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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 June 30, 2010

Or

 

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

For the transition period from              to             .

Commission File Number: 0-17089

 

 

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Commonwealth of Massachusetts   04-2976299

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

Ten Post Office Square

Boston, Massachusetts

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

Registrant’s telephone number, including area code: (888) 666-1363

 

 

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

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

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

 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 30, 2010:

 

Common Stock-Par Value $1.00   76,031,090
(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    8
Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations    29
   Executive Summary    29
   Critical Accounting Policies    30
   Financial Condition    31
  

Condensed Consolidated Balance Sheets and Discussion

   31
  

Loan Portfolio and Credit Quality

   33
   Liquidity    38
   Capital Resources    39
  

Financial Regulatory Reform Legislation

   41
   Results of Operations    41
   Recent Accounting Developments    46
Item 3    Quantitative and Qualitative Disclosures about Market Risk    47
Item 4    Controls and Procedures    47
PART II—OTHER INFORMATION
Item 1    Legal Proceedings    48
Item 1A    Risk Factors and Factors Affecting Forward-Looking Statements    48
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds    48
Item 3    Defaults upon Senior Securities    48
Item 4    (Removed and Reserved)    48
Item 5    Other Information    48
Item 6    Exhibits    48
   Signature Page    50
   Certifications   


Table of Contents

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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

     June 30,
2010
    December 31,
2009
 
     (In thousands, except share and per share data)  

Assets:

    

Cash and due from banks

   $ 234,606      $ 446,916   

Federal funds sold

     1,183        544   
                

Cash and cash equivalents

     235,789        447,460   

Investment securities:

    

Available-for-sale (amortized cost of $716,724 and $876,910, respectively)

     731,115        888,032   

Held-to-maturity (fair value of $3,003 and $4,511, respectively)

     2,995        4,501   
                

Total investment securities

     734,110        892,533   

Loans held for sale

     28,449        12,714   

Loans:

    

Commercial

     2,327,240        2,213,020   

Construction and land

     259,829        315,661   

Residential mortgage

     1,601,714        1,494,703   

Home equity and other consumer loans

     297,418        283,656   
                

Total loans

     4,486,201        4,307,040   

Less: allowance for loan losses

     79,073        68,444   
                

Net loans

     4,407,128        4,238,596   

Other real estate owned (“OREO”)

     12,113        16,600   

Stock in Federal Home Loan Banks

     46,941        47,490   

Premises and equipment, net

     27,514        28,349   

Goodwill

     108,695        108,692   

Intangible assets, net

     38,756        41,425   

Fees receivable

     7,486        7,320   

Accrued interest receivable

     18,453        19,292   

Income tax receivable and deferred

     70,388        52,267   

Other assets

     131,887        136,527   
                

Total assets

   $ 5,867,709      $ 6,049,265   
                

Liabilities:

    

Deposits

   $ 4,380,793      $ 4,255,219   

Securities sold under agreements to repurchase

     110,274        243,377   

Federal funds purchased

     30,000        —     

Federal Home Loan Bank borrowings

     505,620        555,012   

Junior subordinated debentures

     193,645        193,645   

Other liabilities

     87,039        99,008   
                

Total liabilities

     5,307,371        5,346,261   
                

Redeemable noncontrolling interests

     19,672        51,850   

The Company’s Stockholders’ equity:

    

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

    

Series B, issued and outstanding (contingently convertible): 401 shares at June 30, 2010 and December 31, 2009; liquidation value: $100,000 per share

     58,089        58,089   

Series C, issued and outstanding: 0 shares at June 30, 2010 and 154,000 shares at December 31, 2009; liquidation value $1,000 per share

     —          146,012   

Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 74,824,812 shares at June 30, 2010 and 68,666,263 shares at December 31, 2009

     74,825        68,666   

Additional paid-in capital

     651,795        629,001   

Accumulated deficit

     (251,961     (258,186

Accumulated other comprehensive income

     7,918        7,572   
                

Total stockholders’ equity

     540,666        651,154   
                

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

   $ 5,867,709      $ 6,049,265   
                

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (In thousands, except share and per share data)  

Interest and dividend income:

        

Loans

   $ 57,434      $ 57,292      $ 115,300      $ 115,626   

Taxable investment securities

     1,624        1,698        3,129        3,839   

Non-taxable investment securities

     1,262        1,663        2,587        3,398   

Mortgage-backed securities

     1,894        3,930        4,326        7,383   

Federal funds sold and other

     277        208        720        351   
                                

Total interest and dividend income

     62,491        64,791        126,062        130,597   
                                

Interest expense:

        

Deposits

     9,381        15,185        20,011        30,952   

Federal Home Loan Bank borrowings

     5,073        6,395        10,489        12,875   

Junior subordinated debentures and other long-term debt

     2,504        3,130        4,994        6,401   

Other short-term borrowings

     516        779        1,241        1,658   
                                

Total interest expense

     17,474        25,489        36,735        51,886   
                                

Net interest income

     45,017        39,302        89,327        78,711   

Provision for loan losses

     14,962        8,731        22,577        22,056   
                                

Net interest income after provision for loan losses

     30,055        30,571        66,750        56,655   
                                

Fees and other income:

        

Investment management and trust fees

     15,156        12,746        30,031        25,757   

Wealth advisory fees

     9,304        8,496        18,562        16,768   

Gain on repurchase of debt

     —          —          —          407   

Gain on sale of investments, net

     987        951        2,419        4,394   

Gain on sale of loans, net

     500        802        958        1,428   

Gain on sale of non-strategic loans portfolios, net

     —          1,276        —          2,435   

(Loss)/ gain on sale of OREO, net

     (1,611     (243     (2,020     2,242   

Other

     1,297        2,913        3,111        4,131   
                                

Total fees and other income

     25,633        26,941        53,061        57,562   
                                

Operating expense:

        

Salaries and employee benefits

     34,653        32,403        68,501        62,405   

Occupancy and equipment

     6,696        6,877        13,482        13,107   

Professional services

     4,324        4,909        9,168        9,933   

Marketing and business development

     2,042        1,804        3,553        3,413   

Contract services and data processing

     1,437        1,294        2,763        2,597   

Amortization of intangibles

     1,339        2,279        2,669        3,916   

FDIC insurance

     2,266        3,707        4,353        5,114   

Other

     3,908        4,383        8,209        8,798   
                                

Total operating expense

     56,665        57,656        112,698        109,283   
                                

(Loss)/ income before income taxes

     (977     (144     7,113        4,934   

Income tax (benefit)/ expense

     (1,202     (3     1,134        815   
                                

Net income/ (loss) from continuing operations

     225        (141     5,979        4,119   

Net income/ (loss) from discontinued operations

     1,509        (7,763     1,545        (8,392
                                

Net income/ (loss) before attribution to noncontrolling interests

     1,734        (7,904     7,524        (4,273

Less: Net income attributable to noncontrolling interests

     616        579        1,301        1,344   
                                

Net income/ (loss) attributable to the Company

   $ 1,118      $ (8,483   $ 6,223      $ (5,617
                                

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

     (6,160     (8,101     (9,628     (16,506
                                

Net loss attributable to common shareholders for (loss)/ earnings per share calculation

   $ (5,042   $ (16,584   $ (3,405   $ (22,123
                                

(Loss)/ earnings per share attributable to the Company’s common shareholders:

        

(Loss)/ earnings per share from continuing operations:

        

Basic and diluted (loss)/ earnings per share

   $ (0.09   $ (0.13   $ (0.07   $ (0.21

Earnings/ (loss) per share from discontinued operations:

        

Basic and diluted earnings/ (loss) per share

   $ 0.02      $ (0.11   $ 0.02      $ (0.12

Net (loss)/ earnings per share attributable to the Company’s common shareholders:

        

Basic and diluted (loss)/ earnings per share

   $ (0.07   $ (0.24   $ (0.05   $ (0.33

Weighted average basic and diluted common shares outstanding

     68,787,389        67,860,696        68,331,183        66,264,319   

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
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Noncontrolling
Interests
   Total  
     (In thousands, except share data)  

Balance at December 31, 2008

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

Comprehensive Income:

                

Net loss attributable to the Company

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

Other comprehensive income/(loss), net:

                

Change in unrealized loss on securities available-for-sale, net

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

Change in unrealized loss on cash flow hedge, net

     —        —          —          —          (699     —        (699

Change in unrealized gain on other, net

     —        —          —          —          15        —        15   
                      

Total comprehensive loss attributable to the Company, net

                   (8,818

Dividends paid to common shareholders

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

Dividends paid to preferred shareholders

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

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

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

Accretion of Series B Preferred stock Beneficial Conversion Feature

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

Accretion of discount on Series C Preferred stock

     —        622        (622     —          —          —        —     

Issuance of 11,498 shares of incentive common stock

     11      —          (11     —          —          —        —     

Amortization of incentive stock grants

     —        —          1,382        —          —          —        1,382   

Amortization of stock options and employee stock purchase plan

     —        —          1,781        —          —          —        1,781   

Stock options exercised

     72      —          238        —          —          —        310   

Tax deficiency from certain stock compensation awards

     —        —          (692     —          —          —        (692

Other equity adjustments

     —        (178     (221     —          —          —        (399
                                                      

Balance at June 30, 2009

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

Balance at December 31, 2009

   $ 68,666    $ 204,101      $ 629,001      $ (258,186   $ 7,572      $ —      $ 651,154   

Comprehensive Income:

                

Net income attributable to the Company

     —        —          —          6,223        —          —        6,223   

Other comprehensive income/(loss), net:

                

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

     —        —          —          —          1,619        —        1,619   

Change in unrealized loss on cash flow hedges, net

     —        —          —          —          (1,274     —        (1,274

Change in unrealized gain on other, net

     —        —          —          —          1        —        1   
                      

Total comprehensive income attributable to the Company, net

                   6,569   

Dividends paid to common shareholders

     —        —          (1,378     —          —          —        (1,378

Dividends paid to preferred shareholders

     —        —          (2,954     —          —          —        (2,954

Net proceeds from issuance of 562,481 shares of common stock

     563      —          3,176        —          —          —        3,739   

Net proceeds from issuance of 4,715,000 shares of common stock in June 2010 public offering

     4,715      —          22,322        —          —          —        27,037   

Carlyle gross up rights equity receivable

     —        —          6,268        —          —          —        6,268   

Repurchase of 154,000 shares of Series C Preferred stock

     —        (154,000     —          —          —          —        (154,000

Accretion of discount on Series C Preferred stock

     —        7,988        (7,988     —          —          —        —     

Issuance of 870,787 shares of incentive common stock

     871      —          (871     —          —          —        —     

Amortization of incentive stock grants

     —        —          1,623        —          —          —        1,623   

Amortization of stock options and employee stock purchase plan

     —        —          744        —          —          —        744   

Stock options exercised

     10      —          34        —          —          —        44   

Tax deficiency from certain stock compensation awards

     —        —          (974     —          —          —        (974

Other equity adjustments

     —        —          2,792        2        —          —        2,794   
                                                      

Balance at June 30, 2010

   $ 74,825    $ 58,089      $ 651,795      $ (251,961   $ 7,918      $ —      $ 540,666   
                                                      

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2010     2009  
     (In thousands)  

Cash flows from operating activities:

    

Net income/ (loss) attributable to the Company

   $ 6,223      $ (5,617

Adjustments to arrive at net income from continuing operations

    

Net income attributable to noncontrolling interests

     1,301        1,344   

(Gain)/ loss from operating activities of discontinued operations, net of tax

     (1,545     8,392   
                

Net income from continuing operations

     5,979        4,119   
                

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

    

Depreciation and amortization

     8,591        8,446   

Net income attributable to noncontrolling interests

     (1,301     (1,344

Equity issued as compensation

     2,367        3,163   

Provision for loan losses

     22,577        22,056   

Loans originated for sale

     (76,077     (180,190

Proceeds from sale of loans held for sale

     79,293        178,726   

Gain on the repurchase of debt

     —          (407

(Increase)/ decrease in income tax receivable and deferred

     (18,121     51,319   

Net (increase)/ decrease in other operating activities

     (4,327     15,437   
                

Net cash provided by operating activities - continuing operations

     18,981        101,325   

Net cash provided by operating activities - discontinued operations

     1,545        18,284   
                

Net cash provided by operating activities

     20,526        119,609   
                

Cash flows from investing activities:

    

Investment securities available-for-sale:

    

Purchases

     (388,262     (290,832

Sales

     366,636        138,813   

Maturities, redemptions, and principal payments

     181,360        235,971   

Investment securities held-to-maturity:

    

Purchases

     (9,001     (4,016

Maturities and principal payments

     10,507        4,008   

Investments in trusts, net

     (164     (510

Redemption of Federal Home Loan Bank stock

     549        —     

Net increase in portfolio loans

     (216,464     (126,928

Proceeds from sale of OREO

     10,217        13,765   

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

     184        6,072   

Capital expenditures, net of sale proceeds

     (2,152     (3,555

Acquisition of remaining 19% interest in KLS

     (29,691     —     

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

     —          (645
                

Net cash used in investing activities - continuing operations

     (76,281     (27,857

Net cash used in investing activities - discontinued operations

     —          (11,728
                

Net cash used in investing activities

     (76,281     (39,585
                

Cash flows from financing activities:

    

Net increase in deposits

     125,574        317,779   

Net decrease in securities sold under agreements to repurchase

     (133,103     (117,446

Net increase in federal funds purchased

     30,000        —     

Net decrease in short-term Federal Home Loan Bank borrowings

     —          (134,300

Advances of long-term Federal Home Loan Bank borrowings

     46,040        19,127   

Repayments of long-term Federal Home Loan Bank borrowings

     (95,432     (32,850

Repurchase of debt

     —          (48,444

Repurchase of Series C Preferred stock

     (154,000     —     

Dividends paid to common stockholders

     (1,378     (1,314

Dividends paid to preferred stockholders

     (2,954     (3,867

Tax deficiency from certain stock compensation awards

     (974     (692

(Continued)

 

6


Table of Contents

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

Proceeds from stock option exercises

     44        310   

Proceeds from issuance of common stock, net

     436        351   

Proceeds from issuance of common stock from June 2010 public offering, net

     27,037        —     

Other equity adjustments

     2,794        (399
                

Net cash used in financing activities - continuing operations

     (155,916     (1,745

Net cash used in financing activities - discontinued operations

     —          (2,921
                

Net cash used in financing activities

     (155,916     (4,666
                

Net (decrease)/ increase in cash and cash equivalents

     (211,671     75,358   

Cash and cash equivalents at beginning of year

     447,460        281,275   
                

Cash and cash equivalents at end of period

   $ 235,789      $ 356,633   
                

Supplementary schedule of non-cash investing and financing activities:

    

Cash paid for interest

   $ 39,765      $ 54,402   

Cash paid for income taxes, net of refunds received

     21,113        75,005   

Change in unrealized gain/ (loss) on securities available-for-sale, net of tax

     1,619        (2,517

Change in unrealized loss on cash flow hedges, net of tax

     (1,274     (699

Change in unrealized gain on other, net of tax

     1        15   

Non-cash transactions:

    

Loans transferred to other real estate owned from held for sale or portfolio

     7,379        11,832   

Equity issued for acquisitions, including deferred acquisition obligations

     3,303        10,625   

Equity receivable related to June 18, 2010 investment agreement with Carlyle

     6,268        —     

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, consisting of Boston Private Bank & Trust Company (“Boston Private Bank”), Borel Private Bank & Trust Company (“Borel”), First Private Bank & Trust (“FPB”), and Charter Private Bank (formerly Charter Bank) (“Charter”) (together, the “Banks”). The Investment Management segment has two consolidated affiliate partners, consisting of 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, consisting of 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 2009, BPFH divested its interests in Gibraltar Private Bank & Trust Company (“Gibraltar”), RINET Company, LLC (“RINET”), Boston Private Value Investors, Inc. (“BPVI”) and Sand Hill Advisors, LLC (“Sand Hill”). The Company also entered into an agreement with the management team of Westfield Capital Management Company, LP (“Westfield”) to complete the purchase of Westfield during the fourth quarter of 2009, instead of in 2014 as contemplated in a previously announced agreement. Accordingly, the results of operations for the five divested affiliates are included in the results from discontinued operations for prior periods, and gain or loss on sale related to the divestitures are included in the interim periods in which the affiliates were divested. See Part II. Item 8. “Financial Statements and Supplementary Data—Note 2: Divestitures and Acquisitions” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for further detail on the divestitures.

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 for the year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”). Prior periods’ amounts are reclassified whenever necessary to conform to the current periods’ 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, 2009 filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies.

 

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(2) Earnings Per Share

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

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 
     2010     2009     2010     2009  
     (In thousands, except share and per share data)  

Basic earnings/ (loss) per share

        

Numerator:

        

Net income/ (loss) from continuing operations

   $ 225      $ (141   $ 5,979      $ 4,119   

Less: Net income attributable to noncontrolling interests

     616        579        1,301        1,344   
                                

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

     (391     (720     4,678        2,775   
                                

Decrease/ (increase) in noncontrolling interests redemption value (1)

     190        (1,624     1,314        (2,771

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

     —          (4,879     —          (9,246

Accretion of discount on Series C Preferred stock (3)

     (4,963     (242     (7,988     (622

Dividends on preferred stock

     (1,387     (1,356     (2,954     (3,867
                                

Total adjustments to income attributable to common shareholders

     (6,160     (8,101     (9,628     (16,506
                                

Net loss from continuing operations attributable to common shareholders

     (6,551     (8,821     (4,950     (13,731

Net income/ (loss) from discontinued operations

     1,509        (7,763     1,545        (8,392
                                

Net loss attributable to common shareholders

   $ (5,042   $ (16,584   $ (3,405   $ (22,123
                                

Denominator:

        

Weighted average basic and diluted common shares outstanding (4)

     68,787,389        67,860,696        68,331,183        66,264,319   

Basic and diluted earnings/ (loss) per share:

        

Basic and diluted loss per share from continuing operations

   $ (0.09   $ (0.13   $ (0.07   $ (0.21

Basic and diluted earnings/ (loss) per share from discontinued operations

   $ 0.02      $ (0.11   $ 0.02      $ (0.12

Basic and diluted loss per share attributable to common shareholders

   $ (0.07   $ (0.24   $ (0.05   $ (0.33

Dividends declared on common stock

   $ 0.01      $ 0.01      $ 0.02      $ 0.02   

 

(1) See Part I. Item 1. “Notes to the Unaudited Consolidated Financial Statements—Note 10: Noncontrolling Interests” for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), an increase in redemption value from period to period reduces income attributable to common shareholders. Decreases in redemption value from period to period increase income attributable to common shareholders, but only to the extent that the cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.
(2) See the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, Part II. Item 8. “Financial Statements and Supplementary Data—Note 16: Equity” for a description of the preferred stock 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. The beneficial conversion feature on the Series B Preferred stock was fully accreted as of December 31, 2009.
(3)

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, Part II. Item 8. “Financial Statements and Supplementary Data—Note 16: Equity” for a description of the preferred stock that gave rise to the accretion of discount. In accordance with ASC 480, the accretion of the discount on the Series C Preferred stock is accounted for similar to a preferred

 

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stock dividend and reduces income attributable to common shareholders. The Company repurchased $50.0 million of the Series C Preferred stock in January, 2010, and repurchased the remaining $104.0 million in June, 2010. The discount on the Series C Preferred stock was therefore fully accreted as of June 30, 2010.

