Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number: 0-17089

 

 

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Commonwealth of Massachusetts   04-2976299

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

Ten Post Office Square

Boston, Massachusetts

  02109
(Address of principal executive offices)   (Zip Code)

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(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 31, 2009:

 

Common Stock-Par Value $1.00   68,591,766
(class)   (outstanding)

 

 

 


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

Index

 

   PART I—FINANCIAL INFORMATION   

Item 1

  

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets

   3
  

Consolidated Statements of Operations

   4
  

Consolidated Statements of Changes in Stockholders’ Equity

   5
  

Consolidated Statements of Cash Flows

   6
  

Notes to Unaudited Consolidated Financial Statements

   7

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   28
  

Executive Summary

   28
  

Critical Accounting Policies

   30
  

Financial Condition

   30
  

Liquidity

   34
  

Capital Resources

   35
  

Results of Operations

   37
  

Recent Accounting Developments

   42

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

   43

Item 4

  

Controls and Procedures

   43
   PART II—OTHER INFORMATION   

Item 1

  

Legal Proceedings

   44

Item 1A

  

Risk Factors and Factors Affecting Forward-Looking Statements

   44

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

   44

Item 3

  

Defaults upon Senior Securities

   44

Item 4

  

Submission of Matters to a Vote of Security Holders

   44

Item 5

  

Other Information

   45

Item 6

  

Exhibits

   45
  

Signature Page

   46
  

Certifications

  


Table of Contents

PART 1. FINANCIAL INFORMATION, ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

     June 30, 2009     December 31, 2008  
     (In thousands, except share and per share data)  

Assets:

    

Cash and due from banks

   $ 476,142      $ 325,979   

Federal funds sold

     19,932        67,368   
                

Cash and cash equivalents

     496,074        393,347   

Other interest bearing certificates of deposit

     21,629        17,750   

Investment securities:

    

Available for sale (amortized cost of $725,940 and $787,282, respectively)

     736,110        801,435   

Held to maturity (fair value of $11,048 and $11,978, respectively)

     10,875        11,770   
                

Total investment securities

     746,985        813,205   

Loans held for sale

     39,439        36,846   

OREO and other repossessed assets

     17,059        14,699   

Loans:

    

Commercial

     2,607,340        2,479,547   

Construction and land

     657,639        696,792   

Residential mortgage

     1,868,843        1,902,482   

Home equity and other consumer loans

     416,095        397,040   
                

Total loans

     5,549,917        5,475,861   

Less: Allowance for loan losses

     101,414        89,292   
                

Net loans

     5,448,503        5,386,569   

Stock in Federal Home Loan Banks and Banker’s Bank

     59,318        58,953   

Premises and equipment, net

     35,556        35,425   

Goodwill

     105,102        105,090   

Intangible assets, net

     62,962        68,309   

Fees receivable

     23,509        23,845   

Accrued interest receivable

     24,061        26,403   

Income tax receivable and deferred

     64,449        130,429   

Other assets

     116,008        143,130   

Assets of discontinued operations

     —          12,750   
                

Total assets

   $ 7,260,654      $ 7,266,750   
                

Liabilities:

    

Deposits

   $ 5,257,587      $ 4,920,605   

Securities sold under agreements to repurchase

     176,221        293,841   

Federal Home Loan Bank borrowings

     787,928        936,037   

Junior subordinated debentures and other long-term debt

     241,734        290,585   

Other liabilities

     97,792        122,944   

Liabilities of discontinued operations

     —          3,895   
                

Total liabilities

     6,561,262        6,567,907   
                

Redeemable Noncontrolling Interests

     51,357        50,167   

The Company’s Stockholders’ Equity:

    

Preferred stock, $1.00 par value; authorized: 2,000,000 shares;

    

Series B, issued: 401 shares at June 30, 2009 and December 31, 2008

     42,907        33,703   

Series C, issued: 154,000 shares at June 30, 2009 and December 31, 2008; liquidation value: $1,000 per share

     145,128        144,642   

Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 67,797,939 shares at June 30, 2009 and 63,874,024 shares at December 31, 2008

     67,798        63,874   

Additional paid-in capital

     649,466        654,903   

Accumulated deficit

     (269,034     (263,417

Accumulated other comprehensive income

     8,270        11,471   
                

Total Company’s stockholders’ equity

     644,535        645,176   
                

Noncontrolling interests

     3,500        3,500   
                

Total stockholders’ equity

     648,035        648,676   
                

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

   $ 7,260,654      $ 7,266,750   
                

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  
     (In thousands, except share and per share data)  

Interest and dividend income:

        

Loans

   $ 76,597      $ 85,038      $ 154,600      $ 172,823   

Taxable investment securities

     1,701        3,498        3,841        7,613   

Non-taxable investment securities

     1,663        2,041        3,398        4,171   

Mortgage-backed securities

     4,183        1,301        7,851        1,906   

Federal Funds sold and other

     372        1,131        696        3,164   
                                

Total interest and dividend income

     84,516        93,009        170,386        189,677   
                                

Interest expense:

        

Deposits

     21,478        24,798        44,190        54,370   

Federal Home Loan Bank borrowings

     8,329        10,789        16,722        20,774   

Junior subordinated debentures and other long-term debt

     3,130        4,322        6,401        10,157   

Other short-term borrowings

     779        1,379        1,654        3,040   
                                

Total interest expense

     33,716        41,288        68,967        88,341   
                                

Net interest income

     50,800        51,721        101,419        101,336   

Provision for loan losses

     24,063        31,904        40,700        51,552   
                                

Net interest income after provision for loan losses

     26,737        19,817        60,719        49,784   
                                

Fees and other income:

        

Investment management and trust fees

     29,103        40,950        57,168        79,896   

Wealth advisory fees

     10,330        11,156        20,511        21,941   

Gain on repurchase of debt

     —          8,582        407        19,906   

Gain on sale of investments, net

     951        193        4,394        795   

Gain on sale of loans, OREO and other repossessed assets, net

     1,946        357        6,236        714   

Other

     3,710        4,117        4,979        6,627   
                                

Total fees and other income

     46,040        65,355        93,695        129,879   
                                

Operating expenses:

        

Salaries and employee benefits

     48,442        52,379        93,915        103,708   

Westfield re-equitization awards

     —          66,000        —          66,000   

Occupancy and equipment

     9,339        8,408        17,990        16,792   

Professional services

     6,367        6,508        12,424        11,353   

Marketing and business development

     2,353        3,085        4,639        5,904   

Contract services and data processing

     2,026        1,965        3,942        3,778   

Amortization of intangibles

     3,000        3,449        5,358        6,584   

Impairment of goodwill and intangibles

     —          17,400        —          38,000   

Credit for unfunded loan commitments

     (413     (892     (584     (800

FDIC insurance

     5,004        1,081        6,861        2,120   

Other

     6,344        5,145        12,345        9,508   
                                

Total operating expenses

     82,462        164,528        156,890        262,947   
                                

Loss before income taxes

     (9,685     (79,356     (2,476     (83,284

Income tax (benefit)/ expense

     (2,353     739        (396     6,220   
                                

Net loss from continuing operations

     (7,332     (80,095     (2,080     (89,504

Net (loss)/ income from discontinued operations

     (318     272        (2,193     673   
                                

Net loss before attribution to noncontrolling interests

     (7,650     (79,823     (4,273     (88,831

Less: Net income attributable to noncontrolling interests

     833        805        1,344        1,641   
                                

Net loss attributable to the Company

   $ (8,483   $ (80,628   $ (5,617   $ (90,472
                                

Adjustments to net loss attributable to the Company to arrive at net loss attributable to common shareholders

     (8,101     —          (16,506     —     
                                

Net loss attributable to common shareholders for loss per share calculations

   $ (16,584   $ (80,628   $ (22,123   $ (90,472
                                

Loss per share attributable to the Company’s common shareholders:

        

Loss per share from continuing operations:

        

Basic and diluted loss per share

   $ (0.24   $ (2.12   $ (0.30   $ (2.41

(Loss)/ earnings per share from discontinued operations:

        

Basic and diluted (loss)/earnings per share

   $ (0.00   $ 0.01      $ (0.03   $ 0.02   

Net loss per share attributable to the Company’s common shareholders:

        

Basic and diluted loss per share

   $ (0.24   $ (2.11   $ (0.33   $ (2.39

Average basic and diluted common shares outstanding

     67,860,696        38,232,208        66,264,319        37,863,328   

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

     Common
Stock
   Preferred
Stock
    Additional
Paid-in
Capital
    Retained
Earnings/
(Accumulated
Deficit)
    Accumulated Other
Comprehensive
Income/ (Loss)
    Noncontrolling
Interests
   Total  
     (In thousands, except share data)  

Balance at December 31, 2007

   $ 37,470    $ —        $ 411,836      $ 166,963      $ 3,101      $ —      $ 619,370   

Comprehensive Loss:

                

Net loss attributable to the Company

     —        —          -        (90,472     -        —        (90,472

Other comprehensive income/ (loss), net:

                

Change in unrealized loss on securities available for sale, net

     —        —          -        -        (2,792     —        (2,792

Change in unrealized loss on cash flow hedge, net

     —        —          -        -        (1,119     —        (1,119

Change in unrealized gain on other, net

     —        —          -        -        1,160        —        1,160   
                      

Total comprehensive loss attributable to the Company, net

                   (93,223

Dividends paid to common shareholders

     —        —          -        (7,605     -        —        (7,605

Net issuance of 856,115 shares of common stock

     856      —          11,964        -        -        —        12,820   

Issuance of 170,138 shares through incentive stock grants

     170      —          (170     -        -        —        —     

Amortization of incentive stock grants

     —        —          1,596        -        -        —        1,596   

Amortization of stock options and employee stock purchase plan

     —        —          2,840        -        -        —        2,840   

Westfield re-equitization awards

     —        —          62,500        -        -        3,500      66,000   

Stock options exercised

     83      —          662        -        -        —        745   

Other equity adjustments

     —        —          1,566        (1,134     -        —        432   
                                                      

Balance at June 30, 2008

   $ 38,579    $ —        $ 492,794      $ 67,752      $ 350      $ 3,500    $ 602,975   
                                                      

Balance at December 31, 2008

   $ 63,874    $ 178,345      $ 654,903      $ (263,417   $ 11,471      $ 3,500    $ 648,676   

Comprehensive Loss:

                

Net loss attributable to the Company

     —        —          —          (5,617     —          —        (5,617

Other comprehensive income/(loss), net:

                

Change in unrealized gain on securities available for sale, net

     —        —          —          —          (2,517     —        (2,517

Change in unrealized gain on cash flow hedge, net

     —        —          —          —          (699     —        (699

Change in unrealized loss on other, net

     —        —          —          —          15        —        15   
                      

Total comprehensive loss attributable to the Company, net

                   (8,818

Dividends paid to common shareholders

     —        —          (1,314     —          —          —        (1,314

Dividends paid to preferred shareholders

     —        —          (3,867     —          —          —        (3,867

Net issuance of 3,840,771 shares of common stock

     3,841      —          7,135        —          —          —        10,976   

Accretion of Series B Preferred stock Beneficial Conversion Feature

     —        9,246        (9,246     —          —          —        —     

Accretion of discount on Series C Preferred stock

     —        622        (622     —          —          —        —     

Issuance of 11,498 shares through incentive stock grants

     11      —          (11     —          —          —        —     

Amortization of incentive stock grants

     —        —          1,382        —          —          —        1,382   

Amortization of stock options and employee stock purchase plan

     —        —          1,781        —          —          —        1,781   

Stock options exercised

     72      —          238        —          —          —        310   

Tax effect of stock options exercised

     —        —          (692     —          —          —        (692

Other equity adjustments

     —        (178     (221     —          —          —        (399
                                                      

Balance at June 30, 2009

   $ 67,798    $ 188,035      $ 649,466      $ (269,034   $ 8,270      $ 3,500    $ 648,035   
                                                      

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2009     2008  
     (In thousands)  

Cash flows from operating activities:

    

Net loss before attribution to noncontrolling interests

   $ (4,273   $ (88,831

Net (loss)/income from discontinued operations

     (2,193     673   
                

Net loss from continuing operations

     (2,080     (89,504

Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:

    

Depreciation and amortization

     10,216        7,976   

Net income attributable to noncontrolling interests

     (1,344     (1,641

Equity issued as compensation

     3,163        70,436   

Impairment of goodwill and intangibles

     —          38,000   

Provision for loan losses

     40,700        51,552   

Loans originated for sale

     (197,323     (76,418

Proceeds from sale of loans held for sale and OREO

     206,201        70,362   

Gain on the repurchase of debt

     (407     (19,906

Decrease/ (increase) in income tax receivable and deferred

     65,980        (18,931

Net decrease/ (increase) in other operating activities

     8,966        (23,910
                

Net cash provided by operating activities

     134,072        8,016   
                

Cash flows from investing activities:

    

Investment securities available-for-sale:

    

Purchases

     (313,520     (1,555,006

Sales

     138,813        39,856   

Maturities, redemptions, and principal payments

     238,193        1,444,446   

Investment securities held-to-maturity:

    

Purchases

     (4,266     (4,489

Maturities and principal payments

     5,163        5,195   

Purchase of other interest bearing certificates of deposit, net

     (3,879     —     

Distributions/ (investments) in trusts, net

     4,323        (962

Purchase of Federal Home Loan Banks and Banker’s Bank stock

     (365     (12,376

Net increase in portfolio loans

     (114,240     (356,764

Proceeds from sale and repayments of non-strategic loan portfolio, net of advances

     6,072        —     

Capital expenditures, net of sale proceeds

     (4,271     (3,377

Cash paid for acquisitions, including deferred acquisition obligations, net of cash acquired

     (645     (4,171
                

Net cash used in investing activities

     (48,622     (447,648
                

Cash flows from financing activities:

    

Net increase in deposits

     336,982        87,506   

Net (decrease)/ increase in securities sold under agreements to repurchase and other

     (117,620     35,137   

Net increase in federal funds purchased

     —          124,000   

Net (decrease)/ increase in short-term Federal Home Loan Bank borrowings

     (134,300     313,142   

Advances of long-term Federal Home Loan Bank borrowings

     19,127        121,794   

Repayments of long-term Federal Home Loan Bank borrowings

     (32,857     (85,398

Repurchase of other long-term debt

     (48,444     (172,628

Dividends paid to common stockholders

     (1,314     (7,605

Dividends paid to preferred stockholders

     (3,867     —     

Tax effect of stock options exercised

     (692     —     

Proceeds from stock option exercises

     310        745   

Proceeds from issuance of common stock, net

     351        923   

Other equity adjustments

     (399     432   
                

Net cash provided by financing activities

     17,277        418,048   
                

Net increase/ (decrease) in cash and cash equivalents

     102,727        (21,584

Cash and cash equivalents at beginning of year

     393,347        185,095   
                

Cash and cash equivalents at end of period

   $ 496,074      $ 163,511   
                

Supplementary schedule of non-cash investing and financing activities:

    

Cash paid for interest

   $ 72,839      $ 89,854   

Cash (received)/ paid for income taxes, net

     (75,005     32,934   

Change in unrealized gain on securities available-for-sale, net of tax

     (2,517     (2,792

Change in unrealized gain on cash flow hedge, net of tax

     (699     (1,119

Change in unrealized loss on other, net of tax

     15        1,160   

Non-cash transactions:

    

Loans transferred to other real estate owned

     13,405        —     

Equity issued for acquisitions, including deferred acquisition obligations

     10,625        11,897   

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

(1) Basis of Presentation and Summary of Significant Accounting Policies

Boston Private Financial Holdings, Inc. (the “Company” or “BPFH”), is a holding company with three reportable segments, Private Banking, Investment Management, and Wealth Advisory. The Private Banking segment has five consolidated affiliate partners, including Boston Private Bank & Trust Company (“Boston Private Bank”), Borel Private Bank & Trust Company (“Borel”), First Private Bank & Trust (“FPB”), Gibraltar Private Bank & Trust Company (“Gibraltar”), and Charter Bank (“Charter”) (together, the “Banks”). The Investment Management segment has three consolidated affiliate partners, including Westfield Capital Management Company, LP (“Westfield”), Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”), and Anchor Capital Holdings, LLC (“Anchor”) (together, the “Investment Managers”). The Wealth Advisory segment has four consolidated affiliate partners, including KLS Professional Advisors Group, LLC (“KLS”), RINET Company, LLC (“RINET”), Bingham, Osborn & Scarborough, LLC (“BOS”), and Davidson Trust Company (“DTC”) (together, the “Wealth Advisors”). In addition, the Company also holds a minority interest investment in Coldstream Holdings, Inc. (“Coldstream Holdings”).

