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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 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 October 29, 2010:

 

Common Stock-Par Value $1.00   76,480,398
(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

     42   
  

Results of Operations

     42   
  

Recent Accounting Developments

     48   

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

     48   

Item 4

  

Controls and Procedures

     48   
   PART II—OTHER INFORMATION   

Item 1

  

Legal Proceedings

     49   

Item 1A

  

Risk Factors and Factors Affecting Forward-Looking Statements

     49   

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

     49   

Item 3

  

Defaults upon Senior Securities

     49   

Item 4

  

(Removed and Reserved)

     49   

Item 5

  

Other Information

     49   

Item 6

  

Exhibits

     49   
  

Signature Page

     51   
  

Certifications

  


Table of Contents

 

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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

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

Assets:

     

Cash and due from banks

     $ 370,978          $ 446,916    

Federal funds sold

     504          544    
                 

Cash and cash equivalents

     371,482          447,460    

Investment securities:

     

Available-for-sale (amortized cost of $723,225 and $876,910, respectively)

     736,777          888,032    

Held-to-maturity (fair value of $3,021 and $4,511, respectively)

     3,005          4,501    
                 

Total investment securities

     739,782          892,533    

Loans held for sale

     22,290          12,714    

Loans:

     

Total loans

     4,530,274          4,307,040    

Less: allowance for loan losses

     100,010          68,444    
                 

Net loans

     4,430,264          4,238,596    

Other real estate owned (“OREO”)

     13,069          16,600    

Stock in Federal Home Loan Banks

     46,393          47,490    

Premises and equipment, net

     26,781          28,349    

Goodwill

     108,696          108,692    

Intangible assets, net

     37,457          41,425    

Fees receivable

     7,338          7,320    

Accrued interest receivable

     18,783          19,292    

Income tax receivable and deferred

     81,414          52,267    

Other assets

     127,517          136,527    
                 

Total assets

     $ 6,031,266          $ 6,049,265    
                 

Liabilities:

     

Deposits

     $ 4,492,516          $ 4,255,219    

Securities sold under agreements to repurchase

     108,575          243,377    

Federal Home Loan Bank borrowings

     584,521          555,012    

Junior subordinated debentures

     193,645          193,645    

Other liabilities

     99,526          99,008    
                 

Total liabilities

     5,478,783          5,346,261    
                 

Redeemable noncontrolling interests

     18,721          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 September 30, 2010 and December 31, 2009; liquidation value: $100,000 per share

     58,089          58,089    

Series C, issued and outstanding: 0 shares at September 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: 76,592,233 shares at September 30, 2010 and 68,666,263 shares at December 31, 2009      76,592          68,666    

Additional paid-in capital

     652,832          629,001    

Accumulated deficit

     (259,196)         (258,186)   

Accumulated other comprehensive income

     5,445          7,572    
                 

Total stockholders’ equity

     533,762          651,154    
                 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

     $ 6,031,266          $ 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
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  
                 (In thousands, except share and per  share data)              

Interest and dividend income:

           

Loans

     $ 58,036          $ 58,658          $ 173,337          $ 174,284    

Taxable investment securities

     1,613          1,399          4,742          5,238    

Non-taxable investment securities

     1,283          1,298          3,869          4,696    

Mortgage-backed securities

     1,902          3,278          6,228          10,660    

Federal funds sold and other

     223          389          943          741    
                                   

Total interest and dividend income

     63,057          65,022          189,119          195,619    
                                   

Interest expense:

           

Deposits

     8,710          15,049          28,721          46,001    

Federal Home Loan Bank borrowings

     4,870          6,329          15,358          19,204    
Junior subordinated debentures and other long-term debt      2,511          3,072          7,505          9,473    

Other short-term borrowings

     522          855          1,763          2,513    
                                   

Total interest expense

     16,613          25,305          53,347          77,191    
                                   

Net interest income

     46,444          39,717          135,772          118,428    

Provision for loan losses

     32,050          9,099          54,627          31,155    
                                   

Net interest income after provision for loan losses

     14,394          30,618          81,145          87,273    
                                   

Fees and other income:

           

Investment management and trust fees

     14,311          13,732          44,341          39,489    

Wealth advisory fees

     9,525          8,927          28,087          25,696    

Other banking fee income

     1,678          1,317          4,320          4,403    

Gain on repurchase of debt

                             407    

Gain on sale of investments, net

     1,147         1,064          3,566          5,459    

Gain on sale of loans, net

     713         754          1,670          2,182    

Gain on sale of non-strategic loans portfolios, net

             30                  2,465    

Gain/ (loss) on sale or write-downs of OREO, net

     (626)         (466)         (2,645)         1,776    

Other

     551          1,165          1,021          2,208    
                                   

Total fees and other income

     27,299          26,523          80,360          84,085    
                                   

Operating expense:

           

