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Section 1: 10-Q (BPFH Q2-18 10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number: 001-35070
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: (617) 912-1900
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 o
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 x     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
 
 
Accelerated filer o    
 
 
Non-accelerated filer o   
 
(Do not check if a smaller reporting company)
 
Smaller reporting company o    
 
 
 
 
 
 
Emerging growth company o    
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 27, 2018:
Common Stock, Par Value $1.00 Per Share
84,565,703
(class)
(outstanding)
 



BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
 
 
 
 
Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
Item 3
 
Item 4
 
PART II—OTHER INFORMATION
Item 1
 
Item 1A
 
Item 2
 
Item 3
 
Item 4
 
Item 5
 
Item 6
 
 
 
 
 
Certifications
 



i



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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

 
June 30, 2018
 
December 31, 2017
 
(In thousands, except share and per share data)
Assets:
 
 
 
Cash and cash equivalents
$
364,539

 
$
120,541

Investment securities available-for-sale (amortized cost of $1,109,785 and $1,182,427 at June 30, 2018 and December 31, 2017, respectively)
1,076,967

 
1,170,328

Investment securities held-to-maturity (fair value of $76,747 and $73,781 at June 30, 2018 and December 31, 2017, respectively)
78,955

 
74,576

Stock in Federal Home Loan Bank and Federal Reserve Bank
70,127

 
59,973

Loans held for sale
4,622

 
4,697

Total loans
6,767,123

 
6,505,028

Less: Allowance for loan losses
73,464

 
74,742

Net loans
6,693,659

 
6,430,286

Other real estate owned (“OREO”)
108

 

Premises and equipment, net
46,421

 
37,640

Goodwill
75,598

 
75,598

Intangible assets, net
14,584

 
16,083

Fees receivable
10,405

 
11,154

Accrued interest receivable
23,732

 
22,322

Deferred income taxes, net
26,316

 
29,031

Other assets
230,170

 
259,515

Total assets
$
8,716,203

 
$
8,311,744

Liabilities:
 
 
 
Deposits
$
6,620,179

 
$
6,510,246

Securities sold under agreements to repurchase
58,824

 
32,169

Federal funds purchased

 
30,000

Federal Home Loan Bank borrowings
1,056,938

 
693,681

Junior subordinated debentures
106,363

 
106,363

Other liabilities
129,175

 
135,880

Total liabilities
7,971,479

 
7,508,339

Redeemable Noncontrolling Interests
10,747

 
17,461

Shareholders’ Equity:
 
 
 
Preferred stock, $1.00 par value; authorized: 2,000,000 shares;
Series D, 6.95% Non-Cumulative Perpetual, issued and outstanding: zero shares at June 30, 2018 and 50,000 shares at December 31, 2017; liquidation preference: $1,000 per share

 
47,753

Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 84,478,858 shares at June 30, 2018 and 84,208,538 shares at December 31, 2017
84,479

 
84,208

Additional paid-in capital
613,918

 
607,929

Retained earnings
56,912

 
49,526

Accumulated other comprehensive income/ (loss)
(23,328
)
 
(8,658
)
Total Company’s shareholders’ equity
731,981

 
780,758

Noncontrolling interests
1,996

 
5,186

Total shareholders’ equity
733,977

 
785,944

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
8,716,203

 
$
8,311,744

See accompanying notes to consolidated financial statements.

1


BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share and per share data)
Interest and dividend income:
 
 
 
 
 
 
 
Loans
$
64,048

 
$
57,736

 
$
124,977

 
$
111,372

Taxable investment securities
1,501

 
1,592

 
3,011

 
3,262

Non-taxable investment securities
1,752

 
1,655

 
3,482

 
3,261

Mortgage-backed securities
3,049

 
3,495

 
6,227

 
6,999

Short-term investments and other
1,205

 
831

 
2,214

 
1,431

Total interest and dividend income
71,555

 
65,309

 
139,911

 
126,325

Interest expense:
 
 
 
 
 
 
 
Deposits
8,365

 
4,949

 
14,889

 
9,480

Federal Home Loan Bank borrowings
4,447

 
2,489

 
7,791

 
4,600

Junior subordinated debentures
1,008

 
716

 
1,854

 
1,387

Repurchase agreements and other short-term borrowings
190

 
10

 
449

 
71

Total interest expense
14,010

 
8,164

 
24,983

 
15,538

Net interest income
57,545

 
57,145

 
114,928

 
110,787

Provision/ (credit) for loan losses
453

 
(6,114
)
 