During the first quarter of 2009, BPFH adopted plans of disposal for Boston Private Value Investors, Inc. (“BPVI”) and Sand Hill Advisors, LLC (“Sand Hill”). Accordingly, the results of operations and gain or loss on sale related to BPVI and Sand Hill are included in the results from discontinued operations. The sale of BPVI was completed on April 1, 2009. The sale of Sand Hill was completed on June 30, 2009.

On June 30, 2008, the Company completed the re-equitization of Westfield Capital Management Company, LP, formerly known as Westfield Capital Management Company, LLC (“Westfield”). As a result of the re-equitization, the Company is entitled to an amount up to approximately $30 million of pre-tax earnings (the “Preferred Interest”) and one-third of any excess over that amount on an annual basis. Although the key employees of Westfield have control of the entity, the Company has 100% of the investment at risk in the entity. As a result, Westfield meets the definition of a variable interest entity under Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46(R), Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51 (“FIN 46(R)”), and is subject to the consolidation rules of that interpretation. Under that interpretation, the primary beneficiary of the variable interest entity consolidates and is determined based on the entity that absorbs a majority of the losses. The Company has determined that it is the primary beneficiary of Westfield and continues to consolidate it.

The Company conducts substantially all of its business through its three reportable segments. All significant intercompany accounts and transactions have been eliminated in consolidation. The minority investment in Coldstream Holdings is accounted for using the equity method and is included in other assets.

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 (“GAAP”), 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 Annual Report on Form 10-K, as amended, for the year ended December 31, 2008 filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation.

The Company’s significant accounting policies are described in Part II. Item 8. “Financial Statements and Supplementary Data—Note 3: Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies.

 

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(2) Earnings Per Share

The computations of basic and diluted earnings per share are set forth below:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 
     2009     2008     2009     2008  
     (In thousands, except share data)  

Net loss from continuing operations

   $ (7,332   $ (80,095   $ (2,080   $ (89,504

Less: Net income attributable to noncontrolling interests

     833        805        1,344        1,641   
                                

Net loss from continuing operations attributable to the Company

     (8,165     (80,900     (3,424     (91,145
                                

Increase in noncontrolling interests redemption value (1)

     (1,624     —          (2,771     —     

Accretion of Series B Preferred stock Beneficial Conversion Feature (2)

     (4,879     —          (9,246     —     

Accretion of discount on Series C Preferred stock (3)

     (242     —          (622     —     

Dividends on preferred securities

     (1,356     —          (3,867     —     
                                

Total adjustments to income available to common shareholders

     (8,101     —          (16,506     —     
                                

Loss from continuing operations attributable to common shareholders

     (16,266     (80,900     (19,930     (91,145

Net (loss)/ income from discontinued operations

     (318     272        (2,193     673   
                                

Net loss attributable to the common shareholders

   $ (16,584   $ (80,628   $ (22,123   $ (90,472
                                

Weighted average basic common shares outstanding

     67,860,696        38,232,208        66,264,319        37,863,328   

Weighted average diluted common shares outstanding (4)

     67,860,696        38,232,208        66,264,319        37,863,328   

Per share data:

        

Basic and diluted

        

Loss from continuing operations

   $ (0.24   $ (2.12   $ (0.30   $ (2.41

(Loss)/ income from discontinued operations

     (0.00     0.01        (0.03     0.02   
                                

Net loss attributable to common shareholders

   $ (0.24   $ (2.11   $ (0.33   $ (2.39
                                

Dividends declared on common stock

   $ 0.01      $ 0.01      $ 0.02      $ 0.11   

 

(1) See Part I. Item 1. “Notes to the Unaudited Consolidated Financial Statements—Note 11: Noncontrolling Interests” for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with Emerging Issues Task Force (“EITF”) D-98, Classification and Measurement of Redeemable Securities (“EITF D-98”), the increase in redemption value from period to period reduces income available to common shareholders.
(2) See the Company’s 2008 Annual Report on Form 10-K Part II. Item 8. “Financial Statements and Supplementary Data–Note 18: Equity” for a description of the preferred securities issued during the third quarter of 2008 that gave rise to the beneficial conversion feature. In accordance with EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversions, the beneficial conversion feature is accounted for as a preferred stock dividend and reduces income available to common shareholders.
(3) See the Company’s 2008 Annual Report on Form 10-K Part II. Item 8. “Financial Statements and Supplementary Data–Note 18: Equity” for a description of the preferred securities issued during the fourth quarter of 2008 that gave rise to the accretion of the discount at issuance.
(4) The diluted (loss)/ earnings per share (“EPS”) computation for the three and six months ended June 30, 2009 and 2008 does not assume: exercise or contingent issuance of options or other dilutive securities, conversion of the convertible trust preferred securities or the Series B preferred securities, or the exercise of the warrants, because the result would have been anti-dilutive. As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:

 

     For the three months ended
June 30,
   For the six months ended
June 30,
     2009    2008    2009    2008

Potential common shares from:

           

Convertible trust preferred securities

   3,228,687    3,187,800    3,228,687    3,187,275

Exercise or contingent issuance of options or other dilutive securities

   981,098    914,191    1,026,187    898,923

Conversion of the Series B Preferred stock

   7,261,091    —      7,261,091    —  
                   

Total

   11,470,876    4,101,991    11,515,965    4,086,198
                   

 

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In addition, if the effect of the conversion of the trust preferred securities would have been dilutive, interest expense, net of tax, related to the convertible trust preferred securities of $0.7 million and $1.5 million for the three and six month periods ended June 30, 2009 and 2008 would have been added back to net loss attributable to common shareholders for diluted EPS computations for the periods presented.

Also, options to purchase approximately 5.2 million shares of common stock were outstanding at June 30, 2009, but were not included in the computation of diluted EPS or in the above anti-dilution table because the options’ exercise prices were greater than the average market price of the common shares during the quarter.

Furthermore, warrants to purchase approximately 8.3 million shares of common stock were outstanding at June 30, 2009, but were not included in the computation of diluted EPS because the warrants’ exercise prices were greater than the average market price of the common shares during the quarter.

 

(3) Reportable segments

Management Reporting

The Company has three reportable segments: Private Banking, Investment Management, and Wealth Advisory; and Boston Private Financial Holdings, Inc. (the “Holding Company”). The financial performance of the Company is managed and evaluated by these three areas. The segments are managed separately as a result of the concentrations in each function.

Measurement of Segment Profit and Assets

The accounting policies of the segments are the same as those described in Part II. Item 8. “Financial Statements and Supplementary Data—Note 3: Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC. Revenues, expenses, and assets are recorded by each segment, and separate financial statements are reviewed by their management and the Company’s Segment CEOs.

Reconciliation of Reportable Segment Items

The following tables provide a reconciliation of the revenues, profits, assets, and other significant items of reportable segments as of and for the three and six months ended June 30, 2009 and 2008. Interest expense on junior subordinated debentures and a portion of the long-term debt are reported at the Holding Company.

 

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     For the three months ended June 30,  
     Net interest income     Non-interest income     Total revenues  
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ 53,398      $ 55,334      $ 12,151      $ 11,199      $ 65,549      $ 66,533   

Total Investment Managers

     63        136        22,826        33,797        22,889        33,933   

Total Wealth Advisors

     45        54        10,400        11,156        10,445        11,210   
                                                

Total Segments

     53,506        55,524        45,377        56,152        98,883        111,676   

Holding Company and Eliminations

     (2,706     (3,803     663        9,203        (2,043     5,400   
                                                

Total Company

   $ 50,800      $ 51,721      $ 46,040      $ 65,355      $ 96,840      $ 117,076   
                                                
     For the three months ended June 30,  
     Non-interest expense     Income tax (benefit)/expense     Net (loss)/ income from
continuing operations (1)
 
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ 50,581      $ 58,844      $ (4,095   $ (4,041   $ (5,000   $ (20,174

Total Investment Managers

     17,770        88,639        2,202        4,862        2,917        (59,568

Total Wealth Advisors

     7,687        8,342        1,187        1,235        1,571        1,633   
                                                

Total Segments

     76,038        155,825        (706     2,056        (512     (78,109

Holding Company and Eliminations

     6,424        8,703        (1,647     (1,317     (6,820     (1,986
                                                

Total Company

   $ 82,462      $ 164,528      $ (2,353   $ 739      $ (7,332   $ (80,095
                                                
     For the three months ended June 30,  
     Net income/ (loss) from
continuing operations
attributable to
noncontrolling interests
    Net (loss)/income attributable
to the Company (2)
    Amortization of intangibles  
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ —        $ —        $ (5,000   $ (20,174   $ 1,630      $ 1,595   

Total Investment Managers

     (25     354        2,942        (59,922     964        1,430   

Total Wealth Advisors

     357        450        1,214        1,183        380        386   
                                                

Total Segments

     332        804        (844     (78,913     2,974        3,411   

Holding Company and Eliminations

     501        1        (7,639     (1,715     26        38   
                                                

Total Company

   $ 833      $ 805      $ (8,483   $ (80,628   $ 3,000      $ 3,449   
                                                
     As of June 30,        
     Assets (3)     AUM    
     2009     2008     2009     2008    
     (In thousands)     (In millions)    

Total Banks

   $ 7,001,059      $ 6,864,877      $ 3,982      $ 4,653     

Total Investment Managers

     147,357        193,495        15,767        22,256     

Total Wealth Advisors

     80,326        77,233        7,507        8,618     
                                  

Total Segments

     7,228,742        7,135,605        27,256        35,527     

Holding Company and Eliminations

     31,912        47,476        (16     (20  
                                  

Total Company

   $ 7,260,654      $ 7,183,081      $ 27,240      $ 35,507     
                                  

 

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     For the six months ended June 30,  
     Net interest income     Non-interest income     Total revenues  
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ 106,625      $ 108,314      $ 28,847      $ 23,366      $ 135,472      $ 131,680   

Total Investment Managers

     132        321        44,055        64,423        44,187        64,744   

Total Wealth Advisors

     63        128        20,575        21,935        20,638        22,063   
                                                

Total Segments

     106,820        108,763        93,477        109,724        200,297        218,487   

Holding Company and Eliminations

     (5,401     (7,427     218        20,155        (5,183     12,728   
                                                

Total Company

   $ 101,419      $ 101,336      $ 93,695      $ 129,879      $ 195,114      $ 231,215   
                                                
     For the six months ended June 30,  
     Non-interest expense     Income tax (benefit)/expense     Net (loss)/ income from
continuing operations (1)
 
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ 95,134      $ 121,941      $ (1,212   $ (4,859   $ 850      $ (36,954

Total Investment Managers

     34,532        108,917        4,158        9,433        5,497        (53,606

Total Wealth Advisors

     15,950        16,089        2,061        2,571        2,627        3,403   
                                                

Total Segments

     145,616        246,947        5,007        7,145        8,974        (87,157

Holding Company and Eliminations

     11,274        16,000        (5,403     (925     (11,054     (2,347
                                                

Total Company

   $ 156,890      $ 262,947      $ (396   $ 6,220      $ (2,080   $ (89,504
                                                
     For the six months ended June 30,  
     Net income from continuing
operations attributable to
noncontrolling interests
    Net (loss)/income attributable
to the Company (2)
    Amortization of intangibles  
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ —        $ —        $ 850      $ (36,954   $ 2,609      $ 3,190   

Total Investment Managers

     108        678        5,389        (54,284     1,936        2,558   

Total Wealth Advisors

     655        931        1,972        2,472        759        760   
                                                

Total Segments

     763        1,609        8,211        (88,766     5,304        6,508   

Holding Company and Eliminations

     581        32        (13,828     (1,706     54        76   
                                                

Total Company

   $ 1,344      $ 1,641      $ (5,617   $ (90,472   $ 5,358      $ 6,584   
                                                

 

(1) Net (loss)/ income attributable to the Company for the Total Company for the three and six months ended June 30, 2008 was reduced by $16.0 million and $36.6 million, respectively, for the goodwill impairment charge recorded at FPB, net of the effective tax rate used, and $66.0 million for the non-cash compensation charge for the equity ownership restructuring of Westfield. These decreases were slightly offset by gains the Company recognized during the three and six months ended June 30, 2008 of $5.1 million and $11.9 million, net of the effective tax rate used, which the Company recognized from the repurchase of a portion of its 3% Contingent Convertible Senior Notes due 2027 (the “Notes”). The Company’s effective tax rate for the first six months of 2008 is not consistent with the Company’s 2009 effective tax rate as a result of the non-deductible goodwill impairment charge recorded at FPB. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements – Note 10: Income Taxes” for further detail.
(2) Net (loss)/ income from discontinued operations for the three months ended June 30, 2009 and 2008 of $(0.3) million and $0.3 million, respectively, and for the six months ended June 30, 2009 and 2008 of $(2.2) million and $0.7 million, respectively, are included in Holding Company and Eliminations in the calculation of net income/ (loss) attributable to the Company.
(3) At June 30, 2008, Holding Company and Eliminations assets include assets attributable to discontinued operations of $23.8 million.

 

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(4) Investments

Available-for-sale and held-to-maturity securities are summarized as follows:

 

     Amortized
Cost
   Unrealized     Fair
Value
        Gains    Losses    
     (In thousands)

At June 30, 2009:

          

Available for sale securities at fair value:

          

U.S. Government

   $ 3,011    $ 13    $ —        $ 3,024

U.S. Agencies and GSEs

     166,288      2,390      (500     168,178

Corporate bonds

     999      3      —          1,002

Municipal bonds

     164,487      4,077      (281     168,283

Mortgage-backed securities (1)

     380,325      5,688      (1,277     384,736

Other

     10,830      195      (138     10,887
                            

Total

   $ 725,940    $ 12,366    $ (2,196   $ 736,110
                            

Held to maturity securities at amortized cost:

          

U.S. Government

   $ 5,257    $ 58    $ (1   $ 5,314

Mortgage-backed securities (1)

     4,186      120      —          4,306

Other

     1,432      —        (4     1,428
                            

Total

   $ 10,875    $ 178    $ (5   $ 11,048
                            

At December 31, 2008:

          

Available for sale securities at fair value:

          

U.S. Government

   $ 8,527    $ 47    $ —        $ 8,574

U.S. Agencies and GSEs

     264,708      3,868      (6     268,570

Corporate bonds

     22,826      407      —          23,233

Municipal bonds

     208,084      4,977      (118     212,943

Mortgage-backed securities (1)

     276,319      5,589      (553     281,355

Other

     6,818      100      (158     6,760
                            

Total

   $ 787,282    $ 14,988    $ (835   $ 801,435
                            

Held to maturity securities at amortized cost:

          

U.S. Government

   $ 5,245    $ 127    $ —        $ 5,372

Mortgage-backed securities (1)

     4,936      87      (3     5,020

Other

     1,589      —        (3     1,586
                            

Total

   $ 11,770    $ 214    $ (6   $ 11,978
                            

 

GSEs = Government Sponsored Entities

(1) Most mortgage-backed securities are guaranteed by U.S. Agencies or GSEs

The following table sets forth the maturities of investment securities available-for-sale and held-to-maturity, based on contractual maturity, at June 30, 2009:

 

     Available-for-sale    Held-to-maturity
     Amortized
Cost
   Market
Value
   Amortized
Cost
   Market
Value
     (In thousands)

Within one year

   $ 44,167    $ 44,612    $ 5,107    $ 5,165

After one, but within five years

     250,648      255,963      1,984      2,006

After five, but within ten years

     86,311      86,392      2,050      2,126

Greater than ten years

     344,814      349,143      1,734      1,751
                           

Total

   $ 725,940    $ 736,110    $ 10,875    $ 11,048
                           

The following table sets forth the proceeds from sales of available-for-sale securities and the resulting gains and losses realized using the specific identification method.

 

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     For the three months ended
June 30,
   For the six months ended
June 30,
 
     2009     2008    2009     2008  
     (In thousands)  

Proceeds from sales

   $ 43,860      $ 31    $ 138,813      $ 39,856   

Realized gains

     1,032        193      4,497        976   

Realized losses

     (81     —        (103     (181

The following table sets forth information regarding securities at June 30, 2009 having temporary impairment, due to the fair market values having declined below the amortized costs of the individual securities, and the time period that the investments have been temporarily impaired.

