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TABLE OF CONTENTS
As filed with the Securities and Exchange Commission on May 10, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004 |
|
or |
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to . |
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Commonwealth of Massachusetts (State or other jurisdiction of incorporation or organization) |
04-2976299 (I.R.S. Employer Identification Number) |
|
Ten Post Office Square Boston, Massachusetts (Address of principal executive offices) |
02109 (Zip Code) |
|
Registrant's telephone number, including area code: (888) 666-1363 |
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of April 30, 2004:
Common StockPar Value $1.00 (class) |
27,309,975 (outstanding) |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
FORM 10-Q
2
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Unaudited
|
March 31, 2004 |
December 31, 2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands, except share data) |
|||||||||
Assets: | ||||||||||
Cash and due from banks | $ | 70,367 | $ | 45,977 | ||||||
Federal funds sold and other short term investments | 56,735 | 47,511 | ||||||||
Cash and cash equivalents | 127,102 | 93,488 | ||||||||
Money market investments | 200 | 200 | ||||||||
Investment securities available for sale (amortized cost of $490,721 and $392,440, respectively) | 495,777 | 396,546 | ||||||||
Loans held for sale | 8,904 | 4,900 | ||||||||
Loans receivable: | ||||||||||
Commercial | 1,054,246 | 880,626 | ||||||||
Residential mortgage | 656,712 | 651,290 | ||||||||
Home equity and other consumer loans | 81,902 | 80,648 | ||||||||
Total loans | 1,792,860 | 1,612,564 | ||||||||
Less allowance for loan losses | (23,146 | ) | (20,172 | ) | ||||||
Net loans | 1,769,714 | 1,592,392 | ||||||||
Stock in Federal Home Loan Banks | 12,501 | 11,122 | ||||||||
Premises and equipment, net | 16,703 | 13,740 | ||||||||
Goodwill | 85,788 | 17,181 | ||||||||
Intangible assets | 45,980 | 3,137 | ||||||||
Fees receivable | 19,452 | 12,427 | ||||||||
Accrued interest receivable | 10,195 | 8,833 | ||||||||
Other assets | 56,116 | 42,331 | ||||||||
Total assets | $ | 2,648,432 | $ | 2,196,297 | ||||||
Liabilities: | ||||||||||
Deposits | $ | 1,934,379 | $ | 1,658,461 | ||||||
FHLB borrowings | 248,054 | 197,850 | ||||||||
Securities sold under agreements to repurchase | 79,021 | 65,770 | ||||||||
Accrued interest payable | 2,764 | 2,100 | ||||||||
Trust preferred securities and other borrowings | 6,186 | | ||||||||
Deferred purchase obligations | 45,173 | 3,957 | ||||||||
Other liabilities | 42,381 | 32,707 | ||||||||
Total liabilities | 2,357,958 | 1,960,845 | ||||||||
Stockholders' equity: | ||||||||||
Common stock, $1.00 par value per share; authorized: 70,000,000 shares issued: 27,269,762 shares at March 31, 2004 and 25,166,836 shares at December 31, 2003 | 27,270 | 25,167 | ||||||||
Additional paid-in capital | 177,209 | 129,827 | ||||||||
Retained earnings | 88,727 | 83,006 | ||||||||
Unearned compensation | (5,899 | ) | (5,119 | ) | ||||||
Accumulated other comprehensive income | 3,167 | 2,571 | ||||||||
Total stockholders' equity | 290,474 | 235,452 | ||||||||
Total liabilities and stockholders' equity | $ | 2,648,432 | $ | 2,196,297 | ||||||
See accompanying notes to unaudited consolidated financial statements.
3
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
||||||
|
(In thousands, except share data) |
|||||||
Interest and dividend income: | ||||||||
Loans | $ | 22,500 | $ | 19,805 | ||||
Taxable investment securities | 1,265 | 1,695 | ||||||
Non-taxable investment securities | 1,417 | 740 | ||||||
Mortgage-backed securities | 400 | 15 | ||||||
Federal funds sold and other | 284 | 188 | ||||||
Total interest and dividend income | 25,866 | 22,443 | ||||||
Interest expense: | ||||||||
Deposits | 4,022 | 4,110 | ||||||
FHLB borrowings | 2,434 | 1,825 | ||||||
Securities sold under agreements to repurchase | 180 | 194 | ||||||
Federal funds purchased and other | 38 | 6 | ||||||
Total interest expense | 6,674 | 6,135 | ||||||
Net interest income | 19,192 | 16,308 | ||||||
Provision for loan losses | 956 | 778 | ||||||
Net interest income after provision for loan losses | 18,236 | 15,530 | ||||||
Fees and other income: | ||||||||
Investment management and trust fees | 20,155 | 9,849 | ||||||
Financial planning fees | 1,991 | 1,537 | ||||||
Earnings in equity investments | 224 | 95 | ||||||
Deposit account service charges | 298 | 239 | ||||||
Gain on sale of loans, net | 227 | 791 | ||||||
Gain on sale of investment securities, net | 211 | 1,075 | ||||||
Other | 1,018 | 853 | ||||||
Total fees and other income | 24,124 | 14,439 | ||||||
Operating expense: | ||||||||
Salaries and employee benefits | 21,397 | 14,281 | ||||||
Occupancy and equipment | 3,609 | 5,292 | ||||||
Professional services | 1,288 | 1,032 | ||||||
Marketing and business development | 1,192 | 916 | ||||||
Contract services and processing | 670 | 461 | ||||||
Amortization of intangibles | 782 | 39 | ||||||
Other | 2,457 | 2,066 | ||||||
Total operating expense | 31,395 | 24,087 | ||||||
Income before income taxes | 10,965 | 5,882 | ||||||
Income tax expense | 3,732 | 4,801 | ||||||
Net income | $ | 7,233 | $ | 1,081 | ||||
Per share data: | ||||||||
Basic earnings per share | $ | 0.26 | $ | 0.05 | ||||
Diluted earnings per share | $ | 0.25 | $ | 0.05 | ||||
Average basic common shares outstanding | 28,186,499 | 22,618,498 | ||||||
Average diluted common shares outstanding | 29,391,480 | 23,298,957 |
See accompanying notes to unaudited consolidated financial statements.
4
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDARIES
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
|
Common Stock |
Additional Paid-in Capital |
Unearned Compensation |
Retained Earnings |
Accumulated Comprehensive Income (Loss) |
Total |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands, except share data) |
|||||||||||||||||||
Balance at December 31, 2002 | $ | 22,549 | $ | 74,342 | $ | | $ | 65,725 | $ | 4,766 | $ | 167,382 | ||||||||
Net income | | | | 1,081 | | 1,081 | ||||||||||||||
Comprehensive income, net: | ||||||||||||||||||||
Change in unrealized gain (loss) on securities available for sale, net of tax | | | | | (1,157 | ) | (1,157 | ) | ||||||||||||
Total comprehensive income | (76 | ) | ||||||||||||||||||
Dividends paid to shareholders | | | | (1,130 | ) | | (1,130 | ) | ||||||||||||
Issuance of 36,052 shares of common stock | 36 | 637 | | | | 673 | ||||||||||||||
Issuance of 40,400 shares of incentive common stock | 40 | 643 | (683 | ) | | | | |||||||||||||
Amortization of unearned compensation | | | 38 | | | 38 | ||||||||||||||
Stock options exercised | 23 | 896 | | | | 919 | ||||||||||||||
Balance at March 31, 2003 | $ | 22,648 | $ | 76,518 | $ | (645 | ) | $ | 65,676 | $ | 3,609 | $ | 167,806 | |||||||
Balance at December 31, 2003 | $ | 25,167 | $ | 129,827 | $ | (5,119 | ) | $ | 83,006 | $ | 2,571 | $ | 235,452 | |||||||
Net income | | | | 7,233 | 7,233 | |||||||||||||||
Comprehensive income, net: | ||||||||||||||||||||
Change in unrealized gain (loss) on securities available for sale, net of tax | | | | | 596 | 596 | ||||||||||||||
Total comprehensive income | 7,829 | |||||||||||||||||||
Dividends paid to shareholders | | | | (1,512 | ) | | (1,512 | ) | ||||||||||||
Issuance of 1,969,872 shares of common stock | 1,970 | 45,313 | | | | 47,283 | ||||||||||||||
Issuance of 42,850 shares of incentive common stock | 43 | 1,122 | (1,165 | ) | | | | |||||||||||||
Amortization of unearned compensation | | | 385 | | | 385 | ||||||||||||||
Stock options exercised | 90 | 947 | | | | 1,037 | ||||||||||||||
Balance at March 31, 2004 | $ | 27,270 | $ | 177,209 | $ | (5,899 | ) | $ | 88,727 | $ | 3,167 | $ | 290,474 | |||||||
See accompanying notes to unaudited consolidated financial statements.
5
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
Three Months Ended March 31, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
|||||||||
|
(In thousands) |
||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 7,233 | $ | 1,081 | |||||||
Adjustments to reconcile net income to net cash(used in) provided by operating activities: | |||||||||||
Depreciation and amortization | 2,198 | 907 | |||||||||
Amortization of investment and loan fees | (1,352 | ) | (3,623 | ) | |||||||
Gain on sale of loans, net | (227 | ) | (791 | ) | |||||||
Gain on sale of investment securities, net | (211 | ) | (1,075 | ) | |||||||
Provision for loan losses | 956 | 778 | |||||||||
Distributed earnings of partnership investments | 397 | 59 | |||||||||
Common shares issued as compensation | 73 | 23 | |||||||||
Loans originated for sale | (38,884 | ) | (63,096 | ) | |||||||
Proceeds from sale of loans held for sale | 35,107 | 80,831 | |||||||||
(Increase) decrease in: | |||||||||||
Fees receivable | (2,099 | ) | (586 | ) | |||||||
Accrued interest receivable | (619 | ) | (611 | ) | |||||||
Other assets | (3,326 | ) | (385 | ) | |||||||
Increase (decrease) in: | |||||||||||
Accrued interest payable | 288 | (332 | ) | ||||||||
Other liabilities | 2,971 | (1,748 | ) | ||||||||
Net cash provided by operating activities | 2,505 | 11,432 | |||||||||
Cash flows from investing activities: | |||||||||||
Net decrease in money market mutual fund | | 13,000 | |||||||||
Investment securities available for sale: | |||||||||||
Purchases | (153,095 | ) | (110,064 | ) | |||||||
Sales | 36,093 | 40,492 | |||||||||
Maturities and principal payments | 43,781 | 8,351 | |||||||||
Purchase of investmentsRabbi Trust | (6,095 | ) | | ||||||||
Net increase in portfolio loans | (37,800 | ) | (73,551 | ) | |||||||
Purchase of FHLB stock | (1,304 | ) | (814 | ) | |||||||
Charge-offs, net of recoveries | (7 | ) | (92 | ) | |||||||
Capital expenditures, net of sale proceeds | (1,946 | ) | (1,209 | ) | |||||||
Cash paid for acquisitions, net of cash acquired | (33,616 | ) | | ||||||||
Net cash used by investing activities | (153,989 | ) | (123,887 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Net increase (decrease) in deposits | 105,984 | 96,575 | |||||||||
Net increase (decrease) in repurchase agreements | 13,251 | (827 | ) | ||||||||
Proceeds from FHLB borrowings | 52,950 | 20,000 | |||||||||
Repayments of FHLB borrowings | (2,746 | ) | (719 | ) | |||||||
Dividends paid to stockholders | (1,512 | ) | (1,130 | ) | |||||||
Proceeds from issuance of common stock | 17,171 | 1,568 | |||||||||
Net cash provided by financing activities | 185,098 | 115,467 | |||||||||
Net increase in cash and due from banks | 33,614 | 3,012 | |||||||||
Cash and cash equivalents at beginning of year | 93,488 | 97,530 | |||||||||
Cash and cash equivalents at end of period | $ | 127,102 | $ | 100,542 | |||||||
Supplementary disclosures of cash flow information: | |||||||||||
Cash paid for interest | 6,386 | 6,467 | |||||||||
Cash paid for income taxes | 7,400 | 3,100 | |||||||||
Change in unrealized gain (loss) on securities available for sale, net of estimated income taxes | 596 | (1,157 | ) | ||||||||
Fair value of assets acquired | 125,463 | | |||||||||
Less: estimated contingent deferred liability | 41,310 | | |||||||||
Cash and stock paid at close (includes options) | 84,153 | |
See accompanying notes to unaudited consolidated financial statements.
