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Section 1: 10-Q (BPFH Q3 2018 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 September 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 every Interactive Data File required to be submitted 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 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 November 2, 2018:
Common Stock, Par Value $1.00 Per Share
84,377,380
(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)

 
September 30, 2018
 
December 31, 2017
 
(In thousands, except share 
and per share data)
Assets:
 
 
 
Cash and cash equivalents
$
92,634

 
$
120,541

Investment securities available-for-sale (amortized cost of $1,101,756 and $1,182,427 at September 30, 2018 and December 31, 2017, respectively)
1,063,340

 
1,170,328

Investment securities held-to-maturity (fair value of $72,927 and $73,781 at September 30, 2018 and December 31, 2017, respectively)
75,468

 
74,576

Stock in Federal Home Loan Bank and Federal Reserve Bank
48,727

 
59,973

Loans held for sale
3,344

 
4,697

Total loans
6,720,420

 
6,505,028

Less: Allowance for loan losses
73,500

 
74,742

Net loans
6,646,920

 
6,430,286

Other real estate owned (“OREO”)
108

 

Premises and equipment, net
47,399

 
37,640

Goodwill
75,598

 
75,598

Intangible assets, net
13,834

 
16,083

Fees receivable
10,445

 
11,154

Accrued interest receivable
24,641

 
22,322

Deferred income taxes, net
27,833

 
29,031

Other assets
245,549

 
259,515

Total assets
$
8,375,840

 
$
8,311,744

Liabilities:
 
 
 
Deposits
$
6,768,723

 
$
6,510,246

Securities sold under agreements to repurchase
39,453

 
32,169

Federal funds purchased
120,000

 
30,000

Federal Home Loan Bank borrowings
441,836

 
693,681

Junior subordinated debentures
106,363

 
106,363

Other liabilities
149,770

 
135,880

Total liabilities
7,626,145

 
7,508,339

Redeemable Noncontrolling Interests
11,686

 
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 September 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: 84,602,519 shares at September 30, 2018 and 84,208,538 shares at December 31, 2017
84,603

 
84,208

Additional paid-in capital
614,157

 
607,929

Retained earnings
64,618

 
49,526

Accumulated other comprehensive income/ (loss)
(27,578
)
 
(8,658
)
Total Company’s shareholders’ equity
735,800

 
780,758

Noncontrolling interests
2,209

 
5,186

Total shareholders’ equity
738,009

 
785,944

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
8,375,840

 
$
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 September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share and per share data)
Interest and dividend income:
 
 
 
 
 
 
 
Loans
$
68,254

 
$
58,096

 
$
193,231

 
$
169,468

Taxable investment securities
1,510

 
1,569

 
4,521

 
4,831

Non-taxable investment securities
1,779

 
1,664

 
5,261

 
4,925

Mortgage-backed securities
2,941

 
3,267

 
9,168

 
10,266

Short-term investments and other
1,617

 
916

 
3,831

 
2,347

Total interest and dividend income
76,101

 
65,512

 
216,012

 
191,837

Interest expense:
 
 
 
 
 
 
 
Deposits
11,487

 
5,356

 
26,376

 
14,836

Federal Home Loan Bank borrowings
3,877

 
2,657

 
11,668

 
7,257

Junior subordinated debentures
1,028

 
761

 
2,882

 
2,148

Repurchase agreements and other short-term borrowings
68

 
111

 
517

 
182

Total interest expense
16,460

 
8,885

 
41,443

 
24,423

Net interest income
59,641

 
56,627

 
174,569

 
167,414

Provision/ (credit) for loan losses
(949
)
 
(432
)
 
(2,291
)
 
(6,727
)
Net interest income after provision/ (credit) for loan losses
60,590

 
57,059

 
176,860

 
174,141

Fees and other income:
 
 
 
 
 
 
 
Investment management fees
3,245

 
11,274

 
18,897

 
33,194

Wealth advisory fees
13,995

 
13,279

 
41,200

 
39,063

Wealth management and trust fees
11,510

 
11,619

 
34,830

 
33,606

Other banking fee income
2,775

 
2,726

 
7,793

 
6,384

Gain on sale of loans, net
67

 
169

 
204

 
366

Gain/ (loss) on sale of investments, net

 
230

 
(17
)
 
486

Gain/ (loss) on OREO, net

 

 

 
(46
)
Other
722

 
970

 
1,245

 
1,738

Total fees and other income
32,314

 
40,267

 
104,152

 
114,791

Operating expense:
 
