|
|
|
|
|
|
|
|
|
|
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In thousands, except share and per share data)
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
77,085
|
|
|
$
|
120,541
|
|
|
Investment securities available-for-sale (amortized cost of $1,148,526 and $1,182,427 at March 31, 2018 and December 31, 2017, respectively)
|
1,118,497
|
|
|
1,170,328
|
|
|
Investment securities held-to-maturity (fair value of $68,887 and $73,781 at March 31, 2018 and December 31, 2017, respectively)
|
70,809
|
|
|
74,576
|
|
|
Stock in Federal Home Loan Bank and Federal Reserve Bank
|
54,455
|
|
|
59,973
|
|
|
Loans held for sale
|
3,918
|
|
|
4,697
|
|
|
Total loans
|
6,602,327
|
|
|
6,505,028
|
|
|
Less: Allowance for loan losses
|
72,898
|
|
|
74,742
|
|
|
Net loans
|
6,529,429
|
|
|
6,430,286
|
|
|
Premises and equipment, net
|
43,627
|
|
|
37,640
|
|
|
Goodwill
|
75,598
|
|
|
75,598
|
|
|
Intangible assets, net
|
15,334
|
|
|
16,083
|
|
|
Fees receivable
|
10,640
|
|
|
11,154
|
|
|
Accrued interest receivable
|
22,614
|
|
|
22,322
|
|
|
Deferred income taxes, net
|
32,058
|
|
|
29,031
|
|
|
Other assets
|
264,295
|
|
|
259,515
|
|
|
Total assets
|
$
|
8,318,359
|
|
|
$
|
8,311,744
|
|
|
Liabilities:
|
|
|
|
|
Deposits
|
$
|
6,584,322
|
|
|
$
|
6,510,246
|
|
|
Securities sold under agreements to repurchase
|
85,257
|
|
|
32,169
|
|
|
Federal funds purchased
|
—
|
|
|
30,000
|
|
|
Federal Home Loan Bank borrowings
|
611,588
|
|
|
693,681
|
|
|
Junior subordinated debentures
|
106,363
|
|
|
106,363
|
|
|
Other liabilities
|
125,004
|
|
|
135,880
|
|
|
Total liabilities
|
7,512,534
|
|
|
7,508,339
|
|
|
Redeemable Noncontrolling Interests
|
16,322
|
|
|
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: 50,000 shares at March 31, 2018 and December 31, 2017; liquidation preference: $1,000 per share
|
47,753
|
|
|
47,753
|
|
|
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 84,194,267 shares at March 31, 2018 and 84,208,538 shares at December 31, 2017
|
84,194
|
|
|
84,208
|
|
|
Additional paid-in capital
|
612,526
|
|
|
607,929
|
|
|
Retained earnings
|
61,518
|
|
|
49,526
|
|
|
Accumulated other comprehensive income/ (loss)
|
(21,313
|
)
|
|
(8,658
|
)
|
|
Total Company’s shareholders’ equity
|
784,678
|
|
|
780,758
|
|
|
Noncontrolling interests
|
4,825
|
|
|
5,186
|
|
|
Total shareholders’ equity
|
789,503
|
|
|
785,944
|
|
|
Total liabilities, redeemable noncontrolling interests and shareholders’ equity
|
$
|
8,318,359
|
|
|
$
|
8,311,744
|
|
See accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands, except share and per share data)
|
|
Interest and dividend income:
|
|
|
|
|
Loans
|
$
|
60,929
|
|
|
$
|
53,636
|
|
|
Taxable investment securities
|
1,510
|
|
|
1,670
|
|
|
Non-taxable investment securities
|
1,730
|
|
|
1,606
|
|
|
Mortgage-backed securities
|
3,178
|
|
|
3,504
|
|
|
Federal funds sold and other
|
1,009
|
|
|
600
|
|
|
Total interest and dividend income
|
68,356
|
|
|
61,016
|
|
|
Interest expense:
|
|
|
|
|
Deposits
|
6,524
|
|
|
4,531
|
|
|
Federal Home Loan Bank borrowings
|
3,344
|
|
|
2,111
|
|
|
Junior subordinated debentures
|
846
|
|
|
671
|
|
|
Repurchase agreements and other short-term borrowings
|
259
|
|
|
61
|
|
|
Total interest expense
|
10,973
|
|
|
7,374
|
|
|
Net interest income
|
57,383
|
|
|
53,642
|
|
|
Provision/ (credit) for loan losses
|
(1,795
|
)
|
|
(181
|
)
|
|
Net interest income after provision/ (credit) for loan losses
|
59,178
|
|
|
53,823
|
|
|
Fees and other income:
|
|
|
|
|
Investment management fees
|
11,425
|
|
|
10,839
|
|
|
Wealth advisory fees
|
13,512
|
|
|
12,823
|
|
|
Wealth management and trust fees
|
12,151
|
|
|
10,826
|
|
|
Other banking fee income
|
2,273
|
|
|
1,694
|
|
|
Gain on sale of loans, net
|
74
|
|
|
138
|
|
|
Gain/ (loss) on sale of investments, net
|
(24
|
)
|
|
19
|
|
|
Gain/ (loss) on OREO, net
|
—
|
|
|
(46
|
)
|
|
Other
|
332
|
|
|
213
|
|
|
Total fees and other income
|
39,743
|
|
|
36,506
|
|
|
Operating expense:
|
|
|
|
|
Salaries and employee benefits
|
47,084
|
|
|
45,665
|
|
|
Occupancy and equipment
|
7,748
|
|
|
7,185
|
|
|
Professional services
|
3,177
|
|
|
3,314
|
|
|
Marketing and business development
|
1,593
|
|
|
1,660
|
|
|
Information systems
|
5,886
|
|
|
5,379
|
|
|
Amortization of intangibles
|
750
|
|
|
1,426
|
|
|
FDIC insurance
|
744
|
|
|
766
|
|
|
Other
|
3,875
|
|
|
3,385
|
|
|
Total operating expense
|
70,857
|
|
|
68,780
|
|
|
Income before income taxes
|
28,064
|
|
|
21,549
|
|
|
Income tax expense
|
6,026
|
|
|
6,553
|
|
|
Net income from continuing operations
|
22,038
|
|
|
14,996
|
|
|
Net income from discontinued operations
|
1,698
|
|
|
1,632
|
|
|
Net income before attribution to noncontrolling interests
