BOSTON PRIVATE FINANCIAL HOLDINGS INC - 10-Q Quarterly Report

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As filed with the Securities and Exchange Commission on August 14, 2002
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______.

Commission File Number: 0-17089

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

COMMONWEALTH OF MASSACHUSETTS 04-2976299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

TEN POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (617) 912-1900

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of JULY 31, 2002:

Common Stock - Par Value $1.00 22,436,358 Shares
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(class) (outstanding)

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC

FORM 10-Q

TABLE OF CONTENTS

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

5

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

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 "Boston Private Bank"), a
Massachusetts chartered trust company; Borel Private Bank & Trust Company
("Borel"), a California state banking corporation, Westfield Capital Management
Company, LLC ("Westfield"), Sand Hill Advisors, Inc. ("Sand Hill") and Boston
Private Value Investors ("BPVI"), registered investment advisors; and RINET
Company LLC ("RINET"), a financial planning firm and a registered investment
advisor. Boston Private 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. All significant intercompany accounts and transactions have been
eliminated in consolidation.

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, 2001 Annual Report to Shareholders. Certain prior year information
has been reclassified to conform to current year presentation and restated to
reflect certain pooling of interest transactions.

(2) EARNINGS PER SHARE

Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
earnings per share calculation is based upon the weighted average number of
common shares and common share equivalents outstanding during the period. Stock
options, when dilutive, are included as common stock equivalents using the
treasury stock method.

The following tables are a reconciliation of the numerators and
denominators of basic and diluted earnings per share computations:

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) BUSINESS SEGMENTS

MANAGEMENT REPORTING
The Company has six reportable segments, Boston Private Bank, Borel,
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
Boston Private 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. Boston Private Bank seeks to anticipate and respond to the
financial needs of its client base by offering high quality products, dedicated
personal service and long-term banking relationships. Boston Private 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. Boston Private 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 estate administration. Boston Private Bank's investment
management emphasis is on large-cap equity and actively managed fixed income
portfolios.

Borel serves the financial needs of individuals, their families and their
businesses in Northern California. Borel conducts a commercial banking business
which includes accepting demand, savings and time deposits and making
commercial, real estate and consumer loans. Borel offers various savings plans
and provides safe deposit boxes as well as other customary banking services and
facilities, except international operations. Additionally, Borel offers trust
services and provides a variety of other fiduciary services including
management, advisory and administrative services to individuals.

Westfield provides investment services to high net worth individuals and
institutions, including endowments, foundations and pension plans throughout the
U.S. Westfield specializes in separately managed growth equity portfolios, and
also acts as the general partner and investment manager to four limited
partnerships that employ a long/short domestic growth equity strategy, with
styles focusing on the small cap growth and life sciences sectors. Westfield
serves as a subadvisor to three registered mutual funds. Westfield typically
invests client portfolios in stock of companies which appear to have broad
market opportunities, accelerating earnings growth, low financial leverage, and
cash flow sufficient to fund future growth. 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, investment
management, asset allocation services and supervision and reporting 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, fixed income and mutual fund investing. It also provides an
independent mutual fund rating service.

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

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and execute diversification programs for concentrated stock positions held by
its high net worth clients. Sand Hill also serves as an advisor to a registered
mutual fund.

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 in Boston, Massachusetts.

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
was allocated a share of holding company expenses during 2001 based on the
segment's percentage of consolidated net income.

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, 2002 and 2001.

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables are a reconciliation of the revenues, net income,
assets, and other significant items of reportable segments as of and for the six
months ended June 30, 2002 and 2001.

4) RECENT ACCOUNTING DEVELOPMENTS

In June, 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards Nos. 141 "Business Combinations"
(Statement 141), and 142, "Goodwill and Other Intangible Assets" (Statement
142). Statement 141 requires that the purchase method of accounting be used for
all business combinations and eliminated the use of pooling of interests for
transactions initiated subsequent to June 30, 2001. Statement 142 eliminates the
amortization to expense of goodwill recorded as a result of such combinations,
but requires periodic evaluation of the goodwill for impairment. Write-downs of
the balance, if necessary, are to be charged to results of operations. Goodwill
existing prior to the issuance of the statement was required to be amortized
through December 31, 2001.

The Company evaluated its recorded goodwill under Statement 142 as of
January 1, 2002, and concluded that there was no impairment as of that date.
Under Statement 142, goodwill and identifiable intangible assets with
indefinite lives will no longer be amortized, but will be reviewed at least
annually for impairment. Identifiable intangible assets with discrete useful
lives will be amortized over their useful lives. The estimated deferred
purchase price for Sand Hill is contingent upon performance hurdles and other
factors. An adjustment was made to reduce the estimated purchase price based
on current performance and market conditions and the estimated impact that
has on future payments. During the second quarter of 2002, BPVI recorded
$520,000 of goodwill in connection with the acquisition of Edward Goldberg's
business and services (SEE MANAGEMENT'S DISCUSSION AND ANALYSIS).

10

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortization and changes in the carrying amount of goodwill by segment are
as follows:

The net income and earnings per share would have been as follows if there had
been no amortization in 2001.

5) OTHER MATTERS

Boston Private Financial Holdings, Inc. (the "Company") is the holding
company for Boston Private Bank & Trust Company (the "Bank") and its subsidiary
company, Boston Private Preferred Capital Corporation ("BPPCC"), a real estate
investment trust 99.9% owned by the Bank. The Bank has received from the
Commonwealth of Massachusetts Department of Revenue ("DOR") a Notice of Intent
to Assess additional state excise taxes of $1,216,889 plus interest with respect
to its tax years ended December 31, 1999 and December 31, 2000. The Company is
aware that the DOR has sent similar notices to numerous other financial
institutions in Massachusetts that reported a deduction for dividends received
from a REIT on their 1999 and 2000 Massachusetts financial institution excise
tax return. Assessed amounts (including interest) ultimately paid, if any, would
be deductible expenses for federal income tax purposes.

The DOR contends that dividend distributions by BPPCC to the Bank are
fully taxable in Massachusetts. The Company believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by BPPCC to the Bank.
Accordingly, no provision has been made in the Company's financial statements
for the amounts assessed or additional amounts that might be assessed in the
future. The Company intends to vigorously appeal the assessment and to pursue
all available means to defend its position.

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2002

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, evaluations of future interest rate trends
and liquidity, 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. These forward looking statements are based on the
current assumptions and beliefs of management and are only expectations of
future results. Our 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 we operate, 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 we do not
intend 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"). In recent years, some substantial acquisitions have
contributed to our growth.

On June 10, 2002, BPVI appointed Edward Goldberg, "Goldberg" as a
senior vice president. In connection with this appointment, BPVI agreed to
purchase Goldberg's business. The estimated purchase price at close was $1.7
million and is to be paid in three installments as follows: 40% on September 1,
2002, 30% on September 1, 2003 and 30% on September 1, 2004.