 

     Less than 12 months     12 months or longer     Total      
Available-for-sale securities    Fair
value
   Unrealized
losses
    Fair
value
   Unrealized
losses
    Fair
value
   Unrealized
losses
    # of
securities
     (In thousands)

U.S. Agencies and GSEs

   $ 39,590    $ (489   $ 502    $ (11   $ 40,092    $ (500   18

Municipal Bonds

     23,841      (281     —        —          23,841      (281   51

Mortgage-Backed Securities

     118,799      (1,213     3,093      (64     121,892      (1,277   47

Other

     1,949      (54     116      (84     2,065      (138   47
                                                 

Total

   $ 184,179    $ (2,037   $ 3,711    $ (159   $ 187,890    $ (2,196   163
                                                 
     Less than 12 months     12 months or longer     Total      
Held-to-maturity securities    Fair
value
   Unrealized
losses
    Fair
value
   Unrealized
losses
    Fair
value
   Unrealized
losses
    # of
securities
     (In thousands)

U.S. Government

   $ 150    $ (1   $ —      $ —        $ 150    $ (1   1

Other

     827      (4     —        —          827      (4   1
                                                 

Total

   $ 977    $ (5   $ —      $ —        $ 977    $ (5   2
                                                 

These investments are not considered other-than-temporarily impaired for the following reasons: the decline in fair value on investments is primarily attributed to changes in interest rates and not credit quality, the Company has no current intent to sell these securities nor is it more likely than not that they will have to sell these securities before recovery of their amortized cost basis. Decisions to hold or sell securities are influenced by the need for liquidity at the Banks, alternative investments, risk assessment, and asset liability management.

Other-than-Temporary Impairments

In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”), which amended the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under this FSP, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event that some or all of the unrealized loss on a debt security is related to credit, the amount associated with the credit loss is recognized in income. The amount of loss relating to other factors is recorded in accumulated other comprehensive income/ (loss). The FSP also requires additional disclosures regarding the calculation of credit losses and the factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired.

The Company adopted the provisions of FSP FAS 115-2 and 124-2 on April 1, 2009. The adoption of this FSP did not have a material impact on the Company’s financial position or results of operations.

Evaluating Investments for Other-than-Temporary Impairments

The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with FSP FAS 115-1, The Meaning of Other-than-Temporary Impairment and its Application to Certain Investments (“FSP FAS 115-1”), and FSP FAS 115-2 and FAS 124-2. An unrealized loss exists when the current fair value of

 

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an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income/ (loss).

For investment securities with unrealized losses, the Company performs an analysis to assess whether it intends to sell or whether it would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where the Company intends to sell a security, or may be required to do so, the security’s total decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is recorded within earnings as an impairment loss.

Regardless of the Company’s intent to sell a security, it performs additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where the Company does not expect to receive cash flows sufficient to recover the amortized cost basis of a security.

For equity securities, when assessing whether a decline in fair value below the cost basis is other-than-temporary, the Company considers the fair value of the security, the duration of the security’s decline, and the financial condition of the issuer. The Company then considers its intent and ability to hold the equity security for a period of time sufficient to recover the carrying value. Where the Company has determined that it lacks the intent and ability to hold an equity security to its expected recovery, that the duration of the security’s fair value decline is significant, or that the financial condition of the issuer deteriorates significantly, the security’s decline in fair value is deemed to be other-than-temporary and is recorded within earnings as an impairment loss.

Recognition and Measurement of Other-than-Temporary Impairment

Prior to adoption of FSP FAS 115-2 and FAS 124-2 in the current quarter, the Company recognized impairments under the previously effective guidance contained within FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (“FAS 115”).

No impairment losses were recognized through earnings related to available-for-sale securities during the three and six month periods ended June 30, 2009 and June 30, 2008.

 

(5) Fair Value Measurements

FASB Statement No. 157, Fair Value Measurements (“FAS 157”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy established in FAS 157, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

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          Fair value measurements at reporting date using:
Description    At June 30,
2009
   Quoted prices in
active markets
for identical
assets (level 1)
   Significant other
observable inputs
(level 2)
   Significant
unobservable
inputs (level 3)
     (In thousands)

Assets:

           

Available-for-sale securities:

           

U.S. Government

   $ 3,024    $ 3,024    $ —      $ —  

U.S. Agencies and GSEs

     168,178      —        168,178      —  

Corporate bonds

     1,002      —        1,002      —  

Municipal bonds

     168,283      —        168,283      —  

Mortgage-backed securities

     384,736      —        381,585      3,151

Other

     10,887      4,748      5,639      500
                           

Total available-for-sale securities

     736,110      7,772      724,687      3,651

Derivatives - interest rate floor

     3,858      —        3,858      —  

Derivatives - customer swaps

     5,269      —        5,269      —  

Other investments

     5,630      5,630      —        —  

Liabilities:

           

Derivatives - customer swaps

   $ 5,212    $ —      $ 5,212    $ —  
          Fair value measurements at reporting date using:
Description    At December 31,
2008
   Quoted prices in
active markets
for identical
assets (level 1)
   Significant other
observable inputs
(level 2)
   Significant
unobservable
inputs (level 3)
     (In thousands)

Assets:

           

Available for sale securities

   $ 801,435    $ —      $ 801,435    $ —  

Derivatives - interest rate floor

     5,260      —        5,260      —  

Derivatives - customer swaps

     7,762      —        7,762      —  

Other investments

     9,953      9,953      —        —  

Liabilities:

           

Derivative - customer swaps

   $ 7,698    $ —      $ 7,698    $ —  

Available-for-sale securities consist primarily of U.S. Government securities, U.S. Agencies and government-sponsored entities (“GSEs”), corporate bonds, municipal bonds, mortgage-backed securities (primarily residential), and other investments. The U.S. Government securities, and equities and mutual funds (which are categorized as other investments) are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. The U.S. Agencies and GSEs, corporate bonds, municipal bonds, most of the mortgage-backed securities, and certain investments in SBA loans, which are categorized as other investments, generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets. Therefore, they have been categorized as a Level 2 measurement. The remaining investments have unobservable inputs and are not actively traded. Therefore, they have been categorized as a Level 3 measurement.

Currently, the Company uses an interest rate floor and interest rate customer swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, they have been categorized as a Level 2 measurement.

To comply with the provisions of FAS 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

 

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The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Other investments, which are not considered available-for-sale investments, consist of deferred compensation trusts for the benefit of employees, which consist of publicly traded mutual fund investments that are valued at prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement.

The following table presents a rollforward of the Level 3 assets in the six months ended June 30, 2009:

 

     Balance at
January 1,
2009
   Transfers
into Level 3
   Balance at
June 30, 2009
     (In thousands)

Mortgage-backed securities

   $ —      $ 3,151    $ 3,151

Other available-for-sale investments

     —        500      500
                    

Total Level 3 assets

   $ —      $ 3,651    $ 3,651
                    

The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2009 and December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

          Fair value measurements recorded during the period:

Description

   June 30, 2009    Quoted prices in
active markets for
identical assets
(level 1)
   Significant other
observable inputs
(level 2)
   Significant
unobservable
inputs (level 3)
     (In thousands)

Assets:

           

Impaired loans (1)

   $ 19,236    $ —      $ —      $ 19,236

Loans held for sale (2)

     7,830      —        —        7,830

OREO (3)

     985            985
                           
   $ 28,051    $ —      $ —      $ 28,051
                           

 

(1) Collateral-dependent impaired loans whose fair value changed during the second quarter of 2009, net of specific allocations to the general reserve.
(2) Four loans in the loans held for sale category had declines in fair value for the three months ending June 30, 2009. The Company recorded a $0.5 million mark to market charge which was included in gain on sale of loans and other real estate owned, net, in the consolidated statement of operations.
(3) Four OREO properties whose value declined during the second quarter of 2009, net of valuation allowances taken during the second quarter of $0.5 million.

 

          Fair value measurements recorded during the period:

Description

   December 31,
2008
   Quoted prices in
active markets for
identical assets
(level 1)
   Significant other
observable inputs
(level 2)
   Significant
unobservable
inputs (level 3)
     (In thousands)

Assets:

           

Impaired loans

   $ 32,322    $ —      $ —      $ 32,322

Loans held for sale

     27,219      —        —        27,219

OREO

     4,069      —        —        4,069
                           
   $ 63,610    $ —      $ —      $ 63,610
                           

Impaired loans include those loans that were measured at the value of underlying collateral as allowed under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (“FAS 114”). The amount does not include impaired loans that are measured based on expected future cash flows discounted at the respective loan’s original effective interest rate, as that amount is not considered a fair value measurement. The Company uses appraisals, which management may adjust to reflect estimated market value declines, or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property. Therefore they have been categorized as a Level 3 measurement.

 

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The loans held for sale in the table above represent the portfolio of loans in Southern California transferred to the held for sale category in the third quarter of 2008, as discussed in the Company’s 2008 Annual Report on Form 10-K, which had an adjustment to fair value in the three months ended June 30, 2009. The fair value of these loans held for sale was based on broker quotes, comparable market transactions and information from the Company’s agent hired to assist with the sale of the portfolio. Therefore they have been categorized as a Level 3 measurement.

The following table presents the book and fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis (other than certain loans, as noted below):

 

     June 30, 2009    December 31, 2008
     Book Value    Fair Value    Book Value    Fair Value
     (In thousands)

FINANCIAL ASSETS:

           

Cash and cash equivalents

   $ 496,074    $ 496,074    $ 393,347    $ 393,347

Other interest bearing certificates of deposit

     21,629      21,629      17,750      17,750

Held-to-maturity securities

     10,875      11,048      11,770      11,978

Loans, net (including loans held for sale and impaired loans)

     5,487,942      5,558,100      5,423,415      5,431,898

Other financial assets

     156,064      156,064      157,678      157,678

FINANCIAL LIABILITIES:

           

Deposits

     5,257,587      5,276,928      4,920,605      4,947,202

Securities sold under agreements to repurchase

     176,221      179,779      293,841      298,208

Federal Home Loan Bank borrowings

     787,928      821,895      936,037      978,624

Junior subordinated debentures and other long-term debt

     241,734      160,170      290,585      211,085

Other financial liabilities

     19,455      19,455      26,405      26,405

The estimated fair values have been determined by using available quoted market information or other appropriate valuation methodologies. The aggregate fair value amounts presented do not represent the underlying value of the Company taken as a whole.

The fair value estimates provided are made at a specific point in time, based on relevant market information and the characteristics of the financial instrument. The estimates do not provide for any premiums or discounts that could result from concentrations of ownership of a financial instrument. Because no active market exists for some of the Company’s financial instruments, certain fair value estimates are based on subjective judgments regarding current economic conditions, risk characteristics of the financial instruments, future expected loss experience, prepayment assumptions, and other factors. The resulting estimates involve uncertainties and therefore cannot be determined with precision. Changes made to any of the underlying assumptions could significantly affect the estimates.

Cash and Cash Equivalents

The carrying value reported in the balance sheet for cash and cash equivalents approximates fair value due to the short-term nature of their maturities.

Securities Held to Maturity

The fair value presented for securities are based on quoted market prices received from third party pricing services, where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments, quotations, or analysis of estimated future cash flows.

Loans, net (excluding loans held for sale and impaired loans accounted for at fair value)

Fair value estimates are based on loans with similar financial characteristics. Fair values of commercial and residential mortgage loans are estimated by discounting contractual cash flows adjusted for prepayment estimates and using discount rates approximately equal to current market rates on loans with similar characteristics and maturities. The incremental credit risk for non-performing loans has been considered in the determination of the fair value of consumer loans. The fair value estimates for home equity and other loans are based on outstanding loan terms and pricing in each Bank’s local market.

 

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Other Financial Assets

Other financial assets consist primarily of accrued interest and fees receivable, stock in Federal Home Loan Banks (“FHLBs”) and Banker’s Bank, and the cash surrender value of bank-owned life insurance, for which the carrying amount approximates fair value.

The Company carries the FHLB and Banker’s Bank stock at the original cost basis (par value). Each of our Banks is a member of their local FHLB located in either Boston, Atlanta, Seattle, or San Francisco. At each period end, the Company evaluates its investment in the respective FHLB’s stock and Banker’s Bank stock for other-than-temporary impairment. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the asset, the liquidity position of the respective FHLBs, the actions being taken by the respective FHLBs to address their regulatory situations, and the Company’s current intention not to sell or redeem any of its investment in the respective FHLBs, and the determination that it is not more likely than not that the Company would be required to sell or redeem any of its investments in the respective FHLBs, the Company has not recognized an other-than-temporary impairment loss with respect to stock in the FHLBs and Banker’s Bank.

Deposits

The fair values reported for deposits equal their respective book values reported on the balance sheet. The fair values disclosed are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on certificates of deposit with similar remaining maturities.

Securities Sold Under Agreements to Repurchase

The fair value of securities sold under agreements to repurchase are estimated based on contractual cash flows discounted at the Company’s incremental borrowing rate for FHLB borrowings with similar maturities.

Federal Home Loan Bank Borrowings

The fair value reported for FHLB borrowings is estimated based on the discounted value of contractual cash flows. The discount rate used is based on the Company’s estimated current incremental borrowing rate for FHLB borrowings of similar maturities.

Junior Subordinated Debentures and Other Long-Term Debt

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I was based on the current market price of the securities at June 30, 2009 and December 31, 2008. The fair value of the junior subordinated debentures issued by Boston Private Capital Trust II was based on the present value of cash flows discounted using the current rate for similar securities. The fair value of the junior subordinated debentures acquired in the FPB, Gibraltar, and Charter acquisitions approximates book value because of the floating rate nature of the securities. The fair value of the long-term debt was based on the price the Company repurchased this debt for in the open market.

Other Financial Liabilities

Other financial liabilities consist of accrued interest payable and deferred compensation for which the carrying amount approximates fair value.

Financial Instruments with Off-Balance Sheet Risk

The Company’s commitments to originate loans, and for unused lines and outstanding letters of credit are primarily at market interest rates and therefore, the carrying amount approximates fair value.

 

(6) Loans Receivable

The following table presents a summary of the loan portfolio by geography. The geography assigned to the Private Banking loan data is based on the location of the lender. Net loans from the Holding Company to certain principals of the Company’s affiliate partners, loans at the Company’s non-banking segments and inter-company loan eliminations are identified as eliminations and other.

 

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     June 30,
2009
    December 31,
2008
 
     (In thousands)  

Commercial loans:

    

New England

   $ 1,056,761      $ 986,381   

Northern California

     864,660        821,308   

Southern California

     228,500        220,636   

South Florida

     333,875        322,639   

Pacific Northwest

     124,261        129,727   

Eliminations and other

     (717     (1,144
                

Total commercial loans

   $ 2,607,340      $ 2,479,547   
                

Construction and land loans:

    

New England

   $ 134,907      $ 107,991   

Northern California

     228,245        225,536   

Southern California

     11,811        21,477   

South Florida

     233,076        265,075   

Pacific Northwest

     49,600        76,713   
                

Total construction and land loans

   $ 657,639      $ 696,792   
                

Residential mortgage loans:

    

New England

   $ 1,048,424      $ 1,087,843   

Northern California

     207,573        211,976   

Southern California

     65,394        29,204   

South Florida

     545,160        549,601   

Pacific Northwest

     2,292        23,858   
                

Total residential mortgage loans

   $ 1,868,843      $ 1,902,482   
                

Home equity and other consumer loans:

    

New England

   $ 93,901      $ 87,619   

Northern California

     83,431        78,159   

Southern California

     22,539        15,333   

South Florida

     207,589        209,466   

Pacific Northwest

     4,610        2,683   

Eliminations and other

     4,025        3,780   
                

Total home equity and other consumer loans

   $ 416,095      $ 397,040   
                

Total loans

   $ 5,549,917      $ 5,475,861   
                

 

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The following table presents a summary of the Private Banking credit quality data by geography. The geography assigned to the Private Banking credit quality data is based on the location of the lender.

 

     June 30,
2009
   December 31,
2008
     (In thousands)

Classified loans: (1)

     

New England

   $ 14,514    $ 3,210

Northern California

     30,159      10,875

Southern California (2)

     48,367      41,493

South Florida

     91,403      57,495

Pacific Northwest

     49,287      34,968
             

Total classified loans

   $ 233,730    $ 148,041
             

Loans 30-89 days past due and accruing:

     

New England

   $ 6,490    $ 6,641

Northern California

     14,945      5,080

Southern California

     5,189      6,276

South Florida

     8,526      5,072

Pacific Northwest

     3,175      658
             

Total loans 30-89 days past due

     38,325      23,727
             

Non-accrual loans:

     

New England

   $ 10,316    $ 4,098

Northern California

     13,584      6,102

Southern California (3)

     40,864      37,885

South Florida

     46,077      29,942

Pacific Northwest

     18,702      15,905
             

Total non-accrual loans

   $ 129,543    $ 93,932
             

OREO and repossessed assets:

     

New England

   $ 740    $ 2,378

Northern California

     7,237      —  

Southern California

     1,006      7,117

South Florida

     3,912      1,861

Pacific Northwest

     4,164      3,343
             

Total OREO and repossessed assets

   $ 17,059    $ 14,699
             

Total non-performing assets

   $ 146,602    $ 108,631
             

 

(1) Classified loans include loans classified as either substandard or doubtful.
(2) Includes loans held for sale of $17.5 million and $27.2 million as of June 30, 2009 and December 31, 2008, respectively.
(3) Includes loans held for sale of $18.6 million and $27.2 million as of June 30, 2009 and December 31, 2008, respectively.