|
23,736
|
|
|
16,628
|
|
|
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Less: Net income attributable to noncontrolling interests
|
1,050
|
|
|
966
|
|
|
Net income attributable to the Company
|
$
|
22,686
|
|
|
$
|
15,662
|
|
|
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders
|
$
|
(23
|
)
|
|
$
|
(1,166
|
)
|
|
Net income attributable to common shareholders for earnings per share calculation
|
$
|
22,663
|
|
|
$
|
14,496
|
|
|
Basic earnings per share attributable to common shareholders:
|
|
|
|
|
From continuing operations:
|
$
|
0.25
|
|
|
$
|
0.16
|
|
|
From discontinued operations:
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
Total attributable to common shareholders:
|
$
|
0.27
|
|
|
$
|
0.18
|
|
|
Weighted average basic common shares outstanding
|
83,097,758
|
|
|
81,951,179
|
|
|
Diluted earnings per share attributable to common shareholders:
|
|
|
|
|
From continuing operations:
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
From discontinued operations:
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
Total attributable to common shareholders:
|
$
|
0.27
|
|
|
$
|
0.17
|
|
|
Weighted average diluted common shares outstanding
|
85,271,650
|
|
|
84,560,918
|
|
See accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Net income attributable to the Company
|
$
|
22,686
|
|
|
$
|
15,662
|
|
|
Other comprehensive income/ (loss), net of tax:
|
|
|
|
|
Unrealized gain/ (loss) on securities available-for-sale
|
(12,895
|
)
|
|
2,094
|
|
|
Reclassification adjustment for net realized (gain)/ loss included in net income
|
—
|
|
|
(11
|
)
|
|
Net unrealized gain/ (loss) on securities available-for-sale
|
(12,895
|
)
|
|
2,083
|
|
|
Unrealized gain/ (loss) on cash flow hedges
|
588
|
|
|
36
|
|
|
Reclassification adjustment for net realized (gain)/ loss included in net income
|
(14
|
)
|
|
180
|
|
|
Net unrealized gain/ (loss) on cash flow hedges
|
574
|
|
|
216
|
|
|
Net unrealized gain/ (loss) on other
|
—
|
|
|
12
|
|
|
Other comprehensive income/ (loss), net of tax
|
(12,321
|
)
|
|
2,311
|
|
|
Total comprehensive income attributable to the Company, net
|
$
|
10,365
|
|
|
$
|
17,973
|
|
See accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
15,662
|
|
|
—
|
|
|
—
|
|
|
15,662
|
|
|
Other comprehensive income/ (loss), net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,311
|
|
|
—
|
|
|
2,311
|
|
|
Dividends paid to common shareholders:
$0.11 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,212
|
)
|
|
—
|
|
|
—
|
|
|
(9,212
|
)
|
|
Dividends paid to preferred shareholders
|
—
|
|
|
—
|
|
|
—
|
|
|
(869
|
)
|
|
—
|
|
|
—
|
|
|
(869
|
)
|
|
Net change in noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(168
|
)
|
|
(168
|
)
|
|
Net proceeds from issuance of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,811 shares of common stock
|
—
|
|
|
73
|
|
|
648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
721
|
|
|
15,596 incentive stock grant shares canceled or forfeited
|
—
|
|
|
(16
|
)
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercise of warrants
|
—
|
|
|
260
|
|
|
1,616
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,876
|
|
|
Amortization of stock compensation and employee stock purchase plan
|
—
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
Stock options exercised
|
—
|
|
|
85
|
|
|
595
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
680
|
|
|
Other equity adjustments
|
—
|
|
|
—
|
|
|
419
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
419
|
|
|
Balance at March 31, 2017
|
$
|
47,753
|
|
|
$
|
84,134
|
|
|
$
|
602,748
|
|
|
$
|
53,510
|
|
|
$
|
(10,237
|
)
|
|
$
|
3,993
|
|
|
$
|
781,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
22,686
|
|
|
—
|
|
|
—
|
|
|
22,686
|
|
|
Other comprehensive income/ (loss), net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,321
|
)
|
|
—
|
|
|
(12,321
|
)
|
|
Dividends paid to common shareholders:
$0.12 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,159
|
)
|
|
—
|
|
|
—
|
|
|
(10,159
|
)
|
|
Dividends paid to preferred shareholders
|
—
|
|
|
—
|
|
|
—
|
|
|
(869
|
)
|
|
—
|
|
|
—
|
|
|
(869
|
)
|
|
Net change in noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(361
|
)
|
|
(361
|
)
|
|
Net proceeds from issuance of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,434 shares of common stock
|
—
|
|
|
63
|
|
|
770
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
833
|
|
|
110,846 incentive stock grant shares canceled or forfeited and 40,825 shares withheld for employee taxes
|
—
|
|
|
(151
|
)
|
|
(487
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(638
|
)
|
|
Amortization of stock compensation and employee stock purchase plan
|
—
|
|
|
—
|