On November 30, 2001, we acquired by merger Borel, a private bank with
$375 million in total assets located in San Mateo, California, in exchange for
5,629,872 newly issued shares of the Company's common stock. In addition,
Borel's previously outstanding stock options were converted into options to
acquire 229,998 shares of our common stock. In connection with the Borel merger,
we recorded approximately $12 million of merger expenses which are non-recurring
operating expenses. On October 1, 2001, RINET acquired by merger Kanon Bloch
Carre, a Boston-based independent mutual fund rating service and investment
advisor, in exchange for 100,288 newly issued shares of the Company's common
stock. On February 28, 2001, the Company acquired by merger BPVI, 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 initiated prior to June 30, 2001 and were accounted for as
"poolings of interests".

On August 31, 2000, we acquired Sand Hill, an investment advisory firm
servicing the wealth management market, primarily in Northern California. The
estimated purchase price at closing was $16.5 million, with 70% paid at close,
and the remainder to be paid in four annual payments contingent upon performance
using a combination of approximately 73% cash and 27% common stock for each
payment. At closing, we issued 258,395 shares of our common stock in connection
with the transaction. In the fourth quarter of 2001, we issued an additional
15,933 shares of our common stock in connection with the first annual contingent
payment. The estimated purchase price was reduced by $1.1 million due to a
reduction in the amount of the estimated remaining deferred purchase payments.
This acquisition was accounted for as "purchase" and, accordingly,

12

our results of operations and financial position include this enterprise on a
consolidated basis since the date of the acquisitions.

Our results of operations have been restated to reflect the financial
position and results of operations on a consolidated basis for all of the
mergers accounted for as a pooling of interests for all years presented.

We conduct substantially all of our business through our wholly owned
operating subsidiaries, Boston Private Bank, Borel, Westfield, RINET, Sand Hill
and BPVI. A description of each subsidiary is provided in Note 3 to the
Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

Management considers the determination of its allowance for loan
losses to be a critical accounting policy. Management assesses the adequacy of
the allowance and evaluates available information in establishing the
allowances; future adjustments to the allowance may be necessary if economic
conditions differ substantially from assumptions used in making these estimates.
Historically, the Company has not experienced such material differences in
estimates for its allowance.

IMPACT OF ACCOUNTING ESTIMATES

Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States.
These estimates and assumptions impact the reported amount of assets,
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates.

Significant estimates underlying the accompanying consolidated
financial statements include the allowance for loan loss, recoverability of
intangibles and various other operating allowances and accruals. Material
estimates that are particularly susceptible to change relate to the
determination of the allowance for loan loss as well as the evaluation of
goodwill and other intangibles. The allowance for loan losses is determined
using a systematic analysis and procedural discipline based on historical
experience, product types, and industry benchmarks. See "Allowance for Loan
Losses".

In evaluating the recorded goodwill for impairment, management must
estimate the fair value of the business segments that have goodwill. The
estimated valuation requires estimates of future performance and is susceptible
to changes in the capital market environment as well as changes that occur at
the business segment. Impairment testing was performed upon adoption of
Statement 142 in January 2002. Management engaged independent consultants to
assist in this initial impairment testing. Management intends to test for
impairment periodically, but at least annually, as required by Statement 142. As
of June 30, 2002, we had recorded goodwill and identifiable intangible assets in
an aggregate amount of approximately $17.8 million.

FINANCIAL CONDITION

TOTAL ASSETS. Total assets increased $190.1 million, or 12.6%, to $1.7
billion at June 30, 2002 from $1.5 billion at December 31, 2001. This increase
was primarily driven by deposit growth, which was used to fund new loans.

INVESTMENTS. Total investments (consisting of cash, federal funds sold,
investment securities, mortgage-backed securities, and stock in the FHLB of
Boston) increased $47.3 million or 13.5% to $396.8 million, or 23.3% of total
assets, at June 30, 2002, from $349.5 million, or 23.2% of total assets, at
December 31, 2001. Management periodically evaluates investment alternatives to
properly manage the overall balance sheet. The timing of sales and reinvestments
is based on various factors, including our evaluation of interest rate trends
and our liquidity.

13

The following table is a summary of investment and mortgage-backed
securities available for sale as of June 30, 2002 and December 31, 2001:

LOANS. Total loans increased $137.3 million, or 12.4%, during the first
half of 2002 to $1.242 billion, or 73.1% of total assets, at June 30, 2002, from
$1.105 billion, or 73.2% of total assets, at December 31, 2001. Both the
commercial and residential mortgage loan portfolios continued to experience
growth due to the demand for financing. Residential lending in the New England
area continued to experience growth both in the refinancing and purchase markets
due to the low interest rate environment. Commercial loans increased $57.2
million, or 10.6%, and residential mortgage loans increased $78.2 million, or
16.1%, during the first half of 2002.

RISK ELEMENTS. Total non-performing assets, which consist of non-accrual
loans and other real estate owned, decreased by $38,000 during the first half of
2002 to $866,000, or 0.05% of total assets, at June 30, 2002, from $904,000, or
0.06% of total assets, at December 31, 2001. We continue to evaluate the
underlying collateral and value of each of our non-performing assets and pursue
the collection of all amounts due.

At June 30, 2002, loans with an aggregate balance of $4.1 million, or 0.33%
of total loans, were 30 to 89 days past due, an increase of $482,000 as compared
to $3.6 million, or 0.33% of total loans, as of December 31, 2001. Although
these these loans are generally secured, our success in keeping these borrowers
current varies from month to month, and it is uncertain whether available
collateral would, in all cases, be adequate to cover the amounts owed.

We discontinue 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 we believe 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 we believe that the collection of a loan's
principal balance is unlikely, the principal amount is charged against the
allowance. Recoveries on loans that 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. The allowance is segregated into three components;
"general," "specific" and "unallocated". The general component is determined by
applying coverage percentages to groups of loans based on risk ratings and
product types. A system of periodic loan reviews is performed to assess the
inherent risk and assign risk ratings to each loan individually. Coverage
percentages applied are determined based on industry practice and our judgment.
The specific component is established by allocating a portion of the allowance
for loan losses to individual classified loans on the basis of specific
circumstances and assessments. The unallocated component supplements the first
two components based on management's judgment of the effect of current and
forecasted economic conditions on borrowers' abilities to repay, an evaluation
of the allowance for loan losses in relation to the size of the overall loan
portfolio, and

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consideration of the relationship of the allowance for loan losses to
nonperforming 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 our judgment and experience.

While we evaluate currently available information in establishing the
allowance for loan losses, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in making
the evaluations. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review a financial institution's
allowance for loan losses. Such agencies may require the financial institution
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.