(4) The diluted EPS computation for the three and six months ended June 30, 2010 and 2009 does not assume conversion of the convertible trust preferred securities or the Series B Preferred stock, exercise or contingent issuance of options or other dilutive securities, or the exercise of the warrants issued to an affiliate of The Carlyle Group (“Carlyle”), because the result would have been anti-dilutive. As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:

 

     For the three months
ended June 30,
   For the six months
ended June 30,
     2010    2009    2010    2009
     (In thousands)

Potential common shares from:

           

Convertible trust preferred securities

   1,860    3,229    1,860    3,229

Conversion of the Series B Preferred stock

   7,261    7,261    7,261    7,261

Exercise or contingent issuance of options or other dilutive securities

   1,855    981    1,656    1,026
                   

Total potential common shares

   10,976    11,471    10,777    11,516
                   

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 $0.4 million and $0.9 million for the three and six month periods ended June 30, 2010, respectively, and $0.7 million and $1.5 million for the three and six month periods ended June 30, 2009, respectively, would have been added back to net loss attributable to common shareholders for diluted EPS computations for the periods presented.

If the effect of the conversion of the Series B Preferred stock would have been dilutive, preferred dividends related to the Series B Preferred stock of $0.1 million for the three and six month periods ended June 30, 2010 and 2009 would have been added back to net loss attributable to common shareholders for diluted EPS computations for the periods presented.

Options to purchase shares of common stock that were outstanding at June 30, 2010 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 period. These shares excluded from the diluted EPS computation amounted to 4.6 million and 4.4 million for the three and six month periods ended June 30, 2010, respectively, and 5.2 million for both the three and six month periods ended June 30, 2009.

A warrant to purchase approximately 2.9 million shares of common stock (the “TARP warrant”) was outstanding at June 30, 2010 and 2009, but was not included in the computation of diluted EPS because the warrant’s exercise price was greater than the average market price of the common shares for the three and six month periods ended June 30, 2010 and 2009.

 

(3) Reportable segments

Management Reporting

The Company has three reportable segments (Private Banking, Investment Management, and Wealth Advisory) and the parent company (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 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Revenues, expenses, and assets are recorded by each segment, and separate financial statements are reviewed by their management and the Company’s Segment Chief Executive Officers.

Reconciliation of Reportable Segment Items

The following tables provide a reconciliation of the revenues, profits, assets, and other significant items of reportable segments as of and for the three and six months ended June 30, 2010 and 2009. Interest expense on junior subordinated debentures and a portion of the long-term debt are reported at the Holding Company.

 

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     For the three months ended June 30,  
     Net interest income     Non-interest income    Total revenues  
     2010     2009     2010     2009    2010     2009  
                 (In thousands)             

Total Banks

   $ 47,339      $ 41,944      $ 7,255      $ 10,094    $ 54,594      $ 52,038   

Total Investment Managers

     35        46        9,418        7,686      9,453        7,732   

Total Wealth Advisors

     (14     18        9,305        8,496      9,291        8,514   
                                               

Total Segments

     47,360        42,008        25,978        26,276      73,338        68,284   
                                               

Holding Company and Eliminations

     (2,343     (2,706     (345     665      (2,688     (2,041
                                               

Total Company

   $ 45,017      $ 39,302      $ 25,633      $ 26,941    $ 70,650      $ 66,243   
                                               

 

     For the three months ended June 30,  
     Non-interest expense    Income tax (benefit)/expense     Net income/(loss) from
continuing operations
 
     2010    2009    2010     2009     2010     2009  
     (In thousands)  

Total Banks

   $ 36,117    $ 38,418    $ 10      $ 1,278      $ 3,505      $ 3,611   

Total Investment Managers

     7,483      6,914      582        398        1,388        420   

Total Wealth Advisors

     7,325      5,900      755        885        1,211        1,729   
                                              

Total Segments

     50,925      51,232      1,347        2,561        6,104        5,760   
                                              

Holding Company and Eliminations

     5,740      6,424      (2,549     (2,564     (5,879     (5,901
                                              

Total Company

   $ 56,665    $ 57,656    $ (1,202   $ (3   $ 225      $ (141
                                              

 

     For the three months ended June 30,
     Net income from  continuing
operations attributable to
noncontrolling interests
    Net income/(loss) attributable
to the Company (1)
    Amortization of intangibles
     2010    2009     2010     2009     2010    2009
     (In thousands)

Total Banks

   $ —      $ —        $ 3,505      $ 3,611      $ 86    $ 909

Total Investment Managers

     340      (19     1,048        439        869      964

Total Wealth Advisors

     276      598        935        1,131        357      379
                                            

Total Segments

     616      579        5,488        5,181        1,312      2,252
                                            

Holding Company and Eliminations

     —        —          (4,370     (13,664     27      27
                                            

Total Company

   $ 616    $ 579      $ 1,118      $ (8,483   $ 1,339    $ 2,279
                                            

 

     As of June 30,  
     Assets (2)    Assets Under Management/
Advisory (“AUM”)
 
     2010    2009    2010     2009  
     (In thousands)    (In millions)  

Total Banks

   $ 5,661,275    $ 5,483,004    $ 3,405      $ 3,241   

Total Investment Managers

     110,606      111,691      6,880        6,298   

Total Wealth Advisors

     72,854      74,260      7,210        6,400   
                              

Total Segments

     5,844,735      5,668,955      17,495        15,939   
                              

Holding Company and Eliminations

     22,974      1,596,783      (17     (16
                              

Total Company

   $ 5,867,709    $ 7,265,738    $ 17,478      $ 15,923   
                              

 

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Table of Contents
     For the six months ended June 30,  
     Net interest income     Non-interest income    Total revenues  
     2010     2009     2010     2009    2010     2009  
     (In thousands)  

Total Banks

   $ 93,886      $ 83,986      $ 16,069      $ 24,788    $ 109,955      $ 108,774   

Total Investment Managers

     72        93        18,571        15,790      18,643        15,883   

Total Wealth Advisors

     (14     35        18,561        16,763      18,547        16,798   
                                               

Total Segments

     93,944        84,114        53,201        57,341      147,145        141,455   
                                               

Holding Company and Eliminations

     (4,617     (5,403     (140     221      (4,757     (5,182
                                               

Total Company

   $ 89,327      $ 78,711      $ 53,061      $ 57,562    $ 142,388      $ 136,273   
                                               

 

     For the six months ended June 30,  
     Non-interest expense    Income tax expense/
(benefit)
    Net income/ (loss) from
continuing operations
 
     2010    2009    2010     2009     2010     2009  
     (In thousands)  

Total Banks

   $ 71,410    $ 71,611    $ 3,884      $ 4,688      $ 12,084      $ 10,419   

Total Investment Managers

     14,787      14,181      1,412        730        2,444        972   

Total Wealth Advisors

     14,649      12,217      1,457        1,537        2,441        3,044   
                                              

Total Segments

     100,846      98,009      6,753        6,955        16,969        14,435   
                                              

Holding Company and Eliminations

     11,852      11,274      (5,619     (6,140     (10,990     (10,316
                                              

Total Company

   $ 112,698    $ 109,283    $ 1,134      $ 815      $ 5,979      $ 4,119   
                                              

 

     For the six months ended June 30,
     Net income from continuing
operations attributable to
noncontrolling  interests
   Net income/(loss) attributable
to the Company (1)
    Amortization of intangibles
     2010    2009    2010     2009     2010    2009
     (In thousands)

Total Banks

   $ —      $ —      $ 12,084      $ 10,419      $ 173    $ 1,166

Total Investment Managers

     703      210      1,741        762        1,738      1,936

Total Wealth Advisors

     598      1,134      1,843        1,910        705      759
                                           

Total Segments

     1,301      1,344      15,668        13,091        2,616      3,861
                                           

Holding Company and Eliminations

     —        —        (9,445     (18,708     53      55
                                           

Total Company

   $ 1,301    $ 1,344    $ 6,223      $ (5,617   $ 2,669    $ 3,916
                                           

 

(1) Net income/ (loss) from discontinued operations for the three months ended June 30, 2010 and 2009 of $1.5 million and $(7.8) million, respectively, and for the six months ended June 30, 2010 and 2009 of $1.5 million and $(8.4) million, respectively, are included in Holding Company and Eliminations in the calculation of net loss attributable to the Company.
(2) At June 30, 2009, Holding Company and Eliminations assets include assets attributable to discontinued operations of $1.6 billion.

