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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 September 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 October 30, 2009:

 

Common Stock-Par Value $1.00   68,653,721
(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

   30
  

Executive Summary

   30
  

Critical Accounting Policies

   32
  

Financial Condition

   32
  

Liquidity

   36
  

Capital Resources

   38
  

Results of Operations

   40
  

Recent Accounting Developments

   45

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

   46

Item 4

  

Controls and Procedures

   46
   PART II—OTHER INFORMATION   

Item 1

  

Legal Proceedings

   47

Item 1A

  

Risk Factors and Factors Affecting Forward-Looking Statements

   47

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

   47

Item 3

  

Defaults upon Senior Securities

   47

Item 4

  

Submission of Matters to a Vote of Security Holders

   47

Item 5

  

Other Information

   47

Item 6

  

Exhibits

   48
  

Signature Page

   49
  

Certifications

  


Table of Contents

PART 1. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

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

Assets:

    

Cash and due from banks

   $ 468,446      $ 216,932   

Federal funds sold

     10,282        64,343   
                

Cash and cash equivalents

     478,728        281,275   

Other interest bearing certificates of deposit

     105        —     

Investment securities:

    

Available-for-sale (amortized cost of $624,245 and $784,903, respectively)

     639,807        799,026   

Held-to-maturity (fair value of $4,543 and $4,597 respectively)

     4,508        4,499   
                

Total investment securities

     644,315        803,525   

Loans held for sale

     18,308        36,846   

Loans:

    

Commercial

     2,327,291        2,156,908   

Construction and land

     336,756        431,717   

Residential mortgage

     1,471,811        1,352,881   

Home equity and other consumer loans

     194,515        187,575   
                

Total loans

     4,330,373        4,129,081   

Less: Allowance for loan losses

     73,010        64,091   
                

Net loans

     4,257,363        4,064,990   

OREO and other repossessed assets

     16,442        12,838   

Stock in Federal Home Loan Banks

     47,490        47,490   

Premises and equipment, net

     29,043        28,746   

Goodwill

     105,102        105,090   

Intangible assets, net

     44,032        49,961   

Fees receivable

     6,998        7,179   

Accrued interest receivable

     19,123        21,665   

Income tax receivable and deferred

     54,325        112,426   

Other assets

     108,029        132,634   

Assets of discontinued operations

     40,186        1,578,170   
                

Total assets

   $ 5,869,589      $ 7,282,835   
                

Liabilities:

    

Deposits

   $ 4,141,023      $ 3,748,912   

Securities sold under agreements to repurchase

     138,865        293,841   

Federal Home Loan Bank borrowings

     579,148        745,472   

Junior subordinated debentures and other long-term debt

     238,145        290,585   

Other liabilities

     82,145        88,647   

Liabilities of discontinued operations

     19,147        1,416,535   
                

Total liabilities

     5,198,473        6,583,992   
                

Redeemable Noncontrolling Interests

     51,940        50,167   

The Company’s Stockholders’ Equity:

    

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

    

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

     48,358        33,703   

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

     145,398        144,642   

Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 68,571,265 shares at September 30, 2009 and 63,874,024 shares at December 31, 2008

     68,571        63,874   

Additional paid-in capital

     642,157        654,903   

Accumulated deficit

     (300,394     (263,417

Accumulated other comprehensive income

     11,586        11,471   
                

Total Company’s stockholders’ equity

     615,676        645,176   
                

Noncontrolling interests

     3,500        3,500   
                

Total stockholders’ equity

     619,176        648,676   
                

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

   $ 5,869,589      $ 7,282,835   
                

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
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (In thousands, except share data)              

Interest and dividend income:

        

Loans

   $ 58,658      $ 62,366      $ 174,284      $ 191,113   

Taxable investment securities

     1,399        3,481        5,238        10,930   

Non-taxable investment securities

     1,298        1,850        4,696        6,022   

Mortgage-backed securities

     3,278        1,816        10,660        3,580   

Federal funds sold and other

     389        711        741        3,149   
                                

Total interest and dividend income

     65,022        70,224        195,619        214,794   
                                

Interest expense:

        

Deposits

     15,049        19,075        46,001        63,368   

Federal Home Loan Bank borrowings

     6,329        7,382        19,204        20,054   

Junior subordinated debentures and other long-term debt

     3,072        4,049        9,473        14,205   

Other short-term borrowings

     855        1,705        2,513        4,781   
                                

Total interest expense

     25,305        32,211        77,191        102,408   
                                

Net interest income

     39,717        38,013        118,428        112,386   

Provision for loan losses

     9,099        135,145        31,155        180,935   
                                

Net interest (loss)/income after provision for loan losses

     30,618        (97,132     87,273        (68,549
                                

Fees and other income:

        

Investment management and trust fees

     13,732        17,318        39,489        52,182   

Wealth advisory fees

     8,927        8,853        25,696        26,253   

Gain on repurchase of debt

     —          —          407        19,906   

Gain on sale of investments, net

     1,064        531        5,459        1,326   

Gain/ (loss) on sale of loans and other real estate owned, net

     318        (332     6,423        287   

Other

     2,482        1,704        6,611        7,252   
                                

Total fees and other income

     26,523        28,074        84,085        107,206   
                                

Operating expense:

        

Salaries and employee benefits

     32,868        33,352        95,272        99,635   

Occupancy and equipment

     6,731        6,070        19,837        18,067   

Professional services

     4,429        5,010        14,362        13,947   

Marketing and business development

     1,447        1,757        4,860        5,839   

Contract services and data processing

     1,323        1,246        3,920        3,814   

Warrant expense

     —          2,233        —          2,233   

Amortization of intangibles

     2,024        2,085        5,940        6,343   

Impairment of goodwill and intangibles

     —          84,679        —          122,680   

FDIC insurance

     2,619        865        7,734        2,471   

Other

     4,495        4,745        13,294        11,838   
                                

Total operating expense

     55,936        142,042        165,219        286,867   
                                

Income/(loss) before income taxes

     1,205        (211,100     6,139        (248,210

Income tax expense/ (benefit)

     815        (59,297     1,629        (63,560
                                

Net income/(loss) from continuing operations

     390        (151,803     4,510        (184,650

Net loss from discontinued operations

     (30,614     (120,303     (39,006     (175,164
                                

Net loss before attribution to noncontrolling interests

     (30,224     (272,106     (34,496     (359,814

Less: Net income attributable to noncontrolling interests

     1,136        1,255        2,481        4,019   
                                

Net loss attributable to the Company

   $ (31,360   $ (273,361   $ (36,977   $ (363,833
                                

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

     (9,852     (28,278     (26,357     (28,278
                                

Net loss attributable to common shareholders for loss per share calculation

   $ (41,212   $ (301,639   $ (63,334   $ (392,111
                                

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

        

Loss per share from continuing operations:

        

Basic and diluted loss per share

   $ (0.15   $ (3.52   $ (0.37   $ (5.08

Loss per share from discontinued operations:

        

Basic and diluted loss per share

   $ (0.45   $ (2.34   $ (0.58   $ (4.11

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

        