 
 
 
 
 
 
Salaries and employee benefits
38,944

 
44,912

 
125,461

 
133,889

Occupancy and equipment
8,164

 
7,944

 
24,141

 
22,412

Professional services
2,877

 
3,308

 
8,926

 
9,728

Marketing and business development
1,710

 
2,216

 
5,373

 
5,847

Information systems
6,233

 
5,282

 
18,889

 
16,161

Amortization of intangibles
750

 
1,426

 
2,249

 
4,278

FDIC insurance
674

 
647

 
2,126

 
2,292

Restructuring
5,763

 

 
5,763

 

Other
3,442

 
3,611

 
10,870

 
11,340

Total operating expense
68,557

 
69,346

 
203,798

 
205,947

Income before income taxes
24,347

 
27,980

 
77,214

 
82,985

Income tax expense
5,461

 
8,289

 
28,886

 
24,805

Net income from continuing operations
18,886

 
19,691

 
48,328

 
58,180

Net income from discontinued operations

 
1,186

 
1,696

 
3,881

Net income before attribution to noncontrolling interests
18,886

 
20,877

 
50,024

 
62,061

(Continued)
 
 
 
 
 
 
 

2


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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Less: Net income attributable to noncontrolling interests
924

 
1,074

 
2,942

 
3,190

Net income attributable to the Company
$
17,962

 
$
19,803

 
$
47,082

 
$
58,871

Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders
$
(829
)
 
$
(1,146
)
 
$
(4,376
)
 
$
(2,889
)
Net income attributable to common shareholders for earnings per share calculation
$
17,133

 
$
18,657

 
$
42,706

 
$
55,982

Basic earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
From continuing operations:
$
0.20

 
$
0.21

 
$
0.49

 
$
0.63

From discontinued operations:
$

 
$
0.01

 
$
0.02

 
$
0.05

Total attributable to common shareholders:
$
0.20

 
$
0.23

 
$
0.51

 
$
0.68

Weighted average basic common shares outstanding
84,017,284

 
82,556,225

 
83,544,754

 
82,270,849

Diluted earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
From continuing operations:
$
0.20

 
$
0.21

 
$
0.48

 
$
0.61

From discontinued operations:
$

 
$
0.01

 
$
0.02

 
$
0.05

Total attributable to common shareholders:
$
0.20

 
$
0.22

 
$
0.50

 
$
0.66

Weighted average diluted common shares outstanding
85,498,568

 
84,888,311

 
85,254,295

 
84,741,172


 See accompanying notes to consolidated financial statements.

3


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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income attributable to the Company
$
17,962

 
$
19,803

 
$
47,082

 
$
58,871

Other comprehensive income/ (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain/ (loss) on securities available-for-sale
(4,040
)
 
1,114

 
(18,888
)
 
7,588

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

 
(141
)
 

 
(293
)
Net unrealized gain/ (loss) on securities available-for-sale
(4,040
)
 
973

 
(18,888
)
 
7,295

Unrealized gain/ (loss) on cash flow hedges
(138
)
 
70

 
574

 
(140
)
Reclassification adjustment for net realized (gain)/ loss included in net income
(72
)
 
172

 
(273
)
 
558

Net unrealized gain/ (loss) on cash flow hedges
(210
)
 
242

 
301

 
418

Net unrealized gain/ (loss) on other

 

 
1

 
12

Other comprehensive income/ (loss), net of tax
(4,250
)
 
1,215

 
(18,586
)
 
7,725

Total comprehensive income attributable to the Company, net
$
13,712

 
$
21,018

 
$
28,496

 
$
66,596

 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

 

 

 
58,871

 

 

 
58,871

Other comprehensive income/ (loss), net

 

 

 

 
7,725

 

 
7,725

Dividends paid to common shareholders: $0.33 per share

 

 

 
(27,739
)
 

 

 
(27,739
)
Dividends paid to preferred shareholders

 

 

 
(2,606
)
 

 

 
(2,606
)
Net change in noncontrolling interests

 

 

 

 

 
631

 
631

Net proceeds from issuance of:
 
 
 
 
 
 
 
 
 
 
 
 
 
140,284 shares of common stock

 
140

 
1,461

 

 

 

 
1,601

90,848 incentive stock grant shares canceled or forfeited and 62,087 shares withheld for employee taxes

 
(153
)
 
(816
)
 

 

 

 
(969
)
Exercise of warrants

 
261

 
1,618

 