The following table is an analysis of our allowance for loan losses for the
periods indicated:

DEPOSITS. We experienced an increase in total deposits of $181.4 million,
or 15.8%, during the first half of 2002, to $1.327 billion, or 78.1% of total
assets, at June 30, 2002, from $1.145 billion, or 75.9% of total assets, at
December 31, 2001. This increase was due to higher average balances in existing
client accounts, as well as a significant number of new accounts opened during
the first half of 2002. In addition, we believe clients are seeking more stable
investment opportunities in bank deposits due to the current uncertainty in the
marketplace. The following table shows the composition of our deposits at June
30, 2002 and December 31, 2001:

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BORROWINGS. Total borrowings (consisting of federal funds purchased,
securities sold under agreements to repurchase ("repurchase agreements"), and
FHLB borrowings) decreased $2.6 million, or 1.4%, during the first half of 2002
to $188.4 million from $191.0 million at December 31, 2001. This decrease is due
to the continued growth of our deposits. We take advantage of opportunities to
fund asset growth with borrowings, but on a long-term basis, we intend to
replace a portion of our borrowings with lower-cost core deposits.

LIQUIDITY. Liquidity is defined as the ability to meet current and future
financial obligations of a short-term nature. We further define 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 our lending and investment activities.

Management is responsible for establishing and monitoring liquidity targets
as well as strategies to meet these targets. At June 30, 2002, cash, federal
funds sold and securities available for sale amounted to $389.4 million, or
22.9% of total assets of the Company. This compares to $342.6 million, or 22.7%
of total assets, at December 31, 2001.

In general, Boston Private Bank maintains a liquidity target of 15% to 20%
of total assets. Boston Private Bank is a member of the FHLB of Boston and as
such has access to both short and long-term borrowings of up to $424.8 million
as of June 30, 2002. In addition, Boston Private Bank maintains short-term lines
of credit at the Federal Reserve Bank and other correspondent banks totaling
$79.0 million, and has established brokered certificate of deposit lines with
several institutions aggregating $120.0 million. We believe that at June 30,
2002, Boston Private Bank had adequate liquidity to meet its commitments for the
foreseeable future.

In general, Borel maintains a minimum liquidity target of 20%. Borel is a
member of the FHLB of San Francisco, and as such has access to both short and
long-term borrowings of up to $8.0 million as of June 30, 2002. Borel manages
its cash position in a way that avoids reliance on short-term borrowings or
brokered deposits. Concentrations of deposits from any one source are also
avoided. We believe that at June 30, 2002, Borel 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, 2002 Westfield had
working capital of approximately $4.4 million. We believe that at June 30, 2002,
Westfield had adequate liquidity to meet its commitments for the foreseeable
future.

RINET's primary source of liquidity consists of financial planning and
asset management fees that are collected on a quarterly basis. At June 30, 2002,
RINET had working capital of approximately $813,000. We believe that at June 30,
2002, 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, 2002 Sand Hill had
working capital of approximately $238,000. We believe that at June 30, 2002,
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, 2002 BPVI had working
capital of approximately $352,000. We believe that at June 30, 2002, BPVI had
adequate liquidity to meet its commitments for the foreseeable future.

Boston Private Financial Holdings' primary sources of funds are dividends
from our subsidiaries, issuance of our common stock and borrowings. We believe
that we have adequate liquidity to meet our commitments for the foreseeable
future.

CAPITAL RESOURCES. Our stockholders' equity at June 30, 2002 was $153.5
million, or 9.0% of total assets, compared to $139.6 million, or 9.2% of total
assets at December 31, 2001. The dollar increase was the result of our net
income for the first half of 2002 of $12.1 million, combined with common stock
issued in connection with stock grants to employees, proceeds from options
exercised and the change in accumulated other comprehensive income reduced by
dividends paid to shareholders.

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 our financial
statements. For example, under capital adequacy guidelines

16

and the regulatory framework for prompt corrective action, Boston Private Bank
and Borel, which are our wholly-owned subsidiaries, must each meet specific
capital guidelines that involve quantitative measures of each of their
respective assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Boston Private Bank's and
Borel's respective capital amounts and classifications 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, 2002 and December 31, 2001:

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002.

NET INCOME. We recorded net income of $6.3 million, or $0.27 per diluted
share, for the quarter ended June 30, 2002 compared to $5.2 million, or $0.22
per diluted share for the quarter ended June 30, 2001. This represented a 21.6%
increase in net income and a 22.7% increase in earnings per share.

17

NET INTEREST INCOME. For the quarter ended June 30, 2002, net interest
income was $15.9 million, an increase of $2.7 million, or 20.4%, over the same
period in 2001. This increase was attributable to the increase in the average
balance of earning assets exceeding the increased average balance of interest
bearing liabilities and a decrease in the average cost of interest bearing
liabilities exceeding the decrease of the average cost of interest earning
assets. This increase was attributable to an increase in the average balance of
earning assets and a decrease in the average cost of interest earning
liabilities. The Company's net interest margin was 4.30% for the second quarter
of 2002, an increase of 13 basis points compared to the same period last year.

INTEREST INCOME. During the second quarter of 2002, interest income was
$22.4 million, a decrease of $715,000, or 3.1%, compared to $23.1 million for
the same period in 2001. Interest income on commercial loans decreased 3.8% to
$9.8 million for the quarter ended June 30, 2002, compared to $10.2 million for
the same period in 2001. Interest income from residential mortgage loans
increased 26.6% to $8.7 million for the second quarter of 2002, compared to $6.9
million for the same period in 2001, and interest on home equity and other loans
decreased 20.3% to $1.2 million for the second quarter of 2002, compared to $1.5
million, for the same period in 2001. The average balance of commercial loans
increased 19.2% and the average rate decreased 19.3%, or 165 basis points to
6.91% for the quarter ended June 30, 2002. The average balance of residential
mortgage loans increased 39.9%, and the average rate decreased 9.5%, or 67 basis
points to 6.40% for the same period. The average balance of home equity and
other consumer loans increased 5.0% and the average rate decreased 24.1%, or 194
basis points, to 6.13%.

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) decreased $1.9 million, or 41.3%, to $2.6 million
for the quarter ended June 30, 2002, compared to $4.5 million for the same
period in 2001. This decrease was primarily attributable to a decrease in the
average yield on investments of 152 basis points, or 31.3%, to 3.34% compounded
by a decrease in the average balance of $53.7 million, or 14.5%, for the quarter
ended June 30, 2002.

INTEREST EXPENSE. During the second quarter of 2002, interest expense was
$6.5 million, a decrease of $3.4 million, or 34.5%, compared to $9.9 million for
the same period in 2001. This decrease in our interest expense was the result of
a decrease in the average cost of interest-bearing liabilities of 160 basis
points, or 43.0%, to 2.13% for the quarter ended June 30, 2002. This decrease
was partially offset by an increase in the average balance of interest-bearing
liabilities of $157.8 million, or 14.9%, between the two periods.

PROVISION FOR LOAN LOSSES. The provision for loan losses was $555,000 for
the quarter ended June 30, 2002, compared to $690,000 for the same period in
2001. These provisions reflect continued loan growth and excellent credit
quality. We evaluate 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." Charge-offs net of recoveries were $23,000 during
the second quarter of 2002, compared to $0 for the same period in 2001.