6
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation and Summary of Significant Accounting Policies
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 ("Boston Private Bank"), a Massachusetts chartered trust company; Borel Private Bank & Trust Company ("Borel"), a California state banking corporation, and First State Bank of California ("FSB"), a California state banking corporation; Westfield Capital Management Company, LLC ("Westfield"), Sand Hill Advisors, Inc. ("Sand Hill"), Boston Private Value Investors, Inc. ("BPVI"), Dalton, Greiner, Hartman, Maher & Co., LLC ("DGHM"), 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, and Boston Private Preferred Capital Corporation. In addition, the Company holds a 27% minority interest in Coldstream Holdings, Inc. ("Coldstream Holdings") and a 20% minority interest in Bingham, Osborn, & Scarborough, LLC ("BOS"). Coldstream Holdings is the parent of Coldstream Capital Management Inc., a registered investment advisor in Bellevue, Washington. BOS is a financial planning and investment management firm located in San Francisco, CA. The Company conducts substantially all of its business through its wholly-owned subsidiaries, Boston Private Bank, Borel, FSB, (together the "Banks"), Westfield, Sand Hill, BPVI, RINET, and DGHM. 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, 2003 Annual Report to Shareholders. Certain prior year information has been reclassified to conform to current year presentation.
The Company's significant accounting policies are described in Note 3 of the Notes to the Consolidated Financial Statements in its Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows the same significant accounting policies.
Incentive Plans
The Company applies Auditing Practice Board ("APB") No. 25 in accounting for stock options, which measures compensation cost for stock based compensation plans as the excess of the fair market value of the Company's stock at the grant date above the exercise price of the options granted, if any. This generally does not result in any compensation charged to earnings. Below, the Company discloses, according to the assumptions specified by Statement of Financial Accounting Standards ("SFAS")
7
No. 123, pro forma net income and earnings per share as if compensation was measured at the date of grant based on the fair value of the award and recognized over the service period.
|
Three Months Ending March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
||||||
|
(In thousands, except share data) |
|||||||
Net income: | ||||||||
As reported | $ | 7,233 | $ | 1,081 | ||||
Stock-based employee and director compensation expense, net of related tax effects | (539 | ) | (519 | ) | ||||
Pro forma | $ | 6,694 | $ | 562 | ||||
Basic earnings per share: | ||||||||
As reported | $ | 0.26 | $ | 0.05 | ||||
Pro forma | $ | 0.24 | $ | 0.02 | ||||
Diluted earnings per share: | ||||||||
As reported | $ | 0.25 | $ | 0.05 | ||||
Pro forma | $ | 0.23 | $ | 0.02 |
If stock-based compensation had been recorded in the Company's financial statements under the Fair Value Method (SFAS 123), net income would have been reduced by $539 thousand and $519 thousand in the first quarters of 2004 and 2003, respectively. First quarter basic earnings per share would have been reduced $0.02 per share in 2004 and $0.03 in 2003, and first quarter diluted earnings per share would have been reduced by $0.02 per share in 2004 and $0.03 per share in 2003, respectively.
(2) Earnings Per Share
Basic earnings per share ("EPS") excludes dilution attributable to stock options but for the first quarter of 2004 includes 2.3 million unissued shares under the Company's forward contract. Basic EPS 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. The shares outstanding for calculating diluted EPS also includes the 2.3 million unissued shares under the forward agreement. The forward agreement was modified effective April 1, 2004, such that unissued shares under the forward contract will no longer be included in basic shares outstanding and will be included in diluted shares outstanding under the treasury stock method. Stock options, when dilutive, are included as common stock equivalents using the treasury stock method.
8
In the following tables, the numerators and denominators of basic and diluted earnings per share computations are reconciled:
|
Three Months Ended March 31, 2004 |
Three Months Ended March 31, 2003 |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Income |
Shares |
Per Share Amount |
Income |
Shares |
Per Share Amount |
||||||||||||
|
|
(In thousands, except per share amounts) |
||||||||||||||||
Basic EPS | ||||||||||||||||||
Net Income | $ | 7,233 | 28,186 | $ | 0.26 | $ | 1,081 | 22,618 | $ | 0.05 | ||||||||
Effect of Dilutive Securities |
||||||||||||||||||
Stock Options | | 1,205 | (0.01 | ) | | 681 | (0.00 | ) | ||||||||||
Diluted EPS | ||||||||||||||||||
Net Income | $ | 7,233 | 29,391 | $ | 0.25 | $ | 1,081 | 23,299 | $ | 0.05 | ||||||||
(3) Business Segments
Management Reporting
The Company has eight reportable segments: Boston Private Bank, Borel, FSB, Westfield, RINET, Sand Hill, BPVI and DGHM. 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 offers its clients a broad range of basic deposit services, including checking and savings accounts, with automated teller machine access, and cash management services through sweep accounts and repurchase agreements. Boston Private Bank also offers commercial, residential mortgage, home equity and consumer loans. In addition, it provides investment management and trust services to high net worth individuals and institutional clients. Boston Private Bank specializes in separately managed mid to large cap equity and 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, mortgage and consumer loans. Borel offers various savings plans and provides safe deposit boxes as well as other customary banking services and facilities. Additionally, Borel offers trust services and provides a variety of other fiduciary services including management, advisory and administrative services to individuals.
FSB provides a range of commercial and consumer banking services to its customers. Its primary focus is on small and medium sized businesses and professionals located in the San Fernando Valley. It engages in a full complement of lending activities including lines of credit, term loans, commercial real estate loans, construction loans, SBA, accounts receivable, auto, personal, overdraft protection, home
9
improvement, and equity lines of credit. FSB also offers a variety of deposit services including checking accounts, savings accounts, money market accounts, certificates of deposit, telebanking, internet banking, tax payments, deposit pick-up, and ATMs.
Westfield serves the investment management needs of pension funds, endowments and foundations, mutual funds and high net worth individuals throughout the U.S. and abroad. Westfield specializes in separately managed domestic growth equity portfolios in all areas of the capitalization spectrum and acts as the investment manager for several limited partnerships.
Sand Hill provides wealth management services to high net worth individuals and select institutions in Northern California. The firm manages investments covering a wide range of asset classes for both taxable and tax-exempt portfolios.
BPVI serves the investment management needs of high net worth individuals and select institutions primarily in New England and the Northeast. The firm is a large and mid-cap value style investor.
DGHM is a value driven investment manager specializing in smaller capitalization equities. The firm manages investments for institutional clients and high net worth individuals in mid, small, and micro cap portfolios. Founded in 1982, the firm is headquartered in New York City.
RINET provides fee-only financial planning, tax planning and investment management 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. It also provides an independent mutual fund rating service.
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.
10
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 March 31, 2004 and 2003.
|
For the three months ended March 31, 2004 |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income Statement Data: |
Westfield |
RINET |
Sand Hill |
BPVI |
DGHM |
Total Registered Investment Advisors |
||||||||||||||
|
(In thousands) |
|||||||||||||||||||
Revenue from Customers | ||||||||||||||||||||
Net Interest Income | $ | 10 | $ | 1 | $ | (2 | ) | $ | 1 | $ | | $ | 10 | |||||||
Non-Interest Income | 10,535 | 1,961 | 1,396 | 1,448 | 3,547 | 18,887 | ||||||||||||||
Total Revenues | $ | 10,545 | $ | 1,962 | $ | 1,394 | $ | 1,449 | $ | 3,547 | $ | 18,897 | ||||||||
Non-Interest Expense | 6,349 | 1,738 | 1,235 | 1,257 | 2,810 | 13,389 | ||||||||||||||
Income Taxes | 1,755 | 94 | 64 | 79 | 318 | 2,310 | ||||||||||||||
Segment Profit | $ | 2,441 | $ | 130 | $ | 95 | $ | 113 | $ | 419 | $ | 3,198 | ||||||||
Segment Assets | $ | 21,343 | $ | 3,446 | $ | 16,315 | $ | 4,766 | $ | 103,413 | $ | 149,283 | ||||||||
|
For the three months ended March 31, 2004 |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income Statement Data: |
Boston Private Bank |
Borel |
FSB |
Total Banks |
BPFH |
Inter-Segment |
Total |
||||||||||||||||
|
(In thousands) |
||||||||||||||||||||||
Revenue from Customers | |||||||||||||||||||||||
Net Interest Income | $ | 11,670 | $ | 6,353 | $ | 1,137 | $ | 19,160 | $ | 18 | $ | 4 | $ | 19,192 | |||||||||
Non-Interest Income | 3,891 | 1,043 | 167 | 5,101 | 235 | (99 | ) | 24,124 | |||||||||||||||
Total Revenues | $ | 15,561 | $ | 7,396 | $ | 1,304 | $ | 24,261 | $ | 253 | $ | (95 | ) | $ | 43,316 | ||||||||
Provision for Loan Loss | 500 | 375 | 81 | 956 | | | 956 | ||||||||||||||||
Non-Interest Expense | 10,106 | 3,789 | 678 | 14,573 | 3,528 | (95 | ) | 31,395 | |||||||||||||||
Income Taxes | 1,245 | 1,299 | 229 | 2,773 | (1,351 | ) | | 3,732 | |||||||||||||||
Segment Profit | $ | 3,710 | $ | 1,933 | $ | 316 | $ | 5,959 | $ | (1,924 | ) | $ | | $ | 7,233 | ||||||||
Segment Assets | $ | 1,673,722 | $ | 604,493 | $ | 216,344 | $ | 2,494,559 | $ | 21,454 | $ | (16,864 | ) | $ | 2,648,432 | ||||||||
Both Boston Private Bank and Borel also provide investment advisory and trust services which are included in bank Segment Profit and are not included with the Segment Profit of the Registered Investment Advisors. The segment profit for both DGHM and FSB only includes results from the date of acquisition.