 

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(4) Investments

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

 

     Amortized
Cost
   Unrealized     Fair
Value
        Gains    Losses    
     (In thousands)

At June 30, 2010:

          

Available-for-sale securities at fair value:

          

U.S. government and agencies

   $ 13,558    $ 157    $ (2   $ 13,713

Government-sponsored entities

     282,979      2,307      (6     285,280

Corporate bonds

     11,564      49      (14     11,599

Municipal bonds

     197,992      5,036      (106     202,922

Mortgage-backed securities (1)

     207,694      6,999      (59     214,634

Other

     2,937      97      (67     2,967
                            

Total

   $ 716,724    $ 14,645    $ (254   $ 731,115
                            

Held-to-maturity securities at amortized cost:

          

U.S. government and agencies

   $ 687    $ —      $ —        $ 687

Government-sponsored entities

     1,808      8      —          1,816

Other

     500      —        —          500
                            

Total

   $ 2,995    $ 8    $ —        $ 3,003
                            

At December 31, 2009:

          

Available-for-sale securities at fair value:

          

U.S. government and agencies

   $ 184,719    $ 3    $ —        $ 184,722

Government-sponsored entities

     187,557      1,400      (563     188,394

Corporate bonds

     15,961      —        (18     15,943

Municipal bonds

     179,008      5,680      (144     184,544

Mortgage-backed securities (1)

     306,761      5,909      (1,159     311,511

Other

     2,904      65      (51     2,918
                            

Total

   $ 876,910    $ 13,057    $ (1,935   $ 888,032
                            

Held-to-maturity securities at amortized cost:

          

U.S. government and agencies

   $ 4,001    $ 10    $ —        $ 4,011

Other

     500      —        —          500
                            

Total

   $ 4,501    $ 10    $ —        $ 4,511
                            

 

  (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 June 30, 2010:

 

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

Within one year

   $ 72,597    $ 73,201    $ 1,187    $ 1,187

After one, but within five years

     365,479      371,488      1,208      1,214

After five, but within ten years

     90,737      92,283      600      602

Greater than ten years

     187,911      194,143      —        —  
                           

Total

   $ 716,724    $ 731,115    $ 2,995    $ 3,003
                           

 

  (1) Mortgage-backed securities are shown based on their final maturity, but due to prepayments they are expected to have shorter lives.

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

 

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     For the three months
ended June 30,
    For the six months ended
June 30,
 
     2010     2009     2010     2009  
     (In thousands)     (In thousands)  

Proceeds from sales

   $ 139,115      $ 43,860      $ 366,636      $ 138,813   

Realized gains

     1,048        1,032        2,511        4,497   

Realized losses

     (61     (81     (92     (103

The following table sets forth information regarding securities at June 30, 2010 having temporary impairment due to the fair 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 June 30, 2010.

 

     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)

U.S. government and agencies

   $ 931    $ (2   $ —      $ —        $ 931    $ (2   1

Government-sponsored entities

     4,994      (6     —        —          4,994      (6   1

Corporate bonds

     1,562      (14     —        —          1,562      (14   2

Municipal bonds

     26,341      (99     937      (7     27,278      (106   29

Mortgage-backed securities

     17,785      (59     —        —          17,785      (59   7

Other

     146      (17     85      (50     231      (67   36
                                                 

Total

   $ 51,759    $ (197   $ 1,022    $ (57   $ 52,781    $ (254   76
                                                 

The U.S. government and agencies security, government-sponsored entities security, and mortgage-backed securities in the table above had a Moody’s credit rating of AAA or a Standard and Poor’s credit rating of Aaa. The corporate bonds in the table above had Moody’s credit ratings of A2 and A3. Most of the municipal bonds in the table above had a Moody’s credit ratings of at least Aa3 or Standard and Poor’s credit rating of at least AA-, while five of the municipal bonds had a Moody’s credit rating of A1, and one municipal bond was not rated. The other securities consisted of equity securities.

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 recent market volatility and not credit quality, the Company has no current intent to sell these securities nor is it more likely than not that it 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.

No impairment losses were recognized through earnings related to available-for-sale or held-to-maturity securities during the three and six month periods ended June 30, 2010 and 2009.

Cost method investments, which are included in other assets, can be temporarily impaired when the fair values decline below the amortized costs of the individual investments. There were no cost method investments with unrealized losses at June 30, 2010. The Company invests primarily in low income housing partnerships which generate tax credits. The Company also holds partnership interests in venture capital funds formed to provide financing to small businesses and to promote community development. The Company had $25.7 million and $26.3 million in cost method investments included in other assets at June 30, 2010 and December 31, 2009, respectively.

 

(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 (“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

 

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or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

          Fair value measurements at reporting date using:

Description

   At
June 30,
2010
   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 and agencies

   $ 13,713    $ 3,014    $ 10,699    $ —  

Government-sponsored entities

     285,280      —        285,280      —  

Corporate bonds

     11,599      —        11,599      —  

Municipal bonds

     202,922      —        202,922      —  

Mortgage-backed securities

     214,634      —        214,634      —  

Other

     2,967      408      2,059      500
                           

Total available-for-sale securities

     731,115      3,422      727,193      500

Derivatives - interest rate floor

     1,162      —        1,162      —  

Derivatives - interest rate customer swaps

     5,975      —        5,975      —  

Derivatives - customer foreign exchange forward

     13      —        13      —  

Other investments

     9,814      4,340      5,474      —  

Liabilities:

           

Derivative - interest rate customer swaps (1)

   $ 6,177    $ —      $ 6,177    $ —  

Derivatives - customer foreign exchange forward (1)

     13      —        13      —  

Derivatives - junior subordinated debenture interest rate swap (1)

     1,627      —        1,627      —  

 

  (1) Derivatives - interest rate customer swaps and customer foreign exchange forward (liabilities) are netted with the derivative assets within other assets on the consolidated balance sheets.

 

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     Fair value measurements at reporting date using:

Description

   At
December 31,
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 and agencies

   $ 184,722    $ 178,048    $ 6,674    $ —  

Government-sponsored entities

     188,394      —        188,394      —  

Corporate bonds

     15,943      —        15,943      —  

Municipal bonds

     184,544      —        184,544      —  

Mortgage-backed securities

     311,511      —        308,360      3,151

Other

     2,918      412      2,006      500
                           

Total available-for-sale securities

     888,032      178,460      705,921      3,651

Derivatives - interest rate floor

     2,646      —        2,646      —  

Derivatives - interest rate customer swaps

     4,924      —        4,924      —  

Other investments

     9,628      4,176      5,452      —  

Liabilities:

           

Derivatives - interest rate customer swaps (1)

   $ 5,053    $ —      $ 5,053    $ —  

 

  (1) Derivatives - interest rate customer swaps (liabilities) is netted with the derivative assets within other assets on the consolidated balance sheets.

At June 30, 2010, available-for-sale securities consist primarily of U.S. government and agency securities, government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities (primarily residential), and other available-for-sale securities. The U.S. government securities, and equities and mutual funds (which are categorized as other available-for-sale securities) 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, mortgage-backed securities, and certain investments in SBA loans (which are categorized as U.S. government and agencies available-for-sale securities) 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—two Community Reinvestment Act (“CRA”) loan funds (which are categorized as other available-for-sale securities)—had unobservable inputs and are not actively traded. The value for these securities is determined by third party pricing models. Therefore, they have been categorized as a Level 3 measurement.

At December 31, 2009, available-for-sale securities consist primarily of U.S. government and agency securities, government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities (primarily residential), and other available-for-sale securities. The U.S. government securities, and equities and mutual funds (which are categorized as other available-for-sale securities) 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 U.S. government and agencies available-for-sale securities) 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—one mortgage-backed security and two CRA loan funds (which are categorized as other available-for-sale securities)—have unobservable inputs and are not actively traded. The value for these securities is determined by third party pricing models. Therefore, they have been categorized as a Level 3 measurement.

Currently, the Company uses an interest rate floor, interest rate customer swaps, a junior subordinated debenture interest rate swap, and customer foreign exchange forward contracts 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 8: 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

 

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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 certain 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 for the three and six months ended June 30, 2010:

 

     Balance at
March 31,
2010
   Purchases,
(sales), issuances
and
(settlements), net
   Transfers into
(out of)

Level 3 (1)
   Unrealized
gains (losses)
   Amortization    Balance at
June 30,
2010
               (In thousands)               

Mortgage-backed securities

   $ —      $ —      $ —      $ —      $ —      $ —  

Other available-for-sale investments

     500      —        —        —        —        500
                                         

Total Level 3 assets

   $ 500    $ —      $ —      $ —      $ —      $ 500
                                         

 

     Balance at
December 31,
2009
   Purchases,
(sales), issuances
and
(settlements), net
   Transfers into
(out of)

Level 3 (1)
    Unrealized
gains (losses)
   Amortization    Balance at
June 30,
2010
               (In thousands)                

Mortgage-backed securities

   $ 3,151    $ —      $ (3,151   $ —      $ —      $ —  

Other available-for-sale investments

     500      —        —          —        —        500
                                          

Total Level 3 assets

   $ 3,651    $ —      $ (3,151   $ —      $ —      $ 500
                                          

 

(1) One Mortgage-backed security was originally categorized as a Level 3 measurement because its value was being determined by a third party pricing matrix. During the first quarter of 2010, the Company was able to obtain pricing information and market data from similar assets, and therefore the security was changed to a Level 2 measurement.