FEES AND OTHER INCOME. Fees and other income increased $411,000, or 3.2%,
to $13.1 million for the three-month period ending June 30, 2002, compared to
$12.7 million for the same period in 2001. The majority of fee income was
attributable to investment management and trust fees earned on assets under
management. These fees increased $207,000, or 2.1% to $9.9 million for the
second quarter of 2002, compared to $9.7 million for the same period in 2001.
This increase is primarily attributable to increases in assets under management
for certain products that earn a higher fee offset by decreases in the total
assets under management. Total assets under management decreased $224,000 or
3.3% to $6.504 billion as of June 30, 2002 compared to $6.728 billion as of June
30, 2001.

Financial planning fees increased $425,000, or 37.1%, to $1.6 million for
the second quarter of 2002, compared to $1.1 million for the same period in
2001. This increase was due in part to new business and special projects.

Gain on sale of investment securities was $147,000 for the second quarter
of 2002 compared to $670,000 for the second quarter of 2001. The amount of
security gains recorded in the portfolios are dependent on current market
conditions and the status of the banks' balance sheets. Gain on sale of loans
increased $459,000 to $610,000 for the second quarter of 2002 compared to
$151,000 for the second quarter of 2001. Of the total gain, $343,000 was due to
individual fixed rate loans sold in the secondary market and $267,000 was a
result of a $15 million sale of portfolio loans. Boston Private Bank sells
virtually all of its fixed rate loans and periodically sells loans out of
portfolio to free up capital and adjust the balance sheet gap.

18

Cash administration fees, which consists primarily of cash management fees
and liquid asset management fees, were $193,000 for the second quarter ended
June 30, 2002 compared to $489,000 for the second quarter of 2001. These fees
have decreased due to clients choosing to keep their assets in deposits rather
than other cash management products. Other fee income, which consists primarily
of loan fees and banking fees, increased $89,000 to $505,000 for the second
quarter of 2002.

OPERATING EXPENSE. Total operating expense for the second quarter of 2002
increased $1.7 million, or 9.6%, to $19.1 million compared to $17.4 million for
the same period in 2001. This increase was attributable to our continued growth
and expansion. We experienced a 14.9% increase in total balance sheet assets and
an 18.0% increase in the number of employees from June 30, 2001 to June 30,
2002.

Salaries and benefits, the largest component of operating expense,
increased $1.8 million, or 16.8%, to $12.8 million for the quarter ended June
30, 2002, from $11.0 million for the same period in 2001. This increase was due
to an 18.0% 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 $846,000, or 43.6%, to $2.8
million for the second quarter of 2002, from $1.9 million for the same period
last year. The 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 Cambridge, Massachusetts, as well as our continued
investments in technology. In addition, we plan to open offices in Newton,
Massachusetts and Palo Alto, California in the second half of 2002.

Professional services include legal fees, consulting fees, and other
professional services such as audit and tax preparation. These expenses
decreased $169,000, or 15.9%. This decrease is due to certain legal and
consulting expenses incurred in the prior year that were one time in nature.

Marketing and business development decreased $223,000, or 18.9%, to
$956,000 for the second quarter of 2002. This is not a reflection of less
commitment to growth, but simply a timing variance.

Contract services and processing, which are the costs associated for
custody and data processing, decreased $194,000 from the second quarter in 2001.
This decrease is due primarily to a reduction in custody rates as well as lower
balances in assets under management.

Amortization of goodwill decreased $340,000 to $0 for the second quarter of
2002. On January 1, 2002, we adopted FASB statement 142. Statement 142 requires
that goodwill no longer be amortized to earnings and that other indefinite life
intangibles also not be amortized.

Other expenses include insurance, supplies, telephone, mailing expense,
publications and subscriptions, employee training, interest on deferred
acquisition payments and other miscellaneous business expenses. These expenses
have decreased $69,000, or 5.2% to $1.3 million.

INCOME TAX EXPENSE. We recorded income tax expense of $3.1 million for the
second quarter of 2002 as compared to $2.6 million for the same period last
year. The effective tax rate was 32.8% for the second quarter of 2002, compared
to 33.7% for the same period in 2001. The decrease in our effective tax rate is
a result of a lower percentage of fully taxable income. We have been notified by
the Department of Revenue of the Commonwealth of Massachusetts that there is a
proposed deficiency in the 1999 & 2000 tax returns associated with our real
estate investment trust subsidiary. See "RISK FACTORS AND FACTORS AFFECTING
FORWARD LOOKING STATEMENTS - BOSTON PRIVATE MAY OWE ADDITIONAL MASSACHUSETTS
STATE TAXES" and "LEGAL PROCEEDINGS."

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002

NET INCOME. The Company recorded net income of $12.1 million, or $0.52 per
diluted share, for the six months ended June 30, 2002 compared to $10.3 million,
or $0.45 per diluted share for the six months ended June 30, 2001. This
represented a 17.3% increase in net income and a 15.5% increase in earnings per
share.

NET INTEREST INCOME. For the six months ended June 30, 2002, net interest
income was $31.1 million, an increase of $4.9 million, or 18.7%, over the same
period in 2001. This increase was attributable to the increase in the average

19

balance of earning assets exceeding the increased average balance of interest
bearing liabilities and a decrease in the average cost of interest bearing
liabilities exceeding the decrease of the average cost of interest earning
assets. Our net interest margin was 4.31% for the first half of 2002, an
increase of 10 basis points compared to the same period last year.

INTEREST INCOME. During the first six months of 2002, interest income was
$44.0 million, a decrease of $2.9 million, or 6.3%, compared to $46.9 million
for the same period in 2001. Interest income on commercial loans decreased 8.3%
to $19.2 million for the six months ended June 30, 2002, compared to $20.9
million for the same period in 2001. Interest income from residential mortgage
loans increased 27.5% to $16.9 million for the first six months of 2002,
compared to $13.2 million for the same period in 2001, and interest on home
equity and other loans decreased 22.3% to $2.4 million for the first six months
of 2002, compared to $3.1 million for the same period in 2001. The average
balance of commercial loans increased 17.7% and the average rate decreased
22.1%, or 197 basis points to 7.0% for the six months ended June 30, 2002. The
average balance of residential mortgage loans increased 41.1%, and the average
rate decreased 9.6%, or 69 basis points to 6.4% for the same period. The average
balance of home equity and other loans increased 7.7% and the average rate
decreased 27.9% or 239 basis points to 6.18%.

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) decreased $4.1 million, or 42.6% to $5.6 million
for the six months ended June 30, 2002, compared to $9.7 million for the same
period in 2001. This decrease was primarily attributable to the decrease in the
average yield of investments of 175 basis points, or 33.7%, to 3.45% compounded
by a decrease in the average balance of $50.2 million, or 13.4%, for the six
months ended June 30, 2002.