Salaries and employee benefits

     38,662          32,868          107,164          95,272    

Occupancy and equipment

     7,036          6,731          20,519          19,837    

Professional services

     4,857          4,429          14,025          14,362    

Marketing and business development

     1,677          1,447          5,229          4,860    

Contract services and data processing

     1,290          1,323          4,052          3,920    

Amortization of intangibles

     1,299          2,024          3,968          5,940    

FDIC insurance

     2,137          2,619          6,490          7,734    

Other

     4,021          4,495          12,231          13,294    
                                   

Total operating expense

     60,979          55,936          173,678          165,219    
                                   

Income/ (loss) before income taxes

     (19,286)         1,205          (12,173)         6,139    

Income tax expense/ (benefit)

     (12,412)         815          (11,278)         1,629    
                                   

Net income/ (loss) from continuing operations

     (6,874)         390          (895)         4,510    

Net income/ (loss) from discontinued operations

     267          (30,614)         1,812          (39,006)   
                                   

Net income/ (loss) before attribution to noncontrolling interests

     (6,607)         (30,224)         917          (34,496)   
Less: Net income attributable to noncontrolling interests      629          1,136          1,929          2,481    
                                   

Net income/ (loss) attributable to the Company

     $ (7,236)         $ (31,360)         $ (1,012)         $ (36,977)   
                                   
Adjustments to net income/ (loss) attributable to the Company to arrive at net income/ (loss) attributable to common shareholders      163          (9,852)         (9,466)         (26,357)   
                                   
Net income/ (loss) attributable to common shareholders for earnings/ (loss) per share calculation      $ (7,073)         $ (41,212)         $ (10,478)         $ (63,334)   
                                   

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

  

From continuing operations

     $ (0.10)         $ (0.15)         $ (0.18)         $ (0.37)   

From discontinued operations

     $ 0.00          $ (0.45)         $ 0.03          $ (0.58)   

Total attributable to the Company’s common shareholders

     $ (0.10)         $ (0.60)         $ (0.15)         $ (0.95)   
Weighted average basic and diluted common shares outstanding      74,153,623          68,551,527          70,293,324          67,033,585    

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
     Non-
controlling
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 income/ (loss) attributable to the Company

     -              -              -              (36,977)         -              -              (36,977)   

Other comprehensive income/(loss), net:

                    

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

     -              -              -              -              1,043          -              1,043    

Change in unrealized loss on cash flow hedge, net

     -              -              -              -              (945)         -              (945)   

Change in unrealized gain on other, net

     -              -              -              -              17          -              17    
                          

Total comprehensive income/ (loss) attributable to the Company, net

                       (36,862)   

Dividends paid to common shareholders

     -              -              (2,002)         -              -              -              (2,002)   

Dividends paid to preferred shareholders

     -              -              (5,864)         -              -              -              (5,864)   

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

     4,017          -              7,389          -              -              -              11,406    

Accretion of Series B Preferred stock Beneficial Conversion Feature

     -              14,696          (14,696)         -              -              -              -        

Accretion of discount on Series C Preferred stock

     -              1,024          (1,024)         -              -              -              -        

Net issuance of 605,181 shares of incentive common stock

     605          -              (605)         -              -              -              -        

Amortization of incentive stock grants

     -              -              2,699          -              -              -              2,699    

Amortization of stock options and employee stock purchase plan

     -              -              2,800          -              -              -              2,800    

Stock options exercised

     75          -              250          -              -              -              325    

Other equity adjustments

     -              (309)         (1,693)         -              -              -              (2,002)   
                                                              

Balance at September 30, 2009

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

Balance at December 31, 2009

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

Comprehensive Income:

                    

Net income/ (loss) attributable to the Company

     -              -              -              (1,012)         -              -              (1,012)   

Other comprehensive income/(loss), net:

                    

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

     -              -              -              -              1,106          -              1,106    

Change in unrealized loss on cash flow hedges, net

     -              -              -              -              (3,235)         -              (3,235)   

Change in unrealized gain on other, net

     -              -              -              -                      -                
                          

Total comprehensive income/ (loss) attributable to the Company, net

                       (3,139)   

Dividends paid to common shareholders

     -              -              (2,139)         -              -              -              (2,139)   

Dividends paid to preferred shareholders

     -              -              (3,027)         -              -              -              (3,027)   

Net proceeds from issuance of 692,569 shares of common stock

     693          -              3,684          -              -              -              4,377    

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

     4,715          -              22,025          -              -              -              26,740    

Net proceeds from issuance of 1,084,450 shares of common stock in June 2010 private placement, as settled in July 2010

     1,084          -              5,183          -              -              -              6,267    

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)         -              -              -              -        

Net issuance of 1,337,506 shares of incentive common stock

     1,338          -              (1,338)         -              -              -              -        

Amortization of incentive stock grants

     -              -              3,097          -              -              -              3,097    

Amortization of stock options and employee stock purchase plan

     -              -              1,270          -              -              -              1,270    