|
|
1,730
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,730
|
|
|
Stock options exercised
|
—
|
|
|
74
|
|
|
595
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
669
|
|
|
Other equity adjustments
|
—
|
|
|
—
|
|
|
1,989
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,989
|
|
|
Balance at March 31, 2018
|
$
|
47,753
|
|
|
$
|
84,194
|
|
|
$
|
612,526
|
|
|
$
|
61,518
|
|
|
$
|
(21,313
|
)
|
|
$
|
4,825
|
|
|
$
|
789,503
|
|
See accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income attributable to the Company
|
$
|
22,686
|
|
|
$
|
15,662
|
|
|
Adjustments to arrive at net income from continuing operations
|
|
|
|
|
Net income attributable to noncontrolling interests
|
1,050
|
|
|
966
|
|
|
Less: Net income from discontinued operations
|
(1,698
|
)
|
|
(1,632
|
)
|
|
Net income from continuing operations
|
22,038
|
|
|
14,996
|
|
|
Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
4,638
|
|
|
5,325
|
|
|
Net income attributable to noncontrolling interests
|
(1,050
|
)
|
|
(966
|
)
|
|
Stock compensation, net of cancellations
|
1,730
|
|
|
2,000
|
|
|
Provision/ (credit) for loan losses
|
(1,795
|
)
|
|
(181
|
)
|
|
Loans originated for sale
|
(11,875
|
)
|
|
(9,078
|
)
|
|
Proceeds from sale of loans held for sale
|
12,732
|
|
|
12,330
|
|
|
Deferred income tax expense/ (benefit)
|
1,769
|
|
|
217
|
|
|
Net decrease/ (increase) in other operating activities
|
(13,079
|
)
|
|
(11,272
|
)
|
|
Net cash provided by/ (used in) operating activities of continuing operations
|
15,108
|
|
|
13,371
|
|
|
Net cash provided by/ (used in) operating activities of discontinued operations
|
1,698
|
|
|
1,632
|
|
|
Net cash provided by/ (used in) operating activities
|
16,806
|
|
|
15,003
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
Purchases
|
(21,953
|
)
|
|
(71,498
|
)
|
|
Sales
|
15,877
|
|
|
32,717
|
|
|
Maturities, redemptions, and principal payments
|
37,912
|
|
|
47,994
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
Purchases
|
—
|
|
|
(9,970
|
)
|
|
Principal payments
|
3,650
|
|
|
4,485
|
|
|
(Investments)/ distributions in trusts, net
|
(125
|
)
|
|
(296
|
)
|
|
Purchase of additional Bank Owned Life Insurance (“BOLI”)
|
—
|
|
|
(50,000
|
)
|
|
(Purchase)/ redemption of Federal Home Loan Bank and Federal Reserve Bank stock
|
5,518
|
|
|
(6,056
|
)
|
|
Net increase in portfolio loans
|
(97,432
|
)
|
|
(135,514
|
)
|
|
Proceeds from recoveries of loans previously charged-off
|
340
|
|
|
193
|
|
|
Proceeds from sale of OREO
|
—
|
|
|
1,644
|
|
|
Capital expenditures, net of sale proceeds
|
(8,396
|
)
|
|
(3,153
|
)
|
|
Net cash provided by/ (used in) investing activities
|
(64,609
|
)
|
|
(189,454
|
)
|
|
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Cash flows from financing activities:
|
|
|
|
|
Net increase/ (decrease) in deposits
|
74,076
|
|
|
161,474
|
|
|
Net increase/ (decrease) in securities sold under agreements to repurchase
|
53,088
|
|
|
7,625
|
|
|
Net increase/ (decrease) in federal funds purchased
|
(30,000
|
)
|
|
(80,000
|
)
|
|
Net increase/ (decrease) in short-term Federal Home Loan Bank borrowings
|
(120,000
|
)
|
|
140,000
|
|
|
Advances of long-term Federal Home Loan Bank borrowings
|
90,000
|
|
|
34,435
|
|
|
Repayments of long-term Federal Home Loan Bank borrowings
|
(52,093
|
)
|
|
(23,195
|
)
|
|
Dividends paid to common shareholders
|
(10,159
|
)
|
|
(9,212
|
)
|
|
Dividends paid to preferred shareholders
|
(869
|
)
|
|
(869
|
)
|
|
Proceeds from warrant exercises
|
—
|
|
|
1,876
|
|
|
Proceeds from stock option exercises
|
669
|
|
|
680
|
|
|
Proceeds from issuance of common stock, net
|
195
|
|
|
721
|
|
|
Distributions paid to noncontrolling interests
|
(1,018
|
)
|
|
(938
|
)
|
|
Other equity adjustments
|
458
|
|
|
483
|
|
|
Net cash provided by/ (used in) financing activities
|
4,347
|
|
|
233,080
|
|
|
Net increase/ (decrease) in cash and cash equivalents
|
(43,456
|
)
|
|
58,629
|
|
|
Cash and cash equivalents at beginning of year
|
120,541
|
|
|
106,557
|
|
|
Cash and cash equivalents at end of period
|
$
|
77,085
|
|
|
$
|
165,186
|
|
|
Supplementary schedule of non-cash investing and financing activities:
|
|
|
|
|
Cash paid for interest
|
$
|
11,204
|
|
|
$
|
7,431
|
|
|
Cash paid for income taxes, (net of refunds received)
|
(783
|
)
|
|
2,362
|
|
|
Change in unrealized gain/ (loss) on available-for-sale securities, net of tax
|
(12,895
|
)
|
|
2,083
|
|
|
Change in unrealized gain/ (loss) on cash flow hedges, net of tax
|
574
|
|
|
216
|
|
|
Change in unrealized gain/ (loss) on other, net of tax
|
—
|
|
|
12
|
|
|
Non-cash transactions:
|
|
|
|
|
Loans charged-off
|
(389
|
)
|
|
(58
|
)
|
See accompanying notes to consolidated financial statements.