INTEREST EXPENSE. During the first six months of 2002, interest expense was
$12.9 million, a decrease of $7.8 million, or 37.8%, compared to $20.7 million
for the same period in 2001. This decrease in our interest expense was the
result of a decrease in the average cost of interest-bearing liabilities of 184
basis points, or 46.2%, to 2.15% for the six months ended June 30, 2002. This
decrease was partially offset by an increase in the average balance of
interest-bearing liabilities of $161.5 million, or 15.5%, between the two
periods.

PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.2 million
for the six months ended June 30, 2002, compared to $1.3 million for the same
period in 2001. These provisions reflect continued loan growth and excellent
credit quality. We evaluate 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." Charge-offs net of recoveries were $24,000 during
the first six months of 2002, compared to $32,000 in recoveries, net of
charge-offs, for the same period in 2001.

FEES AND OTHER INCOME. Fees and other income increased $1.5 million, or
6.1%, to $26.2 million for the six month period ending June 30, 2002, compared
to $24.7 million for the same period in 2001. The majority of fee income was
attributable to investment management and trust fees earned on assets under
management. These fees increased $459,000, or 2.4% to $19.8 million for the
first six months of 2002, compared to $19.3 million for the same period in 2001.
This increase is primarily attributable to increases in assets under management
for certain products that earn a higher fee partially offset by decreases in the
total assets under management.

Financial planning fees increased $740,000, or 32.1% to $3.0 million for
the first six months of 2002, compared to $2.3 million for the same period in
2001. RINET had strong new business in the first half of this year as well as a
number of special projects that accounted for the majority of the increase.

Gain on sale of investment securities was $563,000 for the first half of
2002. The amount of security gains recorded in the portfolios are dependent on
current market conditions and the status of the banks' balance sheets. Gain on
sale of loans increased $546,000 to $881,000 for the first half of 2002. Of the
total gain, $614,000 was due to individual fixed rate loans sold in the
secondary market and $267,000 was a result of a $15 million sale of portfolio
loans. Boston Private Bank sells virtually all of its fixed rate loans and
periodically sells loans out of portfolio to free up capital and adjust the
balance sheet.

Cash administrative fees, which consists of cash management fees and liquid
asset management fees, were $414,000 for the six months ended 2002 compared to
$573,000 for the same period in 2001. These fees have decreased, in part, due to
clients choosing to keep their assets in deposits rather than other cash
management products. Other fee income, which consists primarily of loan fees and
banking fees increased $407,000 to $1.1 million for the first half of 2002.

20

OPERATING EXPENSE. Total operating expense for the first six months of 2002
increased $4.1 million, or 12.0% to $38.2 million compared to $34.1 million for
the same period in 2001. This increase is due to our continued growth and
expansion. We experienced a 14.9% increase in total balance sheet assets, and an
18.0% increase in the number of employees from June 30, 2001 to June 30, 2002.

Salaries and benefits, the largest component of operating expense,
increased $3.5 million, or 15.9%, to $25.6 million for the six months ended June
30, 2002, from $22.1 million for the same period in 2001. This increase was due
to an 18.0% 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 $1.5 million, or 39.9%, to $5.2
million for the first half of 2002, from $3.7 million for the same period last
year. The 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 Cambridge, Massachusetts, as well as the Company's
continued investments in technology. In addition, we plan to open offices in
Newton, Massachusetts and Palo Alto, California in the second half of 2002.

Professional services include legal fees, consulting fees, and other
professional services such as audit and tax preparation. These expenses
decreased $301,000, or 14.9%. This decrease is due to certain legal expenses
incurred in the prior year that were one time in nature.

Marketing and business development increased $11,000, or 0.6%, to $1.8
million for the second half of 2002 as a result of increased business
development activity due to growth in sales staff.

Contract services and processing, which are the costs associated for
custody and data processing, decreased $92,000, for the six months ended June
30, 2002, or 9.6%. This decrease is due primarily to a reduction in custody
rates as well as lower balances in assets under management.

Amortization of goodwill decreased $679,000 to $0 for the second half of
2002. On January 1, 2002 we adopted FASB Statement 142. Statement 142 requires
that goodwill no longer be amortized to earnings and that other indefinite life
intangibles also not be amortized.

Other expenses include insurance, supplies, telephone, mailing expense,
publications and subscriptions, employee training, interest on deferred
acquisition payments and other miscellaneous business expenses. These expenses
have increased $302,000, or 11.3%, to $3.0 million primarily as a result of
various items, including increased business volume and an increase in the number
of employees.

INCOME TAX EXPENSE. We recorded income tax expense of $5.8 million for the
second half of 2002 as compared to $5.1 million for the same period last year.
The effective tax rate was 32.3% for the second half of 2002, compared to 33.3%
for the same period in 2001. The decrease in the Company's effective tax rate is
a result of a lower percentage of fully taxable income. See description of
pending tax matter in "RISK FACTORS AND FACTORS AFFECTING FORWARD LOOKING
STATEMENTS - BOSTON PRIVATE MAY OWE ADDITIONAL MASSACHUSETTS STATE TAXES" and
"LEGAL PROCEEDINGS."

21

RISK FACTORS AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. BOSTON PRIVATE'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS QUARTERLY REPORT
ON FORM 10-Q. FACTORS WHICH MAY CAUSE SUCH A MATERIAL DIFFERENCE INCLUDE THOSE
SET FORTH BELOW. INVESTORS IN BOSTON PRIVATE'S COMMON STOCK SHOULD CAREFULLY
CONSIDER THE DISCUSSION OF RISK FACTORS BELOW, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q. REFERENCE TO "WE,"
"OUR," AND "US" REFER TO BOSTON PRIVATE AND ITS SUBSIDIARIES ON A CONSOLIDATED
BASIS.

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN BANKING CUSTOMERS AT CURRENT LEVELS

Competition in local banking industries coupled with our relatively
small size may limit the ability of Boston Private Bank and Borel to attract and
retain banking customers. Boston Private Bank and Borel face competition from
the following:

- other banking institutions (including larger Boston and
Northern California and suburban commercial banking
organizations);

- savings banks;

- credit unions;

- other financial institutions;

- non-bank financial service companies serving eastern
Massachusetts, Northern California and their respective
adjoining areas; and

- out of state financial intermediaries that have opened loan
production offices or that solicit deposits in our market
areas.

In particular, our 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. Additionally, banks and other financial
institutions with larger capitalization and financial intermediaries not subject
to bank regulatory restrictions have larger lending limits and are thereby able
to serve the credit and investment needs of larger customers. Areas of
competition include interest rates for loans and deposits, efforts to obtain
deposits and range and quality of services provided.

Because Boston Private Bank and Borel maintain smaller staffs and have
fewer financial and other resources than larger institutions with which they
compete, they may be limited in their ability to attract customers. In addition,
some of the current commercial banking customers may seek alternative banking
sources as they develop needs for credit facilities larger than Boston Private
Bank and Borel can accommodate.