Stock options exercised

     96          -              369          -              -              -              465    

Tax deficiency from certain stock compensation awards

     -              -              (1,206)         -              -              -              (1,206)   

Other equity adjustments

     -              -              3,901                  -              -              3,903    
                                                              

Balance at September 30, 2010

     $     76,592          $ 58,089          $   652,832          $ (259,196)         $ 5,445          $ -              $     533,762    
                                                              

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

 

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

           Nine Months Ended September 30,         
     2010      2009  
     (In thousands)  

Cash flows from operating activities:

     

Net income/ (loss) attributable to the Company

     $ (1,012)         $ (36,977)   

Adjustments to arrive at net income/ (loss) from continuing operations

     

Net income attributable to noncontrolling interests

     1,929          2,481    

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

     (1,812)         39,006    
                 

Net income/ (loss) from continuing operations

     (895)         4,510    
                 

Adjustments to reconcile net income/ (loss) from continuing operations to net cash provided by/ (used for) operating activities:

     

Depreciation and amortization

     13,073          12,937    

Net income attributable to noncontrolling interests

     (1,929)         (2,481)   

Equity issued as compensation

     4,367          5,499    

Provision for loan losses

     54,627          31,155    

Loans originated for sale

     (153,622)         (241,035)   

Proceeds from sale of loans held for sale

     145,022          247,701    

Gain on the repurchase of debt

             (407)   

(Increase)/ decrease in income tax receivable and deferred

     (29,147)         58,101    

Net (increase)/ decrease in other operating activities

     2,436          20,178    
                 

Net cash provided by operating activities - continuing operations

     33,932          136,158    

Net cash provided by operating activities - discontinued operations

     1,812          34,765    
                 

Net cash provided by operating activities

     35,744          170,923    
                 

Cash flows from investing activities:

     

Investment securities available-for-sale:

     

Purchases

     (570,834)         (394,970)   

Sales

     407,515          272,898    

Maturities, redemptions, and principal payments

     315,970          285,069    

Investment securities held-to-maturity:

     

Purchases

     (5,993)         (6,026)   

Maturities and principal payments

     7,489          6,017    

Investments in trusts, net

     (130)         (867)   

Redemption of Federal Home Loan Bank stock

     1,097            

Net increase in portfolio loans

     (273,449)         (241,358)   

Proceeds from sale of OREO

     10,450          22,396    

Proceeds from sale of portfolio loans

     18,434            

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

     276          11,642    

Capital expenditures, net of sale proceeds

     (2,937)         (4,362)   

Acquisition of remaining 19% interest in KLS

     (29,691)           

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

             (645)   

Sale of discontinued operations, net of cash divested

             103,305    
                 

Net cash provided by/ (used in) investing activities - continuing operations

     (121,803)         53,099    

Net cash provided by/ (used in) investing activities - discontinued operations

             39,626    
                 

Net cash provided by/ (used in) investing activities

     (121,803)         92,725    
                 

(Continued)

 

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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

 

Cash flows from financing activities:

     

Net increase in deposits

     237,297          392,111    

Net decrease in securities sold under agreements to repurchase

     (134,802)         (154,976)   

Net decrease in short-term Federal Home Loan Bank borrowings

             (134,300)   

Advances of long-term Federal Home Loan Bank borrowings

     166,040          24,127    

Repayments of long-term Federal Home Loan Bank borrowings

     (136,531)         (56,151)   

Repurchase of debt

             (52,033)   

Repurchase of Series C Preferred stock

     (154,000)           

Dividends paid to common stockholders

     (2,139)         (2,002)   

Dividends paid to preferred stockholders

     (3,027)         (5,864)   

Tax deficiency from certain stock compensation awards

     (1,206)           

Proceeds from stock option exercises

     465          325    

Proceeds from issuance of common stock, net

     1,074          781    

Proceeds from issuance of common stock from 2010 public and private offering, net

     33,007            

Other equity adjustments

     3,903          (2,002)   
                 

Net cash provided by/ (used in) financing activities - continuing operations

     10,081          10,016    

Net cash provided by/ (used in) financing activities - discontinued operations

             (76,106)   
                 

Net cash provided by/ (used in) financing activities

     10,081          (66,090)   
                 

Net increase/ (decrease) in cash and cash equivalents

     (75,978)         197,558    

Cash and cash equivalents at beginning of year

     447,460          281,275    
                 

Cash and cash equivalents at end of period

     $ 371,482          $ 478,833    
                 

Supplementary schedule of non-cash investing and financing activities:

     

Cash paid for interest

     $           56,274          $ 78,329    

Cash paid for income taxes, net of (refunds received)

     21,135                (74,005)   

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

     1,106          1,043    

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

     (3,235)         (945)   

Change in unrealized gain on other, net of tax

             17    

Non-cash transactions:

     

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

     9,131          24,312    

Loans transferred to/ (from) held for sale from/ (to) portfolio, net

     18,360          (412)   