(1,342
)
 
(6,295
)
Net interest income after provision/ (credit) for loan losses
57,092

 
63,259

 
116,270

 
117,082

Fees and other income:
 
 
 
 
 
 
 
Investment management fees
4,227

 
11,081

 
15,652

 
21,920

Wealth advisory fees
13,693

 
12,961

 
27,205

 
25,784

Wealth management and trust fees
11,169

 
11,161

 
23,320

 
21,987

Other banking fee income
2,745

 
1,964

 
5,018

 
3,658

Gain on sale of loans, net
63

 
59

 
137

 
197

Gain/ (loss) on sale of investments, net
7

 
237

 
(17
)
 
256

Gain/ (loss) on OREO, net

 

 

 
(46
)
Other
191

 
555

 
523

 
768

Total fees and other income
32,095

 
38,018

 
71,838

 
74,524

Operating expense:
 
 
 
 
 
 
 
Salaries and employee benefits
39,433

 
43,312

 
86,517

 
88,977

Occupancy and equipment
8,229

 
7,283

 
15,977

 
14,468

Professional services
2,872

 
3,106

 
6,049

 
6,420

Marketing and business development
2,070

 
1,971

 
3,663

 
3,631

Information systems
6,770

 
5,500

 
12,656

 
10,879

Amortization of intangibles
749

 
1,426

 
1,499

 
2,852

FDIC insurance
708

 
879

 
1,452

 
1,645

Other
3,553

 
4,344

 
7,428

 
7,729

Total operating expense
64,384

 
67,821

 
135,241

 
136,601

Income before income taxes
24,803

 
33,456

 
52,867

 
55,005

Income tax expense
17,399

 
9,963

 
23,425

 
16,516

Net income from continuing operations
7,404

 
23,493

 
29,442

 
38,489

Net income/ (loss) from discontinued operations
(2
)
 
1,063

 
1,696

 
2,695

Net income before attribution to noncontrolling interests
7,402

 
24,556

 
31,138

 
41,184

(Continued)
 
 
 
 
 
 
 

2


BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Less: Net income attributable to noncontrolling interests
968

 
1,150

 
2,018

 
2,116

Net income attributable to the Company
$
6,434

 
$
23,406

 
$
29,120

 
$
39,068

Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders
$
(3,524
)
 
$
(577
)
 
$
(3,547
)
 
$
(1,743
)
Net income attributable to common shareholders for earnings per share calculation
$
2,910

 
$
22,829

 
$
25,573

 
$
37,325

Basic earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
From continuing operations:
$
0.03

 
$
0.27

 
$
0.29

 
$
0.42

From discontinued operations:
$

 
$
0.01

 
$
0.02

 
$
0.03

Total attributable to common shareholders:
$
0.03

 
$
0.28

 
$
0.31

 
$
0.45

Weighted average basic common shares outstanding
83,509,115

 
82,298,493

 
83,304,573

 
82,125,795

Diluted earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
From continuing operations:
$
0.03

 
$
0.26

 
$
0.28

 
$
0.41

From discontinued operations:
$

 
$
0.01

 
$
0.02

 
$
0.03

Total attributable to common shareholders:
$
0.03

 
$
0.27

 
$
0.30

 
$
0.44

Weighted average diluted common shares outstanding
85,413,575

 
84,741,680

 
85,221,974

 
84,658,309


 See accompanying notes to consolidated financial statements.

3


BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income attributable to the Company
$
6,434

 
$
23,406

 
$
29,120

 
$
39,068

Other comprehensive income/ (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain/ (loss) on securities available-for-sale
(1,953
)
 
4,380

 
(14,848
)
 
6,474

Reclassification adjustment for net realized (gain)/ loss included in net income

 
(141
)
 

 
(152
)
Net unrealized gain/ (loss) on securities available-for-sale
(1,953
)
 
4,239

 
(14,848
)
 
6,322

Unrealized gain/ (loss) on cash flow hedges
124

 
(246
)
 
712

 
(210
)
Reclassification adjustment for net realized (gain)/ loss included in net income
(187
)
 
206

 
(201
)
 
386

Net unrealized gain/ (loss) on cash flow hedges
(63
)
 
(40
)
 
511

 
176

Net unrealized gain/ (loss) on other
1

 

 
1

 
12

Other comprehensive income/ (loss), net of tax
(2,015
)
 
4,199

 
(14,336
)
 
6,510

Total comprehensive income attributable to the Company, net
$
4,419

 
$
27,605

 
$
14,784

 
$
45,578

 See accompanying notes to consolidated financial statements.