Basic and diluted loss per share

   $ (0.60   $ (5.86   $ (0.95   $ (9.19

Average basic and diluted common shares outstanding

     68,551,527        51,459,490        67,033,585        42,648,974   

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

     —        —          —          (363,833     —          —        (363,833

Other comprehensive income/ (loss), net:

                

Change in unrealized loss on securities available for sale, net

     —        —          —          —          (2,453     —        (2,453

Change in unrealized loss on cash flow hedge, net

     —        —          —          —          (1,099     —        (1,099

Change in unrealized gain on other, net

     —        —          —          —          1,160        —        1,160   
                      

Total comprehensive loss attributable to the Company, net

                   (366,225

Dividends paid to common shareholders

     —        —          —          (8,178     —          —        (8,178

Dividends paid to preferred shareholders

     —        —          —          (136     —          —        (136

Net proceeds from issuance of:

                

18,400,000 shares of common stock related to the public offering

     18,400      —          86,480        —          —          —        104,880   

1,068,649 shares of common stock

     1,069      —          12,904        —          —          —        13,973   

351 shares of convertible preferred stock class A

     —        22,770        —          —          —          —        22,770   

401 shares of convertible preferred stock class B

     —        26,535        —          —          —          —        26,535   

Proceeds from issuance of warrants

     —        —          19,090        —          —          —        19,090   

Accretion of the Beneficial Conversion Feature:

                

Class A

     —        24,643        —          (24,643     —          —        —     

Class B

     —        3,499        —          (3,499     —          —        —     

Reclassification of increase in fair value of warrants

     —        —          2,233        —          —          —        2,233   

Issuance of 271,852 shares of incentive stock grants

     272      —          (272     —          —          —        —     

Amortization of incentive stock grants

     —        —          2,433        —          —          —        2,433   

Amortization of stock options and employee stock purchase plan

     —        —          4,475        —          —          —        4,475   

Westfield re-equitization awards

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

Stock options exercised

     88      —          674        —          —          —        762   

Other equity adjustments

     —        —          (491     (1,134     —          —        (1,625
                                                      

Balance at September 30, 2008

   $ 57,299    $ 77,447      $ 601,862      $ (234,460   $ 709      $ 3,500    $ 506,357   
                                                      

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

     —        —          —          (36,977     —          —        (36,977

Other comprehensive income/(loss), net:

                

Change in unrealized gain on securities available for sale, net

     —        —          —          —          1,043        —        1,043   

Change in unrealized gain on cash flow hedge, net

     —        —          —          —          (945     —        (945

Change in unrealized loss on other, net

     —        —          —          —          17        —        17   
                      

Total comprehensive loss attributable to the Company, net

                   (36,862

Dividends paid to common shareholders

     —        —          (2,002     —          —          —        (2,002

Dividends paid to preferred shareholders

     —        —          (5,864     —          —          —        (5,864

Net issuance of 4,016,683 shares of common stock

     4,017      —          7,389        —          —          —        11,406   

Accretion of Series B Preferred stock Beneficial Conversion Feature

     —        14,696        (14,696     —          —          —        —     

Accretion of discount on Series C Preferred stock

     —        1,024        (1,024     —          —          —        —     

Issuance of 605,181 shares through incentive stock grants

     605      —          (605     —          —          —        —     

Amortization of incentive stock grants

     —        —          2,699        —          —          —        2,699   

Amortization of stock options and employee stock purchase plan

     —        —          2,800        —          —          —        2,800   

Stock options exercised

     75      —          250        —          —          —        325   

Other equity adjustments

     —        (309     (1,693     —          —          —        (2,002
                                                      

Balance at September 30, 2009

   $ 68,571    $ 193,756      $ 642,157      $ (300,394   $ 11,586      $ 3,500    $ 619,176   
                                                      

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)

 

     Nine Months Ended
September 30,
 
     2009     2008  
     (In thousands)  

Cash flows from operating activities:

    

Net loss before attribution to noncontrolling interests

   $ (34,496   $ (359,814

Net loss from discontinued operations

     (39,006     (175,164
                

Net income/ (loss) from continuing operations

     4,510        (184,650

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

    

Depreciation and amortization

     12,937        7,257   

Net income attributable to noncontrolling interests

     (2,481     (4,019

Equity issued as compensation

     5,499        72,908   

Reclassification of increase in fair value of warrants

     —          2,233   

Impairment of goodwill and intangibles

     —          122,680   

Provision for loan losses

     31,155        180,935   

Loans originated for sale

     (241,035     (85,784

Proceeds from sale of loans held for sale and OREO

     270,097        87,510   

Gain on the repurchase of debt

     (407     (19,906

Decrease/ (increase) in income tax receivable and deferred, net

     58,101        (76,336

Net decrease/ (increase) in operating activities of discontinued operations

     34,765        (207,090

Net decrease/ (increase) in other operating activities

     20,178        2,248   
                

Net cash provided by/ (used in) operating activities

     193,319        (102,014
                

Cash flows from investing activities:

    

Investment securities available-for-sale:

    

Purchases

     (394,970     (2,586,875

Sales

     272,898        86,236   

Maturities, redemptions, and principal payments

     285,069        2,376,837   

Investment securities held-to-maturity:

    

Purchases

     (6,026     (9,522

Maturities and principal payments

     6,017        7,481   

Purchase of other interest bearing certificates of deposit, net

     (105     —     

Investments in trusts, net

     (867     (182

Purchase of Federal Home Loan Banks stock

     —          (13,160

Net increase in portfolio loans

     (241,358     (314,557

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

     11,642        —     

Capital expenditures, net of sale proceeds

     (4,362     (3,963

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

     (645     (3,636

Cash received from divestitures

     103,305        —     

Investing activities of discontinued operations

     39,626        41,550   
                

Net cash used in investing activities

     70,224        (419,791
                

Cash flows from financing activities:

    

Net increase/ (decrease) in deposits

     392,111        (32,114

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

     (154,976     78,842   

Net increase in federal funds purchased

     —          81,000   

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

     (134,300     115,518   

Advances of long-term Federal Home Loan Bank borrowings

     24,127        158,591   

Repayments of long-term Federal Home Loan Bank borrowings

     (56,151     —     

Repurchase of other long-term debt

     (52,033     (172,628

Dividends paid to common stockholders

     (2,002     (8,178

Dividends paid to preferred stockholders

     (5,864     (136

Proceeds from issuance of preferred stock, net

     —          49,305   

Proceeds from issuance of warrants

     —          19,090   

Proceeds from stock option exercises

     325        762   

Proceeds from issuance of common stock, net

     781        106,420   

Financing activities of discontinued operations

     (76,106     118,858   

Other equity adjustments

     (2,002     (1,625
                

Net cash (used in)/ provided by financing activities

     (66,090     513,705   
                

Net increase/ (decrease) in cash and cash equivalents

     197,453        (8,100

Cash and cash equivalents at beginning of year

     281,275        155,456   
                

Cash and cash equivalents at end of period

   $ 478,728      $ 147,356   
                

Supplementary schedule of non-cash investing and financing activities:

    

Cash paid for interest

   $ 78,178      $ 99,613   

Cash (received)/ paid for income taxes, net

     (74,005     22,969   

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

     1,043        (2,453

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

     (945     (1,099

Change in unrealized loss on other, net of tax

     17        1,160   

Non-cash transactions:

    

Loans transferred to other real estate owned

     23,440        3,275   

Loans transferred to held for sale

     412        93,325   

Equity issued for acquisitions, including deferred acquisition obligations

     10,625        12,433   

See accompanying notes to unaudited consolidated financial statements.