 

 

 
1,879

Amortization of stock compensation and employee stock purchase plan

 

 
6,183

 

 

 

 
6,183

Stock options exercised

 
102

 
725

 

 

 

 
827

Other equity adjustments

 

 
177

 

 

 

 
177

Balance at September 30, 2017
$
47,753

 
$
84,082

 
$
606,802

 
$
76,455

 
$
(4,823
)
 
$
4,792

 
$
815,061

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 
47,082

 

 

 
47,082

Other comprehensive income/ (loss), net

 

 

 

 
(18,586
)
 

 
(18,586
)
Dividends paid to common shareholders:
$0.36 per share

 

 

 
(30,586
)
 

 

 
(30,586
)
Dividends paid to preferred shareholders

 

 

 
(1,738
)
 

 

 
(1,738
)
Net change in noncontrolling interests

 

 

 

 

 
(2,977
)
 
(2,977
)
Redemption of Series D preferred stock
(47,753
)
 

 
(2,247
)
 

 

 

 
(50,000
)
Repurchase of 137,114 shares of common stock

 
(137
)
 
(1,768
)
 

 

 

 
(1,905
)
Net proceeds from issuance of:
 
 
 
 
 
 
 
 
 
 
 
 
 
142,738 shares of common stock

 
143

 
1,722

 

 

 

 
1,865

132,964 incentive stock grant shares canceled or forfeited and 127,894 shares withheld for employee taxes, net of 7,355 shares of incentive stock grants

 
(253
)
 
(1,699
)
 

 

 

 
(1,952
)
Exercise of warrants

 
438

 
(277
)
 

 

 

 
161

Amortization of stock compensation and employee stock purchase plan

 

 
5,131

 

 

 

 
5,131

Stock options exercised

 
204

 
1,457

 

 

 

 
1,661

Other equity adjustments

 

 
3,909

 

 

 

 
3,909

Balance at September 30, 2018
$

 
$
84,603

 
$
614,157

 
$
64,618

 
$
(27,578
)
 
$
2,209

 
$
738,009


See accompanying notes to consolidated financial statements.

5


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

 
Nine months ended September 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income attributable to the Company
$
47,082

 
$
58,871

Adjustments to arrive at net income from continuing operations
 
 
 
Net income attributable to noncontrolling interests
2,942

 
3,190

Less: Net income from discontinued operations
(1,696
)
 
(3,881
)
Net income from continuing operations
48,328

 
58,180

Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities:
 
 
 
Depreciation and amortization
17,192

 
15,835

Net income attributable to noncontrolling interests
(2,942
)
 
(3,190
)
Stock compensation, net of cancellations
5,232

 
6,183

Provision/ (credit) for loan losses
(2,291
)
 
(6,727
)
Loans originated for sale
(32,364
)
 
(38,099
)
Proceeds from sale of loans held for sale
33,935

 
39,972

Deferred income tax expense/ (benefit)
8,548

 
4,141

Net decrease/ (increase) in other operating activities
(14,348
)
 
(9,407
)
Net cash provided by/ (used in) operating activities of continuing operations
61,290

 
66,888

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

 
3,881

Net cash provided by/ (used in) operating activities
62,986

 
70,769

Cash flows from investing activities:
 
 
 
Investment securities available-for-sale:
 
 
 
Purchases
(63,246
)
 
(138,623
)
Sales
51,781

 
119,238

Maturities, calls, redemptions, and principal payments
86,085

 
100,065

Investment securities held-to-maturity:
 
 
 
Purchases
(11,876
)
 
(14,945
)
Principal payments
10,726

 
23,541

(Investments)/ distributions in trusts, net
1,252

 
(747
)
Purchase of additional Bank Owned Life Insurance (“BOLI”)

 
(50,000
)
(Purchase)/ redemption of Federal Home Loan Bank and Federal Reserve Bank stock
11,246

 
(17,637
)
Net increase in portfolio loans
(217,317
)
 
(298,304
)
Proceeds from recoveries of loans previously charged-off
1,578

 
4,082

Proceeds from sale of OREO

 
1,644

Capital expenditures, net of sale proceeds
(18,349
)
 
(10,769
)
Proceeds from sale of affiliate
34,120

 

Net cash provided by/ (used in) investing activities
(114,000
)
 
(282,455
)
(Continued)
 
 
 

6


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

 
Nine months ended September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Net increase/ (decrease) in deposits
258,477

