business. A borrower's default on its obligations under one or more of the Bank's loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out of the loan. In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, the Bank may have to write-off the loan in whole or in part. In such situations, the Bank may acquire any real estate or other assets, if any, which secure the loan through foreclosure or other similar available remedies. In such cases, the amount owed under the defaulted loan often exceeds the value of the assets acquired. The Bank's management periodically makes a determination of an allowance for loan losses based on available information, including the quality of its loan portfolio, certain economic conditions, the value of the underlying collateral and the level of its non-accruing loans. Provisions to this allowance result in an expense for the period. If, as a result of general economic conditions or an increase in defaulted loans, management determines that additional increases in the allowance for loan losses are necessary, the Bank will incur additional expenses. In addition, bank regulatory agencies periodically review the Bank's allowance for loan losses and the values it attributes to real estate acquired through foreclosure or other similar remedies. Such regulatory agencies may require the Bank to adjust its determination of the value for these items. These adjustments could negatively impact the Bank's results of operations or financial position. A DOWNTURN IN THE LOCAL ECONOMY OR REAL ESTATE MARKET COULD NEGATIVELY IMPACT OUR BANKING BUSINESS A downturn in the local economy or real estate market could negatively impact our banking business. Because the Bank serves primarily individuals and smaller businesses located in eastern Massachusetts and adjoining areas, with a particular concentration in the Greater Boston Metropolitan Area, the ability of the Bank's customers to repay their loans is impacted by the economic conditions in these areas. The Bank's commercial loans are generally concentrated in the following customer groups: - real estate developers and investors; - financial service providers; - technology companies; - manufacturing and communications companies; - professional service providers; - general commercial and industrial companies; and - individuals. The Bank's commercial loans, with limited exceptions, are secured by either real estate (usually, income producing residential and commercial properties), marketable securities or corporate assets (usually, accounts receivable, equipment or inventory). Substantially all of the Bank's residential mortgage and home equity loans are secured by residential property in eastern Massachusetts. As a 23 result, conditions in the real estate market specifically, and the Massachusetts economy generally, can materially impact the ability of the Bank's borrowers to repay their loans and affect the value of the collateral securing these loans. FLUCTUATIONS IN INTEREST RATES MAY NEGATIVELY IMPACT OUR BANKING BUSINESS Fluctuations in interest rates may negatively impact the business of the Bank. The Bank's main source of income from operations is net interest income, which is equal to the difference between the interest income received on interest-bearing assets (usually, loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually, deposits and borrowings). The Bank's net interest income can be affected significantly by changes in market interest rates. In particular, changes in relative interest rates may reduce the Bank's net interest income as the difference between interest income and interest expense decreases. As a result, the Bank has adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, even with these policies in place, changes in interest rates may negatively impact the Bank's results of operations and financial position. An increase in interest rates could also have a negative impact on the Bank's results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to the Bank's allowance for loan losses. OUR COST OF FUNDS FOR BANKING OPERATIONS MAY INCREASE AS A RESULT OF GENERAL ECONOMIC CONDITIONS, INTEREST RATES AND COMPETITIVE PRESSURES Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures. The Bank has traditionally obtained funds principally through deposits and through borrowings. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. Historically and in comparison to commercial banking averages, the Bank has had a higher percentage of its time deposits in denominations of $100,000 or more. Within the banking industry, the amounts of such deposits are generally considered more likely to fluctuate than deposits of smaller denominations. If as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at the Bank decreases relative to its overall banking operations, the Bank may have to rely more heavily on borrowings as a source of funds in the future. OUR INVESTMENT MANAGEMENT BUSINESS MAY BE NEGATIVELY IMPACTED BY CHANGES IN ECONOMIC AND MARKET CONDITIONS Our investment management business may be negatively impacted by changes in general economic and market conditions because the performance of such business is directly affected by conditions in the financial and securities markets. The financial markets and the investment management industry in general have experienced record performance and record growth in recent years. The financial markets and businesses operating in the securities industry, however, are highly volatile (meaning that performance results can vary greatly within short periods of time) and are directly affected by, among other factors, domestic and foreign economic conditions and general trends in business and finance, all of which are beyond our control. We cannot assure you that broad market performance will be favorable in the future. Any decline in the financial markets or a lack of sustained growth may result in a corresponding decline in our performance and may adversely affect the assets which we manage. 