11
|
For the three months ended March 31, 2003 |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income Statement Data: |
Westfield |
RINET |
Sandhill |
BPVI |
Registered Investment Advisors |
||||||||||||
|
(In thousands) |
||||||||||||||||
Revenue from Customers | |||||||||||||||||
Net Interest Income | $ | 10 | $ | | $ | | $ | 1 | $ | 11 | |||||||
Non-Interest Income | 5,029 | 1,508 | 903 | 993 | 8,433 | ||||||||||||
Total Revenues | $ | 5,039 | $ | 1,508 | $ | 903 | $ | 994 | $ | 8,444 | |||||||
Non-Interest Expense | 3,436 | 1,357 | 1,145 | 824 | 6,762 | ||||||||||||
Income Taxes | 670 | 63 | (95 | ) | 69 | 707 | |||||||||||
Segment Profit | $ | 933 | $ | 88 | $ | (147 | ) | $ | 101 | $ | 975 | ||||||
Segment Assets | $ | 10,093 | $ | 2,575 | $ | 14,623 | $ | 3,223 | $ | 30,514 | |||||||
|
For the three months ended March 31, 2003 |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income Statement Data: |
Boston Private Bank |
Borel |
Total Banks |
BPFH |
Inter-Segment |
Total |
||||||||||||||
|
(In thousands) |
|||||||||||||||||||
Revenue from Customers | ||||||||||||||||||||
Net Interest Income | $ | 11,235 | $ | 5,022 | $ | 16,257 | $ | 40 | $ | | $ | 16,308 | ||||||||
Non-Interest Income | 4,729 | 1,256 | 5,985 | 21 | | 14,439 | ||||||||||||||
Total Revenues | $ | 15,964 | $ | 6,278 | $ | 22,242 | $ | 61 | $ | | $ | 30,747 | ||||||||
Provision for Loan Loss | 508 | 270 | 778 | | | 778 | ||||||||||||||
Non-Interest Expense | 9,710 | 3,232 | 12,942 | 4,383 | | 24,087 | ||||||||||||||
Income Taxes | 4,753 | 972 | 5,725 | (1,631 | ) | | 4,801 | |||||||||||||
Segment Profit | $ | 993 | $ | 1,804 | $ | 2,797 | $ | (2,691 | ) | $ | | $ | 1,081 | |||||||
Segment Assets | $ | 1,421,499 | $ | 482,533 | $ | 1,904,032 | $ | 15,457 | $ | (15,888 | ) | $ | 1,934,115 | |||||||
Both Boston Private Bank and Borel also provide investment advisory and trust services which are included in bank Segment Profit and are not included with the Segment Profit of the Registered Investment Advisors.
(4) Acquisitions
On February 5, 2004, the Company completed its acquisition of a 20% interest in Bingham, Osborn and Scarborougha financial planning and investment management firm located in San Francisco, CA. This investment is accounted for using the equity method.
On February 6, 2004, the Company completed its acquisition of an 80% interest in DGHM. DGHM is a value style manager specializing in small-cap equities with approximately $3.0 billion in client assets. The acquisition represents a continuation of the Company's strategy and will provide a foundation for growing our asset management business in the New York Metro region. The purchase price was approximately $97.0 million, with approximately 86% payable in cash. Approximately 20% of the total estimated value is contingent upon operating results through a five-year earn-out period. The
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results of operations of DGHM are included in the earnings of the Company as of the acquisition date. Goodwill of $55.0 million and intangible assets of $39.4 million were recognized upon acquisition. However, the amount recorded for goodwill is an estimate as it is based on the estimated deferred payments to be made which are contingent upon the future operating results of DGHM.
Intangible assets of $38.3 million were recorded for advisory contracts and intangible assets of $1.1 million were recorded for non-competition agreements. The DGHM advisory contracts are being amortized using the constant attrition method. Approximately 11% of the net advisory contracts will be amortized each year for 7 years. The Company expects to amortize the remaining unamortized cost over an 8 year life using the straight line method. The non-competition agreements are being amortized on a straight line basis over a seven year life. Both the intangibles and the goodwill are expected to be deductible for tax purposes.
The following table sets forth the estimated assets acquired and liabilities assumed at fair value from DGHM as of February 6, 2004:
(In Thousands) |
|
|||
---|---|---|---|---|
Assets: | ||||
Cash | $ | 1,200 | ||
Accounts Receivable | 4,926 | |||
Advisory Contracts and Other Intangibles | 39,430 | |||
Goodwill | 54,978 | |||
Other Assets | 729 | |||
Total Assets | $ | 101,263 | ||
Liabilities: | ||||
Payables and Accrued Expenses | $ | 3,660 | ||
Total Liabilities | $ | 3,660 | ||
Net Assets Acquired | $ | 97,603 |
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The following table sets forth the Company's results of operations on a pro forma basis as if the acquisition of DGHM had occurred at the beginning of the quarters ending March 31, 2004 and March 31, 2003:
|
Three Months Ending March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2004 |
2003 |
|||||
Total revenues | $ | 45,781 | $ | 34,946 | |||
Provision for loan loss | 956 | 778 | |||||
Total expenses | 33,176 | 27,685 | |||||
Income before taxes | 11,649 | 6,483 | |||||
Income tax expense | 4,032 | 5,061 | |||||
Net Income | $ | 7,617 | $ | 1,422 | |||
Per share data: | |||||||
Basic earnings per share | $ | 0.27 | $ | 0.06 | |||
Diluted earnings per share | $ | 0.26 | $ | 0.06 |
Although the Company acquired other businesses during the first quarter of 2004, such businesses were not significant to the Company's results of operations on a pro forma basis and, as such, have not been reflected in the above table.
On February 17, 2004, the Company completed its acquisition of First State Bancorp, the holding company of FSB, a commercial bank situated in Los Angeles County with assets of approximately $188 million. Founded in 1983, First State Bank of California is headquartered in Granada Hills with an office in Burbank and a loan production office in Rancho Cucamonga, CA. In the transaction, the Company acquired 100% of First State's common stock for a combination of 15% cash and 85% stock with an aggregate transaction value of $27.5 million. The 886,176 shares of BPFH stock issued in the transaction were valued at $23.81 per share.
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(5) Excess of Cost over Net Assets Acquired (Goodwill) and Intangible Assets
An analysis of the activity in goodwill and intangible assets is presented below:
Intangibles
|
Balance at December 31, 2003 |
Acquisitions and additions |
Amortization |
Balance at March 31, 2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Boston Private BankOther Intangibles | $ | 122 | $ | | $ | (5 | ) | $ | 117 | ||||
Sand Hill Advisory Contracts | 899 | 95 | (28 | ) | 966 | ||||||||
BPVI Advisory Contracts | 2,116 | | (59 | ) | 2,057 | ||||||||
DGHM Advisory Contracts | | 38,300 | (628 | ) | 37,672 | ||||||||
DGHM Non-compete Agreements | | 1,130 | (27 | ) | 1,103 | ||||||||
FSB Core Deposit Intangibles | | 4,100 | (35 | ) | 4,065 | ||||||||
Total | $ | 3,137 | $ | 43,625 | $ | (782 | ) | $ | 45,980 |
|
Balance at December 31, 2002 |
Acquisitions and additions |
Amortization |
Balance at March 31, 2003 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Boston Private BankOther Intangibles | $ | 141 | $ | | $ | (4 | ) | $ | 137 | ||||
BPVI Advisory Contracts | 1,324 | | (35 | ) | 1,289 | ||||||||
Total | $ | 1,465 | $ | | $ | (39 | ) | $ | 1,426 |
Goodwill
|
Balance at December 31, 2003 |
Acquisitions and additions |
Balance at March 31, 2004 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Boston Private Bank | $ | 2,286 | $ | | $ | 2,286 | ||||
Sand Hill | 13,561 | 40 | 13,601 | |||||||
BPVI | 1,334 | | 1,334 | |||||||
DGHM | | 54,978 | 54,978 | |||||||
FSB | | 13,589 | 13,589 | |||||||
Total | $ | 17,181 | $ | 68,607 | $ | 85,788 |
|
Balance at December 31, 2002 |
Acquisitions and additions |
Balance at March 31, 2003 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Boston Private Bank | $ | 2,286 | $ | | $ | 2,286 | ||||
Sand Hill | 13,345 | | 13,345 | |||||||
BPVI | 911 | | 911 | |||||||
Total | $ | 16,542 | $ | | $ | 16,542 |
The intangible values of investment advisory contracts are being amortized over their estimated useful life of 10 years on the straight line method except for the DGHM advisory contracts, which are being amortized on the constant attrition method. Approximately 11% of the DGHM unamortized
15
balance of intangible investment advisory contracts will be amortized annually. The non-competition agreements are being amortized on a straight line basis over seven years. The core deposit intangibles are being amortized on a straight line basis over their estimated life of fifteen years. The annual amortization expenses for the intangibles above are estimated to be $4,519,000 for 2005, $4,569,000, $4,151,000, $3,780,000 and $3,449,000 per year for each of the next four years for an aggregate of $20,468,000 over the next five years. All goodwill, other than that related to FSB, is expected to be deductible for tax purposes.
(6) Recent Accounting Developments
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which defines the circumstances under which a Company will include in its financial statements the assets, liabilities and activities of related entities. In December 2003, the FASB revised FIN 46, ("FIN 46R"), which in part specifically addresses limited purpose trusts formed to issue trust preferred securities. The guidance requires the Company to deconsolidate its investment in the capital trust acquired through the FSB acquisition as of March 31, 2004. In July 2003, the Board of Governors of the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until and unless notice to the contrary is given. The Federal Reserve intends to review the regulatory implications of this accounting treatment change and will provide appropriate guidance as necessary or warranted. There can be no assurance that the Federal Reserve will continue to consider trust preferred securities as Tier 1 capital for regulatory purposes. As of March 31, 2004, if the Company's $6 million in trust preferred securities were no longer considered to be Tier 1 capital, the Company would still exceed the regulatory required capital adequacy minimums. If trust preferred securities were no longer considered to be Tier 1 capital, the Company would be permitted to redeem the securities without penalty. The adoption of this standard will not have a material effect on the Company's financial condition, results of operations, earnings per share or cash flows.
The Company adopted FIN 46R effective March 31, 2004. In conjunction with the adoption of FIN 46R, the Company determined that certain investment partnerships, for which the Company holds a general partner interest in and acts as the asset manager of the investment partnership, meet the definition of a voting interest entity as defined in FIN 46R. In addition, the Securities and Exchange Commission (SEC) staff recently provided interpretative guidance on what may constitute an important right under AICPA Statement of Position No. 78-9, Accounting for Investments in Real Estate Ventures, that may affect the Company's consolidation policies with regard to its investment partnerships. The Company expects to amend eight investment partnership agreements by June 30, 2004, to incorporate important rights as contemplated in the recent SEC staff's interpretative guidance. These amendments will allow the Company to continue to account for its general partnership interests in these limited partnerships on the equity method of accounting. At March 31, 2004, the investment partnerships, for which the Company holds a general partner interest and acts as the asset manager, have $414.4 million of assets, $84.8 million of liabilities, and $326 million of limited partnership interests. The Company's equity interest in the investment partnerships was $139,000 at March 31, 2004, and $220,000 at December 31, 2003.