 

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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 four consolidated affiliate partners, including Boston Private Bank & Trust Company (“Boston Private Bank”), Borel Private Bank & Trust Company (“Borel”), First Private Bank & Trust (“FPB”), and Charter Bank (“Charter”) (together, the “Banks”). The Investment Management segment has two consolidated affiliate partners, including Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”), and Anchor Capital Holdings, LLC (“Anchor”) (together, the “Investment Managers”). The Wealth Advisory segment has three consolidated affiliate partners, including KLS Professional Advisors Group, LLC (“KLS”), 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 divestiture plans 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 for current and prior periods. The sale of BPVI was completed on April 1, 2009. The sale of Sand Hill was completed on June 30, 2009.

During the third quarter of 2009, BPFH adopted divestiture plans for Gibraltar Private Bank & Trust Company (“Gibraltar”), and RINET Company, LLC (“RINET”). The sales of RINET and Gibraltar were completed on September 16 and 17, 2009, respectively. Accordingly, the results of operations and gain or loss on sale related to Gibraltar and RINET are included in the results from discontinued operations for current and prior periods.

During the fourth quarter of 2009, BPFH announced an agreement whereby the management team of Westfield Capital Management Company, LP (“Westfield”) will complete the purchase of Westfield during the fourth quarter of 2009, instead of in 2014 as contemplated in a previously announced agreement. The initial payment from Westfield to BPFH upon completion of this transaction will exceed BPFH’s carrying value for Westfield and thereby remove BPFH from any risk to recorded net assets. BPFH does not influence the operating/financial policies of Westfield or obtain other benefits associated with the ongoing operations of Westfield (other than the receipt of contingent payments). This change in risk to BPFH’s net assets, in addition to the existing circumstances regarding BPFH’s lack of influence over Westfield, will mean that Westfield will no longer be consolidated in the BPFH financial statements upon completion of this transaction. At September 30, 2009, Westfield met the initial criteria for classification as held for sale in accordance with ASC 360-10-45-9, Property, Plant, and Equipment - Overall - Other Presentation Matters - Impairment or Disposal of Long-Lived Assets in the Accounting Standards Codification of the Financial Accounting Standards Board (“FASB”) (the “ASC”) (“ASC 360”). Accordingly, the assets, liabilities, revenues and expenses of Westfield are classified in discontinued operations for current and prior periods.

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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Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

(2) Earnings Per Share

The computations of basic and diluted earnings per share (“EPS”) are set forth below:

 

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

Net income/ (loss) from continuing operations

   $ 390      $ (151,803   $ 4,510      $ (184,650

Less: Net income attributable to noncontrolling interests

     1,136        1,255        2,481        4,019   
                                

Net (loss)/ income from continuing operations attributable to the Company

     (746     (153,058     2,029        (188,669
                                

Increase in noncontrolling interests redemption value (1)

     (2,002     —          (4,773     —     

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

     (5,450     (28,142     (14,696     (28,142

Accretion of discount on Series C Preferred stock (3)

     (402     —          (1,024     —     

Dividends on preferred securities

     (1,998     (136     (5,864     (136
                                

Total adjustments to income attributable to common shareholders

     (9,852     (28,278     (26,357     (28,278
                                

Loss from continuing operations attributable to common shareholders

     (10,598     (181,336     (24,328     (216,947

Net loss from discontinued operations

     (30,614     (120,303     (39,006     (175,164
                                

Net loss attributable to common shareholders

   $ (41,212   $ (301,639   $ (63,334   $ (392,111
                                

Weighted average basic and diluted common shares outstanding (4)

     68,551,527        51,459,490        67,033,585        42,648,974   

Per share data:

        

Basic and diluted

        

Loss from continuing operations

   $ (0.15   $ (3.52   $ (0.37   $ (5.08

Loss from discontinued operations

     (0.45     (2.34     (0.58   $ (4.11
                                

Net loss attributable to common shareholders

   $ (0.60   $ (5.86   $ (0.95   $ (9.19
                                

Dividends declared on common stock

   $ 0.01      $ 0.01      $ 0.03      $ 0.21   

 

(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 ASC 480, Distinguishing Liabilities from Equity (formerly Emerging Issues Task Force (“EITF”) D-98) (“ASC 480”), the increase in redemption value from period to period reduces income attributable 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 ASC 480, the beneficial conversion feature is accounted for similar to a preferred stock dividend and reduces income attributable 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 stock issued during the fourth quarter of 2008 that gave rise to the accretion of discount at issuance.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

(4) The diluted EPS computation for the three and nine months ended September 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 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
September 30,
   For the nine months ended
September 30,
     2009    2008    2009    2008

Potential common shares from:

           

Convertible trust preferred securities

   3,228,687    3,228,687    3,228,687    3,201,079

Exercise or contingent issuance of options or other dilutive securities

   463,721    932,774    699,035    876,680

Conversion of the Series A and B Preferred stock

   7,261,091    9,318,291    7,261,091    3,140,230

Effect of dilutive warrants

   —      984,110    —      331,642
                   

Total

   10,953,499    14,463,862    11,188,813    7,549,631
                   

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 $2.2 million for the three and nine month periods ended September 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 September 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 September 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 nine months ended September 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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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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

Total Banks

   $ 42,321      $ 41,258      $ 8,391      $ 7,788      $ 50,712      $ 49,046   

Total Investment Managers

     46        88        8,362        11,599        8,408        11,687   

Total Wealth Advisors

     17        49        8,928        8,853        8,945        8,902   
                                                

Total Segments

     42,384        41,395        25,681        28,240        68,065        69,635   

Holding Company and Eliminations

     (2,667     (3,382     842        (166     (1,825     (3,548
                                                

Total Company

   $ 39,717      $ 38,013      $ 26,523      $ 28,074      $ 66,240      $ 66,087   
                                                
     For the three months ended September 30,  
     Non-interest expense     Income tax expense/(benefit)     Net income/ (loss) from
continuing operations (1)
 
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ 36,643      $ 82,413      $ 1,291      $ (43,478   $ 3,679      $ (125,034

Total Investment Managers

     7,104        42,025        744        (12,184     560        (18,154

Total Wealth Advisors

     5,851        7,886        1,027        816        2,067        200   
                                                

Total Segments

     49,598        132,324        3,062        (54,846     6,306        (142,988

Holding Company and Eliminations

     6,338        9,718        (2,247     (4,451     (5,916     (8,815
                                                

Total Company

   $ 55,936      $ 142,042      $ 815      $ (59,297   $ 390      $ (151,803
                                                
     For the three months ended September 30,  
     Net income from continuing
operations attributable to
noncontrolling interests
    Net loss attributable to the
Company (2)
    Amortization of intangibles  
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ —        $ —        $ 3,679      $ (125,034   $ 675      $ 270   