The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis for which there was an adjustment to fair value during the three and six months ended June 30, 2010 and during the year ended December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

          Fair value measurements recorded during the three
months ended:

Description

   June 30,
2010
   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)

   $ 21,806    $ —      $ —      $ 21,806

OREO (2)

     1,273      —        —        1,273
                           
   $ 23,079    $ —      $ —      $ 23,079
                           

 

  (1) Collateral-dependent impaired loans that had write-downs in fair value or whose specific reserve changed during the second quarter of 2010.
  (2) Two OREO properties had write downs during the second quarter of 2010.

 

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          Fair value measurements recorded during the six
months ended:

Description

   June 30,
2010
   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)

   $ 26,697    $ —      $ —      $ 26,697

OREO (2)

     4,234      —        —        4,234
                           
   $ 30,931    $ —      $ —      $ 30,931
                           

 

  (1) Collateral-dependent impaired loans that had write-downs in fair value or whose specific reserve changed during the first six months of 2010.
  (2) Five OREO properties had write downs during the first six months of 2010.

 

          Fair value measurements recorded during the year
ended:

Description

   December 31,
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)

   $ 25,650    $ —      $ —      $ 25,650

Loans held for sale (2)

     473      —        —        473

OREO (3)

     6,129      —        —        6,129

Goodwill and identifiable intangible assets (4)

     3,654      —        —        3,654
                           
   $ 35,906    $ —      $ —      $ 35,906
                           

 

  (1) Collateral-dependent impaired loans held at December 31, 2009 that had write-downs in fair value or whose specific reserve changed during 2009.
  (2) Two loans held for sale at December 31, 2009 had write downs during 2009.
  (3) Six OREO properties held at December 31, 2009 had write downs during 2009.
  (4) Goodwill and identifiable intangible assets at one affiliate partner had write downs during 2009.

Impaired loans include those loans that were adjusted to the fair value of underlying collateral as allowed under ASC 310. 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 fair value declines, or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property or consideration of broker quotes. 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 Annual Report on Form 10-K for the year ended December 31, 2009, which had an adjustment to fair value during the year ended December 31, 2009. The fair value of these loans held for sale was based on appraised value, and as necessary on broker quotes, comparable market transactions and information from the Company’s agent hired to assist with the sale of the portfolio. Therefore they have been categorized as a Level 3 measurement.

The OREO in the tables above includes those properties that had an adjustment to fair value during the three and six months ended June 30, 2010 and during the year ended December 31, 2009. The Company uses appraisals, which management may adjust to reflect estimated fair value declines, or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property or consideration of broker quotes. Therefore they have been categorized as a Level 3 measurement.

 

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The goodwill and identifiable intangible assets in the table above includes the goodwill and identifiable intangible assets at one affiliate that had an adjustment to fair value during the year ended December 31, 2009. The Company utilized a weighted average of the income and market approaches, with 80% from the income and 20% from the market approach, to determine fair value. Therefore they have been categorized as a Level 3 measurement. See Part II. Item 8. “Financial Statements and Supplementary Data—Note 10: Goodwill and Other Intangible Assets” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for a detailed discussion of the fair value measurement techniques employed.

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

 

     June 30, 2010    December 31, 2009
     Book Value    Fair Value    Book Value    Fair Value
     (In thousands)

FINANCIAL ASSETS:

           

Cash and cash equivalents

   $ 235,789    $ 235,789    $ 447,460    $ 447,460

Held-to-maturity securities

     2,995      3,003      4,501      4,511

Loans, net (including loans held for sale)

     4,435,577      4,528,184      4,251,310      4,314,744

Other financial assets

     123,447      123,447      123,979      123,979

FINANCIAL LIABILITIES:

           

Deposits

     4,380,793      4,389,791      4,255,219      4,265,309

Securities sold under agreements to repurchase

     110,274      114,263      243,377      246,592

Federal funds purchased

     30,000      29,995      —        —  

Federal Home Loan Bank borrowings

     505,620      533,492      555,012      577,705

Junior subordinated debentures

     193,645      164,662      193,645      156,568

Other financial liabilities

     12,713      12,713      15,588      15,588

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.

Held-to-maturity securities

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 (including loans held for sale)

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. The method of estimating the fair value of the loans disclosed in the table above does not incorporate the exit price concept in the presentation of the fair value of these financial instruments.

 

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Other financial assets

Other financial assets consist primarily of accrued interest and fees receivable, stock in Federal Home Loan Banks (“FHLBs”), and 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 its local FHLB located in either Boston, Seattle, or San Francisco. At each period end, the Company evaluates its investment in the respective FHLB’s stock for other-than-temporary impairment. The Company has not recognized an other-than-temporary impairment loss with respect to stock in the FHLBs, based on the following considerations: 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 second quarter 2010 redemption at par of a portion of FHLB stock held by the Company’s Northern California and Southern California Banks (both of whom are members of the San Francisco FHLB).

Deposits

The fair values reported for transaction accounts (demand, NOW, savings, and money market) 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 funds purchased

The carrying amount of federal funds purchased approximates fair value due to their short-term nature.

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

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I was based on the current market price of the securities at June 30, 2010 and December 31, 2009. 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.

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.

 

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Table of Contents
(6) Loans Receivable

 

The following table presents a summary of the loan portfolio based on the geography of the lender. The concentration of 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, net”.

 

     June 30,
2010
    December 31,
2009
 
     (In thousands)  

Commercial loans: (1)

    

New England

   $ 1,048,562      $ 943,740   

Northern California

     946,171        927,074   

Southern California

     226,215        231,684   

Pacific Northwest

     106,607        111,039   

Eliminations and other, net

     (315     (517
                

Total commercial loans

   $ 2,327,240      $ 2,213,020   
                

Construction and land loans:

    

New England

   $ 105,642      $ 117,817   

Northern California

     134,153        161,839   

Southern California

     3,068        7,719   

Pacific Northwest

     16,966        28,286   
                

Total construction and land loans

   $ 259,829      $ 315,661   
                

Residential mortgage loans:

    

New England

   $ 1,134,756      $ 1,113,842   

Northern California

     262,762        219,394   

Southern California

     158,425        124,212   

Pacific Northwest

     45,771        37,255   
                

Total residential mortgage loans

   $ 1,601,714      $ 1,494,703   
                

Home equity and other consumer loans:

    

New England

   $ 197,410      $ 179,792   

Northern California

     73,452        74,192   

Southern California

     18,078        20,947   

Pacific Northwest

     6,206        5,278   

Eliminations and other, net

     2,272        3,447   
                

Total home equity and other consumer loans

   $ 297,418      $ 283,656   
                

Total loans

   $ 4,486,201      $ 4,307,040   
                

 

  (1) Commercial and industrial loans and commercial real estate loans are included in the commercial loans line item in the table above and on the consolidated balance sheets.

At June 30, 2010, non-accrual loans were $100.3 million, an increase of $10.0 million, or 11%, from $90.3 million at December 31, 2009. Included with non-accrual loans are $3.0 million of the Southern California non-strategic loans held for sale.

At June 30, 2010, loans with an aggregate balance of $7.5 million were 30-89 days past due, a decrease of $13.7 million, or 64%, as compared to $21.2 million at December 31, 2009.

There were no loans past due 90 days or more and still accruing interest at June 30, 2010 or December 31, 2009.

Impaired loans are generally included within the balance of non-accrual loans. At June 30, 2010, impaired loans totaled $95.4 million, as compared to $83.2 million at December 31, 2009. At June 30, 2010, $22.2 million of the impaired loans had $4.4 million in specific allocations to the general reserve. The remaining $73.2 million of impaired loans did not have specific allocations due primarily to the adequacy of the collateral or prior charge-offs taken. At December 31, 2009, $20.7 million of impaired loans had $5.0 million in specific allocations to the general reserve and the remaining $62.5 million of impaired loans did not have specific allocations.

 

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Table of Contents
(7) Allowance for Loan Losses

 

The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled $79.1 million and $68.4 million at June 30, 2010 and December 31, 2009, respectively.

The increased level of allowance for loan losses in 2010 reflects the higher amount of classified loans, particularly in the New England and Northern California regions, recent historical charge-off trends and current economic conditions. An analysis of the risk in the loan portfolio as well as management judgment is used to determine the estimated appropriate amount of the allowance for loan losses as of both June 30, 2010 and December 31, 2009.

The following table summarizes the changes in the allowance for loan losses for the three and six months ended June 30, 2010 and 2009:

 

     At and for the three months
ended June 30,
    At and for the six months
ended June 30,
 
     2010     2009     2010     2009  
     (In thousands)     (In thousands)  

Allowance for loan losses, beginning of period

   $ 73,262      $ 67,591      $ 68,444      $ 64,091   

Provision for loan losses

     14,962        8,731        22,577        22,056   

Charge-offs

     (10,212     (5,438     (15,576     (15,818

Recoveries

     1,061        118        3,628        673   
                                

Allowance for loan losses, end of period

   $ 79,073      $ 71,002      $ 79,073      $ 71,002   
                                

The balance for the reserve for unfunded loan commitments, which is included in the consolidated balance sheets in other liabilities, totaled $2.9 million and $3.0 million at June 30, 2010 and December 31, 2009, respectively.

 

(8) Derivatives and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and, to a lesser extent, the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are generally determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2010 and December 31, 2009.