4


BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/
(Loss)
 
Non-
controlling
Interests
 
Total
 
(In thousands, except share data)
Balance, December 31, 2016
$
47,753

 
$
83,732

 
$
597,454

 
$
47,929

 
$
(12,548
)
 
$
4,161

 
$
768,481

Net income attributable to the Company

 

 

 
39,068

 

 

 
39,068

Other comprehensive income/ (loss), net

 

 

 

 
6,510

 

 
6,510

Dividends paid to common shareholders: $0.22 per share

 

 

 
(18,452
)
 

 

 
(18,452
)
Dividends paid to preferred shareholders

 

 

 
(1,738
)
 

 

 
(1,738
)
Net change in noncontrolling interests

 

 

 

 

 
214

 
214

Net proceeds from issuance of:
 
 
 
 
 
 
 
 
 
 
 
 
 
72,811 shares of common stock

 
73

 
648

 

 

 

 
721

87,419 incentive stock grant shares canceled or forfeited and 62,087 shares withheld for employee taxes

 
(150
)
 
(819
)
 

 

 

 
(969
)
Exercise of warrants

 
261

 
1,616

 

 

 

 
1,877

Amortization of stock compensation and employee stock purchase plan

 

 
4,137

 

 

 

 
4,137

Stock options exercised

 
99

 
705

 

 

 

 
804

Other equity adjustments

 

 
(1,234
)
 

 

 

 
(1,234
)
Balance at June 30, 2017
$
47,753

 
$
84,015

 
$
602,507

 
$
66,807

 
$
(6,038
)
 
$
4,375

 
$
799,419

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
47,753

 
$
84,208

 
$
607,929

 
$
49,526

 
$
(8,658
)
 
$
5,186

 
$
785,944

Reclassification due to change in accounting principles

 

 

 
334

 
(334
)
 

 

Net income attributable to the Company

 

 

 
29,120

 

 

 
29,120

Other comprehensive income/ (loss), net

 

 

 

 
(14,336
)
 

 
(14,336
)
Dividends paid to common shareholders:
$0.24 per share

 

 

 
(20,330
)
 

 

 
(20,330
)
Dividends paid to preferred shareholders

 

 

 
(1,738
)
 

 

 
(1,738
)
Net change in noncontrolling interests

 

 

 

 

 
(3,190
)
 
(3,190
)
Redemption of Series D preferred stock
(47,753
)
 

 
(2,247
)
 

 

 

 
(50,000
)
Net proceeds from issuance of:
 
 
 
 
 
 
 
 
 
 
 
 
 
63,434 shares of common stock

 
63

 
770

 

 

 

 
833

126,752 incentive stock grant shares canceled or forfeited and 112,565 shares withheld for employee taxes, net of 2,547 shares of incentive stock grants

 
(236
)
 
(1,656
)
 

 

 

 
(1,892
)
Exercise of warrants

 
294

 
(273
)
 

 

 

 
21

Amortization of stock compensation and employee stock purchase plan

 

 
3,399

 

 

 

 
3,399

Stock options exercised

 
150

 
1,107

 

 

 

 
1,257

Other equity adjustments

 

 
4,889

 

 

 

 
4,889

Balance at June 30, 2018
$

 
$
84,479

 
$
613,918

 
$
56,912

 
$
(23,328
)
 
$
1,996

 
$
733,977


See accompanying notes to consolidated financial statements.

5


BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Six months ended June 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income attributable to the Company
$
29,120

 
$
39,068

Adjustments to arrive at net income from continuing operations
 
 
 
Net income attributable to noncontrolling interests
2,018

 
2,116

Less: Net income from discontinued operations
(1,696
)
 
(2,695
)
Net income from continuing operations
29,442

 
38,489

Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities:
 
 
 
Depreciation and amortization
11,200

 
10,575

Net income attributable to noncontrolling interests
(2,018
)
 
(2,116
)
Stock compensation, net of cancellations
3,399

 
4,137

Provision/ (credit) for loan losses
(1,342
)
 
(6,295
)
Loans originated for sale
(24,260
)
 