Equity issued for acquisitions, including deferred acquisition obligations

     3,303          10,625    

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”) that enabled them 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    
September 30,
         For the nine months ended    
September 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

     $ (6,874)         $ 390          $ (895)         $ 4,510    

Less: Net income attributable to noncontrolling interests

     629          1,136          1,929          2,481    
                                   

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

     (7,503)         (746)         (2,824)         2,029    
                                   

(Increase)/ decrease in noncontrolling interests redemption value (1)

     236          (2,002)         1,549          (4,773)   

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

             (5,450)         -              (14,696)   

Accretion of discount on Series C Preferred stock (3)

             (402)         (7,988)         (1,024)   

Dividends on preferred stock

     (73)         (1,998)         (3,027)         (5,864)   
                                   

Total adjustments to income/ (loss) attributable to common shareholders

     163          (9,852)         (9,466)         (26,357)   
                                   

Net income/ (loss) from continuing operations attributable to common shareholders

     (7,340)         (10,598)         (12,290)         (24,328)   

Net income/ (loss) from discontinued operations

     267          (30,614)         1,812          (39,006)   
                                   

Net income/ (loss) attributable to common shareholders

     $ (7,073)         $ (41,212)         $ (10,478)         $ (63,334)   
                                   

Denominator:

           

Weighted average basic and diluted common shares outstanding (4)

     74,153,623          68,551,527          70,293,324          67,033,585    

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

  

     

From continuing operations

     $ (0.10)         $ (0.15)         $ (0.18)         $ (0.37)   

From discontinued operations

     $ 0.00          $ (0.45)         $ 0.03          $ (0.58)   

Total attributable to the Company’s common shareholders

     $ (0.10)         $ (0.60)         $ (0.15)         $ (0.95)   

Dividends declared on common stock

     $ 0.01          $ 0.01          $ 0.03          $ 0.03    

(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 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.

 

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(4) The diluted EPS computation for the three and nine months ended September 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  September 30,
         For the nine months    
ended  September 30,
 
     2010      2009      2010      2009  
     (In thousands)  

Potential common shares from:

           

Convertible trust preferred securities (a)

     1,860           3,229           1,860           3,229     

Conversion of the Series B Preferred stock (b)

     7,261           7,261           7,261           7,261     

Exercise or contingent issuance of options or

other dilutive securities (c)

     1,416           464           1,581           699     
                                   

Total potential common shares (d)

     10,537           10,954           10,702           11,189     
                                   
           
             

 

  (a) 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 $1.3 million for the three and nine month periods ended September 30, 2010, respectively, and $0.7 million and $2.2 million for the three and nine month periods ended September 30, 2009, respectively, would have been added back to net loss attributable to common shareholders for diluted EPS computations for the periods presented.

 

  (b) 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 and $0.2 million for the three and nine month periods ended September 30, 2010 and 2009, respectively, would have been added back to net loss attributable to common shareholders for diluted EPS computations for the periods presented.

 

  (c) Stock options and unvested restricted stock outstanding at period end whose respective exercise prices and grant prices were greater than the average market price of the common shares during the reported periods were not included in the computation of diluted EPS or in the above anti-dilution table. Shares excluded from the diluted EPS computation amounted to 5.1 million and 4.6 million for the three and nine month periods ended September 30, 2010, respectively. Shares excluded from the diluted EPS computation amounted to 5.4 million and 5.5 million for the three and nine month periods ended September 30, 2009, respectively.

 

  (d) A warrant to purchase approximately 2.9 million shares of common stock (the “TARP warrant”) was outstanding at September 30, 2010, 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 nine month periods ended September 30, 2010.

 

(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 nine months ended September 30, 2010 and 2009. Interest expense on junior subordinated debentures is reported at the Holding Company.

 

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

Total Banks

    $ 48,841         $ 42,321         $ 8,701         $ 8,391         $ 57,542         $ 50,712    

Total Investment Managers

    35         46         8,712         8,362         8,747         8,408    

Total Wealth Advisors

           17         9,525         8,928         9,527         8,945    
                                               

Total Segments

    48,878         42,384         26,938         25,681         75,816         68,065    
                                               

Holding Company and Eliminations

    (2,434)        (2,667)        361         842         (2,073)        (1,825)   
                                               

Total Company

    $     46,444         $     39,717         $     27,299         $     26,523         $     73,743         $     66,240    
                                               
    For the three months ended September 30,  
      Non-interest expense         Income tax expense/ (benefit)       Net income/ (loss) from
  continuing operations  
 
    2010     2009     2010     2009     2010     2009  
    (In thousands)  

Total Banks

    $ 37,451         $ 36,643         $ (6,442)        $ 1,291         $ (5,517)        $ 3,679    