 

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     June 30, 2010     December 31, 2009  
     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    $ 1,162    Other assets    $ (1,627   Other assets    $ 2,646    Other assets    $ —     

Derivatives not designated as hedging instruments:

                      

Interest rate products (1)

   Other assets      5,975    Other assets      (6,177   Other assets      4,924    Other assets      (5,053

Foreign exchange contracts (1)

   Other assets      13    Other assets      (13   Other assets      —      Other assets      —     
                                          

Total

      $ 7,150       $ (7,817      $ 7,570       $ (5,053
                                          

 

(1) Interest rate product and foreign exchange contracts derivative liabilities are netted with interest rate product and foreign exchange contracts derivative assets within other assets on the consoldiated balance sheet.

Cash Flow Hedges of Interest Rate Risk

The Company’s objective in using derivatives is to add stability to interest income and expense and to manage the risk related to exposure to changes in interest rates. To accomplish this objective, the Company has entered into an interest rate floor and an interest rate swap as part of its interest rate risk management strategy. 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 Holding Company also entered into one interest rate swap in the second quarter of 2010 with a notional amount of $75 million related to the Holding Company’s cash outflows associated with the subordinated debt related to trust preferred securities to protect against rising interest rates. The interest rate swap is a forward starting hedge with an effective date of December 30, 2010 and a term of five years. The swap is forward starting as that is the date the debt is scheduled to switch from a fixed rate of 6.25% to a variable rate of three-month LIBOR plus 1.68%. The interest rate swap will effectively fix the Holding Company’s interest rate payments on the $75 million of debt at 4.45%.

The Company uses the “Hypothetical Derivative Method” described in ASC 815, Derivatives and Hedging (“ASC 815”), for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge ineffectiveness. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. 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 in interest and dividend 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 Holding Company and the Bank affiliate did not have any hedge ineffectiveness recognized in earnings during the three and six months ended June 30, 2010 and 2009. The Holding Company and Bank affiliate also monitor the risk of counterparty default on an ongoing basis.

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.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are made or received on the Company’s variable-rate assets or liabilities. During the

 

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next twelve months, the Company estimates that $1.0 million will be reclassified as an increase to interest income and $0.7 million will be reclassified as an increase in interest expense.

During the three and six months ended June 30, 2010 and 2009, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions relating to the Company’s previously designated interest rate floor becoming probable not to occur. The accelerated amount was an immaterial loss for both the three and six months ended June 30, 2010 and 2009.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from two different services the Bank affiliate provides to qualified commercial clients. The Bank affiliate offers certain derivative products directly to such clients. The Bank affiliate economically hedges derivative transactions executed with commercial clients by entering into mirror-image, offsetting derivatives with third parties. Derivative transactions executed as part of these programs are not designated in ASC 815-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 through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in the consolidated statement of operations in other income. The derivative asset and liability values above include an adjustment related to the consideration of credit risk required under ASC 820 of less than $0.1 million in the three and six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009, the Bank affiliate had 18 interest rate swaps with an aggregate notional amount of $183.2 million and $184.2 million, respectively, related to this program. As of June 30, 2010, the Bank affiliate also had nine foreign currency exchange contracts with a notional amount of $4.7 million related to this program. There were no foreign currency exchange contracts as of December 31, 2009.

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statement of operations for the three and six months ended June 30, 2010 and 2009.

 

     Amount of Gain or (Loss)
Recognized in  OCI

on Derivative
(Effective Portion)
Three Months Ended
June 30,
    Location of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
   Amount of Gain or (Loss)
Reclassified from
Accumulated OCI

into Income
(Effective Portion)
Three Months Ended
June 30,
 

Derivatives in Cash Flow Hedging Relationships

   2010     2009        2010     2009  

Interest rate products

   $ (1,578   $ (78   Interest income    $ 757      $ 763   
       Other income / expense      (1     (1
                                   

Total

   $ (1,578   $ (78      $ 756      $ 762   
                                   

 

     Amount of Gain or (Loss)
Recognized in  OCI

on Derivative
(Effective Portion)
Six Months Ended
June 30,
   Location of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
   Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
Six Months Ended
June 30,
 

Derivatives in Cash Flow Hedging Relationships

   2010     2009       2010     2009  

Interest rate products

   $ (1,478   $ 233    Interest income    $ 1,506      $ 1,516   
        Other income / expense      (5     (6
                                  

Total

   $ (1,478   $ 233       $ 1,501      $ 1,510   
                                  

 

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Table of Contents

Derivatives Not Designated as Hedging
Instruments

  

Location of Gain or (Loss) Recognized in
Income on Derivative

   Amount of Gain or (Loss)
Recognized in Income
on Derivative

Three Months Ended
June 30,
 
      2010     2009  

Interest rate products

   Other income / expense    $ (61   $ (140
                   

Total

      $ (61   $ (140
                   

 

Derivatives Not Designated as Hedging
Instruments

  

Location of Gain or (Loss) Recognized in
Income on Derivative

   Amount of Gain or (Loss)
Recognized in Income

on Derivative
Six Months Ended
June 30,
 
      2010     2009  

Interest rate products

   Other income / expense    $ (74   $ (7
                   

Total

      $ (74   $ (7
                   

The Holding Company and Bank affiliate have agreements with its derivative counterparties that contain provisions where, if the Holding Company or Bank affiliate defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Holding Company or Bank affiliate could also be declared in default on its derivative obligations. The Bank affiliate was in compliance with these provisions as of June 30, 2010 and December 31, 2009. The Holding Company, which had no derivative obligations at December 31, 2009, was in compliance with these provisions as of June 30, 2010.

The Holding Company and Bank affiliate also have agreements with certain of its derivative counterparties that contain provisions where, if the Holding Company or Bank affiliate fails to maintain its status as a well- or adequately-capitalized institution, then the counterparty could terminate the derivative positions and the Holding Company or Bank affiliate would be required to settle its obligations under the agreements. The Bank affiliate was in compliance with these provisions as of June 30, 2010 and December 31, 2009. The Holding Company, which had no derivative obligations at December 31, 2009, was in compliance with these provisions as of June 30, 2010.

Certain of the Holding Company and Bank affiliate’s agreements with its derivative counterparties contain provisions where if specified events or conditions occur that materially change the Holding Company’s or Bank affiliate’s creditworthiness in an adverse manner, the Holding Company or Bank affiliate may be required to fully collateralize its obligations under the derivative instruments. The Bank affiliate was in compliance with these provisions as of June 30, 2010 and December 31, 2009. The Holding Company, which had no derivative obligations at December 31, 2009, was in compliance with these provisions as of June 30, 2010.

As of June 30, 2010 and December 31, 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 $6.7 million and $2.4 million, respectively. As of June 30, 2010, the Company and Bank affiliate has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $2.6 million and $0.3 million, respectively, against its obligations under these agreements.

 

(9) Income Taxes

Due to the divestiture of BPVI, Sand Hill, RINET, Gibraltar, and Westfield during the year ended December 31, 2009, the results of operations related to BPVI, Sand Hill, RINET, Gibraltar, and Westfield are included in discontinued operations. The pretax profits and losses attributable to investors other than the Company are reflected under noncontrolling interests in the table below. The components of income tax expense/ (benefit) for continuing operations, discontinued operations, noncontrolling interests and the Company are as follows:

 

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Table of Contents
     Six months ended
June 30,
 
     2010     2009  
     (In thousands)  

Income from continuing operations:

    

Income before income taxes

   $ 7,113      $ 4,934   

Income tax expense

     1,134        815   
                

Net income from continuing operations

   $ 5,979      $ 4,119   
                

Effective tax rate, continuing operations

     15.9     16.5

Income/ (loss) from discontinued operations:

    

Income/ (loss) before income taxes

   $ 2,474      $ (10,801

Income tax expense/ (benefit)

     929        (2,409
                

Net income/ (loss) from discontinued operations

   $ 1,545      $ (8,392
                

Effective tax rate, discontinued operations

     37.6     22.3

Income attributable to noncontrolling interests:

    

Income before income taxes

   $ 1,301      $ 1,344   

Income tax expense

     —          —     
                

Net income attributable to noncontrolling interests

   $ 1,301      $ 1,344   
                

Effective tax rate, noncontrolling interests

     0.0     0.0

Income/ (loss) attributable to the Company

    

Income/ (loss) before income taxes

   $ 8,286      $ (7,211

Income tax expense/ (benefit)

     2,063        (1,594
                

Net income/ (loss) attributable to the Company

   $ 6,223      $ (5,617
                

Effective tax rate, attributable to the Company

     24.9     22.1

The effective tax rate for the six months ended June 30, 2010 was calculated based on a projected 2010 annual effective tax rate. The effective tax rate for continuing operations was 15.9%, with related tax expense of $1.1 million. The effective tax rate was less than the statutory rate of 35% due primarily to earnings from tax-exempt investments, tax credits, officers’ life insurance, and income attributable to noncontrolling interests. These savings were partially offset by state and local income taxes and executive compensation expenses, which cannot be deducted for tax purposes due to restrictions under the U.S. Department of the Treasury’s (the “Treasury”) Troubled Asset Relief Program’s Capital Purchase Program (the “TARP CPP”).

The effective tax rate for the six months ended June 30, 2009 was calculated based on a projected 2009 annual effective tax rate. The effective tax rate for continuing operations was 16.5%, with related tax expense of $0.8 million. The effective tax rate was less than the statutory rate of 35% due primarily to earnings from tax-exempt investments, tax credits, officers’ life insurance, and income attributable to noncontrolling interests. These savings were partially offset by prior year provision to return differences, state and local income taxes and executive compensation expenses, which cannot be deducted for tax purposes due to restrictions under the Treasury’s TARP CPP.