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, 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, family office, 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, while the assets and liabilities of Anchor were classified as held for sale. Assets held for sale were
$60.2 million
and
$58.8 million
at March 31, 2018 and December 31, 2017, respectively, and liabilities held for sale were
$4.7 million
and
$3.2 million
at March 31, 2018 and December 31, 2017, respectively. 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 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.
|
|
|
|
|
•
|
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,
$160 thousand
for the three months ended March 31, 2017 has been reclassified from salaries and employee benefits expense to other expense within the Company’s consolidated statement of operations. For the three months ended March 31, 2018,
$135 thousand
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.
|
|
|
|
|
•
|
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.
|
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 months ended March 31, 2018 and 2017
. The following tables present the computations of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands, except share and per share data)
|
|
Basic earnings per share - Numerator:
|
|
|
|
|
Net income from continuing operations
|
$
|
22,038
|
|
|
$
|
14,996
|
|
|
Less: Net income attributable to noncontrolling interests
|
1,050
|
|
|
966
|
|
|
Net income from continuing operations attributable to the Company
|
20,988
|
|
|
14,030
|
|
|
Decrease/ (increase) in noncontrolling interests’ redemption values (1)
|
846
|
|
|
(297
|
)
|
|
Dividends on preferred stock
|
(869
|
)
|
|
(869
|
)
|
|
Total adjustments to income attributable to common shareholders
|
(23
|
)
|
|
(1,166
|
)
|
|
Net income from continuing operations attributable to common shareholders, treasury stock method
|
20,965
|
|
|
12,864
|
|
|
Net income from discontinued operations
|
1,698
|
|
|
1,632
|
|
|
Net income attributable to common shareholders, treasury stock method
|
$
|
22,663
|
|
|
$
|
14,496
|
|
|
|
|
|
|
|
Basic earnings per share - Denominator:
|
|
|
|
|
Weighted average basic common shares outstanding
|
83,097,758
|
|
|
81,951,179
|
|
|
Per share data - Basic earnings per share from:
|
|
|
|
|
Continuing operations
|
$
|
0.25
|
|
|
$
|
0.16
|
|
|
Discontinued operations
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
Total attributable to common shareholders
|
$
|
0.27
|
|
|
$
|
0.18
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
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
|
$
|
20,965
|
|
|
$
|
12,864
|
|
|
Net income from discontinued operations
|
1,698
|
|
|
1,632
|
|
|
Net income attributable to common shareholders, after assumed dilution
|
$
|
22,663
|
|
|
$
|
14,496
|
|
|
Diluted earnings per share - Denominator:
|
|
|
|
|
Weighted average basic common shares outstanding
|
83,097,758
|
|
|
81,951,179
|
|
|
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 (2)
|
1,136,145
|
|
|
1,455,333
|
|
|
Warrants to purchase common stock (2)
|
1,037,747
|
|
|
1,154,406
|
|
|
Dilutive common shares
|
2,173,892
|
|
|
2,609,739
|
|
|
Weighted average diluted common shares outstanding (2)
|
85,271,650
|
|
|
84,560,918
|
|
|
Per share data - Diluted earnings per share from:
|
|
|
|
|
Continuing operations
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
Discontinued operations
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
Total attributable to common shareholders
|
$
|
0.27
|
|
|
$
|
0.17
|
|
|
Dividends per share declared and paid on common stock
|
$
|
0.12
|
|
|
$
|
0.11
|
|
_____________________
|
|
|
|
(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)
|
The diluted EPS computations for
the three months ended March 31, 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 March 31,
|
|
|
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
|
39
|
|
|
121
|
|
|
Total shares excluded due to exercise price exceeding the average market price of common shares during the period
|
39
|
|
|
121
|
|
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.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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 months ended March 31, 2018 and 2017
. Interest expense on junior subordinated debentures is reported at the Holding Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Private Banking
|
(In thousands)
|
|
Net interest income
|
$
|
58,131
|
|
|
$
|
54,256
|
|
|
Fees and other income
|
2,475
|
|
|
1,828
|
|
|
Total revenues
|
60,606
|
|
|
56,084
|
|
|
Provision/ (credit) for loan losses
|
(1,795
|
)
|
|
(181
|
)
|
|
Operating expense
|
39,627
|
|
|
35,058
|
|
|
Income before income taxes
|
22,774
|
|
|
21,207
|
|
|
Income tax expense
|
4,613
|
|
|
6,269
|
|
|
Net income from continuing operations
|
18,161
|
|
|
14,938
|
|
|
Net income attributable to the Company
|
$
|
18,161
|
|
|
$
|
14,938
|
|
|
|
|
|
|
|
Assets
|
$
|
8,185,803
|
|
|
$
|
8,058,121
|
|
|
Depreciation
|
$
|
1,584
|
|
|
$
|
1,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Wealth Management and Trust