Non-performing assets include non-accrual loans, other real estate owned (“OREO”), and repossessed assets. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of deeds in lieu of foreclosure.

Impaired loans are generally included within the balance of classified loans. Impaired loans totaled $123.7 million as of June 30, 2009, as compared to $94.8 million at December 31, 2008. The Company may, under certain circumstances, restructure loans as a concession to a borrower. Such restructured loans are generally included in impaired loans.

 

(7) Allowance for Loan Losses

The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled $101.4 million at June 30, 2009.

The increased level of allowance for loan losses reflects the higher amount of non-performing and classified loans, particularly in the South Florida and Northern California regions, recent historical charge-off trends and current economic conditions. An analysis of the risk in the loan portfolio as well as management judgment is used to determine the estimated appropriate amount of the allowance for loan losses.

 

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The following table summarizes the changes in the allowance for loan losses for the six months ended June 30, 2009 and 2008:

 

     At and for the three months
ended June 30,
    At and for the six months
ended June 30,
 
     2009     2008     2009     2008  
     (In thousands)     (In thousands)  

Ending gross loans

   $ 5,549,917      $ 5,593,217      $ 5,549,917      $ 5,593,217   
                                

Allowance for loan losses, beginning of period

   $ 93,144      $ 88,953      $ 89,292      $ 70,992   

Provision for loan losses

     24,064        31,904        40,700        51,552   

Charge-offs

     (15,912     (22,943     (29,251     (24,711

Recoveries

     118        7        673        88   
                                

Allowance for loan losses, end of period

   $ 101,414      $ 97,921      $ 101,414      $ 97,921   
                                

Allowance for loan losses to ending gross loans

     1.83     1.75     1.83     1.75

The following table presents a summary by geography of loans charged off, net of recoveries, for the three and six months ended June 30, 2009 and 2008. The geography assigned to the Private Banking data is based on the location of the lender.

 

     Three months ended June 30,    Six months ended June 30,
     2009    2008    2009    2008
     (In thousands)

Net loans charged off:

           

New England

   $ 1,392    $ 953    $ 1,392    $ 1,958

Northern California

     1,216      1      1,322      16

Southern California

     1,760      21,117      5,542      21,709

South Florida

     10,474      365      13,433      440

Pacific Northwest

     952      500      6,889      500
                           

Total net loans charged off

   $ 15,794    $ 22,936    $ 28,578    $ 24,623
                           

 

(8) Goodwill and Intangible Assets

The Company performs an annual impairment test on goodwill and intangible assets at the reporting unit level in the fourth quarter of each year. Goodwill may be tested more often if events or circumstances indicate it may be impaired.

During the first quarter of 2009, the Company adopted plans for the disposal of BPVI, an Investment Management affiliate, and Sand Hill, a Wealth Advisory affiliate. At the adoption of the plans for disposal, goodwill and intangible asset impairment tests were performed on the two affiliates using the fair values established pursuant to the plans. It was determined that BPVI’s goodwill and intangible assets were impaired and therefore were written off as of March 31, 2009. The $2.1 million impairment expense is included in losses from discontinued operations. Sand Hill’s goodwill and intangibles were deemed not impaired. The sale of BPVI was completed on April 1, 2009. The sale of Sand Hill was completed on June 30, 2009. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements – Note 12: Discontinued Operations” for further details.

Also during the first quarter of 2009, the Company deemed that a triggering event under FASB Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”) occurred due to the decline in the Company’s market capitalization. This triggering event was brought on by a significant adverse change in the banking business climate due to negative economic and market factors. For example, the KBW Regional Bank Index (NYSE: KRE) decreased 34% during the first quarter of 2009 while the S&P 500 index decreased 11% over the same period. As a result, the Company tested all reporting units for impairment using a market approach to determine fair value and determined that no additional goodwill or intangible asset impairment write-downs were needed.

The Company’s market capitalization remained below its book value as of June 30, 2009. As a result, the Company performed a reconciliation of the aggregate fair value of its reporting units to the Company’s overall market capitalization and determined that no additional goodwill and intangible asset impairment was necessary at June 30, 2009.

 

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The following table presents the goodwill by business segment at June 30, 2009 and December 31, 2008:

 

     Balance at
June 30,
2009
   Balance at
December 31,
2008
     (In thousands)

Private Banking

   $ 2,403    $ 2,403

Investment Management

     59,361      59,361

Wealth Advisory

     43,338      43,326
             

Total goodwill

   $ 105,102    $ 105,090
             

The following is an analysis of intangible assets at June 30, 2009 and December 31, 2008:

 

     At June 30, 2009    At December 31, 2008
     Gross
carrying
amount
   Accumulated
amortization
    Net
carrying
amount
   Gross
carrying
amount
   Accumulated
amortization
    Net
carrying
amount
     (In thousands)

Advisory contracts

   $ 65,520    $ (18,675   $ 46,845    $ 65,509    $ (15,732   $ 49,777

Core deposit intangibles

     13,289      (2,486     10,803      13,289      (439     12,850

Employee agreements

     4,127      (2,466     1,661      4,127      (2,150     1,977

Trade names and other

     3,150      —          3,150      3,150      —          3,150

Mortgage servicing rights

     649      (146     503      648      (93     555
                                           

Total other intangibles

   $ 86,735    $ (23,773   $ 62,962    $ 86,723    $ (18,414   $ 68,309
                                           

Amortization expense for the three and six months ended June 30, 2009 was $3.0 million and $5.4 million, respectively and for the three and six months ended June 30, 2008 was $3.4 million and $6.6 million, respectively. During the first half of 2009, the amortization of core deposit intangibles at two of the Private Banking affiliates was accelerated to reflect the attrition trends of acquired deposit accounts.

 

(9) Derivatives and Hedging Activities

The Company’s objective in using derivatives is to add stability to interest income and to manage the risk related to exposure to changes in interest rates. To accomplish this objective, one of the affiliate Banks entered into a $100 million prime-based interest rate floor (the “Floor”) to protect against movements in interest rates below the Floor’s strike rate of 6.5% over the life of the agreement. The Floor has an effective date of November 1, 2005, and a maturity date of November 1, 2010. The Floor hedges the variable cash flows associated with existing variable-rate loan assets that are based on the prime rate (“Prime”). For accounting purposes, the Floor is designated as a cash flow hedge of the overall changes in cash flows on the first Prime-based interest payments received by the Bank affiliate each calendar month during the term of the hedge that, in aggregate for each period, are interest payments on principal from specified portfolios equal to the notional amount of the Floor.

The Company uses the “Hypothetical Derivative Method” described in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”) Implementation Issue No. G20, Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge, for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge ineffectiveness. The effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings (interest income on loans) when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge is recorded as a gain or loss in the consolidated statement of operations as part of fees and other income. The Bank affiliate did not have any hedge ineffectiveness recognized in earnings during the three or six months ended June 30, 2009. The Bank affiliate also monitors the risk of counterparty default on an ongoing basis.

Prepayments in hedged loan portfolios are treated in a manner consistent with the guidance in FAS 133 Implementation Issue No. G25, Cash Flow Hedges: Using the First-Payments-Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans, which allows the designated forecasted transactions to

 

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be the variable, Prime-based interest payments on a rolling portfolio of prepayable interest-bearing loans using the first-payments-received technique, thereby allowing interest payments from loans that prepay to be included in the hedged portfolio.

In addition to the above hedging activities, the Company offers certain derivative products directly to qualified commercial borrowers. The Company hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with third parties. Derivative transactions executed as part of this program are not designated as FAS 133-qualifying hedging relationships and are, therefore, marked to market through earnings each period. Because the derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. As of June 30, 2009, the fair value of the derivative assets was $5.3 million and the offsetting derivative liabilities had a fair value of $5.2 million. Fees earned in connection with the execution of derivatives related to this program are recognized in other income. The derivative asset and liability values below include an adjustment related to the consideration of credit risk required under FAS 157 of less than $0.1 million in the three and six months ending June 30, 2009, respectively. As of June 30, 2009, the Company had 18 interest rate swaps with an aggregate notional amount of $185.1 million related to this program.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2009.

 

     June 30, 2009    December 31, 2008
     Asset derivatives    Liability derivatives    Asset derivatives    Liability derivatives
     Balance
sheet
location
   Fair
value
   Balance
sheet
location
   Fair
value
   Balance
sheet
location
   Fair
value
   Balance
sheet
location
   Fair
value
     (In thousands)

Derivatives designated as hedging instruments:

                       

Interest rate products

   Other
assets
   $ 3,858    Other
liabilities
   $ —      Other
assets
   $ 5,260    Other
liabilities
   $ —  

Derivatives not designated as hedging instruments:

                       

Interest rate products

   Other
assets
     5,269    Other
liabilities
     5,212    Other
assets
     7,762    Other
liabilities
     7,698
                                       

Total

      $ 9,127       $ 5,212       $ 13,022       $ 7,698
                                       

As indicated in the table above, as of June 30, 2009, the Floor designated as a cash flow hedge had a fair value of $3.9 million. For the three and six months ended June 30, 2009, the after-tax change in net unrealized gains/ (losses) on the cash flow hedge reported in the consolidated statements of changes in stockholders’ equity were losses of $0.5 million and $0.7 million, respectively.

Amounts reported in accumulated other comprehensive income related to the Floor will be reclassified to interest income as interest payments are received on the Bank affiliate’s variable-rate assets. During the next 12 months, the Bank affiliate estimates that an additional $2.8 million will be reclassified as an increase to interest income.

During the three and six months ended June 30, 2009, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions relating to the Company’s previously designated interest rate floor becoming probable not to occur. The accelerated amount was an immaterial loss for both the three and six months ended June 30, 2009.

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statement of operations for the three and six months ended June 30, 2009.

 

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Three Months Ended June 30, 2009

Derivatives in FAS 133 cash flow hedging
relationships

   Amount of gain/
(loss) recognized
in OCI on
derivative
(effective
portion)
    Location of gain/
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Amount of gain/
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Location of gain/(loss)
recognized in income on
derivative (ineffective
portion and amount
excluded from
effectiveness testing)
   Amount of gain/(loss)
recognized in income on
derivative (ineffective
portion and amount
excluded from
effectiveness testing)
     (In thousands)

Interest rate products

   $ (78   Interest income    $ 763    Other income / expense    $ —  

 

Three Months Ended June 30, 2009

 

Derivatives not designated as hedging instruments under FAS 133

   Location of gain/(loss)
recognized in income on
derivative
   Amount of gain/
(loss) recognized in
income on
derivative
 
          (In thousands)  

Interest rate products

   Other income    $ (140

 

Six Months Ended June 30, 2009

Derivatives in FAS 133 cash flow hedging
relationships

   Amount of gain/
(loss) recognized
in OCI on
derivative
(effective
portion)
   Location of gain/
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Amount of gain/
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Location of gain/(loss)
recognized in income on
derivative (ineffective
portion and amount
excluded from
effectiveness testing)
   Amount of gain/(loss)
recognized in income on
derivative (ineffective
portion and amount
excluded from
effectiveness testing)
     (In thousands)

Interest rate products

   $ 233    Interest income    $ 1,516    Other income / expense    $ —  

 

Six Months Ended June 30, 2009

 

Derivatives not designated as hedging instruments under FAS 133

   Location of gain/(loss)
recognized in income on
derivative
   Amount of gain/
(loss) recognized in
income on
derivative
 
          (In thousands)  

Interest rate products

   Other income    $ (7

The Bank affiliate has agreements with its derivative counterparties that contain provisions where, if the Bank affiliate defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank affiliate could also be declared in default on its derivative obligations.

The Bank affiliate also has agreements with certain of its derivative counterparties that contain provisions where if the Bank affiliate fails to maintain its status as a well- or adequately-capitalized institution, then the counterparty could terminate the derivative positions and the Bank affiliate would be required to settle its obligations under the agreements.

Certain of the Bank affiliate’s agreements with its derivative counterparties contain provisions where if specified events or conditions occur that materially change the Company’s creditworthiness in an adverse manner, the Bank affiliate may be required to fully collateralize its obligations under the derivative instruments.

As of June 30, 2009, the fair value of derivatives in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $5.2 million. As of June 30, 2009, the Bank affiliate has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $0.3 million against its obligations under these agreements.

 

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(10) Income Taxes

Due to the adoption of plans in the first quarter of 2009 to dispose of BPVI and Sand Hill, the results of operations related to BPVI and Sand Hill were included in discontinued operations. The profits and losses attributable to investors other than the Company are reflected under “Noncontrolling interests” in the table below. The components of income tax (benefit)/ expense for continuing operations, discontinued operations, noncontrolling interests and the Company are as follows:

 

     Six months ended
June 30,
 
     2009     2008  
     (In thousands)  

Loss from continuing operations:

    

Loss before income taxes

   $ (2,476   $ (83,284

Income tax (benefit)/ expense

     (396     6,220   
                

Net loss from continuing operations

   $ (2,080   $ (89,504
                

Effective tax rate, continuing operations

     16.0     nm   

(Loss)/ income from discontinued operations:

    

(Loss)/ income before income taxes

   $ (3,391   $ 1,161   

Income tax (benefit)/ expense

     (1,198     488   
                

Net (loss)/ income from discontinued operations

   $ (2,193   $ 673   
                

Effective tax rate, discontinued operations

     35.3     42.0

Income attributable to noncontrolling interests:

    

Income before income taxes

   $ 1,344      $ 2,764   

Income tax expense

     —          1,123   
                

Net income attributable to noncontrolling interests

   $ 1,344      $ 1,641   
                

Effective tax rate, noncontrolling interests

     0.0     40.6

Loss attributable to the Company

    

Loss before income taxes

   $ (7,211   $ (84,887

Income tax (benefit)/ expense

     (1,594     5,585   
                

Net (loss)/ income attributable to the Company

   $ (5,617   $ (90,472
                

Effective tax rate, attributable to the Company

     22.1     nm   

 

nm = not meaningful

The effective tax rate for the six months ended June 30, 2009 was calculated based on a projected 2009 annual effective tax rate. The effective tax rate from continuing operations was 16.0%, with related tax benefit of $0.4 million. The effective tax rate was less than the statutory rate of 35% due primarily to earnings from tax-exempt investments and tax credits. These savings were partially offset by executive compensation expenses, which cannot be deducted for tax purposes due to restrictions under the U.S. Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP).

The effective tax rate for the six months ended June 30, 2008 was calculated based on the actual results for the second quarter of 2008 and not on a projected annual effective tax rate. The annual effective tax rate could not be predicted due to the potential variability in future financial results. Income taxes for 2008 were affected by non-deductible expenses of $34.3 million for goodwill impairment and $66.0 million for the Westfield re-equitization awards.

 

(11) Noncontrolling Interests

Effective January 1, 2009, the Company adopted FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS 160”), which amended EITF D-98. Both of these pronouncements affect the accounting, reporting and disclosure of the Company’s noncontrolling interests. FAS 160 establishes accounting and reporting standards for noncontrolling interests in certain of our affiliates and for the deconsolidation of affiliates. It clarifies that, in general, a noncontrolling interest in an affiliate is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.

EITF D-98, however, requires that noncontrolling interests containing redemption features that make the interests probable to be redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence of an event that is not solely within the control of the issuer, be reported in a category outside permanent equity, between liabilities and equity on the consolidated balance sheet.

 

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Redeemable noncontrolling interests have been reported at the estimated maximum redemption values for all periods presented in the accompanying consolidated balance sheets in accordance with EITF D-98.

FAS 160 changes the way the consolidated statement of operations is presented in the accompanying consolidated financial statements. It requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the Company and to the noncontrolling interests.

Noncontrolling interests typically consist of equity owned by management of the Company’s respective majority-owned affiliate partners. Net income attributable to noncontrolling interests in the consolidated statements of operations includes the net income allocated to the noncontrolling interest owners of the affiliate partners. Net income attributable to the noncontrolling interest owners was $0.8 million and $1.3 million for the three and six months ended June 30, 2009, respectively, and $0.8 million and $1.6 million for the three and six months ended June 30, 2008, respectively. To the extent that the increase in the estimated maximum redemption amounts exceeds the net income attributable to the noncontrolling interests, such excess reduces net income available to common shareholders for purposes of the EPS computation. Noncontrolling interests which are not redeemable as provided in EITF D-98 are included in stockholders’ equity on the consolidated balance sheets, and are comprised of the capital and undistributed profits owned by the noncontrolling partner. This amounted to $3.5 million at both June 30, 2009 and December 31, 2008.

Each affiliate operating agreement for which noncontrolling interests exist provides the Company and/or the noncontrolling interests with contingent call or put redemption features used to approximate fair value. Fair value is generally defined in the operating agreements as a multiple of earnings before interest, taxes, depreciation, and amortization. The aggregate amount of such redeemable noncontrolling interests at the estimated maximum redemption amounts of $51.4 million and $50.2 million are included in the accompanying consolidated balance sheets at June 30, 2009 and December 31, 2008, respectively. The Company may liquidate these noncontrolling interests in cash, shares of the Company’s common stock, or other forms of consideration dependent on the operating agreement.