(19,814
)
Proceeds from sale of loans held for sale
24,486

 
20,605

Deferred income tax expense/ (benefit)
8,374

 
1,240

Net decrease/ (increase) in other operating activities
(17,613
)
 
(6,434
)
Net cash provided by/ (used in) operating activities of continuing operations
31,668

 
40,387

Net cash provided by/ (used in) operating activities of discontinued operations
1,696

 
2,695

Net cash provided by/ (used in) operating activities
33,364

 
43,082

Cash flows from investing activities:
 
 
 
Investment securities available-for-sale:
 
 
 
Purchases
(32,659
)
 
(99,647
)
Sales
35,550

 
103,031

Maturities, redemptions, and principal payments
65,712

 
78,610

Investment securities held-to-maturity:
 
 
 
Purchases
(11,876
)
 
(14,945
)
Principal payments
7,288

 
8,745

(Investments)/ distributions in trusts, net
(329
)
 
(514
)
Purchase of additional Bank Owned Life Insurance (“BOLI”)

 
(50,000
)
(Purchase)/ redemption of Federal Home Loan Bank and Federal Reserve Bank stock
(10,154
)
 
(1,491
)
Net increase in portfolio loans
(263,692
)
 
(165,426
)
Proceeds from recoveries of loans previously charged-off
593

 
3,748

Proceeds from sale of OREO

 
1,644

Capital expenditures, net of sale proceeds
(14,453
)
 
(6,298
)
Proceeds from sale of affiliate
34,120

 

Net cash provided by/ (used in) investing activities
(189,900
)
 
(142,543
)
(Continued)
 
 
 

6


BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Six months ended June 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Net increase/ (decrease) in deposits
109,933

 
296,193

Net increase/ (decrease) in securities sold under agreements to repurchase
26,655

 
(30,392
)
Net increase/ (decrease) in federal funds purchased
(30,000
)
 
(40,000
)
Net increase/ (decrease) in short-term Federal Home Loan Bank borrowings
350,000

 
(90,000
)
Advances of long-term Federal Home Loan Bank borrowings
91,444

 
46,235

Repayments of long-term Federal Home Loan Bank borrowings
(78,187
)
 
(71,451
)
Redemption of Series D preferred stock
(50,000
)
 

Dividends paid to common shareholders
(20,330
)
 
(18,452
)
Dividends paid to preferred shareholders
(1,738
)
 
(1,738
)
Proceeds from warrant exercises
21

 
1,877

Proceeds from stock option exercises
1,257

 
804

Proceeds from issuance of common stock, net
(1,059
)
 
(248
)
Distributions paid to noncontrolling interests
(1,958
)
 
(2,064
)
Other equity adjustments
4,496

 
(828
)
Net cash provided by/ (used in) financing activities
400,534

 
89,936

Net increase/ (decrease) in cash and cash equivalents
243,998

 
(9,525
)
Cash and cash equivalents at beginning of year
120,541

 
106,557

Cash and cash equivalents at end of period
$
364,539

 
$
97,032

Supplementary schedule of non-cash investing and financing activities:
 
 
 
Cash paid for interest
$
23,742

 
$
15,591

Cash paid for income taxes, (net of refunds received)
9,827

 
16,600

Change in unrealized gain/ (loss) on available-for-sale securities, net of tax
(14,848
)
 
6,322

Change in unrealized gain/ (loss) on cash flow hedges, net of tax
511

 
176

Change in unrealized gain/ (loss) on other, net of tax
1

 
12

Non-cash transactions:
 
 
 
Loans transferred into other real estate owned from loan portfolio
108

 

Loans charged-off
(529
)
 
(521
)

See accompanying notes to consolidated financial statements.