Total Investment Managers

     371        569        189        (18,723     949        1,351   

Total Wealth Advisors

     765        686        1,302        (486     373        426   
                                                

Total Segments

     1,136        1,255        5,170        (144,243     1,997        2,047   

Holding Company and Eliminations

     —          —          (36,530     (129,118     27        38   
                                                

Total Company

   $ 1,136      $ 1,255      $ (31,360   $ (273,361   $ 2,024      $ 2,085   
                                                
     As of September 30,        
     Assets (3)     AUM    
     2009     2008     2009     2008    
     (In thousands)     (In millions)    

Total Banks

   $ 5,619,555      $ 5,235,178      $ 3,421      $ 3,512     

Total Investment Managers

     112,289        114,642        6,972        8,001     

Total Wealth Advisors

     76,625        74,449        6,928        7,005     
                                  

Total Segments

     5,808,469        5,424,269        17,321        18,518     

Holding Company and Eliminations

     61,120        1,609,305        (18     (303  
                                  

Total Company

   $ 5,869,589      $ 7,033,574      $ 17,303      $ 18,215     
                                  
     For the nine months ended September 30,  
     Net interest income     Non-interest income     Total revenues  
     2009     2008     2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ 126,308      $ 122,756      $ 33,179      $ 25,921        $159,487      $ 148,677   

Total Investment Managers

     138        289        24,152        35,047        24,290        35,336   

Total Wealth Advisors

     52        153        25,691        26,245        25,743        26,398   
                                                

Total Segments

     126,498        123,198        83,022        87,213        209,520        210,411   

Holding Company and Eliminations

     (8,070     (10,812     1,063        19,993        (7,007)        9,181   
                                                

Total Company

   $ 118,428      $ 112,386      $ 84,085      $ 107,206        $202,513      $ 219,592   
                                                

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

     For the nine months ended September 30,  
     Non-interest expense    Income tax expense/(benefit)     Net income/ (loss) from
continuing operations (1)
 
     2009    2008    2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ 108,254    $ 181,409    $ 5,979      $ (49,748   $ 14,099      $ (163,919

Total Investment Managers

     21,285      59,834      1,474        (9,928     1,531        (14,570

Total Wealth Advisors

     18,067      19,908      2,565        2,513        5,111        3,977   
                                              

Total Segments

     147,606      261,151      10,018        (57,163     20,741        (174,512

Holding Company and Eliminations

     17,613      25,716      (8,389     (6,397     (16,231     (10,138
                                              

Total Company

   $ 165,219    $ 286,867    $ 1,629      $ (63,560   $ 4,510      $ (184,650
                                              
     For the nine months ended September 30,  
     Net income from continuing
operations attributable to
noncontrolling interests
   Net loss attributable to
the Company (2)
    Amortization of intangibles  
     2009    2008    2009     2008     2009     2008  
     (In thousands)  

Total Banks

   $ —      $ —      $ 14,099      $ (163,919   $ 1,841      $ 1,133   

Total Investment Managers

     581      1,738      950        (16,308     2,886        3,909   

Total Wealth Advisors

     1,900      2,281      3,211        1,696        1,132        1,187   
                                              

Total Segments

     2,481      4,019      18,260        (178,531     5,859        6,229   

Holding Company and Eliminations

     —        —        (55,237     (185,302     81        114   
                                              

Total Company

   $ 2,481    $ 4,019    $ (36,977   $ (363,833   $ 5,940      $ 6,343   
                                              

 

(1) For the three and nine months ended September 30, 2008, earnings were reduced, net of the effective tax rate used, by $81.1 million and $108.6 million, respectively, for the Company’s provision for loan losses, by $71.2 million and $107.8 million, respectively, for the impairment of goodwill and intangibles, and by $1.3 million for the warrant expense.

These decreases were slightly offset by gains the Company recognized during the nine months ended September 30, 2008 of $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 nine months of 2008 is not consistent with the Company’s 2009 effective tax rate as a result of the non-deductible goodwill impairment charges. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements – Note 10: Income Taxes” for further detail.

 

(2) Net losses from discontinued operations for the three months ended September 30, 2009 and 2008 of $(30.6) million and $(120.3) million, respectively, and for the nine months ended September 30, 2009 and 2008 of $(39.0) million and $(175.2) million, respectively, are included in Holding Company and Eliminations in the calculation of net loss attributable to the Company.
(3) At September 30, 2009 and 2008, Holding Company and Eliminations assets include assets attributable to discontinued operations of $40.2 million and $1,541.9 million, respectively.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

(4) Investments

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

 

     Amortized
Cost
   Unrealized     Fair
Value
        Gains    Losses    
     (In thousands)

At September 30, 2009:

          

Available for sale securities at fair value:

          

U.S. Government

   $ 3,063    $ 1    $ —        $ 3,064

Government-sponsored entities

     154,810      2,302      (159     156,953

Municipal bonds

     178,681      6,297      (58     184,920

Mortgage-backed securities (1)

     284,797      7,377      (216     291,958

Other

     2,894      77      (59     2,912
                            

Total

   $ 624,245    $ 16,054    $ (492   $ 639,807
                            

Held to maturity securities at amortized cost:

          

U.S. Government

   $ 4,008    $ 35    $ —        $ 4,043

Other

     500      —        —          500
                            

Total

   $ 4,508    $ 35    $ —        $ 4,543
                            

At December 31, 2008:

          

Available for sale securities at fair value:

          

U.S. Government

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

Government-sponsored entities

     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

     4,439      70      (158     4,351
                            

Total

   $ 784,903    $ 14,958    $ (835   $ 799,026
                            

Held to maturity securities at amortized cost:

          

U.S. Government

   $ 3,999    $ 98    $ —        $ 4,097

Other

     500      —        —          500
                            

Total

   $ 4,499    $ 98    $ —        $ 4,597
                            

 

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

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

 

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

Within one year

   $ 33,934    $ 34,274    $ 4,508    $ 4,543

After one, but within five years

     261,629      268,684      —        —  

After five, but within ten years

     68,796      70,375      —        —  

Greater than ten years

     259,886      266,474      —        —  
                           

Total

   $ 624,245    $ 639,807    $ 4,508    $ 4,543
                           

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.

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2009     2008     2009     2008  
     (In thousands)  

Proceeds from sales

   $ 134,043      $ 46,580      $ 272,898      $ 86,236   

Realized gains

     1,135        550        5,612        1,526   

Realized losses

     (71     (19     (153     (200

The following table sets forth information regarding securities at September 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. There were no held-to-maturity securities in an unrealized loss position at September 30, 2009.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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

Government-sponsored entities

   $ 13,907    $ (159   $ —      $ —        $ 13,907    $ (159   4

Municipal Bonds

     5,369      (58     —        —          5,369      (58   8

Mortgage-Backed Securities

     29,370      (170     3,020      (46     32,390      (216   16

Other

     7      (2     151      (57     158      (59   29
                                                 

Total

   $ 48,653    $ (389   $ 3,171    $ (103   $ 51,824    $ (492   57
                                                 

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 the second quarter of 2009, the Company adopted updates to the provisions of ASC 320, Investments – Debt and Equity Securities (formerly FASB Staff Position (“FSP”) FAS 115-2 and FAS 124-2) (“ASC 320”), which amended the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320, 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). ASC 320 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 adoption of ASC 320 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 ASC 320 and ASC 325, Investments – Other (formerly FSP FAS 115-1 and FAS 124-1). An unrealized loss exists when the current fair value of 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 potential 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.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

Recognition and Measurement of Other-than-Temporary Impairment

Prior to adoption of the updated provisions of ASC 320 in the prior quarter, the Company recognized impairments under the previously effective guidance contained within ASC 320.