Total Investment Managers

    7,217         7,104         517         744         1,013         560    

Total Wealth Advisors

    7,432         5,851         796         1,027         1,299         2,067    
                                               

Total Segments

    52,100         49,598         (5,129)        3,062         (3,205)        6,306    
                                               

Holding Company and Eliminations

    8,879         6,338         (7,283)        (2,247)        (3,669)        (5,916)   
                                               

Total Company

    $     60,979         $     55,936         $ (12,412)        $ 815         $ (6,874)        $ 390    
                                               
    For the three months ended September 30,  
      Net income 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

    $        $        $ (5,517)        $ 3,679         $ 56         $ 675    

Total Investment Managers

    316         371         697         189         869         949    

Total Wealth Advisors

    313         765         986         1,302         347         373    
                                               

Total Segments

    629         1,136         (3,834)        5,170         1,272         1,997    
                                               

Holding Company and Eliminations

                  (3,402)        (36,530)        27         27    
                                               

Total Company

    $ 629         $ 1,136         $ (7,236)        $ (31,360)        $ 1,299         $ 2,024    
                                               
    As of September 30,        
    Assets     AUM    
    2010     2009     2010     2009    
    (In thousands)     (In millions)    

Total Banks

    $ 5,821,542         $ 5,619,555         $ 3,561         $ 3,421      

Total Investment Managers

    111,533         112,289         7,521         6,972      

Total Wealth Advisors

    75,011         76,625         7,553         6,928      
                                 

Total Segments

    6,008,086         5,808,469         18,635         17,321      
                                 

Holding Company and Eliminations

    23,180         61,120         (18)        (18)     
                                 

Total Company

    $ 6,031,266         $ 5,869,589         $ 18,617       $ 17,303      
                                 
    For the nine months ended September 30,  
    Net interest income     Non-interest income     Total revenues  
    2010     2009     2010     2009     2010     2009  
    (In thousands)  

Total Banks

    $ 142,727         $ 126,308         $ 24,770         $ 33,179         $ 167,497         $ 159,487    

Total Investment Managers

    107         138         27,283         24,152         27,390         24,290    

Total Wealth Advisors

    (13)        52         28,086         25,691         28,073         25,743    
                                               

Total Segments

    142,821         126,498         80,139         83,022         222,960         209,520    
                                               

Holding Company and Eliminations

    (7,049)        (8,070)        221         1,063         (6,828)        (7,007)   
                                               

Total Company

    $ 135,772         $ 118,428         $ 80,360         $ 84,085         $ 216,132         $ 202,513    
                                               

 

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

Total Banks

     $ 108,861          $ 108,254          $ (2,557)         $ 5,979          $ 6,566          $ 14,099    

Total Investment Managers

     22,004          21,285          1,929          1,474          3,457          1,531    

Total Wealth Advisors

     22,081          18,067          2,252          2,565          3,740          5,111    
                                                     

Total Segments

     152,946          147,606          1,624          10,018          13,763          20,741    
                                                     

Holding Company and Eliminations

     20,732          17,613          (12,902)         (8,389)         (14,658)         (16,231)   
                                                     

Total Company

     $     173,678          $ 165,219          $ (11,278)         $ 1,629          $ (895)         $ 4,510    
                                                     
     For the nine months ended September 30,  
     Net income 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

     $         $         $ 6,566          $ 14,099          $ 229          $ 1,841    

Total Investment Managers

     1,019          581          2,438          950          2,608          2,886    

Total Wealth Advisors

     910          1,900          2,830          3,211          1,051          1,132    
                                                     

Total Segments

     1,929          2,481          11,834          18,260          3,888          5,859    
                                                     

Holding Company and Eliminations

                     (12,846)         (55,237)         80          81    
                                                     

Total Company

     $ 1,929          $ 2,481          $ (1,012)         $ (36,977)         $ 3,968          $ 5,940    
                                                     

 

(1) Net income/ (loss) from discontinued operations for the three months ended September 30, 2010 and 2009 of $0.3 million and $(30.6) million, respectively, and for the nine months ended September 30, 2010 and 2009 of $1.8 million and $(39.0) million, respectively, are included in Holding Company and Eliminations in the calculation of net loss attributable to the Company.

 

(4) Investments

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

 

     Amortized
Cost
     Unrealized      Fair
Value
 
        Gains      Losses     
     (In thousands)  

At September 30, 2010:

           

Available-for-sale securities at fair value:

           

U.S. government and agencies

     $ 13,100          $ 61          $ (43)         $ 13,118    

Government-sponsored entities

     254,809          2,035          (9)         256,835    

Corporate bonds

     18,956          79          (21)         19,014    

Municipal bonds

     207,888          5,525          (65)         213,348    

Mortgage-backed securities (1)

     225,292          6,218          (326)         231,184    

Other

     3,180          144          (46)         3,278    
                                   

Total

     $     723,225          $     14,062          $     (510)         $     736,777    
                                   

Held-to-maturity securities at amortized cost:

           

U.S. government and agencies

     $ 522          $         $         $ 522    

Government-sponsored entities

     1,983          16                  1,999    

Other

     500                          500    
                                   

Total

     $ 3,005          $ 16          $         $ 3,021    
                                   
             
  (1) Most mortgage-backed securities are guaranteed by U.S. agencies or government-sponsored entities.