|
(In thousands)
|
|
Fees and other income
|
$
|
12,274
|
|
|
$
|
10,921
|
|
|
Operating expense
|
10,694
|
|
|
13,873
|
|
|
Income/ (loss) before income taxes
|
1,580
|
|
|
(2,952
|
)
|
|
Income tax expense/ (benefit)
|
475
|
|
|
(1,166
|
)
|
|
Net income/ (loss) from continuing operations
|
1,105
|
|
|
(1,786
|
)
|
|
Net income/ (loss) attributable to the Company
|
$
|
1,105
|
|
|
$
|
(1,786
|
)
|
|
|
|
|
|
|
Assets
|
$
|
71,560
|
|
|
$
|
74,408
|
|
|
Amortization of intangibles
|
$
|
701
|
|
|
$
|
727
|
|
|
Depreciation
|
$
|
321
|
|
|
$
|
337
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Investment Management (1)
|
(In thousands)
|
|
Net interest income
|
$
|
4
|
|
|
$
|
4
|
|
|
Fees and other income
|
11,408
|
|
|
10,859
|
|
|
Total revenues
|
11,412
|
|
|
10,863
|
|
|
Operating expense
|
8,525
|
|
|
8,354
|
|
|
Income before income taxes
|
2,887
|
|
|
2,509
|
|
|
Income tax expense
|
671
|
|
|
844
|
|
|
Net income from continuing operations
|
2,216
|
|
|
1,665
|
|
|
Noncontrolling interests
|
488
|
|
|
462
|
|
|
Net income attributable to the Company
|
$
|
1,728
|
|
|
$
|
1,203
|
|
|
|
|
|
|
|
Assets
|
$
|
66,996
|
|
|
$
|
92,255
|
|
|
Amortization of intangibles
|
$
|
—
|
|
|
$
|
650
|
|
|
Depreciation
|
$
|
34
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Wealth Advisory
|
(In thousands)
|
|
Net interest income
|
$
|
48
|
|
|
$
|
17
|
|
|
Fees and other income
|
13,539
|
|
|
12,843
|
|
|
Total revenues
|
13,587
|
|
|
12,860
|
|
|
Operating expense
|
10,536
|
|
|
9,443
|
|
|
Income before income taxes
|
3,051
|
|
|
3,417
|
|
|
Income tax expense
|
786
|
|
|
1,287
|
|
|
Net income from continuing operations
|
2,265
|
|
|
2,130
|
|
|
Noncontrolling interests
|
562
|
|
|
504
|
|
|
Net income attributable to the Company
|
$
|
1,703
|
|
|
$
|
1,626
|
|
|
|
|
|
|
|
Assets
|
$
|
73,054
|
|
|
$
|
73,182
|
|
|
Amortization of intangibles
|
$
|
49
|
|
|
$
|
49
|
|
|
Depreciation
|
$
|
163
|
|
|
$
|
226
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Holding Company and Eliminations
|
(In thousands)
|
|
Net interest income
|
$
|
(800
|
)
|
|
$
|
(635
|
)
|
|
Fees and other income
|
47
|
|
|
55
|
|
|
Total revenues
|
(753
|
)
|
|
(580
|
)
|
|
Operating expense
|
1,475
|
|
|
2,052
|
|
|
Income/ (loss) before income taxes
|
(2,228
|
)
|
|
(2,632
|
)
|
|
Income tax expense/ (benefit)
|
(519
|
)
|
|
(681
|
)
|
|
Net income/ (loss) from continuing operations
|
(1,709
|
)
|
|
(1,951
|
)
|
|
Discontinued operations
|
1,698
|
|
|
1,632
|
|
|
Net income/ (loss) attributable to the Company
|
$
|
(11
|
)
|
|
$
|
(319
|
)
|
|
|
|
|
|
|
Assets (including eliminations)
|
$
|
(79,054
|
)
|
|
$
|
(82,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
Total Company
|
(In thousands)
|
|
Net interest income
|
$
|
57,383
|
|
|
$
|
53,642
|
|
|
Fees and other income
|
39,743
|
|
|
36,506
|
|
|
Total revenues
|
97,126
|
|
|
90,148
|
|
|
Provision/ (credit) for loan losses
|
(1,795
|
)
|
|
(181
|
)
|
|
Operating expense
|
70,857
|
|
|
68,780
|
|
|
Income before income taxes
|
28,064
|
|
|
21,549
|
|
|
Income tax expense
|
6,026
|
|
|
6,553
|
|
|
Net income from continuing operations
|
22,038
|
|
|
14,996
|
|
|
Noncontrolling interests
|
1,050
|
|
|
966
|
|
|
Discontinued operations
|
1,698
|
|
|
1,632
|
|
|
Net income attributable to the Company
|
$
|
22,686
|
|
|
$
|
15,662
|
|
|
|
|
|
|
|
Assets
|
$
|
8,318,359
|
|
|
$
|
8,215,120
|
|
|
Amortization of intangibles
|
$
|
750
|
|
|
$
|
1,426
|
|
|
Depreciation
|
$
|
2,102
|
|
|
$
|
2,000
|
|
_____________________
|
|
|
|
(1)
|
Results for the Investment Management Segment for the three months ended
March 31, 2018
and
2017
include results for DGHM and Anchor. Assets for the Investment Management Segment at
March 31, 2018
and
2017
include assets of DGHM and Anchor; however, Anchor’s assets and liabilities are classified as held for sale at
March 31, 2018
.
|
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 March 31, 2018
|
|
|
|
|
|
|
|
|
Available-for-sale securities at fair value:
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
$
|
35,060
|
|
|
$
|
—
|
|
|
$
|
(1,253
|
)
|
|
$
|
33,807
|
|
|
Government-sponsored entities
|
285,992
|
|
|
—
|
|
|
(5,429
|
)
|
|
280,563
|
|
|
Municipal bonds
|
302,556
|
|
|
1,800
|
|
|
(4,073
|
)
|
|
300,283
|
|
|
Mortgage-backed securities (1)
|
508,009
|
|
|
341
|
|
|
(21,415
|
)
|
|
486,935
|
|
|
Other
|
16,909
|
|
|
—
|
|
|
—
|
|
|
16,909
|
|
|
Total
|
$
|
1,148,526
|
|
|
$
|
2,141
|
|
|
$
|
(32,170
|
)
|
|
$
|
1,118,497
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities at amortized cost:
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (1)
|
$
|
70,809
|
|
|
$
|
—
|
|
|
$
|
(1,922
|
)
|
|
$
|
68,887
|
|
|
Total
|
$
|
70,809
|
|
|
$
|
—
|
|
|
$
|
(1,922
|
)
|
|
$
|
68,887
|
|
|
|
|
|
|
|
|
|
|
|
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 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 March 31, 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
|
$
|
73,320
|
|
|
$
|
73,128
|
|
|
After one, but within five years
|
334,864
|
|
|
329,235
|
|
|
After five, but within ten years
|
304,561
|
|