 
177,201

Net increase/ (decrease) in securities sold under agreements to repurchase
7,284

 
279

Net increase/ (decrease) in federal funds purchased
90,000

 
(10,000
)
Net increase/ (decrease) in short-term Federal Home Loan Bank borrowings
(230,000
)
 
110,000

Advances of long-term Federal Home Loan Bank borrowings
91,444

 
50,110

Repayments of long-term Federal Home Loan Bank borrowings
(113,289
)
 
(81,542
)
Redemption of Series D preferred stock
(50,000
)
 

Dividends paid to common shareholders
(30,586
)
 
(27,739
)
Dividends paid to preferred shareholders
(1,738
)
 
(2,606
)
Proceeds from warrant exercises
161

 
1,879

Repurchase of common stock
(1,905
)
 

Proceeds from stock option exercises
1,661

 
827

Proceeds from issuance of common stock
1,865

 
1,601

Tax withholding for share based compensation awards
(2,053
)
 
(969
)
Distributions paid to noncontrolling interests
(2,848
)
 
(3,197
)
Other equity adjustments
4,634

 
(275
)
Net cash provided by/ (used in) financing activities
23,107

 
215,569

Net increase/ (decrease) in cash and cash equivalents
(27,907
)
 
3,883

Cash and cash equivalents at beginning of year
120,541

 
106,557

Cash and cash equivalents at end of period
$
92,634

 
$
110,440

Supplementary schedule of non-cash investing and financing activities:
 
 
 
Cash paid for interest
$
40,703

 
$
23,681

Cash paid for income taxes, (net of refunds received)
18,898

 
32,051

Change in unrealized gain/ (loss) on available-for-sale securities, net of tax
(18,888
)
 
7,295

Change in unrealized gain/ (loss) on cash flow hedges, net of tax
301

 
418

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
)
 
(559
)

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; South 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 third quarter of 2018 include results from DGHM. The Investment Management segment results for the first nine months of 2018 include results from DGHM for the full period and results from Anchor for the portion of the period 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”). On October 17, 2018, the Company announced an agreement to sell its entire ownership interest in BOS in a transaction that will result in BOS being majority-owned by members of its management team. The transaction is expected to close in the fourth quarter of 2018. Completion of the transaction is subject to obtaining client consents, as well as satisfaction of other customary closing conditions. As a result, the assets and liabilities of BOS will be classified as held for sale from October 17, 2018 through the date the transaction closes. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Subsequent Event” for further details.
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:

8



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.
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, $256 thousand and $597 thousand for the three and nine months ended September 30, 2017, respectively, have been reclassified from salaries and employee benefits expense to other expense within the Company’s consolidated statement of operations. For the three and nine months ended September 30, 2018, $131 thousand and $411 thousand, respectively, are 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 nine months ended September 30, 2018 and 2017. The following tables present the computations of basic and diluted EPS:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share and per share data)
Basic earnings per share - Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
18,886

 
$
19,691

 
$
48,328

 
$
58,180

Less: Net income attributable to noncontrolling interests
924

 
1,074

 
2,942

 
3,190

Net income from continuing operations attributable to the Company
17,962

 
18,617

 
45,386

 
54,990

Decrease/ (increase) in noncontrolling interests’ redemption values (1)
(829
)
 
(278
)
 
(391
)
 
(283
)
Dividends on preferred stock (2)

 
(868
)
 
(3,985
)
 
(2,606
)
Total adjustments to income attributable to common shareholders
(829
)
 
(1,146
)
 
(4,376
)
 
(2,889
)
Net income from continuing operations attributable to common shareholders, treasury stock method
17,133

 
17,471

 
41,010

 
52,101

Net income from discontinued operations

 
1,186

 
1,696

 
3,881

Net income attributable to common shareholders, treasury stock method
$
17,133

 
$
18,657

 
$
42,706

 
$
55,982

 
 
 
 
 
 
 
 
Basic earnings per share - Denominator:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
84,017,284

 
82,556,225

 
83,544,754

 
82,270,849

Per share data - Basic earnings per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.20

 
$
0.21

 
$
0.49

 
$
0.63

Discontinued operations
$

 
$
0.01

 
$
0.02

 
$
0.05

Total attributable to common shareholders
$
0.20

 
$
0.23

 
$
0.51

 
$
0.68




10

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

 
Three months ended September 30,
 
Nine months ended September 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
$
17,133