 

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Table of Contents

 

         Amortized    
Cost
     Unrealized      Fair
     Value    
 
            Gains              Losses         
     (In thousands)  

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 September 30, 2010:

 

     Available-for-sale (1)      Held-to-maturity  
         Amortized    
Cost
         Market    
Value
         Amortized    
Cost
         Market    
Value
 
     (In thousands)  

Within one year

   $ 85,359         $ 86,006         $ 522         $ 522     

After one, but within five years

     349,545           355,242           1,708           1,721     

After five, but within ten years

     90,043           91,926           775           778     

Greater than ten years

     198,278           203,603           -               -         
                                   

Total

   $ 723,225         $ 736,777         $ 3,005         $ 3,021     
                                   
             
(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.

 

       For the three months ended  
September 30,
       For the nine months ended  
September 30,
 
     2010      2009      2010      2009  
     (In thousands)      (In thousands)  

Proceeds from sales

     $ 40,879          $ 134,043          $ 407,515          $ 272,898    

Realized gains

     1,152          1,135          3,663          5,612    

Realized losses

     (5)         (71)         (97)         (153)   

The following table sets forth information regarding securities at September 30, 2010 having temporary impairment due to the fair market values having declined below the amortized costs of the individual securities, and the time period that the investments have been temporarily impaired. There were no held-to-maturity securities in an unrealized loss position at September 30, 2010.

 

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        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, except number of securities)        

U.S. government and agencies

    $ 3,398         $ (43)         $ -             $ -              $ 3,398         $ (43)          

Government-sponsored entities

    16,773         (9)         -             -              16,773         (9)          

Corporate bonds

    4,956         (21)         -             -              4,956         (21)          

Municipal bonds

    20,928         (65)         -             -              20,928         (65)        17    

Mortgage-backed securities

    52,940         (326)         -             -              52,940         (326)        21    

Other

    52         (8)         80         (38)         132         (46)        24    
                                                       

Total

    $   99,047         $ (472)         $ 80         $ (38)         $   99,127         $ (510)        69    
                                                       

The U.S. government and agencies security, government-sponsored entities securities, 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 bond in the table above had Moody’s credit ratings of BBB. 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 two 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 not credit quality, the Company has no current intent to sell these securities nor is it more likely than not that they will have to sell these securities before recovery of their amortized cost basis. Decisions to hold or sell securities are influenced by the need for liquidity at the Banks, alternative investments, risk assessment, and asset liability management.

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

Cost method investments, which are included in other assets, can be temporarily impaired when the fair market values decline below the amortized costs of the individual investments. There were no cost method investments with unrealized losses at September 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 $25.8 million and $26.3 million in cost method investments included in other assets at September 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 or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

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

 

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            Fair value measurements at reporting date using:  
Description      At September 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

     $ 13,118           $ 3,017           $ 10,101           $ -         

Government-sponsored entities

     256,835           -               256,835           -         

Corporate bonds

     19,014           -               19,014           -         

Municipal bonds

     213,348           -               213,348           -         

Mortgage-backed securities

     231,184           -               231,184           -         

Other

     3,278           454           2,074           750     
                                   

Total available-for-sale securities

     736,777           3,471           732,556           750     

Derivatives - interest rate floor

     308           -               308           -         

Derivatives - interest rate customer swaps

     6,280           -               6,280           -         

Derivatives - customer foreign exchange forward

     353           -               353           -         

Other investments

     10,165           4,306           5,859           -         

Liabilities:

           

Derivative - interest rate customer swaps (1)

     $ 6,567           $ -               $ 6,567           $ -         

Derivatives - customer foreign exchange forward (1)

     353           -               353           -         

Derivatives - junior subordinated debenture interest rate swap (1)

     4,241           -               4,241           -         
             
(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.

 

            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 September 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

 

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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 — three 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 consisted 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, and a junior subordinated debenture interest rate swap to manage its interest rate risk, and customer foreign exchange forward contracts to manage its foreign exchange risks. 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 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 nine months ended September 30, 2010:

 

     Balance at
  June 30, 2010  
     Purchases,
(sales), issuances
and
(settlements), net
     Transfers
  into  (out of)  
Level 3
     Unrealized
 gains (losses) 
       Amortization        Balance at
 September 30,
2010
 
     (In thousands)  

Other available-for-sale investments

     $ 500          $ 250          $         $         $         $ 750    
                                                     

Total Level 3 assets

     $ 500          $ 250          $         $         $         $ 750    
                                                     
                 

 