FAS 160 has been applied prospectively as of January 1, 2009, except for the presentation and disclosure requirements. The presentation and disclosure requirements have been applied retrospectively for all periods presented in the accompanying consolidated financial statements.

 

(12) Discontinued Operations

During the first quarter of 2009, the Company adopted plans of disposal for BPVI and Sand Hill. Accordingly, the results of operations related to BPVI and Sand Hill are included in the results from discontinued operations. In accordance with FAS 142, the goodwill and intangibles at BPVI and Sand Hill were tested for impairment. In accordance with FAS 160, a loss was recognized in net income and measured as the difference between the consideration received and the carrying amount of the affiliates’ assets and liabilities.

On April 1, 2009, the Company divested its interest in BPVI. BPVI was previously categorized in the Investment Management segment and the results of operations related to BPVI are now included in discontinued operations which reflects income of less than $0.1 million and a loss of approximately $1.6 million for the three and six months ended June 30, 2009, respectively. Of these amounts, $1.4 million of the year to date loss represents the impairment recorded in the first quarter of 2009 related to the remeasurement of the investment in BPVI to its fair value, net of tax. For the three and six months ended June 30, 2008,the Company recognized income of approximately $0.1 million and $0.3 million, respectively, from discontinued operations related to BPVI. In addition, the assets and liabilities of BPVI have been reflected as assets and liabilities attributable to discontinued operations in the accompanying consolidated balance sheets. The Company does not expect any significant future operating cash flows from BPVI. The Company has deferred recognition of potential future gains from contingent payments, if any, until determinable.

On June 30, 2009, the Company divested its interest in Sand Hill. Sand Hill was previously categorized in the Wealth Advisory segment and the results of operations related to Sand Hill are now included in discontinued operations, which reflects losses of approximately $0.4 million and $0.6 million for the three and six months ended June 30, 2009, respectively, and income of $0.1 million and $0.3 million for the three and six months ended June 30, 2008, respectively. In addition, the assets and liabilities of Sand Hill have been reflected as assets and liabilities attributable to discontinued operations in the accompanying consolidated balance sheets. The Company does not expect any significant future operating cash flows from Sand Hill. The Company has deferred recognition of potential future gains from contingent payments, if any, until determinable.

 

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(13) Recent Accounting Developments

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”). FSP FAS 157-4 addresses the factors that determine whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared to the normal market activity. Under FSP FAS 157-4, if the reporting entity has determined that the volume and level of activity has significantly decreased and transactions are not orderly, further analysis is required and significant adjustments to the quoted prices or transactions might be needed. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The Company has adopted FSP 157-4 for the quarter ending June 30, 2009, and there is not a material effect on its financial condition and results of operations.

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (“FAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. FAS 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted FAS 165 during the second quarter of 2009, and its application had no impact on the Company’s condensed consolidated financial statements. In June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which amends the guidance for identifying the primary beneficiary in variable interest entities, requires ongoing assessments for purposes of identifying the primary beneficiary and eliminates the scope exception for qualifying special-purpose entities. FAS 167 will be effective for the Company’s first quarter 2010. The Company is assessing the impact, if any, of FAS 167 on its consolidated financial statements.

In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, which establishes the Accounting Standards Codification (the “Codification”) and SEC interpretive releases as the sources for authoritative GAAP. The Codification will supersede all existing non-SEC accounting and reporting standards under GAAP effective for the Company’s third quarter 2009. The Codification is not intended to change existing GAAP. Accordingly, the Company does not anticipate a material impact on its consolidated financial statements.

 

(14) Subsequent Events

The Company evaluated subsequent events through the date the accompanying unaudited interim financial statements were issued, which was August 7, 2009. Pursuant to the requirements of FAS 165, there were no events or transactions during the subsequent event reporting period that required disclosure in the financial statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of and for the Three and Six Months Ended June 30, 2009

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute 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, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding our strategy, evaluations of future interest rate trends and liquidity, prospects for growth in assets and prospects for overall results over the long term. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond the Company’s control.

Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned “Risk Factors”; continued adverse conditions in the capital and debt markets and the impact of such conditions on the Company’s private banking and asset investment advisory activities; changes in interest rates; competitive pressures from other financial institutions; continued deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay our loans; changes in the value of the securities in our investment portfolio; changes in loan default and charge-off rates; adequacy of loan loss reserves; reductions in deposit levels necessitating increased borrowing to fund loans and investments; the adoption of adverse government regulation; the risk that goodwill and intangibles recorded in the Company’s financial statements will become further impaired; and risks related to the identification and implementation of acquisitions; as well as the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

Executive Summary

The Company offers a full range of wealth management services to high net worth individuals, families, businesses and select institutions through its three reporting segments: Private Banking, Investment Management, and Wealth Advisory. This Executive Summary provides an overview of the most significant aspects of our reporting segments and the Company’s operations in the second quarter of 2009. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following.

During the second quarter of 2009, the Company earned revenues of $96.8 million, a decrease of 17% compared to revenues of $117.1 million for the same period in 2008. Total operating expenses were $82.5 million for the second quarter of 2009, a decrease of 50% compared to total operating expenses of $164.5 million for the same period in 2008. The Company reported a net loss from continuing operations of $7.3 million, compared to a net loss from continuing operations of $80.1 million for the same period in 2008. Net loss attributable to the Company for the second quarter of 2009 was $8.5 million, as compared to a net loss attributable to the Company of $80.6 million for the same period in 2008. The Company reported a net loss available to common shareholders of $0.24 per share for the second quarter of 2009 compared to a net loss of $2.11 per share for the same period in 2008. The second quarter 2009 EPS were adversely impacted by non-cash accounting adjustments which reduced income available to the common shareholders by $8.1 million, or $0.12 per share. The major differences between the second quarter of 2008 and 2009 include the non-cash compensation charge of $66.0 million recorded in conjunction with the Westfield re-equitization and a non-cash impairment charge of $17.4 million recorded in conjunction with the second quarter 2008 impairment at FPB.

The key items that affected the Company’s second quarter 2009 results include:

 

  1. A decrease in Assets Under Management (“AUM”), primarily due to market depreciation over the past year, resulted in a reduction in the Company’s investment management fees of $11.8 million compared to the quarter ended June 30, 2008.

 

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  2. Net interest margin (“NIM”) compression was due to several factors including a higher percentage of the Company’s assets in lower yielding short-term liquid investments, lower rates earned on residential mortgages as adjustable rate mortgages have reset with lower rates, and an increase in non-performing assets.

 

  3. The Company recognized a $3.2 million expense during the second quarter of 2009 related to the special FDIC assessment that was announced during the first quarter of 2009. In addition, the FDIC’s assessment rates increased in the second quarter of 2009 as compared to the second quarter of 2008.

 

  4. In addition, the Company completed its sale of BPVI and Sand Hill during the second quarter of 2009; as a result, all individual revenue and expense items have been reclassified to discontinued operations.

The Company’s Investment Management and Wealth Advisory segments reported positive earnings in the second quarter of 2009, as compared to the Company’s Private Banking segment which reported negative earnings. Segment results exclude the effect of discontinued operations, interest expense on certain portions of long-term debt and the results of unconsolidated affiliates; and are reduced by net income attributable to noncontrolling interests.

The Company’s Private Banking segment reported a net loss of $5.0 million in the second quarter of 2009, compared to a net loss of $20.2 million for the same period in 2008. The major differences in the lower net loss in 2009 were the $17.4 million of impairment charges in the second quarter of 2008 and none in 2009, and a decrease in provision for loan loss expense of $7.8 million in the second quarter of 2009 compared to the same period in 2008. These expense savings were partially offset by an increase in FDIC insurance expense in the second quarter of 2009 of $3.9 million as compared to the same period in 2008. The Company’s Private Banking segment reported revenue declines of $1.0 million, or 1%, in the second quarter of 2009 compared to the same period in 2008. Decreased revenues were primarily due to lower net interest income and decreased investment management and trust fees, slightly offset by the gains recognized from the sale of investments and from the gain on sale of loans and OREO. Net interest income decreased $1.9 million, or 3%, in the second quarter of 2009 compared to the same period in 2008, primarily due to the NIM compression. The NIM compression in the second quarter of 2009 was a result of several factors including a higher percentage of the Company’s assets in lower yielding short-term liquid investments, lower rates earned on residential mortgages as adjustable rate mortgages have reset with lower rates, as well as the increase in non-performing loans. These declines in interest income have been partially offset by the higher percentage of interest bearing liabilities that have shifted to lower cost deposits from borrowed funds, as well as by the steep yield curve. Also, the average balance of commercial loans, including construction and land loans, decreased by $17.3 million in the second quarter 2009 compared to the same period in 2008, primarily due to three of our affiliate Banks reducing the amount of, or not originating, new construction and land loans. However, the New England and Northern California Banks have continued to lend, in certain cases, to the construction industry. Investment management and trust fees at the Banks decreased $1.5 million, or 18%, compared to the second quarter of 2008 as a result of declines in AUM of $0.7 billion, or 14%, from June 30, 2008. 74% of the decrease was attributable to market depreciation, and the remaining 26% was attributable to outflows. AUM at June 30, 2009 for the Banks was $4.0 billion. Total operating expenses at the Banks for the second quarter of 2009 decreased $8.3 million, or 14%, compared to the same period in 2008. The decrease is primarily due to the non-cash impairment charge recorded in the second quarter of 2008 of $17.4 million, partially offset by the increase in FDIC insurance expense. Current quarter operating expenses include the special FDIC insurance assessment of $3.2 million in addition to the higher regular insurance assessment of $1.8 million. On May 22, 2009 the FDIC Board of Directors adopted its final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus its Tier 1 capital as of June 30, 2009. The FDIC has the discretion to charge additional special assessments in 2009.

The Company’s Investment Management segment reported net income of $2.9 million in the second quarter of 2009, compared to a net loss of $59.9 million for the same period in 2008. The Company’s Investment Management segment continues to be negatively affected by the year over year decline in the equity markets. Revenues decreased $11.0 million, or 33%, in the second quarter of 2009 compared to the same period in 2008 as a result of declines in AUM of $6.5 billion, or 29%, from June 30, 2008. Market depreciation for the twelve months ended June 30, 2009 was $6.4 billion, with flows relatively flat for the same period. AUM at June 30, 2009 at the Investment Management firms was $15.8 billion. Total operating expenses at the Investment Management firms for the second quarter of 2009 decreased $70.9 million, or 80%, compared to the same period in 2008. The decrease in expenses is primarily due to non-cash compensation charge of $66.0 million recorded in the second quarter of 2008 in conjunction with the re-equitization of Westfield. Other drivers of the expense decrease include decreased amortization expense, and reduced fixed and variable compensation expenses as a result of decreased salaries and reduced bonus accruals.

The Company’s Wealth Advisory segment reported net income of $1.2 million in the second quarter of 2009, consistent with the net income of $1.2 million for the same period in 2008. The Company’s Wealth Advisory segment also was negatively affected by the challenging market conditions. Revenues decreased $0.8 million, or 7%, in the second quarter of 2009 compared to the same period in 2008 as a result of declines in AUM of $1.1 billion, or 13%, from June 30, 2008.

 

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Market depreciation for the twelve months ended June 30, 2009 was $1.2 billion, slightly offset by inflows of $0.1 billion. AUM at June 30, 2009 at the Wealth Advisory firms was $7.5 billion. Total operating expenses at the Wealth Advisory firms for the second quarter of 2009 decreased $0.7 million, or 8%, compared to the same period in 2008. The decrease is primarily due to decreases in fixed and variable compensation expenses as a result of decrease in staff and reduced bonus accruals.

Critical Accounting Policies

Critical accounting policies are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments are the allowance for loan losses, the valuation of goodwill and intangible assets and analysis for impairment, stock-based compensation, and tax estimates. These policies are discussed in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – III. D. Critical Accounting Policies” in the Company’s 2008 Annual Report on Form 10-K. There have been no changes to these policies through the filing of this report on Form 10-Q.

Financial Condition

Total Assets. Total assets decreased $6.1 million, less than 1%, to $7.3 billion at June 30, 2009 from $7.3 billion at December 31, 2008. The Company’s assets have been relatively flat this year as overall loan growth has slowed and increases in deposits have been used to reduce the balance of borrowed funds.

Cash and Cash Equivalent. Cash and cash equivalents (consisting of cash and due from banks and federal funds sold) increased $102.7 million, or 26%, to $496.1 million, or 7% of total assets, at June 30, 2009, from $393.3 million, or 5% of total assets, at December 31, 2008. The increase is primarily related to the Banks keeping higher balances in deposits at the Federal Reserve. Currently, the interest that the Federal Reserve pays on deposits is similar to what the Banks would earn on short-term investments. Therefore, the Banks see the Federal Reserve as an alternative to investing liquid funds on a short-term basis.

Investments. Total investments (consisting of investment securities available-for-sale, and held-to-maturity) decreased $66.2 million, or 8%, to $747.0 million, or 10% of total assets, at June 30, 2009, from $813.2 million, or 11% of total assets, at December 31, 2008. Several of the Banks have sold a portion of their investment portfolio in the first six months of 2009 and realized net gains on the transactions. The Banks’ investment portfolios primarily consist of investment grade securities that have increased in fair value as interest rates have fallen. The proceeds from the sale of the securities have been reinvested in either higher yielding loans, kept in cash and cash equivalents, or used to repay borrowed funds such as FHLB borrowings. The Banks acquire securities for various purposes such as providing a source of income through interest income or through the subsequent sale of the securities, liquidity, and to manage interest rate and liquidity risk. The sale of investments resulted in the Banks recognizing gains due to changes in interest rates which were previously recorded as unrealized gains within other comprehensive income. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements—Note 4: Investments” for a summary of the Company’s investment securities.

Stock in Federal Home Loan Banks and Banker’s Bank. At June 30, 2009 and December 31, 2008, respectively, the Company had $59.3 million and $59.0 million in FHLB and Banker’s Bank stock. At both dates, these balances were primarily in FHLB stock. The Company carries the FHLB and Banker’s Bank stock at the original cost basis (par value). Each of our Banks is a member of their local FHLB located in either Boston, Atlanta, Seattle, or San Francisco. At each period end, the Company evaluates its investment in the respective FHLB’s stock and Banker’s Bank stock for other-than-temporary impairment. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the asset, the liquidity position of the respective FHLBs, the actions being taken by the respective FHLBs to address their regulatory situations, and the Company’s current intention not to sell or redeem any of its investment in the respective FHLBs, and the determination that it is not more likely than not that the Company would be required to sell or redeem any of its investments in the respective FHLBs, the Company has not recognized an other-than-temporary impairment loss with respect to stock in the FHLBs and Banker’s Bank.

Loans held for sale. Loans held for sale increased $2.6 million, or 7%, to $39.4 million at June 30, 2009 from $36.8 million at December 31, 2008. The increase is primarily related to the timing and volume of residential loans originated for sale in the secondary market. When mortgage rates are low, the Banks see an increase in the percentage of customer requests for fixed rate mortgage loans as compared to adjustable rate mortgages. The Banks sell the majority of their fixed rate loans in the secondary market to mitigate interest rate risk. Included in the total loans held for sale at June 30, 2009 is $18.6 million of the Company’s non-strategic Southern California portfolio loans. During the first half of the year the Company has been able to decrease its non-strategic portfolio from 18 loans, with a carrying value of $27.2 million, at December 31, 2008 to 12 loans, with a carrying value of $18.6 million, at June 30, 2009. The Company continues to actively market the sale of the remaining loans.

 

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Loans. Total portfolio loans increased $74.1 million, or 1%, to $5.5 billion, or 76% of total assets, at June 30, 2009, from $5.5 billion, or 75% of total assets, at December 31, 2008. The Company has seen slower overall growth in the loan portfolio as the increases in our Northern California and New England loan portfolios have been offset by the declines in the Sothern California, South Florida, and Pacific Northwest portfolios. The commercial loan portfolio has experienced the most growth in 2009 with the balance increasing $127.8 million, or 5%. Three of the Banks have reduced the amount of, or stopped originating, new construction and land loans so we are seeing a decline in this category as existing loans are repaid. However, the New England and Northern California Banks have continued to lend, in certain cases, to the construction industry. We have also seen a decline in residential mortgages as many of our customers are refinancing their current adjustable rate mortgages with fixed rate mortgages, which the Banks typically sell in the secondary market. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements—Note 6: Loans Receivable” for a summary of the Company’s loan portfolio by geography.