No impairment losses were recognized through earnings related to available-for-sale or held-to-maturity securities during the three and nine month periods ended September 30, 2009 and September 30, 2008.

(5) Fair Value Measurements

Fair Value is defined under GAAP as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) 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 ASC 820, Fair Value Measurements and Disclosures (formerly FAS 157) (“ASC 820”), which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 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 September 30, 2009 and December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

          Fair value measurements at reporting date using:
Description    At September 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

   $ 3,064    $ 3,064    $ —      $ —  

Government-sponsored entities

     156,953      —        156,953      —  

Municipal bonds

     184,920      —        184,920      —  

Mortgage-backed securities

     291,958      —        288,798      3,160

Other

     2,912      378      2,034      500
                           

Total available-for-sale securities

     639,807      3,442      632,705      3,660

Derivatives - interest rate floor

     3,333      —        3,333      —  

Derivatives - customer swaps

     5,807      —        5,807      —  

Other investments

     3,951      3,951      —        —  

Liabilities:

           

Derivatives - customer swaps

   $ 5,923    $ —      $ 5,923    $ —  

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

          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

   $ 799,026    $ —      $ 799,026    $ —  

Derivatives - interest rate floor

     5,260      —        5,260      —  

Derivatives - customer swaps

     7,762      —        7,762      —  

Other investments

     3,084      3,084      —        —  

Liabilities:

           

Derivative - customer swaps

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

Available-for-sale securities consist primarily of U.S. government securities, government-sponsored entities, 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 government-sponsored entities, 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. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements—Note 9: Derivatives and Hedging Activities” for further details.

To comply with the provisions of ASC 820, 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.

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 nine months ended September 30, 2009:

 

     Balance at
January 1,
2009
   Unrealized
gains (losses)
   Transfers
into Level 3
   Balance at
September 30,
2009
               (In thousands)     

Mortgage-backed securities

   $ —      $ 9    $ 3,151    $ 3,160

Other available-for-sale investments

     —        —        500      500
                           

Total Level 3 assets

   $ —      $ 9    $ 3,651    $ 3,660
                           

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis as of September 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 three months
ended:

Description

   September 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)

   $ 33,959    $ —      $ —      $ 33,959

Loans held for sale (2)

     —        —        —        —  

OREO (3)

     —        —        —        —  
                           
   $ 33,959    $ —      $ —      $ 33,959
                           

 

(1) Collateral-dependent impaired loans whose fair value changed during the third quarter of 2009, net of specific allocations to the general reserve.
(2) No loans in the loans held for sale category had declines in fair value during the third quarter of 2009.
(3) No OREO properties had declines in value during the third quarter of 2009.

 

          Fair value measurements recorded during the three months
ended:

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

   $ 13,654    $ —      $ —      $ 13,654

Loans held for sale

     27,219      —        —        27,219

OREO

     2,436      —        —        2,436
                           
   $ 43,309    $ —      $ —      $ 43,309
                           

Impaired loans include those loans that were measured at the value of underlying collateral as allowed under ASC 310, Receivables (formerly 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.

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 September 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.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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):

 

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

FINANCIAL ASSETS:

           

Cash and cash equivalents

   $ 478,728    $ 478,728    $ 281,275    $ 281,275

Other interest bearing certificates of deposit

     105      105      —        —  

Held-to-maturity securities

     4,508      4,543      4,499      4,597

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

     4,275,671      4,346,674      4,101,836      4,141,499

Other financial assets

     123,133      123,133      124,769      124,769

FINANCIAL LIABILITIES:

           

Deposits

     4,141,023      4,152,351      3,748,912      3,763,141

Securities sold under agreements to repurchase

     138,865      142,678      293,841      298,208

Federal Home Loan Bank borrowings

     579,148      607,088      745,472      775,665

Junior subordinated debentures and other long-term debt

     238,145      176,786      290,585      211,085

Other financial liabilities

     16,519      16,519      16,738      16,738

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.

Other interest-bearing certificates of deposit

The carrying value reported in the balance sheet for other interest-bearing certificates of deposit 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.

Other financial assets

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

The Company carries the FHLB stock at the original cost basis (par value). Each of our Banks is a member of their local FHLB located in either Boston, Seattle, or San Francisco. At each period end, the Company evaluates its investment in

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

the respective FHLB’s 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.

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 September 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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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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

Commercial loans:

    

New England

   $ 1,077,227      $ 986,381   

Northern California

     901,496        821,308   

Southern California

     233,899        220,636   

Pacific Northwest

     115,287        129,727   

Eliminations and other

     (618     (1,144
                

Total commercial loans

   $ 2,327,291      $ 2,156,908   
                

Construction and land loans:

    

New England

   $ 98,181      $ 107,991   

Northern California

     182,448        225,536   

Southern California

     8,300        21,477   

Pacific Northwest

     47,827        76,713   
                

Total construction and land loans

   $ 336,756      $ 431,717   
                

Residential mortgage loans:

    

New England

   $ 1,116,088      $ 1,087,843   

Northern California

     213,370        211,976   

Southern California

     120,175        29,204   

Pacific Northwest

     22,178        23,858   
                

Total residential mortgage loans

   $ 1,471,811      $ 1,352,881   
                

Home equity and other consumer loans:

    

New England

   $ 96,063      $ 87,619   

Northern California

     69,502        78,159   

Southern California

     20,733        15,333   

Pacific Northwest

     4,308        2,683   

Eliminations and other

     3,909        3,781   
                

Total home equity and other consumer loans

   $ 194,515      $ 187,575   
                

Total loans

   $ 4,330,373      $ 4,129,081   
                

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.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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

Classified loans: (1)

     

New England

   $ 14,376    $ 3,210

Northern California

     48,992      10,875

Southern California (2)

     39,580      41,493

Pacific Northwest

     44,755      34,968
             

Total classified loans

   $ 147,703    $ 90,546
             

Loans 30-89 days past due and accruing:

     

New England

   $ 2,185    $ 6,641

Northern California

     136      5,080

Southern California

     5,713      6,276

Pacific Northwest

     3,321      658
             

Total loans 30-89 days past due

     11,355      18,655
             

Non-accrual loans:

     

New England

   $ 9,668    $ 4,098

Northern California

     42,714      6,102

Southern California (3)

     27,398      37,885

Pacific Northwest

     20,058      15,905
             

Total non-accrual loans

   $ 99,838    $ 63,990
             

OREO assets:

     

New England

   $ 740    $ 2,378

Northern California

     6,279      —  

Southern California

     6,439      7,117

Pacific Northwest

     2,984      3,343
             

Total OREO assets

   $ 16,442    $ 12,838
             

Total non-performing assets

   $ 116,280    $ 76,828
             

 

(1) Classified loans include loans classified as either substandard or doubtful.
(2) Includes loans held for sale of $12.8 million and $27.2 million as of September 30, 2009 and December 31, 2008, respectively.
(3) Includes loans held for sale of $13.8 million and $27.2 million as of September 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. There were no loans past due 90 days or more and still accruing interest at either September 30, 2009 or December 31, 2008.