On March 31, 2004, the Financial Accounting Standards Board ("FASB") ratified the consensus reached by the Emerging Issues Task Force ("EITF") on Issue 03-6 "Participating Securities and the Two-Class Method under Statement of Financial Accounting Standards No. 128, Earnings Per Share",
16
affecting the calculation of earnings per share for variable priced contracts. This interpretation applies to the Company's Forward Stock Sale Agreement (the "Agreement") dated December 11, 2003, with an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Company amended the Forward Agreement effective April 1, 2004, and after that date, the interpretation will no longer affect the calculation of earnings per share.
The new accounting interpretation has no impact upon the Company's revenues, operating expenses or net income as previously reported or to be reported for the term of the Forward Agreement. The new interpretation requires the Company to account for the original Agreement differently by including all unissued shares in the calculation of basic and diluted earnings per share for the fourth quarter of 2003 and the first quarter of 2004. The calculation includes these unissued shares, for which the Company has received no capital proceeds. The recalculation for the fourth quarter 2003 and for the full year 2003 decreased the Company's reported basic earnings per share by $0.01. Diluted earnings per share for the fourth quarter and for the full year 2003 did not change. The effect of this new rule on the calculation of earnings per share for the first quarter of 2004 was approximately $0.01 per share.
In December 2003, the American Institute of Certified Public Accountants ("AICPA") issued SOP 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at fair value. The yield that may be accreted is limited to the excess of the investor's estimate of the undiscounted expected principal, interest, and other cash flows over the investor's initial investment in the loan. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances can not be created nor "carried over" in the initial accounting for loans acquired in a transfer of loans. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company's financial position of results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarter Ended March 31, 2004
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.
Executive Summary
The Company is a wealth management company providing private banking, financial planning and investment management services to the high net worth marketplace, selected businesses and non-profits, while leveraging its reputation for and commitment to delivering exceptional client service.
Our strategy is to build a national enterprise in demographically attractive regions in the United States. In each region we form "clusters" of independent affiliates representing our core competencies. While each affiliate remains a separate profit center, we seek product and client synergies within the cluster and across the enterprise. Some of our products are sold nationwideparticularly to the institutional markets; but the major strategic differentiation in the high net worth marketplace is our "small platform" service delivery concept within these clusters.
We use acquisitions for market-entry and then devote corporate resources to develop organic growth toward achieving our long-term earnings goals. In the next 5-7 years we expect to have a significant presence in the top 12 wealth regions of the United States. We maintain a strong commitment to high ethical standards and corporate citizenship to create value for clients and our shareholders.
The Company is a bank holding company and, through its operating subsidiaries, offers a full range of financial services centered around its three core competencies: Private Banking, Investment Management and Financial Planning. During the first quarter of 2004, the Company entered two new regions with the acquisitions of 100% of First State Bancorp, a bank holding company based in Los Angeles County with $188 million in assets, and an 80% interest in DGHM, a registered investment advisor based in New York City with approximately $3.0 billion in assets under management. The Company also added to its wealth management presence in Northern California by acquiring a 20% interest in BOS, a financial planner and registered investment advisor headquartered in San Francisco with approximately $1.0 billion in assets under management. As of March 31, 2004, the Company had
18
eight wholly-owned operating subsidiaries: Boston Private Bank, Borel, FSB, WCM, DGHM, RINET, Sand Hill, and Boston Private Value Investors. The Company's minority interests in Coldstream Holdings and BOS, are accounted for using the equity method. The Company managed approximately $14.9 billion in client investment assets and had balance sheet assets of approximately $2.6 billion as of March 31, 2004.
The Company seeks to create exceptional shareholder value by providing a full complement of wealth management services through affiliated companies that are diversified geographically, by investment management style and by loan and deposit products. During the first quarter of 2004, through organic business growth, acquisitions and by capitalizing on the benefit of strong equity markets, the Company achieved operating revenue of $43.3 million, a 40.9% increase over revenues of $30.8 million for the same period in 2003. Although the last two years have presented an uncertain economic environment for the wealth management industry, the Company increased its revenue in each of the last nine quarters. The Company reported net income for first quarter 2004 of $7.2 million, or $0.25 per diluted share. Net income for the first quarter 2003 was $1.1 million, or $0.05 per diluted share; however these earnings were reduced for costs of approximately $4.4 million (net of tax), or $0.19 per diluted share, related to a retroactive state tax law change and an abandoned lease. Net income for first quarter 2003, excluding these costs, would have been $5.5 million, or $0.24 per diluted share.
Management continues to invest in the Company's infrastructure. Over the last 12 months we significantly increased staff and system resources committed to risk management and regulatory compliance. Management believes that these resources are aligned to support our future growth, the increasing complexity of our company, and the increased threat of terrorism to the financial services industry.
During the three month period ended March 31, 2004, the Company realized 51.7% of its revenues from net interest income generated from its private banks. The cumulative impact of near record low interest rates has caused severe compression of net interest margins in the industry, and the Company was no exception. It has taken awhile to feel the full impact of the decline in interest rates as the yield on certain fixed rate assets and liabilities did not change until they matured or were called or refinanced. Net interest margin declined 16 basis points to 3.61% for the first quarter of 2004, down from 3.77% for the first quarter last year and increased up 14 basis points from 3.47% in the fourth quarter of 2003. The increase in net interest margin from the fourth quarter of 2003 was primarily due to the acquisition of FSB in February 2004 which has a somewhat higher net interest margin than the other banking subsidiaries. Management estimates that the decline in net interest margins compared to the first quarter of 2003 reduced net interest income by $0.8 million while our acquisition of FSB and organic growth increased volume to increase net interest income by $4.2 million. If the acquisition of FSB is excluded net interest income would have decreased $0.9 million while organic growth would have increased net interest income by $3.2 million. Management expects to continue to focus its attention and resources on organic growth in loans and deposits which should contribute to net interest margins which should position us well for the future. Management continues to take certain actions to position the Company's balance sheet for an expected increase in interest rates by increasing the percentage of variable rate loans, by shortening maturities on certain of its assets and extending liabilities where possible. Even with these changes, interest rates on liabilities are expected to reprice more quickly than interest rates on assets in the short term. Accordingly, in the absence of other changes, increases in interest rates may reduce net interest income in the short term, even though rising interest rates are expected to eventually increase net interest income. For the first quarter of 2004, the Company's net interest income on a fully taxable equivalent basis increased 20.7% to $20.2 million, compared to $16.7 million during the same period in 2003. This was accomplished through organic growth of our balance sheet, which was more than sufficient to offset reduced net interest margins, and by our acquisition of FSB. That acquisition contributed $1.1 million of net
19
interest income since acquisition. Management tracks net interest income, net interest margin, deposit growth, loan growth and loan quality as important business metrics in evaluating the condition of its private banking business.
Strong equity markets also impacted the Company during the first three months of 2004. As a result, the Company experienced an increase of market values during the first quarter of 2004. Market appreciation increased the Company's assets under management ("AUM") values by $530 million for the quarter. During this same timeframe, the S&P 500 Index increased 1.3%. The Company's AUM reached $14.9 billion, up 118% over the same period in 2003 as a result of net new sales contributed by both new and existing clients, market appreciation, and acquisitions. New asset management sales for the first quarter of 2004 were $326 million, a 3% increase from December 2003 levels. The acquisition of DGHM contributed $3.0 billion of new AUM in the quarter. The total increase in AUM caused investment management fee income to increase 105% to $20.2 million for the first quarter 2004 from the same period in the prior year. The acquisition of DGHM contributed $3.5 million of net investment management fees since acquisition and $6.0 million for the quarter on a pro forma basis.
The Company also derives revenues from financial planning fees and other income. Financial planning fees of $2.0 million increased 29.5%, for the first quarter 2004 over the same period in the prior year. Gains on the sale of investment securities declined $0.9 million to $0.2 million and gain on the sale of loans decreased $0.6 million to $0.2 million. In 2003 the Company took advantage of the current rate environment to lock in and recognize gains on fixed rate investments and to reposition the portfolio. Demand for mortgage loan refinancings has slowed as mortgage rates have stopped declining.
The effective tax rate for the first quarter of 2004 was 34.0% and the related income tax expense was $3.7 million. The effective tax rate for the same period in 2003 was 34.5% adjusted for the retroactive portion of the REIT tax increase and the lease abandonment costs. Due to the increased state taxes from the business acquisitions that closed in February of 2004, and the changes in state tax laws regarding REITs, the Company anticipates the 2004 effective income tax rate will exceed 36% for the full year.
The return on average assets increased 94 basis points to 1.17% for the three month period ended March 31, 2004, compared to 0.23% for the three month period ended March 31, 2003. The return on average assets for the first quarter of 2003 would have been 1.17% if the retroactive portion of the REIT tax adjustment and the lease accrual were excluded. Average assets increased $597 million, or 32% from $1.9 billion to $2.5 billion from March 31, 2003 to March 31, 2004 but net interest income only increased $2.9 million, or 18% due to reduced net interest margins.
Return on average equity was 10.82% for the quarter ended March 31, 2004, an increase of 826 basis points from 2.56% at March 31, 2003. The return for the three month period ended March 31, 2003 improves to 12.98% if the costs of the retroactive portion of the REIT tax adjustment and the lease accrual are excluded. Average equity increased 58% to $267 million at March 31, 2004. Most of the capital required for the acquisitions was raised in December 2003 and was included in the average shares outstanding for the entire quarter even though we only recognized earnings from the acquisitions from the date they were acquired. The Company issued 886,176 shares and 326,095 shares of common stock at the date of acquisition for FSB and DGHM, respectively. The new affiliates' contribution to net income from the date of acquisition was $0.8 million. Their earnings from the date of acquisition are net of amoritzation of purchased intangibles of $0.7 million.
The Company's December 2003 Forward Stock sale agreement continues to provide the Company access to 1.6 million shares of BPFH stock on an as needed basis through December 11, 2004. During the first quarter of 2004, the Company drew down approximately 700,000 shares of common stock available in the Forward Agreement adding approximately $15 million of new capital. These shares were used to provide additional working capital and to fund the business acquisitions that closed in February of 2004. At March 31, 2004, there were still 1.6 million shares available to the Company
20
under its forward sale contract and there were 27,269,762 shares outstanding. Management expects to use the shares under its forward sale contract to finance additional acquisitions, but will issue the shares by December 11, 2004, whether new acquisitions are closed or not.