|
291,757
|
|
|
Greater than ten years
|
435,781
|
|
|
424,377
|
|
|
Total
|
$
|
1,148,526
|
|
|
$
|
1,118,497
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents the maturities of held-to-maturity investment securities, based on contractual maturity,
as of March 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity Securities
|
|
Amortized
cost
|
|
Fair
value
|
|
(In thousands)
|
|
After five, but within ten years
|
$
|
20,817
|
|
|
$
|
20,198
|
|
|
Greater than ten years
|
49,992
|
|
|
48,689
|
|
|
Total
|
$
|
70,809
|
|
|
$
|
68,887
|
|
The following table presents the proceeds from sales, gross realized gains and gross realized losses for available-for-sale securities that were sold or called during the following periods as well as changes in the fair value of equity securities as prescribed by ASC 321,
Investment - Equity Securities
. ASU 2016-01,
Recognition and Measurements of Financial Assets and Financial Liabilities
was adopted on January 1, 2018, at which time a cumulative effect adjustment of
$339 thousand
was recorded to reclassify the amount of accumulated unrealized gains related to equity securities from accumulated other comprehensive income to retained earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
|
(In thousands)
|
|
Proceeds from sales and calls
|
$
|
15,877
|
|
|
$
|
32,717
|
|
|
Realized gains
|
7
|
|
|
19
|
|
|
Realized losses
|
(1
|
)
|
|
—
|
|
|
Change in unrealized gain/ (loss) on equity securities reflected in the consolidated statement of operations
|
(30
|
)
|
|
n/a
|
|
The following tables present information regarding securities at
March 31, 2018
and
December 31, 2017
having temporary impairment, due to the fair values having declined below the amortized cost of the individual securities, and the time period that the investments have been temporarily impaired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
# of
securities
|
|
|
(In thousands, except number of securities)
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
$
|
14,844
|
|
|
$
|
(138
|
)
|
|
$
|
18,963
|
|
|
$
|
(1,115
|
)
|
|
$
|
33,807
|
|
|
$
|
(1,253
|
)
|
|
6
|
|
|
Government-sponsored entities
|
223,047
|
|
|
(3,391
|
)
|
|
57,516
|
|
|
(2,038
|
)
|
|
280,563
|
|
|
(5,429
|
)
|
|
41
|
|
|
Municipal bonds
|
141,784
|
|
|
(1,811
|
)
|
|
49,429
|
|
|
(2,262
|
)
|
|
191,213
|
|
|
(4,073
|
)
|
|
102
|
|
|
Mortgage-backed securities (1)
|
100,689
|
|
|
(2,908
|
)
|
|
370,008
|
|
|
(18,507
|
)
|
|
470,697
|
|
|
(21,415
|
)
|
|
109
|
|
|
Total
|
$
|
480,364
|
|
|
$
|
(8,248
|
)
|
|
$
|
495,916
|
|
|
$
|
(23,922
|
)
|
|
$
|
976,280
|
|
|
$
|
(32,170
|
)
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (1)
|
$
|
55,189
|
|
|
$
|
(1,505
|
)
|
|
$
|
13,698
|
|
|
$
|
(417
|
)
|
|
$
|
68,887
|
|
|
$
|
(1,922
|
)
|
|
16
|
|
|
Total
|
$
|
55,189
|
|
|
$
|
(1,505
|
)
|
|
$
|
13,698
|
|
|
$
|
(417
|
)
|
|
$
|
68,887
|
|
|
$
|
(1,922
|
)
|
|
16
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
# of
securities
|
|
|
(In thousands, except number of securities)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
$
|
14,902
|
|
|
$
|
(79
|
)
|
|
$
|
19,397
|
|
|
$
|
(754
|
)
|
|
$
|
34,299
|
|
|
$
|
(833
|
)
|
|
6
|
|
|
Government-sponsored entities
|
220,275
|
|
|
(1,350
|
)
|
|
38,273
|
|
|
(1,272
|
)
|
|
258,548
|
|
|
(2,622
|
)
|
|
36
|
|
|
Municipal bonds
|
46,112
|
|
|
(131
|
)
|
|
50,842
|
|
|
(1,017
|
)
|
|
96,954
|
|
|
(1,148
|
)
|
|
63
|
|
|
Mortgage-backed securities (1)
|
97,117
|
|
|
(903
|
)
|
|
386,785
|
|
|
(11,665
|
)
|
|
483,902
|
|
|
(12,568
|
)
|
|
103
|
|
|
Total
|
$
|
378,406
|
|
|
$
|
(2,463
|
)
|
|
$
|
495,297
|
|
|
$
|
(14,708
|
)
|
|
$
|
873,703
|
|
|
$
|
(17,171
|
)
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (1)
|
$
|
59,218
|
|
|
$
|
(534
|
)
|
|
$
|
14,563
|
|
|
$
|
(261
|
)
|
|
$
|
73,781
|
|
|
$
|
(795
|
)
|
|
16
|
|
|
Total
|
$
|
59,218
|
|
|
$
|
(534
|
)
|
|
$
|
14,563
|
|
|
$
|
(261
|
)
|
|
$
|
73,781
|
|
|
$
|
(795
|
)
|
|
16
|
|
_____________________
|
|
|
|
(1)
|
All mortgage-backed securities are guaranteed by U.S. government agencies or government-sponsored entities.
|
As of
March 31, 2018
, the U.S. government and agencies securities, government-sponsored entities securities and mortgage-backed securities in the first table above had current Standard and Poor’s credit ratings of AAA. The municipal bonds in the first table above had a current Standard and Poor’s credit rating of at least AA-. At
March 31, 2018
, the Company does not consider these investments other-than-temporarily impaired because the decline in fair value on investments is primarily attributed to changes in interest rates and not credit quality.
At
March 31, 2018
and
December 31, 2017
, the amount of investment securities in an unrealized loss position greater than 12 months, as well as in total, was primarily due to changes in interest rates. As of
March 31, 2018
, the Company had no intent to sell any securities in an unrealized loss position and it is not more likely than not that the Company would be forced to sell any of these securities prior to the full recovery of all unrealized loss amounts.