Impaired loans are generally included within the balance of classified loans. Impaired loans totaled $95.4 million as of September 30, 2009, as compared to $62.4 million at December 31, 2008. $47.8 million of the impaired loans had $9.4 million in specific allocations to the general reserve. The remaining $47.6 million of impaired loans did not have specific allocations due either to a previous charge-off of a portion of the impaired loan balance or because the impairment analysis did not indicate that a charge-off was required due primarily to the fair value of the related collateral, less costs to sell, exceeding the loan’s carrying value. At December 31, 2008, $21.6 million of impaired loans had $8.0 million in specific allocations to the general reserve, and the remaining $40.8 million of impaired loans did not have specific allocations. The Company may, under certain circumstances, restructure loans as a concession to a borrower. Such restructured loans are generally included in impaired loans.

The following table presents a summary of the Private Banking credit quality data by loan type. The loan type assigned to the Private Banking credit quality data is based on the purpose of the loan.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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

Classified loans: (1) (2)

     

Commercial and industrial (4)

   $ 27,663    $ 12,296

Commercial real estate (4)

     58,391      20,347

Construction and land

     54,293      57,123

Residential mortgage

     6,639      719

Home equity and other consumer

     717      61
             

Total classified loans

   $ 147,703    $ 90,546
             

Loans 30-89 days past due and accruing:

     

Commercial and industrial (4)

   $ 4,069    $ 3,243

Commercial real estate (4)

     4,758      7,974

Construction and land

     1,277      658

Residential mortgage

     734      6,353

Home equity and other consumer

     517      427
             

Total loans 30-89 days past due

     11,355      18,655
             

Non-accrual loans: (3)

     

Commercial and industrial (4)

   $ 17,782    $ 6,642

Commercial real estate (4)

     31,903      13,465

Construction and land

     43,609      39,602

Residential mortgage

     6,093      4,254

Home equity and other consumer

     451      27
             

Total non-accrual loans

   $ 99,838    $ 63,990
             

 

(1) Classified loans include loans classified as either substandard, doubtful, or loss.
(2) Includes loans held for sale of $12.8 million and $27.2 million as of September 30, 2009 and December 31, 2008, respectively.
(3) Includes loans held for sale of $13.8 million and $27.2 million as of September 30, 2009 and December 31, 2008, respectively.
(4) Commercial and industrial loans and Commercial real estate loans are included in the Commercial loans line item on the Consolidated Balance Sheets.

(7) Allowance for Loan Losses

The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled $73.0 million and $64.1 million at September 30, 2009 and December 31, 2008, respectively.

The increased level of allowance for loan losses reflects the higher amount of non-performing and classified loans, particularly in the Northern California region, 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.

The following table summarizes the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2009 and 2008:

 

     At and for the three months ended
September 30,
    At and for the nine months ended
September 30,
 
     2009     2008     2009     2008  
     (In thousands)     (In thousands)  

Ending gross loans

   $ 4,330,373      $ 4,039,145      $ 4,330,373      $ 4,039,145   
                                

Allowance for loan losses, beginning of period

   $ 71,002      $ 81,541      $ 64,091      $ 59,933   

Provision for loan losses

     9,099        135,145        31,155        180,935   

Charge-offs

     (7,416     (164,262     (23,234     (188,533

Recoveries

     325        7        998        96   
                                

Allowance for loan losses, end of period

   $ 73,010      $ 52,431      $ 73,010      $ 52,431   
                                

Allowance for loan losses to ending gross loans

     1.69     1.30     1.69     1.30

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
     2009    2008     2009    2008
     (In thousands)

Net loans charged off/ (recovered):

          

New England

   $ 546    $ 448      $ 1,938    $ 2,407

Northern California

     130      (3     1,452      13

Southern California

     2,410      163,810        7,952      185,518

Pacific Northwest

     4,005      —          10,894      499
                            

Total net loans charged off

   $ 7,091    $ 164,255      $ 22,236    $ 188,437
                            

The following table presents a summary by loan type for loans charged off, net of recoveries, for the three and nine months ended September 30, 2009 and 2008.

 

     Three months ended
September 30,
    Nine months ended
September 30,
     2009     2008     2009    2008
     (In thousands)

Net loans charged off/ (recovered):

         

Commercial and industrial (1)

   $ 4,484      $ 16,848      $ 11,405    $ 18,434

Commercial real estate (1)

     49        2,321        1,684      3,189

Construction and land

     2,387        145,077        8,624      166,699

Residential mortgage

     (42     12        208      97

Home equity and other consumer

     213        (3     315      18
                             

Total net loans charged off

   $ 7,091      $ 164,255      $ 22,236    $ 188,437
                             

 

(1) Commercial and industrial loans and Commercial real estate loans charged off had been included in the Commercial loans line item on the Consolidated Balance Sheets prior to being charged off.

(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 divestiture plans for BPVI, an Investment Management affiliate, and Sand Hill, a Wealth Advisory affiliate. At the adoption of the divestiture plans, 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.

During the third quarter of 2009, the Company disposed of Gibraltar, a Private Banking affiliate. At divestiture, an intangible asset impairment test was performed on the affiliate using the fair value established pursuant to the divestiture plan. At the time of divestiture, Gibraltar did not have any remaining goodwill but did have certain identifiable intangible assets. It was determined that Gibraltar’s identifiable intangible assets were fully impaired and therefore were written off as of September 17, 2009, the date of the divestiture. The $16.9 million impairment expense is included in losses from discontinued operations. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements – Note 12: Discontinued Operations” for further details.

The divestitures of affiliates Gibraltar, RINET and Westfield triggered an impairment analysis as of September 30, 2009. Neither RINET nor Westfield had any intangible assets. The Company performed a reconciliation of the aggregate fair

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

value of its reporting units to the Company’s overall market capitalization and determined that the Company’s market capitalization was greater than its book value, therefore no additional goodwill or intangible asset impairment was necessary at September 30, 2009, other than the impairment of Gibraltar’s intangibles as discussed in the preceding paragraph.

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

 

     Balance at
September 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 September 30, 2009 and December 31, 2008:

 

     At September 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

   $ 53,720    $ (16,062   $ 37,658    $ 53,708    $ (12,319   $ 41,389

Core deposit intangibles

     3,058      (1,813     1,245      3,058      (141     2,917

Employee agreements

     3,977      (2,474     1,503      3,977      (2,028     1,949

Trade names and other

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

Mortgage servicing rights

     649      (173     476      649      (93     556
                                           

Total other intangibles

   $ 64,554    $ (20,522   $ 44,032    $ 64,542    $ (14,581   $ 49,961
                                           

Amortization expense for the three and nine months ended September 30, 2009 was $2.0 million and $5.9 million, respectively and for the three and nine months ended September 30, 2008 was $2.1 million and $6.3 million, respectively. During the first nine months 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 ASC 815, Derivatives and Hedging (formerly FAS 133) (“ASC 815”), 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) 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 nine months ended September 30, 2009. The Bank affiliate also monitors the risk of counterparty default on an ongoing basis.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

Interest payments received from loans that prepay are included in the hedged portfolio due to the guidance in ASC 815, which allows the designated forecasted transactions to be the variable, Prime-based interest payments on a rolling portfolio of prepayable interest-bearing loans using the first-payments-received technique.