 
$
17,471

 
$
41,010

 
$
52,101

Net income from discontinued operations

 
1,186

 
1,696

 
3,881

Net income attributable to common shareholders, after assumed dilution
$
17,133

 
$
18,657

 
$
42,706

 
$
55,982

Diluted earnings per share - Denominator:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
84,017,284

 
82,556,225

 
83,544,754

 
82,270,849

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)
853,906

 
1,233,888

 
1,052,855

 
1,333,830

Warrants to purchase common stock (3)
627,378

 
1,098,198

 
656,686

 
1,136,493

Dilutive common shares
1,481,284

 
2,332,086

 
1,709,541

 
2,470,323

Weighted average diluted common shares outstanding (3)
85,498,568

 
84,888,311

 
85,254,295

 
84,741,172

Per share data - Diluted earnings per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.20

 
$
0.21

 
$
0.48

 
$
0.61

Discontinued operations
$

 
$
0.01

 
$
0.02

 
$
0.05

Total attributable to common shareholders
$
0.20

 
$
0.22

 
$
0.50

 
$
0.66

Dividends per share declared and paid on common stock
$
0.12

 
$
0.11

 
$
0.36

 
$
0.33

_____________________
(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 nine months ended September 30, 2018.
(3)
The diluted EPS computations for the three and nine months ended September 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 September 30,
 
Nine months ended September 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
408

 
48

 
226

 
74

Total shares excluded due to exercise price exceeding the average market price of common shares during the period
408

 
48

 
226

 
74



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 nine months ended September 30, 2018 and 2017. Interest expense on junior subordinated debentures is reported at the Holding Company.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Private Banking
(In thousands)
Net interest income
$
60,551

 
$
57,295

 
$
177,129

 
$
169,334

Fees and other income
3,337

 
3,720

 
8,637

 
8,182

Total revenues
63,888

 
61,015

 
185,766

 
177,516

Provision/ (credit) for loan losses
(949
)
 
(432
)
 
(2,291
)
 
(6,727
)
Operating expense
44,706

 
38,482

 
124,003

 
110,444

Income before income taxes
20,131

 
22,965

 
64,054

 
73,799

Income tax expense
4,469

 
6,634

 
13,063

 
22,112

Net income from continuing operations
15,662

 
16,331

 
50,991

 
51,687

Net income attributable to the Company
$
15,662

 
$
16,331

 
$
50,991

 
$
51,687

 
 
 
 
 
 
 
 
Assets
$
8,292,901

 
$
8,113,836

 
$
8,292,901

 
$
8,113,836

Depreciation
$
2,398

 
$
1,431

 
$
6,013

 
$
4,145


12

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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Wealth Management and Trust
(In thousands)
Fees and other income
$
11,636

 
$
11,739

 
$
35,203

 
$
33,934

Operating expense
10,905

 
11,752

 
32,657

 
37,562

Income/ (loss) before income taxes
731

 
(13
)
 
2,546

 
(3,628
)
Income tax expense/ (benefit)
220

 
(125
)
 
729

 
(1,530
)
Net income/ (loss) from continuing operations
511

 
112

 
1,817

 
(2,098
)
Net income/ (loss) attributable to the Company
$
511

 
$
112

 
$
1,817

 
$
(2,098
)
 
 
 
 
 
 
 
 
Assets
$
79,473

 
$
73,511

 
$
79,473

 
$
73,511

Amortization of intangibles
$
701

 
$
727

 
$
2,103

 
$
2,181

Depreciation
$
328

 
$
330

 
$
983

 
$
1,008

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Investment Management (1)
(In thousands)
Net interest income
$

 
$
8

 
$
6

 
$
16

Fees and other income
3,245

 
11,280

 
18,887

 
33,230

Total revenues
3,245

 
11,288

 
18,893

 
33,246

Operating expense
2,235

 
8,407

 
13,880

 
25,107

Income before income taxes
1,010

 
2,881

 
5,013

 
8,139

Income tax expense
222

 
981

 
1,142

 
2,719

Net income from continuing operations
788

 
1,900

 
3,871

 
5,420

Noncontrolling interests
188

 
451

 
878

 
1,425

Net income attributable to the Company
$
600

 
$
1,449

 
$
2,993

 
$
3,995

 
 
 
 
 
 
 
 
Assets
$
7,496

 
$
93,910

 
$
7,496

 
$
93,910

Amortization of intangibles
$

 
$
650

 
$

 
$
1,951

Depreciation
$
29

 
$
62

 
$
95

 
$
189


13

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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Wealth Advisory
(In thousands)
Net interest income
$
99