If we are unable to attract and retain banking customers, we may be
unable to continue our loan growth and our results of operations and financial
condition may otherwise be negatively impacted.

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN INVESTMENT MANAGEMENT CLIENTS AT
CURRENT LEVELS

Due to the intense local competition, Boston Private Bank, Borel and
our investment management subsidiaries, Westfield, Sand Hill, BPVI, and RINET,
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;

22

- 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 Northern California.

Our ability to successfully attract and retain investment management
clients is dependent upon our ability to compete with our competitors'
investment products, level of investment performance, fees, client services and
marketing and distribution capabilities.

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. For the six months ended June 30, 2002, approximately 35%
of our revenues were derived from investment management contracts which are
typically terminable upon 30 days' notice or less. 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 six 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 such
fees may fluctuate and may be affected by conditions in the capital markets and
other general economic conditions. Westfield, BPVI, RINET, and Sand Hill 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 our customers may negatively
impact our business. A borrower's default on its obligations under one or more
of our 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.

If collection efforts are unsuccessful or acceptable work-out
arrangements cannot be reached, we may have to write-off the loan in whole or in
part. In such situations, Boston Private Bank and Borel may acquire any real
estate or other assets, if any, which secure the loan through foreclosure or
other similar available remedies. The amount owed under the defaulted loan often
exceeds the value of the assets acquired.

OUR ALLOWANCE FOR LOAN LOSSES MAY BE INADEQUATE

The respective management of Boston Private Bank and Borel periodically
make a determination of an allowance for loan losses based on available
information, including the quality of the loan portfolio, economic conditions,
the value of the underlying collateral and the level of non-accruing loans.
Increases in 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, Boston Private Bank or Borel may incur additional expenses.

In addition, bank regulatory agencies periodically review Boston
Private Bank's and Borel's respective allowances for loan losses and the values
they attribute to real estate acquired through foreclosure or other similar
remedies. Such regulatory agencies may require Boston Private Bank or Borel
to adjust their determination of the value for these items. These adjustments
could negatively impact our results of operations or financial position.

A DOWNTURN IN THE LOCAL ECONOMIES OR REAL ESTATE MARKETS COULD NEGATIVELY IMPACT
OUR BANKING BUSINESS

A downturn in the local economies or real estate markets could
negatively impact our banking business. Because Boston Private Bank and Borel
serve primarily individuals and smaller businesses located in Eastern
Massachusetts and adjoining areas, with a particular concentration in the
greater Boston metropolitan area, and Northern California, the ability of our
customers to repay their loans is impacted by the economic conditions in
these areas. Furthermore, current negative economic trends, including
uncertainty regarding an economic recovery, increased unemployment and
recently announced significant layoffs of employees by companies in Northern
California and New England, as well as continuing

23

economic uncertainty created by terrorist attacks, and the United States' war on
terrorism, may negatively impact businesses in Northern California and New
England. While the short-term and long-term effects of these events remain
uncertain, they could adversely affect general economic conditions, consumer
confidence or market liquidity, or result in changes in interest rates, any of
which could have a negative impact on our banking business.

The 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.

Boston Private Bank and Borel 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). Our ability to
continue to originate real estate loans may be impaired by adverse changes in
local and regional economic conditions in the real estate markets, or by acts of
nature, including earthquakes and flooding. Due to the concentration of real
estate collateral, these events could have a material adverse impact on the
value of the collateral resulting in losses to either or both of Boston Private
Bank and Borel. Substantially all of Boston Private Bank's and Borel's
residential mortgage and home equity loans are secured by residential property
in eastern Massachusetts and Northern California. As a result, conditions in the
real estate markets specifically, and the Massachusetts and California economies
generally, can materially impact the ability of Boston Private Bank's and
Borel's borrowers to repay their loans and affect the value of the collateral
securing these loans.

ENVIRONMENTAL LIABILITY ASSOCIATED WITH COMMERCIAL LENDING COULD RESULT IN
LOSSES

In the course of business, Boston Private Bank and Borel may in the
future acquire, through foreclosure, properties securing loans they have
originated or purchased which are in default. Particularly in commercial real
estate lending, there is a risk that hazardous substances could be discovered on
these properties. In this event, we might be required to remove these substances
from the affected properties at our sole cost and expense. The cost of this
removal could substantially exceed the value of affected properties. We may not
have adequate remedies against the prior owner or other responsible parties, or
could find it difficult or impossible to sell the affected properties, which
could have a material adverse affect on our business, financial condition and
operating results.

FLUCTUATIONS IN INTEREST RATES MAY NEGATIVELY IMPACT OUR BANKING BUSINESS

Fluctuations in interest rates may negatively impact the business of
Boston Private Bank and Borel. Boston Private Bank's and Borel's sources 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). These rates are highly sensitive to many factors beyond our
control, including general economic conditions, both domestic and foreign,
and the monetary and fiscal policies of various governmental and regulatory
authorities. Net interest income can be affected significantly by changes in
market interest rates. Changes in relative interest rates may reduce our net
interest income as the difference between interest income and interest
expense decreases. We cannot assure that a decrease in interest rates will
not negatively impact our results from operations or financial position.
Specifically, Borel is currently asset sensitive, which means that its
interest bearing liabilities mature, or otherwise reprice, at a slower rate
than its interest earning assets. As a result, in a period of declining
interest rates, Borel will experience a shrinking of its interest margin as
its floating rate loans will reprice immediately, while its fixed rate
deposits will reprice over the course of a year. This reduction in interest
rate may adversely affect Borel's earnings.

24

An increase in interest rates could also have a negative impact on our
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
our allowances for loan losses. Specifically, Boston Private Bank is currently
liability sensitive. As a result, during periods of increasing interest rates,
Boston Private Bank's results of operations may be negatively impacted.
Increases in interest rates also may reduce the demand for loans and, as a
result, the amount of loan and commitment fees. In addition, fluctuations in
interest rates may result in disintermediation, which is the flow of funds away
from depository institutions into direct investments that pay a higher rate of
return and may affect the value of our investment securities and other
interest-earning assets.

OUR COST OF FUNDS FOR BANKING OPERATIONS MAY INCREASE AS A RESULT OF GENERAL
ECONOMIC CONDITIONS, INTEREST RATES OR COMPETITIVE PRESSURES

Our cost of funds for banking operations may increase as a result of
general economic conditions, interest rates and competitive pressures. Boston
Private Bank and Borel have 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, Boston Private Bank and Borel have
had a higher percentage of their 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 Boston Private Bank and Borel
decrease relative to their overall banking operations, Boston Private Bank and
Borel may have to rely more heavily on borrowings as a source of funds in the
future, which may negatively impact our net interest margin.