7

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 bank holding company (the “Holding Company”) with four reportable segments: Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory.
The Private Banking segment is comprised of the banking operations of Boston Private Bank & Trust Company (the “Bank” or “Boston Private Bank”), a trust company chartered by The Commonwealth of Massachusetts whose deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”), and a wholly-owned subsidiary of the Company. Boston Private Bank is a member of the Federal Reserve Bank of Boston. Boston Private Bank primarily operates in three geographic markets: New England, the San Francisco Bay Area, and Southern California.
The Wealth Management and Trust segment is comprised of the operations of Boston Private Wealth LLC (“Boston Private Wealth”), a wholly-owned subsidiary of Boston Private Bank, and the trust operations of Boston Private Bank. The segment offers investment management, wealth management, retirement plan advisory, family office, financial planning, and trust services to individuals, families, and institutions. The Wealth Management and Trust segment operates in New England; Southeast Florida; Naples, Florida; California; and Madison, Wisconsin.
The Investment Management segment had two consolidated affiliates, Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”) and Anchor Capital Advisors, LLC (“Anchor”) (together, the “Investment Managers”) included in its results for the first quarter of 2018. The assets and liabilities of Anchor were classified as held for sale as of March 31, 2018 and December 31, 2017. Assets held for sale were $58.8 million at December 31, 2017, and liabilities held for sale were $3.2 million at December 31, 2017. In December 2017, the Company entered into an agreement to sell its entire ownership interest in Anchor in a transaction that would result in Anchor being majority-owned by members of its management team. The transaction closed in April 2018. The Investment Management segment results for the second quarter of 2018 include results from DGHM for the full quarter and results from Anchor for the portion of April before the transaction was closed.
The Wealth Advisory segment has two consolidated affiliates, consisting of KLS Professional Advisors Group, LLC (“KLS”) and Bingham, Osborn & Scarborough, LLC (“BOS”) (together, the “Wealth Advisors” and, together with the Wealth Management and Trust, and Investment Management segments, the “Wealth and Investment businesses”).
The Company conducts substantially all of its business through its four reportable segments. All significant intercompany accounts and transactions have been eliminated in consolidation.
The unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“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 of operations 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, 2017, as filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation.
The Company’s significant accounting policies are described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 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, 2017, as filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies, except for the following new accounting pronouncements from the Financial Accounting Standards Board (the “FASB”) that were adopted effective January 1, 2018:
Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). As a result of implementing this standard, the Company reclassified $5 thousand in unrealized losses on derivatives related to hedge ineffectiveness from accumulated other comprehensive income to retained earnings as of January 1, 2018. This ASU will provide more flexibility in the Company’s risk management activities and we believe it will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

8



ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This amendment requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. As a result of the retrospective adoption of this ASU, $181 thousand and $341 thousand for the three and six months ended June 30, 2017, respectively, has been reclassified from salaries and employee benefits expense to other expense within the Company’s consolidated statement of operations. For the three and six months ended June 30, 2018, $145 thousand and $280 thousand, respectively, is presented within other expense that would have been presented within salaries and employee benefits prior to adoption of ASU 2017-07.
ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”).  This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for the Company beginning on January 1, 2018. The guidance requires application using a retrospective transition method. This ASU did not have an impact on the Company’s consolidated financial statements.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This amendment requires equity investments to be measured at fair value with changes in fair value, net of tax, recognized in net income. As a result of implementing this standard, the Company reclassified $339 thousand in unrealized gains on available-for-sale equity investments, net of tax, from accumulated other comprehensive income to retained earnings as of January 1, 2018. Additionally, this amendment requires that entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. As a result of implementing this standard, the Company’s updated process includes identifying a fair value for loans using the exit price notion. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 5: Fair Value Measurements” for further details.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which was subsequently amended by additional ASUs, including ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, collectively, “ASU 2014-09 et al.” ASU 2014-09 et al. was adopted using the modified retrospective transition method as of January 1, 2018, however no cumulative effect adjustment was required. This new guidance was applied to all revenue contracts in place at the date of adoption. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 13: Revenue Recognition” for further details.



9

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

2.    Earnings Per Share
The treasury stock method of calculating earnings per share (“EPS”) is presented below for the three and six months ended June 30, 2018 and 2017. The following tables present the computations of basic and diluted EPS:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share and per share data)
Basic earnings per share - Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
7,404

 
$
23,493

 
$
29,442

 
$
38,489

Less: Net income attributable to noncontrolling interests
968

 
1,150

 
2,018

 
2,116

Net income from continuing operations attributable to the Company
6,436

 
22,343

 
27,424

 
36,373

Decrease/ (increase) in noncontrolling interests’ redemption values (1)
(408
)
 
292

 
438

 
(5
)
Dividends on preferred stock (2)
(3,116
)
 
(869
)
 
(3,985
)
 
(1,738
)
Total adjustments to income attributable to common shareholders
(3,524
)
 
(577
)
 
(3,547
)
 
(1,743
)
Net income from continuing operations attributable to common shareholders, treasury stock method
2,912