Cost method investments, which are included in other assets, can be temporarily impaired when the fair values decline below the amortized costs of the individual investments. There were
no
cost method investments with unrealized losses
as of March 31, 2018
or
December 31, 2017
. The Company’s cost method investments primarily include 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
$41.8 million
and
$39.4 million
in cost method investments included in other assets
as of March 31, 2018
and
December 31, 2017
, 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.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis
as of March 31, 2018
and
December 31, 2017
, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
Fair value measurements at reporting date using:
|
|
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
|
$
|
33,807
|
|
|
$
|
33,676
|
|
|
$
|
131
|
|
|
$
|
—
|
|
|
Government-sponsored entities
|
280,563
|
|
|
—
|
|
|
280,563
|
|
|
—
|
|
|
Municipal bonds
|
300,283
|
|
|
—
|
|
|
300,283
|
|
|
—
|
|
|
Mortgage-backed securities
|
486,935
|
|
|
—
|
|
|
486,935
|
|
|
—
|
|
|
Other
|
16,909
|
|
|
16,909
|
|
|
—
|
|
|
—
|
|
|
Total available-for-sale securities
|
1,118,497
|
|
|
50,585
|
|
|
1,067,912
|
|
|
—
|
|
|
Derivatives - interest rate customer swaps
|
22,810
|
|
|
—
|
|
|
22,810
|
|
|
—
|
|
|
Derivatives - customer foreign exchange forwards
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Derivatives - interest rate swaps
|
1,286
|
|
|
—
|
|
|
1,286
|
|
|
—
|
|
|
Other investments
|
7,187
|
|
|
7,187
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives - interest rate customer swaps
|
$
|
23,097
|
|
|
$
|
—
|
|
|
$
|
23,097
|
|
|
$
|
—
|
|
|
Derivatives - customer foreign exchange forwards
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Derivatives - risk participation agreement
|
142
|
|
|
—
|
|
|
142
|
|
|
—
|
|
|
Other liabilities
|
7,187
|
|
|
7,187
|
|
|
—
|
|
|
—
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using:
|
|
As of December 31, 2017
|
|
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
|
$
|
34,299
|
|
|
$
|
34,096
|
|
|
$
|
203
|
|
|
$
|
—
|
|
|
Government-sponsored entities
|
302,501
|
|
|
—
|
|
|
302,501
|
|
|
—
|
|
|
Municipal bonds
|
303,058
|
|
|
—
|
|
|
303,058
|
|
|
—
|
|
|
Mortgage-backed securities
|
509,676
|
|
|
—
|
|
|
509,676
|
|
|
—
|
|
|
Other
|
20,794
|
|
|
20,794
|
|
|
—
|
|
|
—
|
|
|
Total available-for-sale securities
|
1,170,328
|
|
|
54,890
|
|
|
1,115,438
|
|
|
—
|
|
|
Derivatives - interest rate customer swaps
|
18,575
|
|
|
—
|
|
|
18,575
|
|
|
—
|
|
|
Derivatives - interest rate swaps
|
555
|
|
|
—
|
|
|
555
|
|
|
—
|
|
|
Derivatives - risk participation agreements
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Derivatives - customer foreign exchange forwards
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Other investments
|
7,062
|
|
|
7,062
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives - interest rate customer swaps
|
$
|
18,953
|
|
|
$
|
—
|
|
|
$
|
18,953
|
|
|
$
|
—
|
|
|
Derivatives - interest rate swaps
|
80
|
|
|
—
|
|
|
80
|
|
|
—
|
|
|
Derivatives - risk participation agreements
|
108
|
|
|
—
|
|
|
108
|
|
|
—
|
|
|
Derivatives - customer foreign exchange forwards
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Other liabilities
|
7,062
|
|
|
7,062
|
|
|
—
|
|
|
—
|
|
As of March 31, 2018
and
December 31, 2017
, available-for-sale securities consisted of U.S. government and agency securities, government-sponsored entities securities, municipal bonds, mortgage-backed securities, and other available-for-sale securities. Available-for-sale Level 1 securities are valued with prices quoted in active markets and include U.S. Treasury securities (which are categorized as U.S. government and agencies securities) and equities (which are categorized as other available-for-sale securities). Available-for-sale Level 2 securities generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets and include government-sponsored entities securities, municipal bonds, mortgage-backed securities, and certain investments in SBA loans (which are categorized as U.S. government and agencies securities).
No
investments held as of
March 31, 2018
or
December 31, 2017
were categorized as Level 3. There were no changes in the valuation techniques used for measuring the fair value of available-for-sale securities in the
three months
ended
March 31, 2018
.
In managing its interest rate and credit risk, the Company utilizes derivative instruments including interest rate customer swaps, interest rate swaps, and risk participation agreements. As a service to its customers, the Company may utilize derivative instruments including customer foreign exchange forward contracts to manage its foreign exchange risk, if any. 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, and therefore, they have been categorized as a Level 2 measurement
as of March 31, 2018
and
December 31, 2017
. 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. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The Company has determined that 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
as of March 31, 2018
and
December 31, 2017
.
Other investments, which are not considered available-for-sale investments, consist of publicly traded mutual fund investments held in deferred compensation trusts that are valued at prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement
as of March 31, 2018
and
December 31, 2017
.
There were no transfers between levels for assets or liabilities recorded at fair value on a recurring basis during the
three months ended
March 31, 2018
and
2017
.
There were
no
Level 3 assets valued on a recurring basis at
March 31, 2018
or
December 31, 2017
.
The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis during the period ended
March 31, 2018
, aggregated by the level in the fair value hierarchy within which those measurements fall. There were
no
collateral-dependent impaired loans held at
March 31, 2017
that had write-downs in fair value or whose specific reserve changed during the first
three months
of
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
Fair value measurements at reporting date using:
|
|
Gain (losses) from fair value changes
|
|
Quoted prices in
active markets
for identical
assets (Level 1)
|
|
Significant
other
observable
inputs (Level 2)
|
|
Significant
unobservable
inputs (Level 3)
|
|
Three months ended March 31, 2018
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (1)
|
$
|
1,835
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,835
|
|
|
$
|
(216
|
)
|
_____________________
|
|
|
|
(1)
|
Collateral-dependent impaired loans held at
March 31, 2018
that had write-downs in fair value or whose specific reserve changed during the first
three months
of
2018
.