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 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 September 30, 2009 and December 31, 2008, the fair value of the derivative assets was $5.8 million and $7.8 million, respectively and the offsetting derivative liabilities had a fair value of $5.9 million and $7.7 million, respectively. 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 ASC 820 of $0.2 million in the three and nine months ending September 30, 2009, respectively. As of both September 30, 2009 and December 31, 2008, the Company had 18 interest rate swaps with aggregate notional amounts of $184.7 million and $185.8 million, respectively, 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 September 30, 2009.

 

     September 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
   $ 3,333    Other
liabilities
   $ —      Other
assets
   $ 5,260    Other
liabilities
   $ —  

Derivatives not designated as hedging instruments:

                       

Interest rate products

   Other
assets
     5,807    Other
liabilities
     5,923    Other
assets
     7,762    Other
liabilities
     7,698
                                       

Total

      $ 9,140       $ 5,923       $ 13,022       $ 7,698
                                       

As indicated in the table above, as of September 30, 2009 and December 31, 2008, the Floor designated as a cash flow hedge had a fair value of $3.3 million and $5.3 million, respectively. For the three and nine months ended September 30, 2009, the after-tax change in net unrealized losses on the cash flow hedge reported in the consolidated statements of changes in stockholders’ equity were $0.2 million and $0.9 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2009.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

Three Months Ended September 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

   $ (304   Interest income    $ 769    Other income / expense    $ —  

 

Three Months Ended September 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    $ (173

 

Nine Months Ended September 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

   $ (537   Interest income    $ 2,286    Other income / expense    $ —  

 

Nine Months Ended September 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    $ (179

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 September 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 $5.9 million. As of September 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.

(10) Income Taxes

Due to the adoption of plans in the first nine months of 2009 to dispose of BPVI, Sand Hill, RINET, Gibraltar, and Westfield, the results of operations related to BPVI, Sand Hill, RINET, Gibraltar, and Westfield were included in discontinued operations.

The disposition of Gibraltar in the third quarter of 2009 resulted in a loss which is considered to be a capital loss in nature. Due to the Company’s limited amount of historical capital gains available, as well as the limited tax planning strategies available to generate capital gains in the future, the Company recorded a valuation reserve related a significant portion of the capital loss from the Gibraltar disposition.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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:

 

     Nine months ended
September 30,
 
     2009     2008  
     (In thousands)  

Income/ (loss) from continuing operations:

    

Income/ (loss) before income taxes

   $ 6,139      $ (248,210

Income tax expense/ (benefit)

     1,629        (63,560
                

Net income/ (loss) from continuing operations

   $ 4,510      $ (184,650
                

Effective tax rate, continuing operations

     26.5     25.6

Loss from discontinued operations:

    

Loss before income taxes

   $ (42,159   $ (161,632

Income tax (benefit)/ expense

     (3,153     13,532   
                

Net loss from discontinued operations

   $ (39,006   $ (175,164
                

Effective tax rate, discontinued operations

     7.5     -8.4

Income attributable to noncontrolling interests:

    

Income before income taxes

   $ 2,481      $ 4,019   

Income tax expense

     —          —     
                

Net income attributable to noncontrolling interests

   $ 2,481      $ 4,019   
                

Effective tax rate, noncontrolling interests

     0.0     0.0

Loss attributable to the Company

    

Loss before income taxes

   $ (38,501   $ (413,861

Income tax benefit

     (1,524     (50,028
                

Net loss attributable to the Company

   $ (36,977   $ (363,833
                

Effective tax rate, attributable to the Company

     4.0     12.1

The effective tax rate for the nine months ended September 30, 2009 was calculated based on a projected 2009 annual effective tax rate. The effective tax rate from continuing operations was 26.5%, with related tax expense of $1.6 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’s Capital Purchase Program.

The effective tax rate for the nine months ended September 30, 2008 was calculated based on the actual results for the third 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 $213.3 million for goodwill impairment and $66.0 million for the Westfield re-equitization awards.

(11) Noncontrolling Interests

Effective January 1, 2009, the Company adopted updates to ASC 810, Consolidation (formerly FAS 160) (“ASC 810”). ASC 810 affects the accounting, reporting and disclosure of the Company’s noncontrolling interests. More specifically, it establishes the accounting and reporting standards for noncontrolling interests in certain of our affiliates and for the deconsolidation of the 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.

Also affected by this update was ASC 480, which 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.

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 the ASC 480.

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

ASC 810 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. The net income allocated to the noncontrolling interest owners was $1.1 million and $2.5 million for the three and nine months ended September 30, 2009, respectively, and $1.3 million and $4.0 million for the three and nine months ended September 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 EPS computation.

Noncontrolling interests which are not redeemable as provided in ASC 480 are included in stockholders’ equity in the consolidated balance sheets, and include the capital and undistributed profits owned by the noncontrolling partner. Noncontrolling interests amounted to $3.5 million at both September 30, 2009 and December 31, 2008.

Each affiliate operating agreement 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 $51.9 million and $50.2 million are included in the accompanying consolidated balance sheets at September 30, 2009 and December 31, 2008, respectively. The Company may pay for the purchases of these noncontrolling interests in cash, shares of the Company’s common stock, or other forms of consideration dependent on the operating agreement.

The new provisions of ASC 810 have been applied prospectively as of January 1, 2009, except for the presentation and disclosure requirements. The presentation and disclosure requirements were applied retrospectively for all periods presented in the accompanying consolidated financial statements.

(12) Discontinued Operations

During the first quarter of 2009, the Company adopted divestiture plans for BPVI and Sand Hill.

During the third quarter of 2009, the Company adopted divestiture plans for RINET and Gibraltar.

Early in the fourth quarter of 2009, the Company announced an agreement in which management at Westfield will complete the purchase of the firm in 2009, rather than in 2014. The Company determined that as of September 30, 2009 it met the criteria to be classified as held for sale. The transaction is expected to close in the fourth quarter of 2009.

Accordingly, the results of operations related to BPVI, Sand Hill, RINET, Gibraltar, and Westfield are included in the results from discontinued operations. In accordance with ASC 350, Intangibles - Goodwill and Other, the goodwill and intangibles, if any, at BPVI, Sand Hill, RINET, Gibraltar and Westfield were tested for impairment. In accordance with ASC 810, a loss was recognized in the discontinued operations line item on the statement of operations 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 included in the Investment Management segment and the results of operations related to BPVI are now included in discontinued operations which reflect losses of $0.1 million and $2.5 million for the three and nine months ended September 30, 2009, respectively. Of these amounts, $2.1 million of the year to date loss represents the remeasurement of the investment in BPVI to its fair value. The Company recognized income, including divestiture expenses incurred by the Holding Company, of $0.2 million and $0.8 million from discontinued operations related to BPVI for the three and nine months ended September 30, 2008, respectively. The Company recorded a gain on the sale in the amount of less than $0.1 million in the second quarter of 2009. In addition, the assets and liabilities of BPVI have been reflected as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets for periods prior to the divestiture. The Company does not expect any significant future operating cash flows from BPVI. The Company has deferred any potential future gains from contingent payments, if any, until determinable.