Risk Elements. The Company’s non-performing assets include non-accrual loans (including the Southern California non-strategic loans held for sale), OREO and repossessed assets. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of deeds in lieu of foreclosure. In addition, the Company may, under certain circumstances, restructure loans as a concession to a borrower. Such restructured loans are generally included in impaired loans. Non-performing assets increased $38.0 million, or 35%, to $146.6 million, or 2.02% of total assets, at June 30, 2009, from $108.6 million, or 1.49% of total assets, at December 31, 2008. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 6: Loans Receivable” for a summary of the Company’s Private Banking credit quality by geography.

The increases in non-performing assets, past due loans and classified loans are the result of continued weakness in the U.S. housing and labor markets and increased bankruptcy filings. This weakening has caused a related deterioration in real estate and land loans as prices for these assets continue to decline.

Total non-accrual loans at June 30, 2009 were $129.5 million, an increase of $35.6 million, or 38%, from $93.9 million at December 31, 2008. Included with non-accrual loans are $18.6 million of the Southern California non-strategic loans held for sale. For a detailed breakout of non-accrual loans by geographic region based on the location of the lender, refer to Part 1. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 6: Loans Receivable”.

Of the total non-accrual loans, $43.2 million, or 34%, of the total is in construction and land loans, $31.6 million, or 25%, is in commercial real estate loans, $21.2 million, or 16%, is in residential mortgage loans, $18.6 million, or 14%, is in loans held for sale, $11.8 million, or 9%, is in commercial and industrial loans, and $3.1 million, or 2%, is in other loan categories.

OREO and repossessed assets consists of 18 OREO properties with a carrying value of $17.1 million at June 30, 2009, an increase of $2.4 million, or 16%, as compared to $14.7 million at December 31, 2008. The increase was due to four additional properties in Northern California, three additional properties in the Pacific Northwest, two additional properties in South Florida, and one additional property in Southern California, offset by the disposition of one property in New England, as well as partial dispositions and write-downs of various properties in New England, South Florida, and the Pacific Northwest. The fair value of OREO is defined as the cash price that might reasonably be anticipated in a current sale (within 12 months), less estimated selling costs, or, in the event that a current sale is unlikely, all cash flows generated by the property on a discounted basis. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements—Note 6: Loans Receivable” for a summary of the Company’s Private Banking credit quality by geography.

Additional writedowns of $0.9 million were taken during the year on loans in Southern California which were previously transferred to the loans held for sale category. These write downs were the result of further declines in the collateral values of five loans. The loss associated with the write downs is included with the gain on sale of loans and other real estate owned, net on the consolidated statement of operations. The Company recorded net gains of $3.4 million on sales of or payments on these loans during the year.

At June 30, 2009, loans with an aggregate balance of $38.3 million, or 0.69% of total loans, were 30-89 days past due, an increase of $14.6 million, or 62%, as compared to $23.7 million, or 0.43% of total loans, at December 31, 2008. The Company believes most of these loans are adequately secured at the present time and the payment performance of these borrowers varies from month to month. Further deterioration in the local economy or in the real estate market where the collateral is located could lead to these delinquent loans transferring to non-accrual status with a corresponding downgrade of the loans’ credit ratings. Downgrades in credit ratings generally result in additional charges to the provision for loan losses.

 

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The Banks’ general policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, loans that have become 90 days past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in process of collection. There were no loans 90 days past due, but still accruing, as of June 30, 2009, or December 31, 2008.

$28.6 million of net charge-offs were recorded through the first six months of 2009. For a detailed breakout of net loans charged off by geographic region based on the location of the lender, refer to Part 1. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 7: Allowance for Loan Losses”.

Non-performing assets and delinquent loans are affected by factors such as the economic conditions in the Banks’ geographic regions, interest rates, and seasonality. These factors are generally not within the Company’s control. A decline in the fair values of the collateral for the non-performing assets could result in additional future expense depending on the timing and severity of the decline. The Banks continue to evaluate the underlying collateral of each non-accrual loan and pursue the collection of interest and principal. Where appropriate, the Banks obtain updated appraisals on the collateral.

Loans that evidence weakness or potential weakness related to repayment history, the borrower’s financial condition, or other factors are reviewed by the Banks’ management to determine if the loan should be adversely classified. Delinquent loans may or may not be adversely classified depending upon management’s judgment with respect to each individual loan. Classified loans are classified as either substandard or doubtful under the rating system adopted by the Banks based on the criteria established by federal bank regulatory authorities.

At June 30, 2009, the Company had classified loans of $233.7 million, an increase of $85.7 million, or 58%, compared to $148.0 million at December 31, 2008. Increases in classified loans were recorded in all regions during the first half of 2009. The largest absolute change was in the South Florida region which increased $33.9 million, or 59%, as compared to December 31, 2008. Over the same period, the Northern California region increased $19.3 million, or more than 100%; the Pacific Northwest region increased $14.3 million, or 41%; the New England region increased $11.3 million, or more than 100%; and the Southern California region increased $6.9 million, or 17%. For a detailed breakout of classified loans by geographic region based on the location of the lender, refer to Part 1. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 6: Loans Receivable”. Included in the Southern California classified loans are $17.5 million of loans in the held for sale category. The increases in classified loans were primarily due to deteriorating real estate and economic conditions in certain areas where the Banks conduct business. Impaired loans are generally included with the balance of classified loans. Impaired loans totaled $123.7 million at June 30, 2009, an increase of $28.9 million, or 30%, compared to $94.8 million at December 31, 2008. $41.5 million of the impaired loans had $9.1 million in specific allocations to the general reserve. The remaining $82.2 million of impaired loans did not have specific allocations to the general reserve either due to a previous charge off of a portion of the impaired loan or due to the abundance of collateral supporting the impaired loan. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 6: Loans Receivable” for a summary of the Private Banking credit quality data by geography.

Allowance for Loan Losses. The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled $101.4 million at June 30, 2009.

The allowance for loan losses at June 30, 2009 increased $12.1 million, or 14%, from December 31, 2008. The increase in the allowance for loan losses is a result of the provision for loan losses of $40.7 million, partially offset by charge-offs, net of recoveries, of $28.6 million. In 2009 the Company experienced continued deterioration in economic conditions and the values of real estate and land where our Banks are located. This deterioration has caused the Company’s non-performing loans and classified loans to increase and, in some cases, has led to charge-offs. As a result of these issues, the Company has incurred significant provision for loan losses. This increase reflects the higher level of non-performing, past-due, and classified loans; other risk factors; and growth in the loan portfolio. Approximately 81% of the provision recorded in the first half of 2009 was related to the Southern California, South Florida and Pacific Northwest regions. Approximately 91% of the charge-offs, net of recoveries, recorded in the first half of 2009 were related to the Southern California, South Florida and Pacific Northwest regions. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses” for an analysis of the Company’s allowance for loan losses.

Management evaluates currently available internal and external factors in establishing the allowance for loan losses, such as changes in the local economic market, concentration of risk and decreases in local property values. While management’s allowance for loan losses as of June 30, 2009 is considered adequate, under adversely different conditions or assumptions the Company would need to increase the allowance. 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 full allowance for loan losses policy may be found in Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies”.

 

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Income Taxes Receivable and Deferred. Income taxes receivable and deferred decreased $66 million, or 51%, to $64.4 million at June 30, 2009 from $130.4 million at December 31, 2008. The decrease is primarily due to income tax refunds received during the first half of 2009.

Other Assets. Other assets, consisting of prepaid expenses, investment in partnerships, amounts due from brokers for unsettled security sales, and other receivables, decreased $27.1 million, or 19%, to $116.0 million at June 30, 2009 from $143.1 million at December 31, 2008. The decrease is due primarily to the settlement of the receivable related to the sale of securities at December 31, 2008.

Deposits. The Company experienced an increase in total deposits of $337.0 million, or 7%, to $5.3 billion, at June 30, 2009, from $4.9 billion at December 31, 2008. The increase in deposits is primarily driven by organic growth of the Banks’ core deposits and retail certificates of deposit. The FDIC’s Temporary Liquidity Guarantee Program (the “TLGP”) instituted in the fourth quarter of 2008 helped to stabilize the deposit environment enabling the Company’s core deposits to grow in the first six months of 2009. The TLGP insures all of the Company’s demand deposit accounts and certain NOW accounts. Certificates of deposit at June 30, 2009 include $405.8 million in the Certificate of Deposit Account Registry Service, or CDARS, an increase of $261.4 million from December 31, 2008. CDARS provides depositors with up to $50 million in FDIC insurance coverage through its reciprocal deposit placement service. CDARS enables the Banks to distribute depositors’ monies among multiple CDs in increments less than the current FDIC insurance limit at other CDARS member banks across the country.

The following table shows the composition of the Company’s deposits at June 30, 2009 and December 31, 2008:

 

     June 30, 2009     December 31, 2008  
     Balance    As a % of
total
    Balance    As a % of
total
 
          (In thousands)       

Demand deposits (non-interest bearing)

   $ 911,179    17   $ 957,336    19

NOW

     437,530    8     390,338    8

Savings

     155,128    3     146,179    3

Money market

     1,625,737    32     1,523,092    32

Certificates of deposit under $100,000 (1)

     1,058,220    20     995,994    20

Certificates of deposit $100,000 or greater (1)

     1,069,793    20     907,666    18
                          

Total deposits

   $ 5,257,587    100   $ 4,920,605    100
                          

 

(1) Included in certificates of deposit are brokered and CDARS CDs of $495.0 million and $405.8 million, respectively, as of June 30, 2009. As of December 31, 2008, brokered and CDARS CDs were $628.6 million and $144.4 million, respectively.

Borrowings. Total borrowings (consisting of FHLB borrowings, securities sold under agreements to repurchase (“repurchase agreements”), junior subordinated debentures, and other long-term debt) decreased $314.6 million, or 21%, to $1.2 billion at June 30, 2009 from $1.5 billion at December 31, 2008. FHLB borrowings (net of unamortized fair valuation adjustments) decreased $148.1 million, or 16%. FHLB borrowings are generally used to provide additional funding for loan growth when it is in excess of deposit growth. Repurchase agreements decreased $117.6 million, or 40%. Repurchase agreements are generally linked to commercial demand deposit accounts with an overnight sweep feature. Junior subordinated debentures and other long-term debt decreased $48.9 million or 17%, to $241.7 million at June 30, 2009 from $290.6 million at December 31, 2008. The Company repurchased $48.9 million of its 3% Contingent Convertible Senior Notes due 2027 (“Notes”) during the first six months of 2009. As of June 30, 2009 the Notes outstanding were $3.6 million. The Company called and paid off the remaining $3.6 million in July 2009.

Other liabilities. Other liabilities, consisting of deferred acquisition obligations, accrued interest, bonus and other accrued expenses, decreased $25.2 million, or 20%, to $97.8 million at June 30, 2009 from $122.9 million at December 31, 2008. The decrease is due to the payments on the 2008 accrued compensation, and the reduction in the Company’s deferred acquisition obligations to DGHM and Anchor as a result of the payments made in the first quarter of 2009 pursuant to the terms of the acquisition agreements.

 

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Liquidity

Liquidity is defined as the Company’s ability to generate cash adequate to meet its needs for day-to-day operations and material long and short-term commitments. Liquidity risk is the risk of potential loss if the Company were unable to meet its funding requirements at a reasonable cost. The Company manages its liquidity based on demand, commitments, specific events and uncertainties to meet current and future financial obligations of a short-term nature. The Company’s objective in managing liquidity is to respond to the needs of depositors and borrowers as well as to earnings enhancement opportunities in a changing marketplace.

Management is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. At June 30, 2009, consolidated cash and cash equivalents, other interest bearing certificates of deposit and securities available-for-sale, less securities pledged, amounted to $922.1 million, or 13% of total assets, as compared to $733.6 million, or 10% of total assets, at December 31, 2008. In addition, the Banks have available borrowing capacity through the FHLB totaling $860.2 million as of June 30, 2009. Combined, this liquidity totals $1.8 billion, or 25% of total assets and 34% of total deposits as of June 30, 2009. The Banks use a portion of their securities as collateral for borrowings and other purposes, which reduces the amount of securities they could sell in the short term.

During the fourth quarter of 2008, the Company received $154.0 million in funding through the U.S. Treasury’s Capital Purchase Program (“CPP”). The Banks have increased total loans and investments in mortgage backed securities by $119.9 million and $169.3 million, respectively, since receiving the funds.

Holding Company Liquidity. The Company and several of the Company’s majority-owned affiliate partners have put and call options that would require the Company to purchase (and the majority-owned affiliate partners to sell) the remaining minority ownership interests in these companies at the then fair value. These put and call options are discussed in detail in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – II. E. Liquidity” in the Company’s 2008 Annual Report on Form 10-K. At June 30, 2009, the estimated maximum redemption value for these affiliates related to outstanding put options was approximately $51.4 million, of which $28.0 million could be redeemed within the next 12 months, and is classified on the consolidated balance sheet as redeemable noncontrolling interests in accordance with EITF D-98.

The Holding Company’s primary sources of funds are dividends from its affiliate partners, primarily the Investment Managers and Wealth Advisors, access to the capital and debt markets, and private equity investments. See Part II. Item 5. “Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Repurchases of Equity Securities” in the Company’s 2008 Annual Report on Form 10-K. Dividends from the Banks are limited by various regulatory requirements relating to capital adequacy and retained earnings.

At June 30, 2009, Holding Company cash and cash equivalents amounted to $129.9 million. Management believes that the Company has adequate liquidity to meet its commitments for the foreseeable future.

The Company is required to pay interest quarterly on its junior subordinated debentures and semi-annually on its long-term debt. The estimated cash required for the interest payments for the remainder of 2009 on the junior subordinated debentures is approximately $6.4 million based on the debt outstanding at June 30, 2009 and estimated interest rates. At June 30, 2009, the Company had $3.6 million in outstanding long-term Notes. The Company called and paid off the remaining $3.6 million in July 2009.

The Company presently plans to pay cash dividends on its common and preferred stock on a quarterly basis. Based on the current dividend rate and estimated shares outstanding, the Company estimates the amount to be paid out for the remainder of 2009 for dividends to common shareholders and to the holder of the convertible Preferred Series B stock will be approximately $1.5 million. Based on the Company’s Preferred Series C stock outstanding and the dividend rate, the Company expects to pay $3.9 million in cash dividends on Preferred Series C stock for the remainder of 2009.

While the Company believes its current and anticipated capital levels are adequate to support its business plan, the capital and credit markets have been experiencing volatility and disruption for more than 12 months. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

Bank Liquidity. Each affiliate Bank is a member of its regional FHLB, and as such, has access to short and long-term borrowings from such institution, as long as there are no regulatory restrictions on this type of borrowing. At June 30, 2009,

 

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the Banks had available credit of $860.2 million from the various FHLBs. Liquid assets (i.e., cash and cash equivalents, other interest bearing certificates of deposit and securities available-for-sale, less securities pledged) and available credit at the FHLBs of the Banks totaled $1.8 billion at June 30, 2009, which equals 25% of the Banks’ total assets and 33% of the Banks’ total deposits. The FHLB can change the advance amounts that banks can utilize based on the bank’s current financial condition or publicly available supervisory actions. Decreases in the amount of FHLB borrowings available to our Banks would lower their liquidity and possibly limit the Bank’s ability to grow in the short term. Management believes that the Banks have adequate liquidity to meet their commitments for the foreseeable future.

In addition to the above liquidity, the Banks have access to the Federal Reserve Board’s (“FRB’s”) discount window facility, which can provide short-term liquidity as “lender of last resort,” brokered certificates of deposit, and federal funds lines. The use of non-core funding sources, including brokered deposits and borrowings, by our Banks may be limited by regulatory agencies. Generally, the regulatory agencies prefer that banks rely on core-funding sources for liquidity.

If the Banks were no longer able to utilize the FHLBs for borrowing, collateral currently used for FHLB borrowings could be transferred to other facilities such as the FRB’s discount window. In addition, the Banks could increase their usage of brokered certificates of deposit. Other borrowing arrangements may have higher rates than the FHLB would typically charge.

Capital Resources

The Company’s stockholders’ equity at June 30, 2009 was $644.5 million, or 9% of total assets, compared to $645.2 million, or 9% of total assets at December 31, 2008. The decrease in the Company’s stockholders’ equity in the first six months of 2009 was primarily the result of the current period net loss and dividends paid, offset by common stock issued for deferred acquisition payments.

As a bank holding company, the Company is subject to various regulatory capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. For example, under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks, which are wholly owned subsidiaries of the Company, must each meet specific capital guidelines that involve quantitative measures of each Bank’s assets and certain off-balance sheet items as calculated under regulatory guidelines. The Banks’ 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 with respect to certain nonbanking activities, including adjustments in connection with off-balance sheet items.

To be categorized as “well capitalized,” the Company and the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. In addition, the Company and the Banks cannot be subject to any written agreement, order or capital directive or prompt corrective action to be considered “well capitalized.”