24 In addition, Westfield's, Sand Hill's, and BPVI's management contracts generally provide for fees payable for investment management services based on the market value of assets under management, although a portion of Westfield's contracts also provide for the payment of fees based on investment performance. Because most contracts provide for a fee based on market values of securities, fluctuations in securities prices may have a material adverse effect on our results of operations and financial condition. OUR INVESTMENT MANAGEMENT BUSINESS IS HIGHLY REGULATED Our investment management business is highly regulated, primarily at the federal level. The failure of any of our subsidiaries that provide investment management services to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other sanctions, including revocation of such subsidiary's registration as an investment adviser. Specifically, five of our subsidiaries, including Westfield, Sand Hill, and RINET, BPVI are registered investment advisers under the Investment Advisers Act. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary, record keeping, operational and disclosure obligations. These subsidiaries, as investment advisers, are also subject to regulation under the federal and state securities laws and the fiduciary laws of certain states. In addition, Westfield acts as a sub-adviser to a mutual fund which is registered under the 1940 Act and is subject to that act's provisions and regulations. We are also subject to the provisions and regulations of ERISA to the extent we act as a "fiduciary" under ERISA with respect to certain of our clients. ERISA and the applicable provisions of the federal tax laws, impose a number of duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving the assets of each ERISA plan which is a client of ours, as well as certain transactions by the fiduciaries (and certain other related parties) to such plans. In addition, applicable law provides that all investment contracts with mutual fund clients may be terminated by the clients, without penalty, upon no later than 60 days' notice. Investment contracts with institutional and other clients are typically terminable by the client, also without penalty, upon 30 days' notice. The Company itself does not manage investments for clients, does not provide any investment management services and, therefore, is not a registered investment adviser. The Bank is exempt from the regulatory requirements of the Investment Advisors Act, but is subject to extensive regulation by the FDIC and the Commissioner of Banks of The Commonwealth of Massachusetts. OUR BANKING BUSINESS IS HIGHLY REGULATED Bank holding companies and state chartered banks operate in a highly regulated environment and are subject to supervision and examination by federal and state regulatory agencies. The Company is subject to the BHCA, and to regulation and supervision by the Federal Reserve Board. The Bank, as a Massachusetts chartered trust company the deposits of which are insured by the FDIC, is subject to regulation and supervision by the Massachusetts Commissioner of Banks and the FDIC. Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The FDIC and the Massachusetts Commissioner of Banks possess cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the Federal Reserve Board possesses similar powers with respect to 25 bank holding companies. These and other restrictions limit the manner in which The Company and the Bank may conduct business and obtain financing. Furthermore, our banking business is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve Board. Changes in monetary or legislative policies may affect the interest rates the Bank must offer to attract deposits and the interest rates it must charge on its loans, as well as the manner in which it offers deposits and makes loans. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally including the Bank. TO THE EXTENT THAT WE ACQUIRE OTHER COMPANIES IN THE FUTURE, OUR BUSINESS MAY BE NEGATIVELY IMPACTED BY RISKS INHERENT WITH SUCH ACQUISITIONS We have in the past considered, and will in the future continue to consider, the acquisition of other banking and investment management companies. We are currently a party to acquire to agreements for two acquisitions, one to acquire Borel Bank & Trust Company and the other to acquire Kanon Bloch Carre. See "Item 5. Other Information" for a description of these proposed transactions. To the extent that we acquire Borel, Kanon Bloch Carre or other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. These risks include the following: - the risk that we will incur substantial expenses in pursuing potential acquisition without completing such acquisitions - the risk that the acquired business will not perform in accordance with management's expectations; - the risk that difficulties will arise in connection with the integration of the operations of the acquired business with the operations of our banking or investment management businesses; - the risk that management will divert its attention from other aspects of our business; - the risk that we may lose key employees of the acquired business; and - the risks associated with entering into geographic and product markets in which we have limited or no direct prior experience. SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY NEGATIVELY AFFECT THE MARKET VALUE OF OUR COMMON STOCK AND COULD IMPACT OUR ABILITY TO OBTAIN ADDITIONAL EQUITY FINANCING On February 4, 2000, the Commission declared a registration statement on Form S-3 effective, pursuant to which 3,094,589 shares of common stock of the Company were registered to enable the holders to publicly sell shares which would otherwise be ineligible for sale in the public market. The registration of these shares discharged our obligations under the terms of registration rights agreements with the former stockholders of Westfield and RINET. Similar registration obligations exist with respect to former shareholders of Sand Hill and the former shareholders of E.R. Taylor Investments, the predecessor of BPVI. The sale of a substantial number of shares of common stock into