On June 29, 2009, the Company divested its interest in Sand Hill. Sand Hill was previously included in the Wealth Advisory segment and the results of operations related to Sand Hill are now included in discontinued operations, which

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

reflects losses, including divestiture expenses incurred by the Holding Company, of less than $0.1 million and $1.1 million for the three and nine months ended September 30, 2009, respectively. There was no loss upon remeasurement of the investment in Sand Hill to its fair value. The Company recognized income of $0.3 million and $1.0 million from discontinued operations related to Sand Hill for the three and nine months ended September 30, 2008, respectively. The Company recorded a gain on the sale in the amount of $0.2 million in the second quarter of 2009. In addition, the assets and liabilities of Sand Hill have been reflected as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets for periods prior to the divestiture. The Company does not expect any significant future operating cash flows from Sand Hill. The Company has deferred any potential future gains from contingent payments, if any, until determinable.

On September 16, 2009, the Company divested its interest in RINET. RINET was previously included in the Wealth Management segment and the results of operations related to RINET are now included in discontinued operations which reflect income, including divestiture expenses incurred by the Holding Company, of $0.1 million and $0.2 million for the three and nine months ended September 30, 2009, respectively. There was no loss upon remeasurement of the investment in RINET to its fair value. The Company recognized income of $0.3 million and $0.8 million from discontinued operations related to RINET for the three and nine months ended September 30, 2008, respectively. The Company recorded a gain on the sale in the amount of approximately $2.0 million in the third quarter of 2009. In addition, the assets and liabilities of RINET have been reflected as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets for periods prior to the divestiture. The Company does not expect any significant future operating cash flows from RINET. The Company has deferred any potential future gains from contingent payments, if any, until determinable.

On September 17, 2009, the Company divested its interest in Gibraltar. Gibraltar was previously included in the Private Banking segment and the results of operations related to Gibraltar are now included in discontinued operations which reflect losses, including divestiture expenses incurred by the Holding Company, of $4.0 million and $19.5 million for the three and nine months ended September 30, 2009, respectively. In addition to these amounts, $16.3 million represents the remeasurement of the investment in Gibraltar to its fair value. The Company recognized a loss of $124.1 million and $120.7 million from discontinued operations related to Gibraltar for the three and nine months ended September 30, 2008, respectively. The Company recorded a loss on the sale in the amount of $34.8 million in the third quarter of 2009. In addition, the assets and liabilities of Gibraltar have been reflected as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets for periods prior to the divestiture. The Company does not expect any future operating cash flows from Gibraltar.

On October 6, 2009, the Company announced an agreement in which management at Westfield will complete the purchase of the firm in 2009, rather than in 2014. Westfield was previously included in the Investment Management segment. The Company met all of the requirements related to a disposal group and has classified Westfield as “held for sale” in accordance with ASC 360 and was therefore included in discontinued operations in accordance with ASC 205-20, Presentation of Financial Statements – Discontinued Operations as of September 30, 2009, which reflects income of $5.4 million and $13.3 million for the three and nine months ended September 30, 2009, respectively. The Company recognized income of $6.7 million and a loss of $43.3 million from discontinued operations related to Westfield for the three and nine months ended September 30, 2008, respectively. In addition, the assets and liabilities of Westfield have been reflected as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets. The transaction is expected to close in the fourth quarter of 2009. The Company expects operating cash flows from Westfield during the fourth quarter of 2009. Additionally, the Company will retain a 12.5% revenue interest in Westfield for eight years, subject to certain limitations, for which it expects annual payments ranging from $5.6 million to $11.6 million.

The following table includes summary income statement information, reflected as discontinued operations, for the periods presented:

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2009     2008     2009     2008  
     (In thousands)  

Revenues

   $ 30,712      $ 37,702      $ 92,877      $ 121,775   

Pre-tax loss

     (12,376     (116,564     (22,707     (161,632

Pre-tax loss, net of gains, from disposal of discontinued operations

     (19,093     —          (19,452     —     

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

(13) Recent Accounting Developments

In June, 2009, the FASB issued updates to ASC 810, Consolidation, (formerly known as FAS 167) (“ASC 810”). These updates require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. It determines whether a reporting entity is required to consolidate another entity based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. These updates are effective on a prospective basis in fiscal years beginning on or after November 15, 2009, and interim periods within those fiscal years, and will be adopted by the Company in the first quarter of fiscal year 2010. The Company is assessing the potential impact, if any, of the adoption of these updates on its consolidated results of operations and financial condition.

Effective July 1, 2009, the FASB’s Accounting Standards Codification (the “ASC”) became the single official source of authoritative, nongovernmental GAAP in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to the ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of the ASC.

(14) Subsequent Events

The Company evaluated subsequent events through the date the accompanying unaudited interim financial statements were issued, which was November 6, 2009. Pursuant to the requirements of ASC 855, Subsequent Events (formerly FAS 165), there were no events or transactions during the subsequent event reporting period that required disclosure in the financial statements, other than the Westfield agreement, which is discussed in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 12: Discontinued Operations.”

 

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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 nine months ended September 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, investment management and wealth 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 third 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.

The following table illustrates the Company’s operations for the three months ended September 30, 2009 compared to the same period in 2008:

 

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

Total revenues

   $ 66,240      $ 66,087      $ 153      0

Total operating expenses

     55,936        142,042        (86,106   -61

Net income/ (loss) from continuing operations

     390        (151,803     152,193      nm   

Net income attributable to noncontrolling interests

     1,136        1,255        (119   -9

Net loss from discontinued operations

     (30,614     (120,303     89,689      75

Net loss attributable to the Company

     (31,360     (273,361     242,001      89

(Loss)/ earnings per share:

        

From continuing operations

   $ (0.15   $ (3.52   $ 3.37      96

From discontinued operations

     (0.45     (2.34     1.89      81

Attributable to the Company

     (0.60     (5.86     5.26      90

 

nm not meaningful

 

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The major differences leading to the $86.1 million decrease in operating expenses and the $152.2 million increase in net income from continuing operations from the third quarter of 2008 to the third quarter of 2009 include the non-cash impairment charge of $71.2 million, net of tax, recorded in the third quarter 2008, and the transfer of the non-strategic Southern California loan portfolio to the loans held for sale category resulting in charge-offs of $96.4 million, net of tax, in the third quarter of 2008.

The third quarter 2009 earnings per share were adversely impacted by accounting adjustments which reduced income available to common shareholders by $9.9 million, or $0.14 per share.

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

 

  1. Net interest margin (“NIM”) compression due to several factors including a higher percentage of the Company’s assets invested 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