Although the Company and all of the Banks within the segment maintain capital at levels that would otherwise be considered “well capitalized” under the applicable regulations, for supervisory reasons, the Southern California and Pacific Northwest banks, and therefore the Company, are not deemed “well capitalized.”

The Company contributed an additional $37.0 million of capital in the first six months of 2009 to certain of its Bank affiliates. These capital contributions were made to meet applicable regulatory capital requirements and to increase regulatory capital levels given the economic conditions in the regions in which these affiliate Banks operate and increased uncertainty in the local real estate markets.

 

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The following table presents actual capital amounts and regulatory capital requirements as of June 30, 2009 and December 31, 2008:

 

     Actual     For capital adequacy
purposes
    To be well capitalized
under prompt corrective
action provisions
 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  
                (In thousands)             

As of June 30, 2009

               

Total risk-based capital

               

Company

   $ 783,606    15.51      $ 404,266    >8.0   $ 505,333    >10.0

Boston Private Bank

     242,002    12.10        159,951    8.0        199,939    10.0   

Borel

     155,787    11.37        109,627    8.0        137,034    10.0   

FPB

     57,986    17.69        26,218    8.0        32,772    10.0   

Gibraltar

     128,490    12.43        82,671    8.0        103,339    10.0   

Charter

     36,308    15.70        18,505    8.0        23,131    10.0   

Tier I risk-based capital

               

Company

     719,448    14.24        202,133    4.0        303,200    6.0   

Boston Private Bank

     216,970    10.85        79,976    4.0        119,964    6.0   

Borel

     138,639    10.12        54,814    4.0        82,220    6.0   

FPB

     53,782    16.41        13,109    4.0        19,663    6.0   

Gibraltar

     115,397    11.17        41,336    4.0        62,003    6.0   

Charter

     33,275    14.39        9,252    4.0        13,878    6.0   

Tier I leverage capital

               

Company

     719,448    10.29        279,559    4.0        349,448    5.0   

Boston Private Bank

     216,970    7.34        118,291    4.0        147,863    5.0   

Borel

     138,639    9.38        59,136    4.0        73,920    5.0   

FPB

     53,782    11.30        19,038    4.0        23,798    5.0   

Gibraltar

     115,397    7.67        60,208    4.0        75,260    5.0   

Charter

     33,275    6.97        19,093    4.0        23,866    5.0   

As of December 31, 2008

               

Total risk-based capital

               

Company

   $ 797,726    15.47   $ 412,500    >8.0   $ 515,625    >10.0

Boston Private Bank

     229,476    11.57        158,678    8.0        198,347    10.0   

Borel

     145,247    10.95        106,155    8.0        132,693    10.0   

FPB

     52,835    13.74        30,771    8.0        38,463    10.0   

Gibraltar

     121,799    11.67        83,461    8.0        104,326    10.0   

Charter

     29,053    11.01        21,109    8.0        26,386    10.0   

Tier I risk-based capital

               

Company

     731,768    14.19        206,250    4.0        309,375    6.0   

Boston Private Bank

     204,666    10.32        79,339    4.0        119,008    6.0   

Borel

     129,625    9.77        53,077    4.0        79,616    6.0   

FPB

     48,003    12.48        15,385    4.0        23,078    6.0   

Gibraltar

     108,685    10.42        41,730    4.0        62,595    6.0   

Charter

     25,621    9.71        10,554    4.0        15,831    6.0   

Tier I leverage capital

               

Company

     731,768    10.52        278,189    4.0        347,737    5.0   

Boston Private Bank

     204,666    6.79        120,652    4.0        150,815    5.0   

Borel

     129,625    9.08        57,110    4.0        71,387    5.0   

FPB

     48,003    8.43        22,772    4.0        28,466    5.0   

Gibraltar

     108,685    7.23        60,098    4.0        75,121    5.0   

Charter

     25,621    6.27        16,354    4.0        20,442    5.0   

 

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Results of Operations for the Three and Six Months Ended June 30, 2009 versus June 30, 2008

Net loss attributable to the Company. The Company recorded a net loss attributable to the Company for the three and six months ended June 30, 2009 of $8.5 million, or $0.24 per share, and $5.6 million, or $0.33 per share, respectively. Net loss attributable to the Company for the same periods in 2008 was $80.6 million, or $2.11 per share, and $90.5 million, or $2.39 per share, respectively.

Selected financial highlights are presented in the table below:

 

     Three months ended June 30,     Six months ended June 30,  
     2009     2008     % Change     2009     2008     % Change  
     (In thousands, except per share data)  

Net interest income

   $ 50,800      $ 51,721      -2   $ 101,419      $ 101,336      0

Fees and other income

     46,040        65,355      -30     93,695        129,879      -28
                                    

Total revenue

     96,840        117,076      -17     195,114        231,215      -16
                                    

Provision for loan losses

     24,063        31,904      -25     40,700        51,552      -21

Operating expense

     82,462        81,128      2     156,890        158,947      -1

Westfield re-equitization awards

     —          66,000      nm        —          66,000      nm   

Impairment of goodwill and intangibles

     —          17,400      nm        —          38,000      nm   

Income tax (benefit)/expense

     (2,353     739      nm        (396     6,220      nm   
                                    

Net loss from continuing operations

     (7,332     (80,095   -91     (2,080     (89,504   -98

Net (loss)/ income from discontinued operations

     (318     272      nm        (2,193     673      nm   
                                    

Net loss before attribution to noncontrolling interests

     (7,650     (79,823   -90     (4,273     (88,831   -95

Less: net income attributable to noncontrolling interests

     833        805      3     1,344        1,641      -18
                                    

Net loss attributable to the Company

   $ (8,483   $ (80,628   -89   $ (5,617   $ (90,472   -94
                                    

 

nm = not meaningful

Net interest income. Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest earning assets and the average rate paid on total interest-bearing liabilities. NIM is the amount of net interest income, on a fully taxable-equivalent (“FTE”) basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earnings assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities.

Net interest income for the second quarter of 2009 was $50.8 million, a decrease of $0.9 million, or 2%, compared to the same period in 2008. The $0.9 million decrease is the result of $4.8 million in rate changes (change in average interest rate multiplied by the prior year average balance), net of $3.9 million in increased business volumes (change in average balance multiplied by the prior year average rate). The NIM was 3.14% for the second quarter of 2009, a decrease of 25 basis points compared to the same period in 2008. Net interest income for the six months ended June 30, 2009 was $101.4 million, consistent with net interest income for the same period in 2008. The Company’s NIM was 3.16% for the six months ended June 30, 2009, a decrease of 19 basis points compared to the same period in 2008. The decrease in the Company’s NIM for the three and six months ended June 30, 2009 compared to the same period in 2008 is a result of several factors including a higher percentage of the Company’s assets in lower yielding short-term liquid investments, lower rates earned on residential mortgages as adjustable rate mortgages have reset with lower rates, as well as the increase in non-performing loans. These declines in interest income have been partially offset by the higher percentage of interest bearing liabilities that have shifted to lower cost deposits from borrowed funds, as well as by the steep yield curve.

 

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The following tables set forth the composition of the Company’s NIM on a FTE basis for the three and six months ended June 30, 2009 and June 30, 2008:

 

     Three months ended
June 30, 2009
    Three months ended
June 30, 2008
 
     Average
balance
   Interest
earned/
paid (1)
   Average
rate
    Average
balance
   Interest
earned/
paid (1)
   Average
rate
 
               (In thousands)            

Earning assets:

                

Taxable investment securities

   $ 207,667    $ 1,701    3.28   $ 381,433    $ 3,498    3.67

Non-taxable investment securities (1)

     201,160      2,555    5.08     235,185      3,146    5.35

Mortgage-backed securities

     386,677      4,183    4.13     97,720      1,301    5.33

Federal funds sold and other

     404,354      372    0.37     158,452      1,131    2.86

Loans (2)

                

Commercial and construction (1)

     3,195,460      46,740    5.83     3,212,768      53,628    6.62

Residential mortgage

     1,857,844      26,255    5.65     1,833,659      27,306    5.96

Home equity and other consumer

     409,886      4,571    4.42     345,535      4,873    5.64
                                        

Total loans

     5,463,190      77,566    5.66     5,391,962      85,807    6.33
                                        

Total earning assets

   $ 6,663,048    $ 86,377    5.16   $ 6,264,752    $ 94,883    6.03
                                        

Interest-bearing liabilities:

                

Deposits

   $ 4,190,678    $ 21,478    2.06   $ 3,690,002    $ 24,798    2.70

Borrowed funds

     1,260,068      12,238    3.85     1,826,641      16,490    3.58
                                        

Total interest-bearing liabilities

   $ 5,450,746    $ 33,716    2.47   $ 5,516,643    $ 41,288    2.99
                                        

Net interest income

      $ 52,661         $ 53,595   
                        

Interest rate spread

         2.69         3.04

Net interest margin

         3.14         3.39
     Six months ended
June 30, 2009
    Six months ended
June 30, 2008
 
     Average
balance
   Interest
earned/
paid (1)
   Average
rate
    Average
balance
   Interest
earned/
paid (1)
   Average
rate
 
               (In thousands)            

Earning assets:

                

Taxable investment securities

   $ 228,012    $ 3,841    3.38   $ 385,865    $ 7,613    3.95

Non-taxable investment securities (1)

     203,430      5,212    5.12     233,604      6,436    5.51

Mortgage-backed securities

     361,701      7,851    4.27     74,045      1,906    5.15

Federal funds sold and other

     392,920      696    0.36     185,367      3,164    3.40

Loans (2)

                

Commercial and construction (1)

     3,187,762      94,092    5.91     3,180,259      109,285    6.81

Residential mortgage

     1,859,193      53,221    5.75     1,814,997      54,905    6.05

Home equity and other consumer

     405,610      9,084    4.46     331,216      10,109    6.10
                                        

Total loans

     5,452,565      156,397    5.75     5,326,472      174,299    6.51
                                        

Total earning assets

   $ 6,638,628    $ 173,997    5.25   $ 6,205,353    $ 193,418    6.20
                                        

Interest-bearing liabilities:

                

Deposits

   $ 4,123,690    $ 44,190    2.16   $ 3,659,655    $ 54,370    2.99

Borrowed funds

     1,330,356      24,777    3.73     1,777,598      33,971    3.79
                                        

Total interest-bearing liabilities

   $ 5,454,046    $ 68,967    2.54   $ 5,437,253    $ 88,341    3.25
                                        

Net interest income

      $ 105,030         $ 105,077   
                        

Interest rate spread

         2.71         2.95

Net interest margin

         3.16         3.35

 

(1) Interest income on non-taxable investments and loans is presented on a FTE basis using the federal statutory rate. These adjustments were $1.9 million for both the three months ending June 30, 2009 and 2008, and $3.6 million and $3.7 million for the six months ending June 30, 2009 and 2008, respectively. The discussion following these tables reflects non-FTE data.
(2) Includes loans held for sale and non-accrual loans.

Interest and Dividend Income. Interest and dividend income for the three and six months ended June 30, 2009 was $84.5 million, and $170.4 million, respectively, a decrease of $8.5 million, or 9%, and $19.3 million, or 10% compared to the same periods in 2008, respectively. The decrease for the three and six months ended June 30, 2009 was primarily attributed to a decrease from interest on loans due to lower interest rates and an increase in non-accrual loans.

 

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Interest income on commercial loans (including construction loans) for the second quarter of 2009 was $45.8 million, a decrease of $7.1 million, or 13%, compared to the same period in 2008 as a result of a 79 basis point decrease in the average yield and a 1% decrease in the average balance. Interest income on commercial loans for the six months ended June 30, 2009 was $92.3 million, a decrease of $15.5 million, or 14%, compared to the same period in 2008 as a result of a 90 basis point decrease in the average yield, and relatively flat average balances. The decrease in the average balance of commercial loans, including construction and land loans, for the three months ended June 30, 2009 as compared to the same period in 2008 is primarily due to our affiliate Banks, in certain cases, reducing new commercial loan originations until their local economic conditions improve. Three of the Banks have reduced the amount of, or stopped originating, new construction and land loans. However, the New England and Northern California Banks have continued to lend, in certain cases, to the construction industry. For the six months ending June 30, 2009 as compared to the same period in 2008, there was a small increase in the average balance of commercial loans although much lower than historical growth rates due to the reasons indicated above. The decrease in the yields was primarily due to additional non-accrual loans and a 175 basis point decline in the Prime rate since June 30, 2008 as the majority of the Company’s commercial loans are based on the Prime rate. The Company’s variable rate commercial loans that are not indexed to Prime are typically based on the London Interbank Offered Rate (“LIBOR”). LIBOR has fluctuated up and down over the past year which has impacted the yields positively and negatively depending on the fluctuation.

Interest income on residential mortgage loans for the second quarter of 2009 was $26.3 million, a decrease of $1.1 million, or 4%, compared to the same period in 2008, resulting from a 31 basis point decrease in the average yield, slightly offset by a 1% increase in the average balances. Interest income on residential mortgage loans for the six months ended June 30, 2009 was $53.2 million, a decrease of $1.7 million, or 3%, compared to the same period in 2008, resulting from a 30 basis point decrease in the average yield, slightly offset by a 2% increase in the average balances. The increase in the average balances of residential mortgage loans for the three and six months ended June 30, 2009 was primarily due to the organic growth of loan portfolios at the Banks. The decrease in the yields was primarily due to the additional non-accrual loans in 2009 as well as adjustable rate mortgage (“ARM”) loans repricing to lower rates. The decline in U.S. Treasury yields, the index to which the ARMs are typically linked, has decreased the yields on mortgage loans.

Interest income on consumer and other loans for the second quarter of 2009 was $4.6 million, a decrease of $0.3 million, or 6%, compared to the same period in 2008 as a result of a 122 basis point decrease in the average yield, partially offset by a 19% increase in the average balances. Interest income on consumer and other loans for the six months ended June 30, 2009 was $9.1 million, a decrease of $1.0 million, or 10%, compared to the same period in 2008 as a result of a 164 basis point decrease in the average yield, partially offset by a 23% increase in the average balances. The increase in the average balances of consumer and other loans was primarily due to the organic growth of loan portfolios at the Banks. The decrease in the yields was primarily due to the decrease in the Prime rate, the rate to which a majority of home equity loan rates are indexed. The Prime rate decreased 175 basis points from June 30, 2008 to June 30, 2009.

Investment income for the second quarter of 2009 was $7.9 million, relatively flat compared to the same period in 2008, as a result of a 129 basis point decrease in the average yield, offset by a 37% increase in the average balance. Investment income for the six months ended June 30, 2009 was $15.8 million, a decrease of $1.1 million, or 6%, compared to the same period in 2008 as a result of a 136 basis point decrease in the average yield, partially offset by a 35% increase in the average balance. The increase in the average balances was primarily due to the Banks increasing their liquidity and in some cases, their investment portfolios as well. The decline in the average yield was primarily due to lower yields on short-term liquid investments such as federal funds and lower rates on U.S. Treasury and Agency securities. The FHLBs have not declared any dividends in the first half of 2009 as compared to $1.4 million earned in the same period of 2008, and the Company does not expect to receive any dividends on its FHLB stock at least for the remainder of 2009. Investment decisions are made based on anticipated liquidity, loan demand, and asset liability management decisions.

Interest expense. Interest expense on deposits and borrowings for the three and six months ended June 30, 2009 was $33.7 million, and $69.0 million, respectively, a decrease of $7.6 million, or 18%, and $19.4 million, or 22%, compared to the same period in 2008, respectively. The decrease for the three and six months ended June 30, 2009 was attributed to the decreases in the average rate paid on deposits and borrowings and a decrease in the average balances outstanding of borrowings.

Interest expense on deposits for the second quarter of 2009 was $21.5 million, a decrease of $3.3 million, or 13%, compared to the same period in 2008 as a result of a 64 basis point decrease in the average yield, offset by a 14% increase in the averages balances. Interest expense on deposits for the six months ended June 30, 2009 was $44.2 million, a decrease of $10.2 million, or 19%, compared to the same period in 2008 as a result of an 83 basis point decrease in the average yield,

 

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offset by a 13% increase in the average balances. The increase in the average deposits for the three and six month periods ending June 30, 2009 is primarily driven by organic growth of the Banks’ core deposits and retail certificates of deposit. The TLGP, instituted in the fourth quarter of 2008, helped to stabilize the deposit environment enabling the Company’s core deposits to grow in the first six months of 2009. The TLGP insures all demand deposit checking accounts and certain NOW accounts. The decrease in the average rates paid was primarily due to the Banks’ ability to lower interest rates on deposits due to the decline in short-term rates.