 
21,766

 
23,877

 
34,630

Net income/ (loss) from discontinued operations
(2
)
 
1,063

 
1,696

 
2,695

Net income attributable to common shareholders, treasury stock method
$
2,910

 
$
22,829

 
$
25,573

 
$
37,325

 
 
 
 
 
 
 
 
Basic earnings per share - Denominator:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
83,509,115

 
82,298,493

 
83,304,573

 
82,125,795

Per share data - Basic earnings per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.03

 
$
0.27

 
$
0.29

 
$
0.42

Discontinued operations
$

 
$
0.01

 
$
0.02

 
$
0.03

Total attributable to common shareholders
$
0.03

 
$
0.28

 
$
0.31

 
$
0.45




10

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share and per share data)
Diluted earnings per share - Numerator:
 
 
 
 
 
 
 
Net income from continuing operations attributable to common shareholders, after assumed dilution
$
2,912

 
$
21,766

 
$
23,877

 
$
34,630

Net income/ (loss) from discontinued operations
(2
)
 
1,063

 
1,696

 
2,695

Net income attributable to common shareholders, after assumed dilution
$
2,910

 
$
22,829

 
$
25,573

 
$
37,325

Diluted earnings per share - Denominator:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
83,509,115

 
82,298,493

 
83,304,573

 
82,125,795

Dilutive effect of:
 
 
 
 
 
 
 
Stock options, performance-based and time-based restricted stock, and performance-based and time-based restricted stock units, and other dilutive securities (3)
1,076,049

 
1,338,939

 
1,112,938

 
1,394,605

Warrants to purchase common stock (3)
828,411

 
1,104,248

 
804,463

 
1,137,909

Dilutive common shares
1,904,460

 
2,443,187

 
1,917,401

 
2,532,514

Weighted average diluted common shares outstanding (3)
85,413,575

 
84,741,680

 
85,221,974

 
84,658,309

Per share data - Diluted earnings per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.03

 
$
0.26

 
$
0.28

 
$
0.41

Discontinued operations
$

 
$
0.01

 
$
0.02

 
$
0.03

Total attributable to common shareholders
$
0.03

 
$
0.27

 
$
0.30

 
$
0.44

Dividends per share declared and paid on common stock
$
0.12

 
$
0.11

 
$
0.24

 
$
0.22

_____________________
(1)
See Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the 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)
Consideration paid in excess of carrying value for the redemption of the 6.95% Non-Cumulative Perpetual Preferred Stock, Series D (“the Series D preferred stock”) of $2.2 million is considered a deemed dividend and, for purposes of calculating EPS, reduces net income attributable to common shareholders for the three and six month ended June 30, 2018.
(3)
The diluted EPS computations for the three and six months ended June 30, 2018 and 2017 do not assume the conversion, exercise, or contingent issuance of the following shares for the following periods because the result would have been anti-dilutive for the periods indicated. As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Shares excluded due to exercise price exceeding the average market price of common shares during the period (total outstanding):
(In thousands)
Potential common shares from:
 
 
 
 
 
 
 
Stock options
16

 
54

 
136

 
87

Total shares excluded due to exercise price exceeding the average market price of common shares during the period
16

 
54

 
136

 
87



11

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

3.    Reportable segments
Management Reporting
The Company has four reportable segments (Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory), and the Holding Company (Boston Private Financial Holdings, Inc.). The financial performance of the Company is managed and evaluated by these four 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, 2017.
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 present a reconciliation of the revenues, profits, assets, and other significant items of reportable segments as of and for the three and six months ended June 30, 2018 and 2017. Interest expense on junior subordinated debentures is reported at the Holding Company.
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Private Banking
(In thousands)
Net interest income
$
58,447

 
$
57,783

 
$
116,578

 
$
112,039

Fees and other income
2,825

 
2,634

 
5,300

 
4,462

Total revenues
61,272

 
60,417

 
121,878

 
116,501

Provision/ (credit) for loan losses
453

 
(6,114
)
 
(1,342
)
 
(6,295
)
Operating expense
39,670

 
36,904

 
79,297

 
71,962

Income before income taxes
21,149

 
29,627

 
43,923

 
50,834

Income tax expense
3,981

 
9,209

 
8,594

 
15,478

Net income from continuing operations
17,168

 
20,418

 
35,329

 
35,356

Net income attributable to the Company
$
17,168

 
$
20,418

 
$
35,329

 
$
35,356

 
 