On March 31, 2004, the Financial Accounting Standards Board ("FASB") changed its interpretation of Statement of Financial Accounting Standards No. 128, Earnings Per Share, affecting the calculation of earnings per share for variable priced contracts, which included the Forward Agreement. The new interpretation requires the Company to change its accounting for the original agreement by including all unissued shares in the calculation of basic and diluted earnings per share for the fourth quarter 2003 and the first quarter 2004 despite the fact the Company received no capital proceeds from these unissued shares. The recalculation for the fourth quarter 2003 and for the full year 2003 decreases the Company's reported basic earnings per share by $0.01. Diluted earnings per share for the fourth quarter and for the full year 2003 do not change. Dilutive and Basic earnings per share for the first quarter of 2004 were reduced by $0.01 per share as a result of this new interpretation of accounting guidance. The Company amended the Forward Agreement effective April 1, 2004, determining the sale price, subject to interest rate adjustments, for the common shares to be sold under the Forward Agreement. This amendment reestablishes the original intent of the Forward Agreement by eliminating the need for the Company to include unissued shares under the Forward Agreement in its basic earnings per share calculation until such time as the shares are issued and the Company receives the resulting capital proceeds. The unissued shares are included in the diluted earnings per share under the treasury stock method which means they are only dilutive if the average stock price increases over the strike price of approximately $22.89. The amended Forward Agreement preserves the flexibility of accessing additional capital without having a significant impact on earnings per share until the shares are actually issued and the capital proceeds are received.
We remain focused on continuing our growth plan and expanding into new regions with attractive markets. The Company believes that by creating regional platforms of companies, it is favorably positioned to access diversified markets to expand its potential client base and mitigate regional economy risks. The Company believes its regional presence will enable it to provide better access to decision makers and more customized personal service for its wealth management clients. We are focused on managing our business to benefit from diversified revenue opportunities, and will seek to maintain effective controls over operating expenses while mitigating risk from unpredictable market conditions. We also expect to continue to focus on enhancing and refining our enterprise-wide risk management and compliance programs.
General
The Company is incorporated under the laws of The Commonwealth of Massachusetts and is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). On July 1, 1988, the Company became the parent holding company of Boston Private Bank, a trust company chartered by The Commonwealth of Massachusetts and insured by the Federal Deposit Insurance Corporation (the "FDIC").
On February 6, 2004, the Company purchased an 80% interest in DGHM. DGHM is a value style manager specializing in small-cap equities. On February 17, 2004, the Company acquired FSB, a public bank headquartered in Granada Hills, CA by merger. These acquisitions were accounted for as a "purchase of a business" and, accordingly, the Company's results of operations and financial position include DGHM and FSB on a consolidated basis since the respective date of acquisition. On February 5, 2004, the Company acquired a 20% interest in BOS. The Company's minority interest in BOS is recorded in the Company's financial statements from the date of acquisition under the equity method.
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The Company conducts substantially all of its business through its wholly-owned subsidiaries, Boston Private Bank, Borel, FSB, Westfield, Sand Hill, BPVI, DGHM, and RINET. A description of each subsidiary is provided in either Note 2 or Note 25 to the Consolidated Financial Statements included on Form 10K.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:
Allowance for Loan Losses: Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company's allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off.
Valuation of Goodwill/Intangible Assets and Analysis for Impairment: For acquisitions under the purchase method, the Company is required to record assets acquired and liabilities assumed at their fair value, which is an estimate determined by the use of internal or other valuation techniques. These valuation estimates result in goodwill and other intangible assets. Goodwill is subject to ongoing periodic impairment tests and is evaluated using various fair value techniques. In evaluating the recorded goodwill for impairment, management must estimate the fair value of the business segments that have goodwill. Management performs a preliminary evaluation at least annually to determine if the possibility of a significant impairment charge for a business segment is more than remote. A discounted cash flow analysis is prepared for any business segment where management believes a more detailed review is appropriate. This detailed analysis is based on the projected receipt of future net cash flows discounted at a rate that reflects both the current return requirements of the market in general, and the risks inherent in the specific entity that is being valued. This analysis is reviewed with valuation consultants and compared to other valuations to confirm the results.
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 GAAP. 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.
Financial Condition
Total Assets Total assets increased $452.1 million, or 20.6%, to $2.6 billion at March 31, 2004 from $2.2 billion at December 31, 2003. This increase was primarily driven by the acquisitions of FSB, DGHM, deposit growth and additional FHLB borrowings.
Investments Total investments (consisting of cash, federal funds sold and other short term investments, money market investments, investment securities, mortgage-backed securities, and stock in the FHLB) increased $134.2 million or 26.8% to $635.6 million, or 24.0% of total assets, at March 31, 2004, from $501.4 million, or 22.8% of total assets, at December 31, 2003. Management periodically evaluates investment alternatives to properly manage the overall balance sheet. The timing of sales and
22
reinvestments is based on various factors, including management's evaluation of interest rate trends and our liquidity.
The following table is a summary of investment and mortgage-backed securities available for sale as of March 31, 2004 and December 31, 2003:
|
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Market Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands) |
||||||||||||
At March 31, 2004 | |||||||||||||
U.S. Government and agencies | $ | 174,739 | $ | 1,813 | $ | (49 | ) | $ | 176,503 | ||||
Corporate bonds | 30,561 | 71 | (103 | ) | 30,529 | ||||||||
Municipal bonds | 227,011 | 3,340 | (135 | ) | 230,216 | ||||||||
Mortgage-backed securities | 58,410 | 229 | (110 | ) | 58,529 | ||||||||
Total investments | $ | 490,721 | $ | 5,453 | $ | (397 | ) | $ | 495,777 | ||||
At December 31, 2003 |
|||||||||||||
U.S. Government and agencies | $ | 179,869 | $ | 1,514 | $ | (92 | ) | $ | 181,291 | ||||
Corporate bonds | 19,222 | 63 | (137 | ) | 19,148 | ||||||||
Municipal bonds | 192,554 | 2,885 | (130 | ) | 195,309 | ||||||||
Mortgage-backed securities | 795 | 3 | | 798 | |||||||||
Total investments | $ | 392,440 | $ | 4,465 | $ | (359 | ) | $ | 396,546 | ||||
Loans held for sale Loans held for sale increased $4.0 million, or 81.7% during the first three months of 2004 to $8.9 million from $4.9 million at December 31, 2003. This increase is primarily due to the acquisition of FSB and the timing of the loan sales. In the first quarter of 2004, there were $38.9 million of mortgage loans originated for sale offset by $35.1 million loans sold on the secondary market.
Loans Total portfolio loans increased $180.3 million, or 11.2%, during the first three months of 2004 to $1.79 billion, or 67.7% of total assets, at March 31, 2004, from $1.61 billion, or 73.4% of total assets, at December 31, 2003. This increase was primarily driven by growth in the commercial loans portfolio which increased $173.6 million, or 19.7%, due to the acquisition of FSB and the high demand for financing in this low interest rate environment. Residential mortgage loans increased $5.4 million, or 0.8%, during the first three months of 2004 as mortgage loan originations of variable rate loans of $36.3 million were almost offset by payoffs and refinancings.
Risk Elements Total non-performing assets, which consist of non-accrual loans and other real estate owned, increased by $4.2 million during the first three months of 2004 to $6.0 million or 0.23% of total assets, at March 31, 2004, from $1.8 million, or 0.08% of total assets, at December 31, 2003. This increase in non-performing loans can be attributed to one credit. Management took action to collect on the loans to this credit during the first quarter and anticipates collection of the full amount of the principal outstanding. 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 March 31, 2004, loans with an aggregate balance of $10.1 million, or 0.56% of total loans, were 30 to 89 days past due, an increase of 57.5% as compared to $3.7 million, or 0.23% of total loans, as of December 31, 2003. Although 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.
23
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 management believes 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. 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 management's 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 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 rely 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 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:
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
||||||
|
(Dollars in thousands) |
|||||||
Ending gross loans |
$ |
1,792,860 |
$ |
1,375,538 |
||||
Allowance for loan losses, beginning of period |
$ |
20,172 |
$ |
17,050 |
||||
Provision for loan losses | 956 | 778 | ||||||
Charge-offs | (7 | ) | (92 | ) | ||||
Recoveries | | | ||||||
Acquisition | 2,025 | | ||||||
Allowance for loan losses, end of period | $ | 23,146 | $ | 17,736 | ||||
Allowance for loan losses to ending gross loans | 1.29 | % | 1.29 | % | ||||
Goodwill Goodwill increased $68.6 million during the first quarter of 2004 to $85.8 million at March 31, 2004, from $17.2 million at December 31, 2003. This increase was due to the acquisitions of DGHM and FSB in the first quarter of 2004.
24
Intangible Assets Intangible assets increased $42.8 million during the first quarter of 2004 to $46.0 million at March 31, 2004 from $3.1 million at December 31, 2003. This increase was primarily due to the acquisitions of DGHM and FSB.
Other AssetsInvestments in Limited Partnership Boston Private Bank has investments in both tax advantaged and small business investment limited partnerships. The tax advantaged limited partnerships are primarily involved in approved low income housing investment tax credit projects in Boston Private Bank's market area while the small business investment limited partnerships are primarily providing capital to small businesses also in Boston Private Bank's market area. These investments are included in other assets and are not required to be consolidated under FIN 46. Investments in the tax advantaged limited partnerships are amortized over the same period the tax benefits are expected to be received. Boston Private Bank's investments are accounted for under the cost method and the carrying value is periodically evaluated for other than temporary impairment. Except for fixed capital or loan commitments agreed to in advance, the partnerships have no recourse to Boston Private Bank.
Deposits We experienced an increase in total deposits of $275.9 million, or 16.6%, during the first three months of 2004, to $1.934 billion, or 73.0% of total assets, at March 31, 2004, from $1.658 billion, or 75.5% of total assets, at December 31, 2003. This increase was due to the acquisition of FSB, higher average balances in existing client accounts, as well as a significant number of new accounts opened during the first three months of 2004. The following table shows the composition of our deposits at March 31, 2004 and December 31, 2003:
|
March 31, 2004 |
December 31, 2003 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance |
As a % of Total |
Balance |
As a % of Total |
||||||||
Demand deposits (non-interest bearing) | $ | 321,093 | 16.6 | % | $ | 287,154 | 17.3 | % | ||||
NOW | 226,868 | 11.7 | 207,324 | 12.5 | ||||||||
Savings | 34,615 | 1.8 | 26,146 | 1.6 | ||||||||
Money market | 977,807 | 50.6 | 887,791 | 53.5 | ||||||||
Certificates of deposit under $100,000 | 99,318 | 5.1 | 75,707 | 4.6 | ||||||||
Certificates of deposit $100,000 or greater | 274,678 | 14.2 | 174,339 | 10.5 | ||||||||
Total | $ | 1,934,379 | 100.0 | % | $ | 1,658,461 | 100.0 | % | ||||
Borrowings Total borrowings (consisting of FHLB borrowings, securities sold under agreements to repurchase ("repurchase agreements") and trust preferred debt) increased $69.6 million, or 26.4%, during the first three months of 2004 to $333.3 million from $263.6 million at December 31, 2003. To better manage interest rate risk and to help protect our net interest margin, we utilize fixed rate FHLB borrowings to fund a portion of fixed rate assets.
Deferred Purchase Obligations A portion of the purchase price for business acquisitions is often deferred and the deferred payments are contingent upon future performance of the entity being acquired. The obligations are recorded at their estimated present value and the interest accrued is included in Other operating expenses.