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     Balance at
December 31,
2009
     Purchases,
(sales),  issuances

and
(settlements), net
     Transfers into
(out  of)
Level 3 (1)
     Unrealized
gains (losses)
     Amortization      Balance at
September 30,
2010
 
     (In thousands)  

Mortgage-backed securities (1)

     $ 3,151          $ -              $ (3,151)         $ -              $ -              $ -        

Other available-for-sale investments

     500          250          -              -              -              750    
                                                     

Total Level 3 assets

     $ 3,651          $ 250          $ (3,151)         $ -              $ -              $ 750    
                                                     
                   
(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 nine months ended September 30, 2010 and during the year ended December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

     September 30, 2010      Fair value measurements recorded during the three  months
ended:
 

Description

      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)

     $ 65,166          $ -               $ -               $ 65,166    

OREO (2)

     893          -               -               893    
                                   
     $ 66,059          $ -               $ -               $ 66,059    
                                   
             
(1) Collateral-dependent impaired loans that had write-downs in fair value or whose specific reserve changed during the third quarter of 2010.

 

(2) Three OREO properties had write downs during the third quarter of 2010.

 

            Fair value measurements recorded during the nine  months
ended:
 

Description

   September 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)

     $ 71,817          $ -               $ -               $ 71,817    

OREO (2)

     4,460          -               -               4,460    
                                   
     $ 76,277          $ -               $ -               $ 76,277    
                                   
             
(1) Collateral-dependent impaired loans that had write-downs in fair value or whose specific reserve changed during the first nine months of 2010.

 

(2) Seven OREO properties had write downs during the first nine months of 2010.

 

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Table of Contents

 

     December 31,
2009
     Fair value measurements recorded during the year ended:  

Description

      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 nine months ended September 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.

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.

 

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Table of Contents

 

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

 

    September 30, 2010     December 31, 2009  
      Carrying Value       Fair Value       Carrying Value       Fair Value  
    (In thousands)  

FINANCIAL ASSETS:

       

Cash and cash equivalents

    $ 371,482          $ 371,482          $ 447,460          $ 447,460     

Held-to-maturity securities

    3,005          3,021          4,501          4,511     

Loans, net (including loans held for sale)

          4,452,554                4,588,973                4,251,310                4,314,744     

Other financial assets

    123,432          123,432          123,979          123,979     

FINANCIAL LIABILITIES:

       

Deposits

    4,492,516          4,502,860          4,255,219          4,265,309     

Securities sold under agreements to repurchase

    108,575          112,994          243,377          246,592     

Federal Home Loan Bank borrowings

    584,521          615,295          555,012          577,705     

Junior subordinated debentures

    193,645          168,689          193,645          156,568     

Other financial liabilities

    12,837          12,837          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.

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

 

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being taken by the respective FHLBs to address their regulatory situations; the third quarter 2010 net income reported by the respective FHLBs; and the second and third quarter 2010 redemptions 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 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 September 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.

 

(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”.

 

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

Commercial loans:

   

New England

    $ 1,082,877          $ 943,740     

Northern California

    935,994          927,074     

Southern California

    233,383          231,684     

Pacific Northwest

    134,337          111,039     

Eliminations and other, net

    (213)         (517)    
               

Total commercial loans

    $ 2,386,378          $ 2,213,020     
               

Construction and land loans:

   

New England

    $ 97,585          $ 117,817     

Northern California

    97,791          161,839     

Southern California

    1,869          7,719     

Pacific Northwest

    13,670          28,286     
               

Total construction and land loans

    $ 210,915          $ 315,661     
               

Residential mortgage loans:

   

New England

    $ 1,154,671          $ 1,113,842     

Northern California

    277,321          219,394     

Southern California

    159,321          124,212     

Pacific Northwest

    43,645          37,255     
               

Total residential mortgage loans

    $ 1,634,958          $ 1,494,703     
               

Home equity and other consumer loans:

   

New England

    $ 201,569          $ 179,792     

Northern California

    72,152          74,192     

Southern California

    15,529          20,947     

Pacific Northwest

    6,567          5,278     

Eliminations and other, net

    2,206          3,447     
               

Total home equity and other consumer loans

    $ 298,023          $ 283,656     
               

Total loans

    $       4,530,274          $       4,307,040     
               

At September 30, 2010, non-accrual loans were $143.1 million, an increase of $52.8 million, or 58%, from $90.3 million at December 31, 2009. Included with non-accrual loans at September 30, 2010 are $2.9 million of the Southern California non-strategic loans held for sale, compared to $3.6 million at December 31, 2009.

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

Impaired loans are generally included within the balance of non-accrual loans. At September 30, 2010, impaired loans totaled $141.6 million, an increase of $58.4 million, or 70%, from $83.2 million at December 31, 2009. At September 30, 2010, $65.9 million of the impaired loans had $9.8 million in specific allocations to the general reserve. The remaining $75.7 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.

 

(7) Allowance for Loan Losses

The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled $100.0 million and $68.4 million at September 30, 2010 and December 31, 2009, respectively.