 
 
 
 
 
 
Assets
$
8,637,774

 
$
7,951,911

 
$
8,637,774

 
$
7,951,911

Depreciation
$
2,031

 
$
1,343

 
$
3,615

 
$
2,714

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Wealth Management and Trust
(In thousands)
Fees and other income
$
11,293

 
$
11,274

 
$
23,567

 
$
22,195

Operating expense
11,058

 
11,937

 
21,752

 
25,810

Income/ (loss) before income taxes
235

 
(663
)
 
1,815

 
(3,615
)
Income tax expense/ (benefit)
34

 
(239
)
 
509

 
(1,405
)
Net income/ (loss) from continuing operations
201

 
(424
)
 
1,306

 
(2,210
)
Net income/ (loss) attributable to the Company
$
201

 
$
(424
)
 
$
1,306

 
$
(2,210
)
 
 
 
 
 
 
 
 
Assets
$
73,202

 
$
74,842

 
$
73,202

 
$
74,842

Amortization of intangibles
$
701

 
$
727

 
$
1,402

 
$
1,454

Depreciation
$
334

 
$
341

 
$
655

 
$
678


12

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Investment Management (1)
(In thousands)
Net interest income
$
2

 
$
4

 
$
6

 
$
8

Fees and other income
4,234

 
11,091

 
15,642

 
21,950

Total revenues
4,236

 
11,095

 
15,648

 
21,958

Operating expense
3,120

 
8,346

 
11,645

 
16,700

Income before income taxes
1,116

 
2,749

 
4,003

 
5,258

Income tax expense
249

 
894

 
920

 
1,738

Net income from continuing operations
867

 
1,855

 
3,083

 
3,520

Noncontrolling interests
202

 
512

 
690

 
974

Net income attributable to the Company
$
665

 
$
1,343

 
$
2,393

 
$
2,546

 
 
 
 
 
 
 
 
Assets
$
7,189

 
$
91,915

 
$
7,189

 
$
91,915

Amortization of intangibles
$

 
$
651

 
$

 
$
1,301

Depreciation
$
32

 
$
61

 
$
66

 
$
127

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Wealth Advisory
(In thousands)
Net interest income
$
77

 
$
29

 
$
125

 
$
46

Fees and other income
13,717

 
12,980

 
27,256

 
25,823

Total revenues
13,794

 
13,009

 
27,381

 
25,869

Operating expense
9,227

 
8,943

 
19,763

 
18,386

Income before income taxes
4,567

 
4,066

 
7,618

 
7,483

Income tax expense
1,214

 
1,511

 
2,000

 
2,798

Net income from continuing operations
3,353

 
2,555

 
5,618

 
4,685

Noncontrolling interests
766

 
638

 
1,328

 
1,142

Net income attributable to the Company
$
2,587

 
$
1,917

 
$
4,290

 
$
3,543

 
 
 
 
 
 
 
 
Assets
$
76,175

 
$
75,247

 
$
76,175

 
$
75,247

Amortization of intangibles
$
48

 
$
48

 
$
97

 
$
97

Depreciation
$
164

 
$
235

 
$
327

 
$
461


13

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Holding Company and Eliminations
(In thousands)
Net interest income
$
(981
)
 
$
(671
)
 
$
(1,781
)
 
$
(1,306
)
Fees and other income
26

 
39

 
73

 
94

Total revenues
(955
)
 
(632
)
 
(1,708
)
 
(1,212
)
Operating expense
1,309

 
1,691

 
2,784

 
3,743

Income/ (loss) before income taxes
(2,264
)
 
(2,323
)
 
(4,492
)
 
(4,955
)
Income tax expense/ (benefit) (2)
11,921

 
(1,412
)
 
11,402

 
(2,093
)
Net income/ (loss) from continuing operations
(14,185
)
 
(911
)
 
(15,894
)
 
(2,862
)
Discontinued operations
(2
)
 
1,063

 
1,696

 
2,695

Net income/ (loss) attributable to the Company
$
(14,187
)
 
$
152

 
$
(14,198
)
 
$
(167
)
 
 
 
 
 
 
 
 
Assets (including eliminations)
$
(78,137
)
 
$
(86,269
)
 
$
(78,137
)
 
$
(86,269
)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Total Company
(In thousands)
Net interest income
$
57,545