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 our lending and investment activities.
25
Management is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. In general, the Company maintains a relatively high degree of liquidity. At March 31, 2004, cash, federal funds sold and other short term investments, money market investments and securities available for sale amounted to $623.1 million, or 23.5% of total assets of the Company. This compares to $490.2 million, or 22.3% of total assets, at December 31, 2003.
During February 2004, the Company acquired ownership interests in several businesses, as more fully described in Note 4. In connection with these business acquisitions, the Company paid cash in the amount of approximately $55.0 million in February 2004. To provide additional working capital, the Company borrowed $5 million under its existing $24 million line of credit during February 2004. This borrowing was repaid before the end of the quarter when the Company drew down 700,000 shares of stock under the forward agreement.
Liquidity at the Holding Company level should also be considered separately from the consolidated liquidity since there are restrictions on the ability of the banking affiliates to distribute funds to the Holding Company. The "Holding Company" is defined as the Company on an unconsolidated basis. The Holding Company's primary sources of funds are dividends from its subsidiaries, proceeds from the issuance of its common stock, a committed line of credit and access to the capital markets. The total amount available to borrow under the line of credit was $24 million. The purpose of the line of credit is to provide short-term working capital to the Company and its subsidiaries, if necessary. The interest rate on the line of credit is a floating rate indexed to either the prime rate or the federal funds rate, as selected by the Company. The Company is required to maintain various minimum capital and loan loss ratios in conjunction with the revolving credit agreement. As of March 31, 2004, there were no borrowings under this line of credit. The Company utilized this line of credit in early 2004, to fund working capital requirements which were impacted by business acquisitions. In the short term, management anticipates the cost of borrowing under the line of credit will be lower than the cost of accessing the capital markets to issue additional common stock. However, it may be necessary to raise capital to meet regulatory requirements even though it would be less expensive to borrow the cash needed.
At March 31, 2004, the payable related to the consolidated deferred purchase obligations was approximately $45.2 million and $42.3 million of this was payable by the Holding Company. The timing of these payments varies depending on the specific terms of each business acquisition agreement. Variability exists in these estimated cash flows because certain payments may be based on amounts yet to be determined, such as earn out agreements that may be based on adjusted earnings, revenues or selected AUM. These contingent deferred purchase payments are typically spread out over 3-5 years and a prearranged portion of the payments are paid with BPFH stock instead of cash. A payment of approximately $20.0 million is due September 30, 2004.
The Company's forward stock sale agreement continues to provide the Company access to capital in an as needed basis. During the first quarter of 2004, the Company drew down approximately 700,000 shares of the 2.3 million shares available in the forward contract, providing cash proceeds of approximately $15 million. These shares were used to fund the business acquisitions that closed in February 2004.
We believe that the Holding Company has adequate liquidity to meet its commitments for the foreseeable future. Liquidity at the Holding Company is dependent upon the liquidity of its subsidiaries. The Company's non-bank subsidiaries are well capitalized, and Boston Private Bank and Borel have access to borrowings from the Federal Reserve Bank and other sources as more fully described in the Annual Report on Form 10-K. FSB has lines of credit with correspondent banks totaling $10.3 million at March 31, 2004.
Capital Resources Our stockholders' equity at March 31, 2004, was $290.5 million, or 11.0% of total assets, compared to $235.5 million, or 10.7% of total assets at December 31, 2003. The dollar
26
increase was primarily the result of our net income for the first three months of 2004 of $7.2 million, combined with proceeds from issuance of additional equity of $47.3 million, options exercised, the change in accumulated other comprehensive income, and 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 and the regulatory framework for prompt corrective action, Boston Private Bank, Borel, and FSB 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, Borel's, and FSB'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 primary driver for the overall decrease in the Company's capital ratios, as compared to the year ended December 31, 2003, was the increase in intangible assets as a result of the acquisitions that occurred in February 2004. In addition, the capital ratios at December 31, 2003, were unusually high as 2.1 million shares of stock were issued in December 2003 in anticipation of the acquisitions that occurred in February 2004. The Company anticipates some variability in its capital ratios during the year due to changing working capital needs and the effects of additional capital that will be added pursuant to the Forward Agreement as described in the Company's 2003 Annual Report on Form 10-K.
The following table presents actual capital amounts and regulatory capital requirements as of March 31, 2004 and December 31, 2003:
|
Actual |
For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||
|
(Dollars in thousands) |
|||||||||||||||||||
As of March 31, 2004: | ||||||||||||||||||||
Total risk-based capital | ||||||||||||||||||||
Company | $ | 183,496 | 10.45 | % | $ | 140,433 | > 8.0 | % | $ | 175,542 | > 10.0 | % | ||||||||
Boston Private Bank | 117,056 | 11.16 | 83,926 | 8.0 | 104,908 | 10.0 | ||||||||||||||
Borel | 54,212 | 10.37 | 41,816 | 8.0 | 52,270 | 10.0 | ||||||||||||||
FSB | 18,948 | 11.86 | 12,784 | 8.0 | 15,981 | 10.0 | ||||||||||||||
Tier I risk-based | ||||||||||||||||||||
Company | 161,538 | 9.20 | 70,217 | 4.0 | 105,325 | 6.0 | ||||||||||||||
Boston Private Bank | 103,926 | 9.91 | 41,963 | 4.0 | 62,945 | 6.0 | ||||||||||||||
Borel | 47,680 | 9.12 | 20,908 | 4.0 | 31,362 | 6.0 | ||||||||||||||
FSB | 16,950 | 10.61 | 6,392 | 4.0 | 9,588 | 6.0 | ||||||||||||||
Tier I leverage capital | ||||||||||||||||||||
Company | 161,538 | 6.92 | 93,442 | 4.0 | 116,802 | 5.0 | ||||||||||||||
Boston Private Bank | 103,926 | 6.28 | 66,174 | 4.0 | 82,717 | 5.0 | ||||||||||||||
Borel | 47,680 | 8.13 | 23,468 | 4.0 | 29,335 | 5.0 | ||||||||||||||
FSB | 16,950 | 9.71 | 6,983 | 4.0 | 8,729 | 5.0 | ||||||||||||||
27
As of December 31, 2003: |
||||||||||||||||||||
Total risk-based capital | ||||||||||||||||||||
Company | $ | 231,799 | 15.07 | % | $ | 123,047 | > 8.0 | % | $ | 153,809 | > 10.0 | % | ||||||||
Boston Private Bank | 112,914 | 11.28 | 80,072 | 8.0 | 100,090 | 10.0 | ||||||||||||||
Borel | 51,834 | 10.26 | 40,398 | 8.0 | 50,497 | 10.0 | ||||||||||||||
Tier I risk-based | ||||||||||||||||||||
Company | 212,562 | 13.82 | 61,523 | 4.0 | 92,285 | 6.0 | ||||||||||||||
Boston Private Bank | 100,385 | 10.03 | 40,036 | 4.0 | 60,054 | 6.0 | ||||||||||||||
Borel | 45,599 | 9.03 | 20,199 | 4.0 | 30,298 | 6.0 | ||||||||||||||
Tier I leverage capital | ||||||||||||||||||||
Company | 212,562 | 9.66 | 88,059 | 4.0 | 110,073 | 5.0 | ||||||||||||||
Boston Private Bank | 100,385 | 6.60 | 60,822 | 4.0 | 76,027 | 5.0 | ||||||||||||||
Borel | 45,599 | 8.08 | 22,564 | 4.0 | 28,208 | 5.0 |
Results of Operations for the Three Months Ended March 31, 2004
Net Income The Company recorded net income of $7.2 million, or $0.25 per diluted share, for the quarter ended March 31, 2004, compared to $1.1 million, or $0.05 per diluted share for the quarter ended March 31, 2003. Net income for the quarter ended March 31, 2003, includes reserves (net of federal income taxes) of $3.1 million ($0.13 per diluted share) and $1.3 million ($0.06 per diluted share) related to the enactment of a retroactive Massachusetts tax increase and lease abandonment costs, respectively. Excluding these reserves, net income and diluted earnings per share would have been $5.5 million and $0.24, respectively, for the quarter ended March 31, 2003.
Prior Year REIT Tax Adjustment In the first quarter of 2003, the Company established a reserve of $3.1 million for additional state taxes, relating to new legislation retroactively disallowing the deduction for dividends received from a real estate investment trust subsidiary (a "REIT") for the 1999 through 2002 calendar years. The reserve includes interest (net of any federal tax deduction associated with such taxes and interest). The REIT tax reserve was established due to legislation enacted March 5, 2003, that amended Massachusetts law to expressly disallow the deduction for dividends received from a REIT. The legislative amendment applies retroactively to tax years ending on or after December 31, 1999. As a result of the new legislation the Company ceased recording the tax benefits associated with the dividend received deduction effective for the 2003 tax year. The effective tax rate was 34.5% for the first quarter of 2003 before the retroactive portion of the REIT adjustment. See "Legal Proceedings."
Prior Year Lease Abandonment In the first quarter of 2003, Sand Hill moved its offices to space adjacent to the Palo Alto offices of Borel. In connection with this move, a charge of approximately $2.0 million was recorded relating to the lease for the vacated space. The charge is for the difference between the fair value of the remaining lease payments reduced by the fair value of the estimated sublease income to be received from the space being vacated.
The chart below provides a reconciliation of net income and diluted earnings per share as determined in accordance with GAAP to adjust net income and earnings per share. To supplement its financial results prepared in accordance with GAAP, the Company has presented non-GAAP measures of earnings adjusted to exclude the REIT tax reserve and the lease abandonment costs which management believes are outside the Company's core operational results. The Company believes presentation of these adjusted earnings enhances an overall understanding of its historical financial
28
performance and future prospects because management believes they are an indication of the performance of our base business. Management uses these non-GAAP measures as a basis for evaluating financial performance as well as for budgeting and forecasting of future periods. For these reasons the Company believes they can be useful to investors. The presentation of this additional information should not be considered in isolation or as a substitute for net income or net income per diluted share prepared in accordance with GAAP.
|
March 31, 2003 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
GAAP Earnings |
Retroactive REIT Tax Adjustment |
Lease Abandonment |
Adjusted Earnings |
||||||||
Revenues | $ | 30,747 | $ | | $ | | $ | 30,747 | ||||
Provision for Loan Losses | 778 | | | 778 | ||||||||
Expenses | 24,087 | (466 | ) | (2,028 | ) | 21,593 | ||||||
Pre-Tax Income | 5,882 | 466 | 2,028 | 8,376 | ||||||||
Income Tax Expense | 4,801 | (2,613 | ) | 710 | 2,898 | |||||||
Net Income | $ | 1,081 | $ | 3,079 | $ | 1,318 | $ | 5,478 | ||||
Diluted Earnings per share | $ | 0.05 | $ | 0.13 | $ | 0.06 | $ | 0.24 |
Similar adjustments to GAAP earnings had not occurred within 2 years of the date they were recognized in the table above and the Company believes it is not reasonably likely that similar adjustments will occur within the two year period after they occurred.