the public market, or the availability of these shares for future sale, could adversely affect the market price for our common stock and could impair the our ability to obtain additional capital in the future through an offering of equity securities should we desire to do so. 26 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK For information related to this item, see the Company's December 31, 2000 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 On June 7, 2000, one of the Company's subsidiaries received correspondence on behalf of one of its former clients claiming that the subsidiary is responsible for underperformance of allegedly $5.1 million when compared to the former client's performance targets. On or about January 11, 2001, our subsidiary received notice of a court document filed in Pennsylvania state court on behalf of the client stating that an action has been commenced against our subsidiary, but containing no allegations. We intend to defend this matter vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS No changes in security holders' rights have taken place. ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities have taken place. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS At the Annual Meeting of Stockholders held on April 19, 2001, stockholders of the Company approved the proposals to: (1) elect four (4) Class I Directors of the Company to serve until the 2004 annual meeting and until their successors are duly elected and qualified. The votes for such proposal were as follows:
FOR ABSTAIN ---------- -------- Eugene S. Colangelo.................................... 12,891,929 17,550 Allen Sinai............................................ 12,891,929 17,550 Walter M. Pressey...................................... 12,272,117 637,362 Timothy L. Vaill....................................... 12,355,764 553,715
The term of office of each of Arthur J. Bauernfeind, Peter C. Bennett, C. Michael Hazard, Herbert S. Alexander, Lynn Thompson Hoffman, Richard N. Thielen and Charles O. Wood, III as a director of the Company continued after the annual meeting. (2) ratify the appointment of KPMG LLP as the Company's independent auditors for the fiscal year ending December 31, 2001. The votes for such proposal were as follows:
FOR AGAINST ABSTAIN --- -------- -------- 12,733,845 172,649 2,985
27 ITEM 5. OTHER INFORMATION On June 27, 2001, the Company signed a definitive agreement to acquire Borel Bank & Trust Company, a $360 million private bank located in San Mateo, California, which has been serving the financial needs of individuals, their families and their businesses in Northern California for over 20 years. Subject to certain contingencies, Boston Private will pay $37.00--$37.50 per share for 100% of Borel's common stock for a total of approximately $113,200,000, in a pooling of interests transaction. Borel's shares will be converted into Boston Private shares at a conversion ratio based on the average daily closing price of Boston Private common stock for the thirty day period ended three days prior to the closing of the merger. Under the terms of the agreement, Borel will become a wholly owned subsidiary of the Company. Borel's management team will remain in place and continue to manage the bank under the Borel Bank & Trust Company name. On June 29, 2001, the Company's subsidiary, RINET signed a definitive agreement to acquire the company which owns Kanon Bloch Carre, a noted Boston-based independent mutual fund rating service and investment advisor. At the closing of this transaction, which is anticipated to be accounted for as a pooling of interests, Kanon Bloch Carre's stockholder will receive newly issued shares of the Company's common stock valued at $2,000,000. Under the terms of the transaction, Kanon Bloch Carre will become a division of RINET. The consummation of these acquisitions is subject to a number of conditions including, among others, the obtaining of all necessary regulatory approvals and third party consents, the approval of the acquisition of Borel by the Company's and Borel's stockholders, the Company's satisfaction with its due diligence review of Kanon Bloch Carre 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 (a) Exhibits. See Exhibit index on page 30 (b) Reports on Form 8-K 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOSTON PRIVATE FINANCIAL HOLDINGS, INC. (Registrant)
August 14, 2001 /s/ TIMOTHY L. VAILL --------------------------------------------- Timothy L. Vaill CHAIRMAN AND CHIEF EXECUTIVE OFFICER August 14, 2001 /s/ WALTER M. PRESSEY --------------------------------------------- Walter M. Pressey PRESIDENT AND CHIEF FINANCIAL OFFICER
29 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION --------------------- ------------------------------------------------------------ 2.1 Agreement and Plan of Reorganization by and between Boston Private Financial Holdings, Inc. and Borel Bank & Trust Company, dated June 27, 2001 (incorporated by reference to Exhibit 99.2 to Boston Private Financial Holdings, Inc.'s Current Report on Form 8-K filed on July 3, 2001) *3.1 Restated Articles of Organization of Boston Private Financial Holdings, Inc. filed May 23, 1994 *3.2 Articles of Amendment of Boston Private Financial Holdings, Inc. filed on April 22, 1998 3.3 By-laws of Boston Private Financial Holdings, Inc., as amended (incorporated by reference to Exhibit 3.2 to Boston Private Financial Holdings, Inc.'s Annual Report on Form 10-K filed on March 6, 2000) *10.1 Employment Agreement dated January 1, 1996 by and among Boston Private Financial Holdings, Inc., Boston Private Bank & Trust Company and Timothy L. Vaill *10.2 Commercial Lease dated October 31, 1994 by and between Boston Private Financial Holdings, Inc. and Leggat McCall Properties Management, Inc. 10.3 Deferred Compensation Plan of Boston Private Financial Holdings, Inc. (incorporated by reference to Exhibit 4.1 to Boston Private Financial Holdings, Inc.'s Registration Statement on Form S-8 filed on July 24, 2001)
------------------------ * Filed herewith. 30