 
$
57,145

 
$
114,928

 
$
110,787

Fees and other income
32,095

 
38,018

 
71,838

 
74,524

Total revenues
89,640

 
95,163

 
186,766

 
185,311

Provision/ (credit) for loan losses
453

 
(6,114
)
 
(1,342
)
 
(6,295
)
Operating expense
64,384

 
67,821

 
135,241

 
136,601

Income before income taxes
24,803

 
33,456

 
52,867

 
55,005

Income tax expense
17,399

 
9,963

 
23,425

 
16,516

Net income from continuing operations
7,404

 
23,493

 
29,442

 
38,489

Noncontrolling interests
968

 
1,150

 
2,018

 
2,116

Discontinued operations
(2
)
 
1,063

 
1,696

 
2,695

Net income attributable to the Company
$
6,434

 
$
23,406

 
$
29,120

 
$
39,068

 
 
 
 
 
 
 
 
Assets
$
8,716,203

 
$
8,107,646

 
$
8,716,203

 
$
8,107,646

Amortization of intangibles
$
749

 
$
1,426

 
$
1,499

 
$
2,852

Depreciation
$
2,561

 
$
1,980

 
$
4,663

 
$
3,980

_____________________
(1)
Results for the Investment Management segment for the three and six months ended June 30, 2017 include results for DGHM and Anchor. Results for the Investment Management segment for the three and six months ended June 30, 2018 include results for DGHM and results for Anchor through its sale date in April 2018. Assets for the Investment Management Segment at June 30, 2017 include assets of DGHM and Anchor. Assets for the Investment Management segment at June 30, 2018 include assets of DGHM.
(2)
Income tax expense/ (benefit) for the three and six months ended June 30, 2018 include $12.7 million in additional expense related to the sale of Anchor in April 2018.


14

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

4.    Investments
The following tables present a summary of investment securities:
 
Amortized
Cost
 
Unrealized
 
Fair
Value
Gains
 
Losses
 
(In thousands)
At June 30, 2018
 
 
 
 
 
 
 
Available-for-sale securities at fair value:
 
 
 
 
 
 
 
U.S. government and agencies
$
35,061

 
$

 
$
(1,361
)
 
$
33,700

Government-sponsored entities
275,881

 

 
(6,277
)
 
269,604

Municipal bonds
297,257

 
1,722

 
(3,790
)
 
295,189

Mortgage-backed securities (1)
493,644

 
260

 
(23,372
)
 
470,532

Other
7,942

 

 

 
7,942

Total
$
1,109,785

 
$
1,982

 
$
(34,800
)
 
$
1,076,967

 
 
 
 
 
 
 
 
Held-to-maturity securities at amortized cost:
 
 
 
 
 
 
 
U.S. government and agencies
$
11,902

 
$
2

 
$

 
$
11,904

Mortgage-backed securities (1)
67,053

 

 
(2,210
)
 
64,843

Total
$
78,955

 
$
2

 
$
(2,210
)
 
$
76,747

 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
Available-for-sale securities at fair value:
 
 
 
 
 
 
 
U.S. government and agencies
$
35,132

 
$

 
$
(833
)
 
$
34,299

Government-sponsored entities
305,101

 
22

 
(2,622
)
 
302,501

Municipal bonds
299,647

 
4,559

 
(1,148
)
 
303,058

Mortgage-backed securities (1)
521,753

 
491

 
(12,568
)
 
509,676

Other
20,794

 

 

 
20,794

Total
$
1,182,427

 
$
5,072

 
$
(17,171
)
 
$
1,170,328

 
 
 
 
 
 
 
 
Held-to-maturity securities at amortized cost:
 
 
 
 
 
 
 
Mortgage-backed securities (1)
$
74,576

 
$

 
$
(795
)
 
$
73,781

Total
$
74,576

 
$

 
$
(795
)
 
$
73,781

_____________________
(1)
 All mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities.
The following table presents the maturities of available-for-sale investment securities, based on contractual maturity, as of June 30, 2018. Certain securities are callable before their final maturity. Additionally, certain securities (such as mortgage-backed securities) are shown within the table below based on their final (contractual) maturity, but due to prepayments and amortization are expected to have shorter lives.
 
Available-for-sale Securities
Amortized
cost
 
Fair
value
(In thousands)
Within one year
$
75,733

 
$
75,473

After one, but within five years
313,162

 
306,903

After five, but within ten years
312,887

 
298,202