Net Interest Income For the quarter ended March 31, 2004, net interest income was $19.2 million, an increase of $2.9 million, or 17.7%, over the same period in 2003. This increase was due to increases in average balances of both interest earning assets and liabilities offset by decreases in the average rates of both interest earning assets and liabilities. The Company's net interest margin was 3.61% for the first quarter of 2004, a decrease of 14 basis points compared to the same period last year.
The following table sets forth the average balance and average rate for interest earning assets and interest bearing liabilities for the three month period ended March 31, 2004 and March 31, 2003.
|
March 31, 2004 |
March 31, 2003 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average Balance |
Interest Earned/ Paid |
Average Rate |
Average Balance |
Interest Earned/ Paid |
Average Rate |
||||||||||||||
Earning assets: | ||||||||||||||||||||
Cash and investments(1) | $ | 569,984 | $ | 4,142 | 2.88 | % | $ | 426,532 | $ | 3,036 | 2.86 | % | ||||||||
Loans(2) | ||||||||||||||||||||
Commercial | 946,580 | 13,836 | 5.79 | % | 697,522 | 10,862 | 6.13 | % | ||||||||||||
Residential mortgage | 655,802 | 7,877 | 4.77 | % | 563,085 | 7,813 | 5.58 | % | ||||||||||||
Home equity and other | 79,096 | 988 | 5.07 | % | 79,144 | 1,130 | 5.85 | % | ||||||||||||
Total loans | 1,681,478 | 22,701 | 5.45 | % | 1,339,751 | 19,805 | 5.92 | % | ||||||||||||
Total earning assets | $ | 2,251,462 | $ | 26,843 | 4.81 | % | $ | 1,766,283 | $ | 22,841 | 5.18 | % | ||||||||
Interest bearing liabilities: | ||||||||||||||||||||
Deposits | $ | 1,529,064 | $ | 4,022 | 1.08 | % | $ | 1,213,053 | $ | 4,110 | 1.37 | % | ||||||||
Borrowed funds | 303,891 | 2,652 | 3.50 | % | 222,514 | 2,025 | 3.72 | % | ||||||||||||
Total interest-bearing liabilities | $ | 1,832,955 | $ | 6,674 | 1.47 | % | $ | 1,435,567 | $ | 6,135 | 1.73 | % | ||||||||
Interest rate spread | 3.34 | % | 3.45 | % | ||||||||||||||||
Net interest margin | 3.61 | % | 3.77 | % |
29
Interest Income During the first quarter of 2004, interest income was $25.9 million, an increase of $3.4 million or 15.3%, compared to $22.4 million for the same period in 2003. Interest income on commercial loans increased 25.5% to $13.6 million for the quarter ended March 31, 2004, compared to $10.9 million for the same period in 2003. Interest income from residential mortgage loans increased 0.8% to $7.9 million for the first quarter of 2004, compared to $7.8 million for the same period in 2003, and interest on home equity and other loans decreased 12.6% to $988,000 for the first quarter of 2004, compared to $1.1 million, for the same period in 2003. The average balance of commercial loans increased 35.7% and the average rate decreased 5.5%, or 34 basis points, to 5.79% for the quarter ended March 31, 2004. The average balance of residential mortgage loans increased 16.5%, and the average rate decreased 14.5%, or 81 basis points, to 4.77% for the same period. The decline in the average rate is due to a high level of refinancing at lower interest rates. The average balance of home equity and other loans decreased 0.1% and the average rate decreased 13.3%, or 78 basis points, to 5.07%.
Total investment income (consisting of interest and dividend income from cash, federal funds sold, investment securities, mortgage-backed securities, and stock in the FHLBs) increased $728,000, or 27.6%, to $3.4 million for the quarter ended March 31, 2004, compared to $2.6 million for the same period in 2003. This increase was primarily attributable to an increase in the average balance of $143.5 million, or 27.6% for the quarter ended March 31, 2004.
Interest Expense During the first quarter of 2004, interest expense was $6.7 million, an increase of $539,000, or 8.8%, compared to $6.1 million for the same period in 2003. This increase in the Company's interest expense was the result of an increase in the average balance of interest bearing liabilities due to the acquisition of FSB and deposit growth partially offset by a decrease in the average cost of interest-bearing liabilities of 26 basis points, or 15.0%, to 1.47% for the quarter ended March 31, 2004.
Provision for Loan Losses The provision for loan losses was $956,000 for the quarter ended March 31, 2004, compared to $778,000 for the same period in 2003. These provisions reflect continued loan growth and a low level of non-performing assets. 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 ConditionAllowance for Loan Losses." Charge-offs net of recoveries were $7,000 during the first quarter of 2004. Charge-offs net of recoveries were $93,000 for the same period in 2003.
Fees and Other Income Fees and other income increased $9.6 million, or 66.5%, to $24.1 million for the three-month period ending March 31, 2004, compared to $14.5 million for the same period in 2003. The majority of fee income was attributable to investment management and trust fees earned on assets under management. These fees increased $10.3 million, or 104.6%, to $20.2 million for the first quarter of 2004, compared to $9.8 million for the same period in 2003. This increase is attributable to acquisitions, growth, and an increase in the average fees earned on assets under management.
Financial planning fees increased $454,000, or 29.5%, to $2.0 million for the first quarter of 2004. This increase was due to both new business and special projects.
Gain on sale of investment securities was $211,000 for the first quarter of 2004 compared to $1.1 million for the first quarter of 2003. 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 decreased $564,000 to $227,000 for the first quarter of 2004 compared to $791,000 for the first quarter of 2003. The Company sells virtually all of its fixed rate mortgage loans to reduce interest rate risk.
30
Other fee income, which consists primarily of loan fees and banking fees, increased 19% to $1.0 million for the first quarter of 2004.
Operating Expense Total operating expenses for the first quarter of 2004 were $31.4 million compared to $24.1 million for the same period in 2003. Total operating expenses for the first quarter of 2003 include reserves of $466,000 and $2.0 million related to the interest associated with retroactive Massachusetts tax increase and lease abandonment costs, respectively. Excluding these costs, adjusted operating expenses increased $9.8 million, a 45.1% increase over the first quarter of 2003. This increase was attributable to our continued growth and acquisitions. We experienced a 20.6% increase in total balance sheet assets from March 31, 2003 to March 31, 2004.
Salaries and benefits, the largest component of operating expense, increased $7.1 million, or 50.0%, to $21.4 million for the quarter ended March 31, 2004, from $14.3 million for the same period in 2003. This increase was due to an increase in the number of employees due to acquisitions and growth, normal salary increases, and the related taxes and benefits thereon.
Occupancy and equipment expense was $3.6 million for the first quarter of 2004 compared to $5.3 million for the same period last year. Excluding the lease abandonment costs of $2.0 million, occupancy and equipment expenses increased $345,000, or a 10.6% increase over the first quarter of 2003. The increase was primarily attributable to the increased growth as a result of acquisitions and expansion. The leases at both Ten Post Office Square and 10 Post Office Square in Boston were renegotiated during the first quarter. As a result, rent expense for the first quarter was reduced approximately $150,000 and the new terms were executed for a period of five years with options for two five year extensions.
Professional services include legal fees, consulting fees, and other professional services such as audit and tax preparation. These expenses increased $256,000, or 24.8%. This is a result of increased expenditures among a number of different professional services.
Contract services and processing, which are mostly costs associated with custody and data processing, increased $209,000 from the first quarter in 2003. This increase was due primarily to continued investments in our data processing systems.
Amortization of intangibles was $782,000 for the first quarter of 2004, an increase of $743,000 from the first quarter of 2003. This increase is mostly attributable to the acquisition of DGHM.
Other expenses include insurance, supplies, telephone, mailing expense, publications and subscriptions, employee training, interest on deferred acquisition payments and other miscellaneous business expenses. Other expenses were $2.5 million in the first quarter of 2004 compared to $2.1 million for the same period in 2003. For the first quarter of 2003, other expenses include a reserve of $466,000 for interest associated with the retroactive Massachusetts Tax increase. Excluding these expenses, other expenses increased $808,000 from the same period in 2003.
Income Tax Expense The Company recorded income tax expense of $3.7 million for the first quarter of 2004 as compared to $4.8 million for the same period last year. Excluding the charge related to the retroactive Massachusetts tax increase, income tax expense would have been $2.2 million for the first quarter of 2003. The effective tax rate for the first quarter of 2004 was 34.0%. The effective tax rate was 34.5% for the first quarter of 2003 before the REIT adjustment. See "Legal Proceedings." Due to the increased state taxes from the business acquisitions that closed in February 2004 and the change in tax laws regarding REIT's, the Company anticipates the 2004 effective income tax rate will exceed 36% for the full year.
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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. The Company'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 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 on Form 10-Q. References to "we," "our," and "us" refer to the Company and its subsidiaries on a consolidated basis.
Risks Relating to Our Business
To the extent that we fail to comply with the requirements of the informal agreement, there could be significant consequences.
In June 2003, Boston Private Bank entered into an informal agreement, commonly known as a Memorandum of Understanding, with the Massachusetts Division of Banks and the FDIC to enhance its Bank Secrecy Act and related anti-money laundering compliance controls and procedures. As of March 31, 2004, Boston Private Bank had implemented many of the improvements and had met all of the regulatory deadlines as of that date contemplated under the informal agreement. Boston Private Bank continues to address the remaining requirements of the informal agreement. Any material failure to comply in a timely manner with the requirements of the informal agreement could result in regulatory sanctions and the delay of any acquisitions that may be pending.
To the extent that we acquire other companies in the future, our business may be negatively impacted by certain 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. To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. These risks include, but are not limited to the following:
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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 stockholders may well experience dilution in connection with any acquisition, including our acquisitions.
Attractive acquisition opportunities may not be available to us in the future.
We will continue to consider the acquisition of other businesses. However, we may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of our business. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire compatible businesses. This competition could increase prices for acquisitions that we would likely pursue, and our competitors may have greater resources than we do. Also, acquisitions of regulated business such as banks are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests.
If we are required to write down goodwill and other intangible assets, our financial condition and results would be negatively affected.
When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. At March 31, 2004, our goodwill and other identifiable intangible assets were approximately $132 million. Under current accounting standards, if we determine goodwill or intangible assets are impaired, we will be required to write down the value of these assets. We conduct an annual review to determine whether goodwill and other identifiable intangible assets are impaired. We concluded that no impairment charge was necessary for the prior fiscal year. We cannot assure you that we will not be required to take an impairment charge in the future. Any impairment charge would have a negative effect on our stockholders' equity and financial results.
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 our banking subsidiaries to attract and retain banking customers.
In particular, the Banks' 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. Our Banks also face competition from out-of-state financial intermediaries which have opened low-end production offices or which solicit deposits in their respective market areas.
Because our Banks 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 Banks' current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than our Banks can accommodate.
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If our Banks are unable to attract and retain banking customers, they may be unable to continue their loan growth and their 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, and the relatively short history and limited record of performance in the investment management business, our investment management subsidiaries may not be able to attract and retain investment management clients at current levels. Competition is especially strong in our geographic market area, because there are numerous well-established and successful investment management firms in Boston, New York 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 our ability to compete with 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.