 
$
36

 
$
224

 
$
82

Fees and other income
14,022

 
13,299

 
41,278

 
39,122

Total revenues
14,121

 
13,335

 
41,502

 
39,204

Operating expense
9,510

 
9,174

 
29,273

 
27,560

Income before income taxes
4,611

 
4,161

 
12,229

 
11,644

Income tax expense
1,242

 
1,562

 
3,242

 
4,360

Net income from continuing operations
3,369

 
2,599

 
8,987

 
7,284

Noncontrolling interests
736

 
623

 
2,064

 
1,765

Net income attributable to the Company
$
2,633

 
$
1,976

 
$
6,923

 
$
5,519

 
 
 
 
 
 
 
 
Assets
$
79,907

 
$
77,289

 
$
79,907

 
$
77,289

Amortization of intangibles
$
49

 
$
49

 
$
146

 
$
146

Depreciation
$
161

 
$
237

 
$
488

 
$
698

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Holding Company and Eliminations
(In thousands)
Net interest income
$
(1,009
)
 
$
(711
)
 
$
(2,790
)
 
$
(2,018
)
Fees and other income
74

 
229

 
147

 
323

Total revenues
(935
)
 
(482
)
 
(2,643
)
 
(1,695
)
Operating expense
1,201

 
1,531

 
3,985

 
5,274

Income/ (loss) before income taxes
(2,136
)
 
(2,013
)
 
(6,628
)
 
(6,969
)
Income tax expense/ (benefit) (2)
(692
)
 
(763
)
 
10,710

 
(2,856
)
Net income/ (loss) from continuing operations
(1,444
)
 
(1,250
)
 
(17,338
)
 
(4,113
)
Discontinued operations

 
1,186

 
1,696

 
3,881

Net income/ (loss) attributable to the Company
$
(1,444
)
 
$
(64
)
 
$
(15,642
)
 
$
(232
)
 
 
 
 
 
 
 
 
Assets (including eliminations)
$
(83,937
)
 
$
(89,148
)
 
$
(83,937
)
 
$
(89,148
)

14

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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Total Company
(In thousands)
Net interest income
$
59,641

 
$
56,627

 
$
174,569

 
$
167,414

Fees and other income
32,314

 
40,267

 
104,152

 
114,791

Total revenues
91,955

 
96,894

 
278,721

 
282,205

Provision/ (credit) for loan losses
(949
)
 
(432
)
 
(2,291
)
 
(6,727
)
Operating expense
68,557

 
69,346

 
203,798

 
205,947

Income before income taxes
24,347

 
27,980

 
77,214

 
82,985

Income tax expense
5,461

 
8,289

 
28,886

 
24,805

Net income from continuing operations
18,886

 
19,691

 
48,328

 
58,180

Noncontrolling interests
924

 
1,074

 
2,942

 
3,190

Discontinued operations

 
1,186

 
1,696

 
3,881

Net income attributable to the Company
$
17,962

 
$
19,803

 
$
47,082

 
$
58,871

 
 
 
 
 
 
 
 
Assets
$
8,375,840

 
$
8,269,398

 
$
8,375,840

 
$
8,269,398

Amortization of intangibles
$
750

 
$
1,426

 
$
2,249

 
$
4,278

Depreciation
$
2,916

 
$
2,060

 
$
7,579

 
$
6,040

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


15

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 September 30, 2018
 
 
 
 
 
 
 
Available-for-sale securities at fair value:
 
 
 
 
 
 
 
U.S. government and agencies
$
35,025

 
$

 
$
(1,526
)
 
$
33,499

Government-sponsored entities
275,767

 

 
(6,942
)
 
268,825

Municipal bonds
304,473

 
1,130

 
(5,614
)
 
299,989

Mortgage-backed securities (1)
479,412

 
208

 
(25,672
)
 
453,948

Other (2)
7,079

 

 

 
7,079

Total
$
1,101,756

 
$
1,338

 
$
(39,754
)
 
$
1,063,340

 
 
 
 
 
 
 
 
Held-to-maturity securities at amortized cost:
 
 
 
 
 
 
 
U.S. government and agencies
$
11,964

 

 
$
(1
)
 
$
11,963

Mortgage-backed securities (1)
63,504

 

 
(2,540
)
 
60,964

Total
$
75,468

 
$

 
$
(2,541
)
 
$
72,927

 
 
 
 
 
 
 
 
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 (2)
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
$