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 businesses operating in the securities
industry 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. In particular, the financial
and securities markets have experienced a significant downturn since March 2000.
This decline has impacted our investment management business, in particular,
performance fees we earn on mutual funds for which Westfield acts as a
subadvisor. In addition, following the September 11, 2001 terrorist attacks on
the World Trade Center and the Pentagon, the world financial and securities
markets experienced significant and precipitous decline in value and will likely
continue to experience significant volatility as a result of, among other
things, world economic and political conditions. Continued 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.

Westfield's, BPVI's, Sand Hill's and a portion of RINET's management
contracts generally provide for fees payable for investment management services
based on the market value of assets under management, although, as noted above,
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. Four of our subsidiaries, namely Westfield, Sand Hill, BPVI,
and RINET are registered investment advisers under the Investment Advisers Act
of 1040, as amended. Tow of our subsidiaries, Boston Private Bank and Borel,
also provide investment management services, but are regulated as banks and are
not required to register as investment advisors. Each of our subsidiaries
providing investment management services is subject to fiduciary laws. The
Investment Advisers Act imposes numerous obligations on registered investment
advisers, including fiduciary, record keeping, operational and disclosure
obligations. In addition, Westfield and Sand Hill act as subadvisors or advisors
to mutual funds which are registered under the Investment Company Act of 1940
and are subject to that act's provisions and regulations.

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Our subsidiaries are also subject to the provisions and regulations of
ERISA to the extent they 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 transactions involving the assets of each ERISA plan which is a client,
as well as certain transactions by the fiduciaries (and certain other related
parties) to such plans.

Applicable law provides that all investment contracts with mutual fund
clients may be terminated by the mutual fund without penalty, upon no later than
60 days' notice. Investment contracts with institutional and other clients are
typically terminable by the client, without penalty, upon 30 days' notice or
less.

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.

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. Boston Private Financial Holdings is subject to
the Bank Holding Company Act of 1956, and to regulation and supervision by the
Federal Reserve Board. Boston Private 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. Borel,
as a California banking corporation, is subject to regulation and supervision by
the California Department of Financial Institutions 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,
- maintenance of permissible non-banking activities,
- the level of reserves against deposits and
- restrictions on dividend payments

The FDIC, the DFI 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 bank holding companies. These and
other restrictions limit the manner in which we and Boston Private Bank and
Borel 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
Boston Private Bank and Borel must offer to attract deposits and the interest
rates they must charge on their 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 Boston Private Bank and Borel.

OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE NEGATIVELY IMPACTED BY CERTAIN
RISKS INHERENT WITH THE ACQUISITION OF OTHER COMPANIES

We have in the past considered, and will in the future continue to
consider, the acquisition of other banking and investment management companies.
To the extent that we acquire other companies in the future, our business may be
negatively impacted by certain risks inherent with such acquisitions.

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These risks include the following:

- the risk that we will incur substantial expenses in pursuing potential
acquisitions without consummating our 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,
particularly to the extent we are covering new geographic markets;
- 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;
- the risk that unanticipated costs or charges relating to potential
acquisitions could reduce our earnings per share;
- the risks associated with entering into geographic and product markets
in which we have limited or no direct prior experience; and
- the risks of the acquired company which we may assume as a result of
the acquisition.

As a result of these risks, any given acquisition, if and when
consummated, may adversely affect our results of operations or financial
condition. In addition, because the consideration for an acquisition may involve
cash, debt or the issuance of shares of our stock and may involve the payment of
a premium over book and market values, existing shareholders may well experience
dilution in connection with any acquisition.

In addition, we are likely to record goodwill and other intangible
assets in connection with the acquisition of other companies. Under Financial
Accounting Standards Board Statement No. 142, goodwill and identifiable
intangible assets with indefinite lives will no longer be amortized, but will be
reviewed at least annually for impairment. Impairment may result from, among
other things, deterioration in performance of the acquired company, adverse
market conditions, adverse changes in applicable laws or regulations, including
changes that restrict the activities of the acquired business, and a variety of
other circumstances. We evaluated our recorded goodwill as of January 1, 2002,
and concluded that there was no impairment as of that date. Goodwill recorded
prior to implementation of Statement 142 in January 2002, contains certain
intangible assets that were not separately stated at that time. Should the
goodwill of a business segment be impaired, recognition of the related
intangible assets, if applicable, would not be permitted under Statement 142 and
would likely be included in the aggregate amount of any impairment loss. In the
event that we incur an impairment loss in the future, such loss could have a
material adverse effect on our consolidated financial results for the period in
which such charge is taken.

ADVERSE DEVELOPMENTS IN LITIGATION COULD NEGATIVELY IMPACT OUR BUSINESS

Since 1984, Borel has served as the trustee of a private trust that has
been the subject of protracted litigation. During the last eight years there
have been three actions filed in the Superior Court for San Mateo County,
California, by certain beneficiaries of the trust relating to the management and
proposed sale of certain real property. These beneficiaries have claimed, among
other things, that Borel breached its fiduciary duties as the trustee. Borel has
prevailed in the first action and final judgment has been entered in its favor.
Borel has prevailed in the trial court in the second action and a final decision
was issued in favor of Borel; however, the plaintiff beneficiaries made a number
of filings following the trial court's decision including a notice of appeal,
from the judgment on the merits. The plaintiff beneficiaries' motions for a new
trial and for a preliminary injunction were denied. While the plaintiffs filed a
notice of appeal from the denial of the preliminary injunction, this appeal was
rendered moot by the consummation of sale and settlement agreements with UNOCAL
on July 2, 2002. The third action has been held in abeyance by the trial court
for several years pending disposition of the first two matters. Adverse
developments in these lawsuits could have a material adverse effect on Borel's
business or the combined business of our banks. For a more detailed description
of this litigation, see "Legal Proceedings."

BOSTON PRIVATE BANK MAY OWE ADDITIONAL MASSACHUSETTS STATE TAXES

Boston Private Preferred Capital Corporation is a real estate
investment trust, 99.9% of which is owned by Boston Private Bank. Boston Private
Bank has received from the Commonwealth of Massachusetts Department of Revenue a
Notice of Intent to Assess additional state excise taxes of $1,216,889 plus
interest with respect to its tax years ended December 31, 1999 and December 31,
2000 in connection with dividends it received from Boston Private Preferred
Capital Corporation, its real estate investment trust subsidiary. We are aware
that the Department of Revenue has sent similar notices to numerous other
financial institutions in Massachusetts that reported a deduction for dividends

27

received from a real estate investment trust on their respective 1999 and 2000
Massachusetts financial institution excise tax returns.