For the quarter ended March 31, 2004, approximately 46.5% of our revenues were 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 some performance-based fees. The amount of these fees is impacted directly by the investment performance of Westfield. As a result, the future revenues and earnings from such fees may fluctuate and may be affected by conditions in the capital markets and other general economic conditions.
Our investment management business is highly dependent on people to produce investment returns and to solicit and retain clients.
We rely on our investment managers to produce investment returns. We believe that investment performance is one of the most important factors for the growth of our assets under management. Poor investment performance could impair our revenues and growth because:
The market for investment managers is extremely competitive and is increasingly characterized by frequent movement of investment managers among different firms. In addition, our individual investment managers often have regular direct contact with particular clients, which can lead to a strong client relationship based on the client's trust in that individual manager. The loss of a key investment manager could jeopardize our relationships with our clients and lead to the loss of client accounts. Losses of such accounts could have a material adverse effect on our results of operations and financial condition.
In addition to the loss of key investment managers, our investment management business is dependent on the integrity of our asset managers and our employees. If an asset manager or employee were to misappropriate any client funds, the reputation of our asset management business could be negatively affected, which may result in the loss of accounts and have a material adverse effect on our results of operations and financial condition.
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Defaults in the repayment of loans may negatively impact our business.
Defaults in the repayment of loans by our Banks' customers may negatively impact their businesses. A borrower's default on its obligations under one or more of the Banks' 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, our Banks may have to write-off the loan in whole or in part. In such situations, the Banks may acquire 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.
Our Banks' management periodically makes a determination of an allowance for loan losses based on available information, including the quality of their loan portfolio, certain economic conditions, and 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 Banks will incur additional expenses.
In addition, bank regulatory agencies periodically review our Banks' allowances for loan losses and the values they attribute to real estate acquired through foreclosure or other similar remedies. Such regulatory agencies may require the Banks to adjust their determination of the value for these items. These adjustments could negatively impact the Banks' results of operations or financial position.
A downturn in 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. Primarily, our Banks serve individuals and smaller businesses located in eastern Massachusetts and adjoining areas, with a particular concentration in the Greater Boston Metropolitan Area, as well as clients located in Northern California and Southern California. The ability of the Banks' customers to repay their loans is impacted by the economic conditions in these areas.
The Banks' commercial loans are generally concentrated in the following customer groups:
Our Banks' commercial loans, with limited exceptions, are secured by real estate (usually income producing residential and commercial properties), marketable securities or corporate assets (usually accounts receivable, equipment or inventory). Substantially all of our Banks' residential mortgage and home equity loans are secured by residential property in eastern Massachusetts, northern California and southern California. Consequently, our Banks' 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 ability of our Banks' borrowers to repay their loans and affect the value of the collateral securing these loans.
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Environmental liability associated with commercial lending could result in losses.
In the course of business, our Banks may 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, or our respective Bank subsidiaries, 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 and could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect 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 our Banks. Our Banks' 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). 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. Our Banks' net interest income can be affected significantly by changes in market interest rates. Changes in relative interest rates may reduce our Banks' net interest income as the difference between interest income and interest expense decreases. As a result, our Banks have 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, a decrease in interest rates can impact our results from operations or financial position.
An increase in interest rates could also have a negative impact on our Banks' 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 Banks' allowances 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. Our Banks 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, our Banks 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 our Banks decrease relative to their overall banking operations, our Banks 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
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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. The world financial and securities markets 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 that we manage.
In addition, our 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 in addition to a base fee. 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 which could limit or restrict our activities and impose fines or suspensions on the conduct of our business.
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.
All of our investment adviser affiliates 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 and Sand Hill act as sub-advisers to mutual funds which are registered under the Investment Company Act of 1940 and are subject to that act's provisions and regulations.
We are also subject to the provisions and regulations of the Employee Retirement Income Security Act of 1974, or 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, 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 more than 60 days' notice. Investment contracts with institutional and other clients are typically terminable by the client, also without penalty, upon 30 days notice.
We do not directly manage investments for clients, do not directly provide any investment management services and, therefore, are not a registered investment adviser. Boston Private Bank, Borel, and FSB are exempt from the regulatory requirements of the Investment Advisers Act, but are subject to extensive regulation by the FDIC, the Massachusetts Commissioner of Banks, and the California Department of Financial Institutions.
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Our banking business is highly regulated which could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business.
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. We are subject to the Bank Holding Company Act and to regulation and supervision by the Board of Governors of the Federal Reserve System. 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 Private Bank and FSB as California banking corporations, are 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, permissible nonbanking activities, the level of reserves against deposits and restrictions on dividend payments. The FDIC, the California Department of Financial Institutions 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 our Banks and we 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 our Banks must offer to attract deposits and the interest rates they must charge on their loans, as well as the manner in which they offer deposits and make loans. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally, including our Banks.
Adverse developments in our litigation could negatively impact our business.
Since 1984, Borel has served as the trustee of a private family trust that has been the subject of protracted litigation. In the first action, initiated in 1994, certain beneficiaries of the trust sought removal of Borel as trustee, claiming that Borel had breached its fiduciary duties as trustee by its management and proposed sale of certain real property owned by the trust. Borel prevailed and obtained final judgment in that action. In the second action, initiated in 1995, Borel petitioned for court approval of its proposed sale of the property. Borel prevailed in that action in the trial court, but the Court of Appeal has recently remanded the case with orders that it be dismissed as moot, because the case referred to terms for sale proposed in 1995, and the property was ultimately sold in 2002 under revised terms.
In a third action, filed in 1996, the same group of beneficiaries sought damages against Borel for alleged mismanagement of the property and for negotiating the proposed sale of the property and settlement of potential claims against the lessee of the property. This action was held in abeyance by the trial court since 1997 until 2004 pending final resolution of the first two actions but has recently been reactivated. In 2002, the same beneficiary group filed a new action seeking to enjoin the proposed sale of the property. Their motion for a preliminary injunction to block the transaction was denied, and the property was sold in July 2002. This action remains pending as the beneficiaries seek unspecified damages for disposition of the property.
Adverse developments in these lawsuits could have a material affect on Borel's business or the combined business of our Banks.
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In May of 2002, a complaint was filed against Westfield which alleges that Westfield failed to uphold its contractual and common law obligations to invest the plaintiff's funds with proper care and diligence. Although the unfair trade practices claim was dismissed, and although Westfield intends to continue to defend the remaining claims vigorously, expert discovery is now in progress and there can be no assurances that Westfield will be successful in defending these claims. Adverse developments in the Westfield litigation could have a material effect on Westfield's business.
We are subject to regulatory capital adequacy guidelines, and if we fail to meet these guidelines our financial condition would be adversely affected.
Under regulatory capital adequacy guidelines and other regulatory requirements, we and our subsidiary Banks must meet guidelines that include quantitative measures of assets, liabilities, and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If we fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. The regulatory accords on international banking institutions to be reached by the Basel Committee on Banking Supervision may require us to meet additional capital adequacy measures. We cannot predict the final form of, or the effects of, the regulatory accords. Our failure to maintain the status of "well capitalized" under our regulatory framework could affect the confidence of our clients in us, thus compromising our competitive position. In addition, failure to maintain the status of "well capitalized" under our regulatory framework or "well managed" under regulatory examination procedures could compromise our status as a financial holding company and related eligibility for a streamlined review process for acquisition proposals.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
For information related to this item, see the Company's December 31, 2003 Form 10-K, Item 7AInterest Rate Sensitivity and Market Risk. No material changes have occurred since that date.
Item 4. Controls and Procedures
As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the rules regarding disclosure and control procedures, we intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
None.
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A. Investment Management Litigation
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 Retirement Board of Allegheny County (the "plaintiff"). The complaint alleges that Westfield failed to uphold its contractual and common law obligations to invest Allegheny County retirement funds with proper care and diligence, resulting in alleged opportunity losses. The complaint does not identify what conduct constituted the alleged breach. Westfield moved to dismiss the complaint on the ground, inter alia, that the complaint contains no allegations as to how Westfield breached the contract between the parties or its fiduciary duty to the Board. The motion was granted, in part. The plaintiff's unfair trade practices claim, by which treble damages are potentially available, was dismissed. Discovery is in progress, and Westfield will continue to defend this claim vigorously.
B. Trust Litigation
Since 1984, Borel has served as the trustee of a private family trust (the "Trust"), which was a joint owner of certain real property known as the Guadalupe Oil Field. Litigation commenced in 1994. Certain beneficiaries of the Trust have claimed Borel breached its fiduciary duties in managing oil and gas leases on the Guadalupe Oil Field, and following the discovery of environmental contamination on the property, by negotiating, and later finalizing, a Settlement Agreement and Purchase and Sale Agreement conveying the property to Union Oil Company of California (d/b/a UNOCAL), the operator of the oil field. In the first of the lawsuits, in which the beneficiaries sought to remove Borel as trustee, Borel prevailed and obtained final judgment in its favor. In various related lawsuits, there have been numerous procedural decisions by the trial court and by the California Court of Appeal. Borel has prevailed on all material issues. In the several actions pending, the plaintiff beneficiaries seek the unwinding of the Settlement and Purchase and Sale Agreements, the return of the Guadalupe Oil Field to the Trusts, and unspecified damages against Borel for alleged mismanagement of the Guadalupe Oil Field and for sale of the property. In a 1998 trial of the action to remove Borel as trustee, the petitioning beneficiaries submitted expert testimony to the effect that Borel's actions had damaged the trust in the amount of $102 million. The trial court found this testimony unpersuasive in that context; but neither the issue of damages nor the issue of Borel's liability has been finally determined. Borel will continue to litigate these matters vigorously. While the ultimate outcome 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 this matter is probable or that such liability can be reasonably estimated.
C. Other
The Company is also involved in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, final disposition of these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of the Security Holders
None.
None.
Item 6. Exhibits and Reports on Form 8-K
*31.1 | Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934. |
*31.2 |
Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934. |
**32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
**32.2 |
Certification of Chief Financial Officer Pursuant to18 U.S.C. § 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
On January 26, 2004, the Company filed a Current Report, dated the same date, on Form 8-K regarding its earnings press release for the fiscal quarter ending December 31, 2003.
On February 3, 2004, the Company filed a Current Report, dated the same date, on Form 8-K regarding receipt of the regulatory approvals necessary to complete acquisitions to acquire an 80% interest in Dalton, Greiner, Hartman, Maher & Co. (DGHM) of New York, NY, a 20% interest in Bingham, Osborn & Scarborough, LLC (Bingham Osborn) of San Francisco, California and 100% interest in First State Bancorp (OTC BB: FCAL.OB), the holding company of First State Bank of California.
On February 18, 2004, the Company filed a Current Report, dated the same date, on Form 8-K regarding the completion of the acquisition of First State Bancorp.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Boston Private Financial Holdings, Inc. (Registrant) |
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May 10, 2004 |
/s/ TIMOTHY L. VAILL Timothy L. Vaill Chairman and Chief Executive Officer |
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May 10, 2004 |
/s/ WALTER M. PRESSEY Walter M. Pressey President and Chief Financial Officer |
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