 

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

 

        At and for the three months    
ended September 30,
        At and for the nine months    
ended September 30,
 
    2010     2009     2010     2009  
    (In thousands)  

Allowance for loan losses, beginning of period

    $ 79,073          $ 71,002          $ 68,444          $ 64,091     

Provision for loan losses

    32,050          9,099          54,627          31,155     

Charge-offs

    (14,204)         (7,416)         (29,779)         (23,234)    

Recoveries

    3,091          325          6,718          998     
                               

Allowance for loan losses, end of period

    $         100,010          $         73,010          $       100,010          $         73,010     
                               

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

 

(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 September 30, 2010 and December 31, 2009.

 

    September 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         $ 308           Other assets         $ (4,241)          Other assets         $ 2,646           Other assets         $ -       
Derivatives not designated as hedging instruments:                

Interest rate products (1)

     Other assets          6,280           Other assets          (6,567)          Other assets          4,924           Other assets          (5,053)    

Foreign exchange contracts (1)

     Other assets          353           Other assets          (353)          Other assets          -             Other assets          -       
                                       

Total

     $       6,941           $     (11,161)          $       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 consolidated 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

 

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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 nine months ended September 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 next twelve months, the Company estimates that $0.3 million will be reclassified as an increase to interest income and $1.3 million will be reclassified as an increase in interest expense.

During the three and nine months ended September 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 nine months ended September 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 nine months ended September 30, 2010 and $0.2 million the three and nine months ended September 30, 2009. As of September 30, 2010 and December 31, 2009, the Bank affiliate had 18 interest rate swaps with an aggregate notional amount of $182.8 million and $184.2 million, respectively, related to this program. As of September 30, 2010, the Bank affiliate also had 20 foreign currency exchange contracts with a notional amount of $6.6 million related to this program. There were no foreign currency exchange contracts as of December 31, 2009.

 

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

 

Derivatives in Cash Flow

Hedging Relationships

   Amount of Gain or (Loss)
Recognized in OCI on  Derivative
(Effective Portion) Three Months
Ended September 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 September 30,
 
   2010      2009         2010      2009  
          

Interest rate products

     $ (2,636)           $ (304)         Interest income      $ 763           $ 770     
         Other income / expense      -               (1)    
                                      

Total

     $         (2,636)           $         (304)              $           763           $           769     
                                      

Derivatives in Cash Flow

Hedging Relationships

   Amount of Gain or  (Loss)
Recognized in OCI on Derivative
(Effective Portion) Nine Months

Ended September 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)  Nine
Months Ended September 30,
 
   2010      2009         2010      2009  
          

Interest rate products

     $ (4,114)          $ (537)        Interest income      $ 2,269           $ 2,293     
         Other income / expense      (5)          (7)    
                                      

Total

     $         (4,114)          $ (537)             $           2,264           $           2,286     
                                      

 

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 September 30,
 
      2010      2009  
                   

Interest rate products

   Other income / expense      $ (84)          $         (173)    
                    

Total

        $         (84)          $ (173)    
                    

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
Nine Months Ended September 30,
 
      2010      2009  
                   

Interest rate products

   Other income / expense      $ (158)          $ (179)    
                    

Total

        $         (158)          $         (179)    
                    

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 September 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 September 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 September 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 September 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 September 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 September 30, 2010.

 

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As of September 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 $10.5 million and $2.4 million, respectively. As of September 30, 2010, the Company and Bank affiliate has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $6.0 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 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:

 

            Nine months ended         
September 30,
 
    2010     2009  
    (In thousands)  

Income/ (loss) from continuing operations:

   

Income/ (loss) before income taxes

    $       (12,173)         $ 6,139     

Income tax expense/ (benefit)

    (11,278)         1,629     
               

Net income/ (loss) from continuing operations

    $ (895)         $ 4,510     
               

Effective tax rate, continuing operations

    92.6%         26.5%    

Income/ (loss) from discontinued operations:

   

Income/ (loss) before income taxes

    $ 4,214          $       (42,159)    

Income tax expense/ (benefit)

    2,402          (3,153)    
               

Net income/ (loss) from discontinued operations

    $ 1,812          $ (39,006)    
               

Effective tax rate, discontinued operations

    57.0%         7.5%    

Income/ (loss) attributable to noncontrolling interests:

   

Income/ (loss) before income taxes

    $ 1,929          $ 2,481     

Income tax expense/ (benefit)

    -              -         
               

Net income attributable to noncontrolling interests

    $ 1,929          $ 2,481     
               

Effective tax rate, noncontrolling interests

    0.0%         0.0%    

Income/ (loss) attributable to the Company

   

Income/ (loss) before income taxes

    $ (9,888)         $ (38,501)    

Income tax expense/ (benefit)

    (8,876)         (1,524)    
               

Net income/ (loss) attributable to the Company

    $ (1,012)     &