Interest paid on borrowings for the second quarter of 2009 was $12.2 million, a decrease of $4.3 million, or 26%, compared to the same period in 2008 as a result of a 31% decrease in the average balance, slightly offset by a 27 basis point increase in the average rate paid. Interest paid on borrowings for the six months ended June 30, 2009 was $24.8 million, a decrease of $9.2 million, or 27%, compared to the same period in 2008 as a result of a 25% decrease in the average balance, and a 6 basis point decrease in the average rate paid. The decrease in the average balances of borrowings was primarily due to the repurchase of the Company’s Notes and the Banks reducing their reliance on FHLB borrowings as deposit growth as outpaced loan growth. The Company repurchased $89.9 million of its Notes during the twelve months ended June 30, 2009. The Company called and paid off the remaining $3.6 million of its Notes in July 2009.

Provision for loan losses. The provision for loan losses for the second quarter of 2009 was $24.1 million, a decrease of $7.8 million, or 25%, compared to the same period in 2008, and $40.7 million for the six months ended June 30, 2009, a decrease of $10.9 million, or 21%, compared to the same period in 2008. The high level of the 2008 provision for loan losses was primarily related to the Southern California banking affiliate’s construction and land development portfolio in the Inland Empire of Southern California, which had been severely affected by a rapid decline in fair values of real estate and land. Although the 2009 provision has declined as compared to 2008, it still remains historically high for the Company. The 2009 provision reflects continued deterioration in economic conditions and the values of real estate and land where our Banks are located. This deterioration has caused the Company’s non-performing assets and classified loans to increase and, in some cases, has led to charge-offs. As a result of these issues, the Company has recorded significant provision for loan losses.

Management evaluates several factors when estimating the provision for loan losses for the period. These factors include loss and recovery trends, trends in loan delinquencies, trends in non-accrual loans, the nature and volume of the loan portfolio, lending policies and procedures, loan review procedures, concentrations of credit, and the experience and quality of management. See Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Allowance for Loan Losses.” Charge-offs, net of recoveries, were $15.8 million during the second quarter of 2009, primarily attributable to the South Florida region, compared to $22.9 million in the second quarter of 2008. Charge-offs, net of recoveries, for the six months ended June 30, 2009 were $28.6 million, primarily attributable to the South Florida, Southern California and Pacific Northwest regions, compared to $24.6 million for the same period in 2008.

Fees and other income. Fees and other income for the three and six months ended June 30, 2009 were $46.0 million, and $93.7 million, respectively, a decrease of $19.3 million, or 30%, and $36.2 million, or 28%, compared to the same respective periods in 2008. The decrease is primarily due to the decrease in investment management and trust fees, and the gains recognized in 2008 from the repurchase of the Company’s Notes. Other items that affected the Company’s 2009 fees and other income include decreases in wealth advisory fees partially offset by the gains recognized from the sale of loans and investments.

Investment management and trust fee income for the second quarter of 2009 was $29.1 million, a decrease of $11.8 million, or 29%, compared to the same period in 2008, and was $57.2 million for the six months ended June 30, 2009, a decrease of $22.7 million, or 28%, compared to the same period in 2008. The decrease is primarily attributed to the $7.2 billion, or 27% decrease in AUM at the Banks and Investment Managers as compared to June 30, 2008. AUM as of June 30, 2009 for the Banks and Investment Managers were $19.7 billion. The decrease in AUM is comprised of $6.9 billion in market depreciation, and net outflows of $0.3 billion. Management fees for the Company’s Banks and Investment Management affiliates are typically calculated based on a percentage of AUM. Approximately 80% of the Company’s second quarter 2009 investment management and trust fees were calculated based on the June 30, 2009 market value of AUM; the remaining 20% of the Company’s investment management and trust fees were calculated based on March 31, 2009 market value of AUM.

Wealth Advisory fee income for the second quarter of 2009 was $10.3 million, a decrease of $0.8 million, or 7%, compared to the same period in 2008, and was $20.5 million for the six months ended June 30, 2009, a decrease of $1.4 million, or 7%, compared to the same period in 2008. The Company’s wealth advisory fee income was negatively affected by the challenging market conditions. Assets Under Advisory, managed by the Wealth Advisors, decreased $1.1 billion, or 13%, compared to June 30, 2008. The decrease was primarily attributable to market depreciation of $1.2 billion, slightly offset by positive flows of $0.1 billion.

 

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Gain on repurchase of debt for the three and six months ended June 30, 2009 decreased $8.6 million, and $19.5 million compared to the same period in 2008, respectively. In the first half of 2008, the Company repurchased $194.0 million of its Notes, $107.5 million in the first quarter and $86.5 million in the second. During the first quarter of 2009, the Company repurchased $48.9 million of its Notes resulting in a net gain of $0.4 million. The remaining outstanding balance of the Company’s Notes at June 30, 2009 was $3.6 million. The Company called and paid off the remaining $3.6 million of the Notes in July 2009 at par.

Gain on sale of investments, net, for the second quarter of 2009 was $1.0 million, an increase of $0.8 million compared to the same period in 2008, and was $4.4 million for the six months ended June 30, 2009, an increase of $3.6 million compared to the same period in 2008. Our Banks have sold a portion of their investment portfolios in the first six months of 2009 and realized net gains on the transactions. The Banks’ investment portfolios primarily consist of investment grade securities that have increased in fair value as interest rates have fallen. The Banks periodically sell investments as part of their interest rate risk management programs.

Gain on sale of loans, OREO, and other repossessed assets, net, for the second quarter of 2009 was $1.9 million, an increase of $1.6 million compared to the same period in 2008, and was $6.2 million for the six months ended June 30, 2009, an increase of $5.5 million compared to the same period in 2008. The increase is primarily due to the net gain recognized as the Company continued to reduce its non-strategic portfolio in Southern California through the sale/recovery of non-strategic loans and OREO properties of $3.8 million and $5.1 million for the three and six months ended June 30, 2009, respectively.

Other income for the second quarter of 2009 was $3.7 million, a decrease of $0.4 million, or 10%, compared to the same period in 2008, and was $5.0 million for the six months ended June 30, 2009, a decrease of $1.6 million, or 25%. The decrease is primarily due to the investment losses from the Company’s Rabbi Trust. The Company’s Rabbi Trust is an investment vehicle that was established to offset the Company’s deferred compensation plan liability, which enables certain executives to elect to defer a portion of their income. The amounts deferred are excluded from the employee’s taxable income and are not deductible for tax purposes by the Company until paid. The employee selects from a limited number of mutual funds, and the deferred liability is increased or decreased to correspond to the fair value of these underlying hypothetical mutual fund investments. The increase or decrease in value is recognized as compensation expense or savings. The Rabbi Trust holds similar assets and approximately mirrors the activity in the hypothetical mutual funds. The increase or decrease in the value of the mutual funds in the Rabbi Trust is recognized in other income/ (loss). The net effect of the compensation expense/ (savings) and the other income/ (loss) has little to no effect on the Company’s net income.

Operating Expenses. Operating expenses, which exclude the non-cash impairment and Westfield re-equitization charges, for the three and six months ended June 30, 2009, were $82.5 million, and $156.9 million, respectively, an increase of $1.3 million, or 2%, and a decrease of $2.1 million, or 1%, respectively, compared to the same period in 2008. The increase for the quarter is primarily attributable to a special FDIC assessment charge, partially offset by decreases in salaries and employee benefit expenses. The decrease for the year to date is primarily attributable to the decreases in salaries and employee benefit expenses and decreased amortization expense, partially offset by the FDIC’s special assessment and increased expenses related to occupancy and equipment, professional services, and other expenses.

Salaries and employee benefits, the largest component of operating expenses, for the second quarter of 2009 were $48.4 million, a decrease of $3.9 million, or 8%, compared to the same period in 2008, and were $93.9 million for the six months ended June 30, 2009, a decrease of $9.8 million, or 9%, compared to the same period in 2008. The decrease is primarily due to decreased fixed and variable compensation as a result of reduction in bonuses and declines in fee-based income, as well as the savings recognized from the Company’s deferred compensation plan as noted above.

Occupancy and equipment expenses for the second quarter of 2009 were $9.3 million, an increase of $0.9 million, or 11%, compared to the same period in 2008, and were $18.0 million for the six months ended June 30, 2009, an increase of $1.2 million, or 7%, compared to the same period in 2008. The increase is primarily due to increases in technology and equipment costs, and an increase in rent expense at the Company’s Private Banking segment. The Banks typically lease their offices and these lease agreements generally contain clauses for minimum increases in rent payments each year.

Professional services include legal fees, consulting fees, and other professional services such as audit and tax preparation. These expenses for the second quarter of 2009 were $6.4 million, a decrease of $0.1 million, or 2%, compared to the same period in 2008, and were $12.4 million for the six months ended June 30, 2009, an increase of $1.1 million, or 9%, compared to the same period in 2008. The increase for the six months ended June 30, 2009 was attributable to increased legal fees related to general corporate matters and problem loan workouts, and increased accounting fees primarily for audit services and compliance outsourcing.

 

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Amortization of intangibles for the second quarter of 2009 was $3.0 million, a decrease of $0.4 million, or 13%, compared to the same period in 2008, and was $5.4 million for the six months ended June 30, 2009, a decrease of $1.2 million, or 19%, compared to the same period in 2008. The decrease is related to the accelerated amortization generally taken in the first few years of the intangible arising from the acquisition as well as the impairment charges recorded in 2008. The impairment charges in 2008 lowered the carrying value of the related assets, which decreases future amortization expense for the remainder of the life of the intangible. Intangibles at June 30, 2009 decreased $37.0 million, or 37%, to $63.0 million, compared to $100.0 million at June 30, 2008. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 8: Goodwill and Intangible Assets” for further detail.

FDIC insurance for the second quarter of 2009 was $5.0 million, an increase of $3.9 million, compared to the same period in 2008, and was $6.9 million for the six months ended June 30, 2009, an increase of $4.7 million compared to the same period in 2008. The increase is primarily due to the $3.2 million special assessment charged by the FDIC in the second quarter of 2009 and the increase in assessment rates. Additionally, the Company experienced increased levels of deposits, partially due to participating in the TLGP and the temporary increase in the FDIC insurance levels from $100 thousand to $250 thousand per depositor in 2008. The increase in the balance and mix of deposits and the FDIC’s ratings of our Banks have an effect on the amount of FDIC insurance expense. The Company anticipates these higher deposit insurance costs will continue. On May 22, 2009 the FDIC Board of Directors adopted its final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus its Tier 1 capital as of June 30, 2009. An additional special assessment may be made later in 2009 by the FDIC.

Other expenses include supplies and other administrative expenses. Other expenses for the second quarter of 2009 were $6.3 million, an increase of $1.2 million, or 23%, compared to the same period in 2008, and were $12.3 million for the six months ended June 30, 2009, an increase of $2.8 million, or 30%, compared to the same period in 2008. The increase is primarily due to increased expenses related to OREO and repossessed assets, bank charges and insurance expense.

Income Tax Expense. Income tax benefit for the second quarter and six months ended June 30, 2009 was $2.4 million and $0.4 million, respectively. The effective tax rate for the second quarter and six months ended June 30, 2009 is not consistent with the Company’s 2008 quarterly and annual effective tax rate due to the non-deductible goodwill impairment charges that were accounted for in 2008. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 10: Income Taxes” for further detail.

Recent Accounting Developments

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”). FSP FAS 157-4 addresses the factors that determine whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared to the normal market activity. Under FSP FAS 157-4, if the reporting entity has determined that the volume and level of activity has significantly decreased and transactions are not orderly, further analysis is required and significant adjustments to the quoted prices or transactions might be needed. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The Company has adopted FSP 157-4 for the quarter ending June 30, 2009, and there is not a material effect on its financial condition and results of operations.

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (“FAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. FAS 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted FAS 165 during the second quarter of 2009, and its application had no impact on the Company’s condensed consolidated financial statements. In June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which amends the guidance for identifying the primary beneficiary in variable interest entities, requires ongoing assessments for purposes of identifying the primary beneficiary and eliminates the scope exception for qualifying special-purpose entities. FAS 167 will be effective for the Company’s first quarter 2010. The Company is assessing the impact, if any, of FAS 167 on its consolidated financial statements.

In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 which establishes the Accounting Standards Codification (the “Codification”) and SEC interpretive releases as the sources for authoritative GAAP. The Codification will supersede all existing non-SEC accounting and reporting standards under GAAP effective for the Company’s third quarter 2009. The Codification is not intended to change existing GAAP. Accordingly, the Company does not anticipate a material impact on its consolidated financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the Interest Rate Sensitivity and Market Risk as described in Part II. Item 7A. “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Sensitivity and Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, the effectiveness of the design and operation of its 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 on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of June 30, 2009 in ensuring that material information required to be disclosed by the Company, including its consolidated subsidiaries, was made known to the certifying officers by others within the Company and its consolidated subsidiaries in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reporting within the time periods specified in the Securities Exchange Commission rules and forms. On a quarterly basis, the Company evaluates the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

(b) Change in internal controls over financial reporting.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II. Other Information

 

Item 1. Legal Proceedings

A. Trust Litigation

Beginning in 1984, Borel served as the trustee of a private family trust (the “Trust”) that was the joint owner of a certain real property known as the Guadalupe Oil Field. The field was leased for many years to Union Oil Company of California (d/b/a UNOCAL) for oil and gas production. Significant environmental contamination resulting from UNOCAL’s operations was found on the property in 1994. The subject property was the subject of lengthy litigation brought by certain beneficiaries of the Trust against Borel and others in 1994. In 2002, during the course of that litigation, Borel (as Trustee) sold the property to its former lessee, the Union Oil Company of California (d/b/a UNOCAL) in exchange for cash and a comprehensive indemnity on behalf of the Trust. Litigation with the beneficiaries continued until 2005, when Borel, UNOCAL, and others entered into a comprehensive settlement with all of the beneficiaries, except one, dismissing all of their pending actions in exchange for a payment of cash and other considerations from UNOCAL. Borel paid nothing in the settlement. The dissenting beneficiary attempted to continue the litigation against Borel on his own, acting pro se. The state court dismissed this individual action with prejudice in 2005, whereupon the dissenting beneficiary filed a similar action, again pro se, in the U.S. District Court for the Northern District of California. The federal court dismissed this action with prejudice, and the dissenting beneficiary then unsuccessfully pursued appeals to the Ninth Circuit Court of Appeals and the U.S. Supreme Court. His petition for certiorari was denied in February 2008, concluding the litigation. The 2005 settlement with the other beneficiaries was thereafter consummated. All of the property formerly belonging to the Trust was distributed to separate subtrusts established for each individual beneficiary. Borel is not the trustee of these subtrusts of the litigants. Borel’s petition for termination of the Trust was heard in March 2009. The motion for termination was granted and the order signed on March 18, 2009. Borel was formally discharged as Trustee on June 2, 2009. No further action will be required with respect to this matter.

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 1A. Risk Factors and Factors Affecting Forward-Looking Statements

Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully consider the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC. There have been no material changes to these risk factors since the filing of that report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of the Security Holders

At the Annual Meeting of Stockholders held on April 22, 2009, stockholders of the Company approved the following proposals:

 

  1. To elect four Class III Directors of the Company to serve until the 2012 annual meeting or until their successors are duly elected and qualified. The results of the vote were as follows:

 

     For    Withheld

Herbert S. Alexander

   57,507,260    1,524,458

Adolfo Henriques

   57,437,948    1,593,770

Lynn Thompson Hoffman

   57,523,337    1,508,381

John Morton, III

   58,243,580    788,138

 

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  2. To approve a new 2009 Stock Option and Incentive Plan for officers, employees, non-employee directors and other key persons of the Company and its subsidiaries:

 

   

For

 

Against

 

Abstain

 

Broker Non-Votes

   
  33,323,750   18,462,256   81,082   7,164,630  

 

  3. To approve a non-binding, advisory resolution regarding the compensation of the Company’s executive officers:

 

   

For

 

Against

 

Abstain

       
  54,006,584   2,078,294   2,946,839    

 

Item 5. Other Information

None.

 

Item 6. Exhibits

(a) Exhibits

 

+   10.1    2009 Stock Option and Incentive Plan (Incorporated by reference to the Company’s Current Report on Form 8-K filed April 27, 2009).
+ *   10.2    Form of Non-Qualified Stock Option Agreement for Employees under the Boston Private Financial Holdings, Inc. 2009 Stock Option and Incentive Plan
+ *   10.3    Form of Restricted Stock Award Agreement under the Boston Private Financial Holdings, Inc. 2009 Stock Option and Incentive Plan
*   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 to 18 U.S.C. § 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  + Management contract or compensatory plan or agreement
  * Filed herewith
  ** Furnished herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Boston Private Financial Holdings, Inc.
  (Registrant)
 

/s/ Timothy L. Vaill

August 7, 2009   Timothy L. Vaill
  Chairman and Chief Executive Officer
 

/s/ David J. Kaye

August 7, 2009   David J. Kaye
  Executive Vice President and Chief Financial Officer

 

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