 

(10) 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 represents the net income allocated to the noncontrolling interest owners of the affiliate partners. The net income allocated to the noncontrolling interest owners was $0.6 million for the three months ended June 30, 2010 and 2009, and $1.3 million for the six months ended June 30, 2010 and 2009. 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. Decreases in redemption value from period to period increase income attributable to common shareholders for purposes of EPS computation, but only to the extent that the cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.

Each affiliate operating agreement provides the Company and/or the noncontrolling interests with contingent call or put redemption features used for the orderly transfer of noncontrolling equity interests between the affiliate minority shareholders and the Company at 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

 

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interests at the estimated maximum redemption amounts of $19.7 million and $51.9 million are included in the accompanying consolidated balance sheets at June 30, 2010 and December 31, 2009, 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. These agreements are discussed in Part II. Item 8. “Financial Statements and Supplementary Data—Note 15: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following table summarizes the estimated maximum redemption amounts by affiliate:

 

     At June 30,
2010
   At December 31,
2009
     (in thousands)

Anchor

   $ 11,700    $ 12,973

BOS

     4,685      5,159

DGHM

     1,445      1,843

DTC

     1,842      1,828

KLS (1)

     —        30,047
             

Total

   $ 19,672    $ 51,850
             

 

  (1) In January 2010, the Company increased its investment in KLS to 100% from 81%. The acquisition of the remaining 19% interest of KLS was made pursuant to the Amended and Restated Limited Liability Agreement (“Agreement”) between the Company and the minority shareholders of KLS dated December 31, 2004. The consideration paid by the Company was approximately $29.7 million which represents the value of the additional 19% interest and additional consideration paid for performance targets negotiated in the original Agreement.

The following table is an analysis of the Company’s redeemable noncontrolling interests for the periods indicated:

 

     For the six months  ended
June 30,
 
     2010     2009  
     (In thousands)  

Balance at beginning of year

   $ 51,850      $ 50,167   

Net income attributable to noncontrolling interests

     1,301        1,344   

KLS redemption

     (29,691     —     

Distributions

     (1,286     (391

Adjustment to redemption value, net

     (2,502     237   
                

Balance at June 30

   $ 19,672      $ 51,357   
                

 

(11) Equity

During 2010, the Company entered into four transactions that had an impact on stockholders’ equity.

On June 21, 2010, the Company completed a public offering of its common stock in which 4.7 million shares were sold to the public at a price of $6.10 per share, for total net proceeds, after underwriters’ discount and other related costs, of $27.0 million.

Related to the public offering, on June 18, 2010, the Company entered into an investment agreement (the “Investment Agreement”) with Carlyle pursuant to which the Company raised approximately $6.3 million. Under the terms of the Investment Agreement, Carlyle agreed to purchase 1.1 million shares of the Company’s common stock pursuant to Carlyle’s exercise of its gross up option under an investment agreement between the Company and Carlyle dated July 22, 2008. However, due to the timing of the Investment Agreement in relation to the quarter end, the delayed delivery date for the securities, which was ten business days after the closing date of June 22, occurred on July 7, 2010. This transaction created a receivable as of June 30, 2010 which is contained in other assets, and is offset in additional paid-in capital, on the consolidated balance sheet. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements—Note 13: Subsequent Events” for further details of the settlement of the Investment Agreement in July 2010.

On June 16, 2010, the Company redeemed $104.0 million of the Company’s outstanding Series C Preferred stock that was issued to the Treasury pursuant to the TARP CPP in November of 2008. The Company also paid $0.4 million for

 

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accrued and unpaid dividends on the Series C Preferred stock in conjunction with this repurchase. At the date of redemption, the Company accelerated the remaining $5.0 million of the discount on the Series C Preferred stock. The discount accretion is treated as a preferred dividend for earnings per share purposes and thereby reduces net income attributable to common shareholders and earnings per share.

On January 13, 2010, the Company redeemed $50.0 million of the Company’s outstanding Series C Preferred stock that was issued to the the Treasury pursuant to the TARP CPP in November of 2008. The Company also paid $0.4 million for accrued and unpaid dividends on the Series C Preferred stock in conjunction with this repurchase. At the date of redemption, the Company accreted $2.7 million of the discount on the Series C Preferred stock. The discount accretion is treated as a preferred dividend for earnings per share purposes and thereby reduces net income attributable to common shareholders and earnings per share.

 

(12) Recent Accounting Developments

In July 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”). ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company will need to disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existing disclosures to be presented on a disaggregated basis include a rollforward of the allowance for loan losses, the related recorded investment in such loans. Additional disclosure is also required regarding information about troubled debt restructurings and significant purchases and sales of loans during the reporting period by class. ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company anticipates that adoption of these additional disclosures will not have a material effect on its financial position or results of operations.

In June, 2009, the FASB issued updates to ASC 860, Transfers and Servicing (“ASC 860 updates”). Among other things, the ASC 860 updates amend ASC 860 to remove the concept of a qualifying special purpose entity (“QSPE”) from the prior statement and remove the exception from applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities, to QSPEs. Effective as of January 1, 2010, the ASC 860 updates do not have a material impact on the Company’s financial position or results of operations.

In June, 2009, the FASB issued ASC 810, updates to Consolidation (“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 were effective on a prospective basis in fiscal years beginning on or after November 15, 2009. Effective as of January 1, 2010, the ASC 810 updates do not have a material impact on the Company’s financial position or results of operations.

 

(13) Subsequent Events

The Company evaluated subsequent events through the date the accompanying unaudited interim financial statements were issued. Pursuant to the requirements of ASC 855, Subsequent Events, there were no events or transactions during the subsequent event reporting period that required disclosure in the financial statements, other than the following:

On July 7, 2010, the Company issued 1.1 million shares for $6.3 million in settlement of the Investment Agreement with Carlyle, as discussed in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements—Note 11: Equity.”

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of and for the three and six months ended June 30, 2010

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, effectiveness of our investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth in assets, deposits and results of operations, receipt of regulatory approval for pending acquisitions, success of acquisitions, future operations, market position, financial position, and prospects, plans and objectives of management. 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”; 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; the effects of continuing 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; the adequacy of loan loss reserves; reductions in deposit levels necessitating increased borrowing to fund loans and investments; increasing government regulation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; risks related to the identification and implementation of acquisitions; and changes in assumptions used in making such forward-looking statements, 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 reportable segments: Private Banking, Investment Management, and Wealth Advisory. This Executive Summary provides an overview of the most significant aspects of our operating segments and the Company’s operations in the second quarter of 2010. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following.

 

     Three months ended
June 30,
             
     2010     2009     Change     % Change  
     (In thousands, except per share data)        

Total revenues

   $ 70,650      $ 66,243      $ 4,407      7

Provision for loan losses

     14,962        8,731        6,231      71

Total operating expenses

     56,665        57,656        (991   -2

Net income/ (loss) from continuing operations

     225        (141     366      nm   

Net income attributable to noncontrolling interests

     616        579        37      6

Net income/ (loss) from discontinued operations

     1,509        (7,763     9,272      nm   

Net income/ (loss) attributable to the Company

     1,118        (8,483     9,601      nm   

(Loss)/ earnings per share:

        

From continuing operations

   $ (0.09   $ (0.13   $ 0.04      31

From discontinued operations

     0.02        (0.11     0.13      nm   

Attributable to the Company

     (0.07     (0.24     0.17      71

 

nm not meaningful

 

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The Company recorded net income attributable to the Company of $1.1 million in the three months ended June 30, 2010 compared to a net loss attributable to the Company of $8.5 million in the same period of 2009. The Company recognized a loss per share of $0.07 for the three months ended June 30, 2010, compared to a loss per share of $0.24 for the same period of 2009.

Key items that affected the Company’s second quarter 2010 results include:

 

   

A $6.2 million, or 71%, increase in provision for loan losses to $15.0 million for the three months ended June 30, 2010 from $8.7 million for the same period in 2009. The increase was primarily due to charge-offs and additional classified loans in the Northern California commercial real estate portfolio.

 

   

A 15 basis point increase in net interest margin (“NIM”) to 3.29% from 3.14% for the three month periods ended June 30, 2010 and 2009, respectively. A six basis point increase in NIM to 3.24% from 3.18% for the six month periods ended June 30, 2010 and 2009, respectively.

 

   

The full repurchase of the remaining $104.0 million of Series C Preferred stock issued under the U.S. Department of the Treasury’s (the “Treasury”) Troubled Asset Relief Program’s Capital Purchase Program (the “TARP CPP”) in June 2010. The repurchase triggered an acceleration of the accretion of the discount on the Series C Preferred stock of $5.0 million. The accretion, which is treated as a preferred stock dividend in the calculation of earnings per share, and the preferred dividends paid on the Series C Preferred stock, reduced earnings per share by $0.09 for the quarter.

 

   

The issuance of 4.7 million shares of common stock through a public offering in June 2010, which added $27.0 million of capital at June 30, 2010. In addition to the public offering, the Company agreed to issue common stock to Carlyle pursuant to Carlyle’s gross up rights, which added an additional $6.3 million of capital at June 30, 2010.

Except for the Northern California bank, credit quality improved during the quarter, as evidenced by decreased loan charge-offs, decreased past due loans, and, for two of the Banks, decreased non-performing assets.