The Department of Revenue contends that dividend distributions by
Boston Private Preferred Capital Corporation to Boston Private Bank are fully
taxable in Massachusetts. We believe that the Massachusetts statute that
provides for a dividends received deduction equal to 95% of certain dividend
distributions applies to the distributions made by Boston Private Preferred
Capital Corporation to Boston Private Bank. Accordingly, we have made no
provision in our financial statements for the amounts assessed or additional
amounts that might be assessed in the future. If the Department of Revenue is
able to assess such additional state excise taxes or the Commonwealth of
Massachusetts amends the relevant state tax laws, Boston Private Bank's results
of operations may be adversely affected. We intend to vigorously appeal the
assessment and to pursue all available means to defend our position.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

For information related to this item, see the Company's December 31, 2001
Form 10-K, Item 7A - 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, Westfield received correspondence on behalf of a
former client, the Retirement Board of Allegheny County (the "plaintiff"),
claiming that Westfield is responsible for investment underperformance of
allegedly $5.1 million when compared to the plaintiff's performance targets. On
January 11, 2001, a pleading was filed in Pennsylvania state court on behalf of
the plaintiff stating that an action has been commenced against the subsidiary,
but containing no allegations.

On or about May 3, 2002, a complaint was filed against Westfield in the
Allegheny County Court of Common Pleas in Pittsburgh, Pennsylvania, on behalf of
the same plaintiff. The complaint alleges that Westfield's management of the
plaintiff's assets resulted in underperformance resulting in a loss of "more
than $4 million." The complaint purports to state claims of common law breach of
contract, professional negligence, and breach of fiduciary duty, as well as a
claim under the Pennsylvania unfair trade practices statute, and seeks an award
of damages. The complaint also raises claims against a third party investment
monitor arising out of the same facts. On July 1, 2002, Westfield filed a motion
to dismiss the complaint contending, among other things, that the complaint does
not contain allegations as to how Westfield breached the contact or its
purported fiduciary duty. A hearing on the motion is scheduled for August 27,
2002, after which the Court will determine whether to dismiss the claims against
Westfield. We intend to defend this matter vigorously.

Since 1984, Borel has served as the trustee of a private family trust
known as the Andre LeRoy Trust. There have been three actions involving Borel
relating to the management and proposed sale of certain real property (known as
the Guadalupe Oil Field), owned by the Andre LeRoy Trust and another private
family trust (for which Bankers Trust is the trustee). In the first action
("Removal Action"), certain beneficiaries of the Andre LeRoy Trust, petitioned
for removal of Borel as trustee, claiming that Borel had breached its fiduciary
duties concerning the management of oil and gas leases, and, following discovery
of environmental contamination of the property, negotiating a proposed
Settlement Agreement and Purchase and Sale Agreement to sell the Guadalupe Oil
Field to Union Oil Company of California (d/b/a UNOCAL), the operator of the
Guadalupe Oil Field.

In the second action ("Approval Action"), Borel requested court
approval of the proposed Settlement Agreement and Purchase and Sale Agreement.
Borel prevailed in both the Removal Action and Approval Action in the trial
court, and plaintiffs appealed those decisions. In February 2001, the California
Court of Appeals affirmed the findings and decisions of the trial court in the
Removal Action and remanded the Approval Action for limited reconsideration by
the trial court. Final judgment in the Removal Action was entered in favor of
Borel in March 2001. Following the trial court's decision, plaintiff
beneficiaries made a number of filings (1) a motion for a new trial, which was
denied by the trial court; (2) a notice of appeal from the judgment on the
merits in the Approval Action (3) a motion for preliminary injunction seeking to
enjoin the closing of the settlement with UNOCAL and the sale of the Guadalupe
Oil Field to UNOCAL, which was denied by the trial court as well; (4) a notice
of appeal from the denial of the preliminary injunction; and (5) a Petition for
a Writ of Supersedeas seeking the same injunction, in effect, from the Court of
Appeals, which was denied. The transactions contemplated by the Purchase

28

and Sale Agreement and Settlement Agreement with UNOCAL closed on July 2, 2002,
which rendered the appeal from the denial of the injunction moot. Plaintiff's
appeal from the adverse judgment on the merits in the trial court remains
pending.

On March 18, 2002, on remand in the Approval Action, the trial court
issued a statement of decision confirming its decision in favor of Borel
approving the proposed Settlement Agreement and Purchase and Sale Agreement. On
April 23, 2002, the plaintiff beneficiaries filed a notice of intention to file
for a new trial. No date for a hearing or decision has been yet scheduled.

In the third action ("Damages Action"), the same plaintiff
beneficiaries claimed damages against Borel and Deutsche Bank for alleged
mismanagement of the Andre LeRoy Trust and the other family trust in connection
with oil and gas leases and the proposed sale of the Guadalupe Oil Field. In the
Damages Action, plaintiffs claimed damages of $234.2 million, but that amount
was unsubstantiated and the component elements of damages plaintiffs identified
did not total that amount. In the trial of the Approval Action, plaintiffs
submitted expert testimony of damages in the amount of $102 million, but the
court found such evidence unpersuasive.

Borel will continue to vigorously litigate the remaining matters. While
the ultimate results of these proceedings cannot be predicted with certainty, at
the present time, Borel's management, based on consultation with legal counsel,
believes there is no basis to conclude that liability with respect to these
matters is probable or that such liability can be reasonably estimated.

The Company is also involved in routine legal proceedings occurring in
the ordinary course of business. In the opinion of management, final disposition
of these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.

On or about June 2, 2002, Boston Private Bank received from the
Commonwealth of Massachusetts Department of Revenue a Notice of Intent to Assess
additional state excise taxes of $1,216,889 plus interest with respect to its
tax years ended December 31, 1999 and December 31, 2000 for dividends from its
real estate investment trust subsidiary. We are aware that the Department of
Revenue has sent similar notices to numerous other financial institutions in
Massachusetts that reported a deduction for dividends received from a real
estate investment trust on their respective 1999 and 2000 Massachusetts
financial institution excise tax returns. Assessed amounts (including interest)
ultimately paid, if any, would be deductible expenses for federal income tax
purposes. We intend to vigorously appeal the assessment and to pursue all
available means to defend our position.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

At the Annual Meeting of Stockholders held on April 18, 2002,
stockholders of the Company approved proposals to:

1. elect four Class II directors of the Company to serve
until the 2005 annual meeting and until their
successors are duly elected and qualified. The votes
for such proposal were as follows:

29

The term of office of each of Eugene S. Colangelo, Harold A.
Fick, Allen L. Sinai, Timothy L. Vaill, 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, 2002. The votes for such proposal were as
follows:

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.
None.

(b) Reports on Form 8-K
Current report on Form 8-K filed on June 18, 2002
Item reported: Receipt of Notice of Intent to Assess additional state
excise tax from Commonwealth of Massachusetts Department of Revenue

Current report on Form 8-K filed on July 19, 2002
Item reported: Earnings announcement for second quarter ending June 30,
2002

30

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, 2002 /s/ Timothy L. Vaill
--------------- ---------------------------------------
Timothy L. Vaill
Chairman and Chief
Executive Officer

August 14, 2002 /s/ Walter M. Pressey
--------------- ---------------------------------------
Walter M. Pressey
President and
Chief Financial Officer

31