The Company’s Private Banking segment reported net income of $3.5 million in the second quarter of 2010, compared to net income of $3.6 million in the same period of 2009. The $0.1 million decrease in net income was a result of the following items: a higher provision for loan losses as described above, and lower non-interest income due to lower volume of loan sales and increases in losses on sales of other real estate owned (“OREO”) in the second quarter of 2010 as compared to the same period of 2009. These changes were partially offset by increased net interest income due primarily to lower rates paid on deposits and decreased operating expenses compared to 2009 which included a Federal Deposit Insurance Corporation (“FDIC”) insurance special assessment.

The Company’s Investment Management segment reported net income of $1.0 million in the second quarter of 2010, compared to net income of $0.4 million in the same period of 2009. The $0.6 million increase was primarily due to a $1.7 million, or 22%, increase in investment management and trust fees for the second quarter of 2010 compared to the same period in 2009. The increase in investment management and trust fees was related to a $0.6 billion, or 9%, increase in assets under management/advisory (“AUM”) from June 30, 2009, of which $1.1 billion related to market appreciation, partially offset by $0.5 billion in net outflows. During the second quarter of 2010, the Investment Management segment experienced a $0.3 billion market depreciation, which will negatively affect the third quarter’s revenue as 85% of fees are billed quarterly in advance.

The Company’s Wealth Advisory segment reported net income of $0.9 million in the second quarter of 2010, compared to net income of $1.1 million in the same period of 2009. The $0.2 million, or 17%, decrease in net income was primarily due to a $1.3 million, or 33%, increase in compensation expense related to new compensation agreements that went into effect in 2010 and increased headcount. This increased expense was partially offset by an increase in wealth advisory fees of $0.8 million, or 10%, due to a $0.8 billion, or 13%, increase in AUM from June 30, 2009, of which $0.4 billion related to market appreciation and $0.4 billion related to net inflows. Also offsetting the increased expense was a $0.3 million decrease in income attributable to noncontrolling interests primarily due to the elimination of a noncontrolling interest at KLS as a result of the Company’s acquisition of the remaining 19% interest in KLS in January 2010.

Critical Accounting Policies

Critical accounting policies are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical

 

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accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments are the allowance for loan losses, the valuation of goodwill and intangible assets and analysis for impairment, and tax estimates. These policies are discussed in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. There have been no changes to these policies through the filing of this Quarterly Report on Form 10-Q.

Financial Condition

Condensed Consolidated Balance Sheets and Discussion

 

     June 30,
2010
   December 31,
2009
   Increase/
(decrease)
    %
Change
 
     (In thousands)  

Assets:

          

Total cash and investments

   $ 1,016,840    $ 1,387,483    $ (370,643   -27

Loans held for sale

     28,449      12,714      15,735      124

Total loans

     4,486,201      4,307,040      179,161      4

Less: allowance for loan losses

     79,073      68,444      10,629      16
                        

Net loans

     4,407,128      4,238,596      168,532      4

Goodwill and intangible assets

     147,451      150,117      (2,666   -2

Other assets

     267,841      260,355      7,486      3
                        

Total assets

   $ 5,867,709    $ 6,049,265    $ (181,556   -3
                        

Liabilities and Equity:

          

Deposits

   $ 4,380,793    $ 4,255,219    $ 125,574      3

Total borrowings

     839,539      992,034      (152,495   -15

Other liabilities

     87,039      99,008      (11,969   -12
                        

Total liabilities

     5,307,371      5,346,261      (38,890   -1

Redeemable noncontrolling interests

     19,672      51,850      (32,178   -62

Total stockholders’ equity

     540,666      651,154      (110,488   -17
                        

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

   $ 5,867,709    $ 6,049,265    $ (181,556   -3
                        

Total Assets. Total assets decreased $181.6 million, or 3%, to $5.9 billion at June 30, 2010 from $6.0 billion at December 31, 2009. The repurchase of the Series C Preferred stock from the Treasury was the primary driver of this decrease.

Cash and Investments. Total cash and investments (consisting of cash and cash equivalents, investment securities, and stock in the FHLBs) decreased $370.6 million, or 27%, to $1.0 billion, or 17% of total assets in 2010 from $1.4 billion or 23% of total assets in 2009. The decrease was primarily due to the $211.7 million, or 47%, decrease in cash and cash equivalents and the $158.4 million, or 18%, decrease in investment securities. The decrease in cash and cash equivalents is primarily related to the level of loan growth and borrowing paydowns that were not offset by deposit growth, and the decrease in investment securities is primarily due to the Holding Company liquidating a portion of its investment portfolio during the first six months of 2010 to fund its $154.0 million repurchase of its Series C Preferred stock and the $29.7 million payment to the minority shareholders of KLS to acquire the remaining 19% interest in KLS along with additional consideration paid for performance targets negotiated in the original agreement with KLS.

The majority of the Company’s investments are held by the Banks. The Banks’ investment policies require management to maintain a portfolio of securities which will provide liquidity necessary to facilitate funding of loans and to cover deposit fluctuations, and to mitigate the Banks’ overall balance sheet exposure to interest rate risk, while at the same time achieving a satisfactory return on the funds invested. The securities in which the Banks may invest are subject to regulation and are generally limited to securities that are considered “investment grade.”

Investment maturities, principal payments and sales of the Company’s available-for-sale and held-to-maturity securities provided $0.6 billion of cash proceeds during the first half of 2010, and $0.4 billion was deployed on purchases of new investments. The timing of sales and reinvestments is based on various factors, including management’s evaluation of interest rate trends and the Company’s liquidity. The sale of investments resulted in recognized gains for the three and six months ended June 30, 2010 of $1.0 million and $2.4 million, respectively, due to changes in interest rates, the majority of which were previously recorded in unrealized gains within other comprehensive income. The Company’s available-for-sale

 

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investment portfolio carried a total of $14.6 million of unrealized gains and $0.3 million of unrealized losses at June 30, 2010, compared to $13.1 million of unrealized gains and $1.9 million of unrealized losses at December 31, 2009.

No impairment losses were recognized through earnings related to available-for-sale or held-to-maturity securities during the three and six month periods ended June 30, 2010 and 2009. The amount of investment securities in an unrealized loss position greater than 12 months as well as the total amount of unrealized losses was not significant and was primarily due to movements in interest rates. The Company has no intent to sell any securities in an unrealized loss position at June 30, 2010, and it is not more likely than not that the Company would be forced to sell any of these securities prior to the full recovery of all unrealized losses.

See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements—Note 4: Investments” for further details of the Company’s investment securities.

Loans held for sale. Loans held for sale increased $15.7 million to $28.4 million at June 30, 2010 from $12.7 million at December 31, 2009. Included in loans held for sale at June 30, 2010 are $18.5 million of second mortgage loans that were transferred in from the loan portfolio during the second quarter of 2010 and are expected to be sold in the third quarter of 2010. Boston Private Bank periodically sells small balances of second mortgages related to their first time home buyer program as part of their overall asset liability management program when favorable prices for these type of loans are available in the secondary market. Also included in the total loans held for sale at June 30, 2010 is $3.0 million of the Company’s non-strategic Southern California portfolio loans. During the first six months of 2010, two of the five loans remaining in the non-strategic Southern California portfolio at December 31, 2009 were transferred to OREO. For these types of loans, the Company believes it will be easier to sell the asset as an OREO property versus as a loan, as there are fewer legal restrictions associated with an OREO property. Other factors affecting the balance of loans held for sale include the timing and volume of residential loans originated for sale in the secondary market. When mortgage rates are low, the Banks see an increase in the percentage of customer requests for fixed rate mortgage loans as compared to adjustable rate mortgages. The Banks sell the majority of their fixed rate loans in the secondary market to mitigate interest rate risk.

Goodwill and intangible assets, net. Goodwill and intangible assets decreased $2.7 million, or 2%, to $147.5 million at June 30, 2010 from $150.1 million at December 31, 2009. The decrease is primarily due to amortization of intangible assets. The Company tests goodwill for impairment on an annual basis and in between annual dates if events or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value, in accordance with ASC 350, Intangibles—Goodwill and Other. Management concluded that a triggering event occurred at June 30, 2010, due to the Company’s market capitalization decreasing to less than book value as of that date. Management’s test consisted of an evaluation of the relationship of aggregate fair values of its reporting units to the Company’s overall market capitalization and book value. Upon comparison of the fair values of its reporting units to their respective book values, management concluded that there was no impairment of goodwill or intangible assets at June 30, 2010.

Other Assets. Other assets, consisting of OREO, premises and equipment, fees receivable, accrued interest receivable, income tax receivable and deferred, and other, increased $7.5 million, or 3%, to $267.8 million at June 30, 2010 from $260.4 million at December 31, 2009. The increase is primarily due to the change in income taxes receivable and deferred, partially offset by decreases in other assets and OREO.

Income taxes receivable and deferred increased $18.1 million, or 35%, to $70.4 million at June 30, 2010 from $52.3 million at December 31, 2009. The increase is due primarily to income tax payments made during the six months ended June 30, 2010.

OREO decreased $4.5 million, or 27%, to $12.1 million at June 30, 2010 from $16.6 million at December 31, 2009. OREO consisted of 15 properties at both June 30, 2010 and December 31, 2009. The decrease is primarily due to additional valuation allowances taken on existing OREO properties, particularly in Northern California, and sales of OREO properties, partially offset by loans transitioning into OREO and gains on sales of OREO properties.

Other assets, other, consisting primarily of prepaid expens