|
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
|
Fair Value
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range of
Inputs
Utilized
|
|
Weighted
Average of
Inputs
Utilized
|
|
|
(In thousands)
|
|
|
|
Impaired Loans
|
$
|
1,835
|
|
|
Appraisals of Collateral
|
|
Discount for costs to sell
|
|
0% - 24%
|
|
14%
|
|
Appraisal adjustments
|
|
0% - 26%
|
|
16%
|
Impaired loans include those loans that were adjusted to the fair value of underlying collateral as required under ASC 310,
Receivables
. 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. The appraisers use a market, income, and/or a cost approach in determining the value of the collateral. Therefore they have been categorized as a Level 3 measurement.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the carrying values and fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
Book Value
|
|
Fair Value
|
|
Quoted prices
in active
markets for
identical
assets
(Level 1)
|
|
Significant
other
observable
inputs (Level 2)
|
|
Significant
unobservable
inputs (Level 3)
|
|
(In thousands)
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
77,085
|
|
|
$
|
77,085
|
|
|
$
|
77,085
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment securities held-to-maturity
|
70,809
|
|
|
68,887
|
|
|
—
|
|
|
68,887
|
|
|
—
|
|
|
Loans held for sale
|
3,918
|
|
|
3,967
|
|
|
—
|
|
|
3,967
|
|
|
—
|
|
|
Loans, net
|
6,529,429
|
|
|
6,474,781
|
|
|
—
|
|
|
—
|
|
|
6,474,781
|
|
|
Other financial assets
|
87,709
|
|
|
87,709
|
|
|
—
|
|
|
87,709
|
|
|
—
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
6,584,322
|
|
|
6,582,187
|
|
|
—
|
|
|
6,582,187
|
|
|
—
|
|
|
Securities sold under agreements to repurchase
|
85,257
|
|
|
85,257
|
|
|
—
|
|
|
85,257
|
|
|
—
|
|
|
Federal Home Loan Bank borrowings
|
611,588
|
|
|
607,606
|
|
|
—
|
|
|
607,606
|
|
|
—
|
|
|
Junior subordinated debentures
|
106,363
|
|
|
96,363
|
|
|
—
|
|
|
—
|
|
|
96,363
|
|
|
Other financial liabilities
|
1,993
|
|
|
1,993
|
|
|
—
|
|
|
1,993
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Book Value
|
|
Fair Value
|
|
Quoted prices
in active
markets for
identical
assets
(Level 1)
|
|
Significant
other
observable
inputs (Level 2)
|
|
Significant
unobservable
inputs (Level 3)
|
|
(In thousands)
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
120,541
|
|
|
$
|
120,541
|
|
|
$
|
120,541
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment securities held-to-maturity
|
74,576
|
|
|
73,781
|
|
|
—
|
|
|
73,781
|
|
|
—
|
|
|
Loans held for sale
|
4,697
|
|
|
4,737
|
|
|
—
|
|
|
4,737
|
|
|
—
|
|
|
Loans, net
|
6,430,286
|
|
|
6,388,297
|
|
|
—
|
|
|
—
|
|
|
6,388,297
|
|
|
Other financial assets
|
93,449
|
|
|
93,449
|
|
|
—
|
|
|
93,449
|
|
|
—
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
6,510,246
|
|
|
6,509,197
|
|
|
—
|
|
|
6,509,197
|
|
|
—
|
|
|
Securities sold under agreements to repurchase
|
32,169
|
|
|
32,169
|
|
|
—
|
|
|
32,169
|
|
|
—
|
|
|
Federal funds purchased
|
30,000
|
|
|
30,000
|
|
|
—
|
|
|
30,000
|
|
|
—
|
|
|
Federal Home Loan Bank borrowings
|
693,681
|
|
|
692,402
|
|
|
—
|
|
|
692,402
|
|
|
—
|
|
|
Junior subordinated debentures
|
106,363
|
|
|
96,363
|
|
|
—
|
|
|
—
|
|
|
96,363
|
|
|
Other financial liabilities
|
2,224
|
|
|
2,224
|
|
|
—
|
|
|
2,224
|
|
|
—
|
|
The estimated fair values have been determined by using available quoted market information or other appropriate valuation methodologies. The aggregate fair value amounts presented above do not represent the underlying value of the financial assets and liabilities of the Company taken as a whole as they do not reflect any premium or discount the Company might recognize if the assets were sold or the liabilities sold, settled, or redeemed. An excess of fair value over book value on financial assets represents a premium, or gain, the Company might recognize if the assets were sold, while an excess of book value over fair value on financial liabilities represents a premium, or gain, the Company might recognize if the liabilities were
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
sold, settled, or redeemed prior to maturity. Conversely, losses would be recognized if assets were sold where the book value exceeded the fair value or liabilities were sold where the fair value exceeded the book value.
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 are considered best estimates. 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 and are classified as Level 1.
Held-to-maturity investment securities
Held-to-maturity securities currently include mortgage-backed securities. The mortgage-backed securities are fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities is based on quoted market prices obtained from external pricing services. The principal market for our securities portfolio is the secondary institutional market, with an exit price that is predominantly reflective of bid level pricing in that market.
Accordingly, held-to-maturity mortgage-backed securities are included in the Level 2 fair value category.
Loans held for sale
Loans held for sale are recorded at the lower of cost or fair value in the aggregate. Fair value estimates are based on actual commitments to sell the loans to investors at an agreed upon price or current market prices if rates have changed since the time the loan closed. Accordingly, loans held for sale are included in the Level 2 fair value category.
Loans, net
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 credit and interest rate characteristics and maturities. The fair value estimates for home equity and other loans are based on outstanding loan terms and pricing in the local markets. Net loans are included in the Level 3 fair value category based upon the inputs and valuation techniques used.
Other financial assets
Other financial assets consist of accrued interest and fees receivable, and stock in the Federal Home Loan Bank of Boston (“FHLB”) and the Federal Reserve Bank (“FRB”), for which the carrying amount approximates fair value, and are classified as Level 2.
Deposits
The fair values reported for transaction accounts (demand, NOW, savings, and money market) equal their respective book values reported on the balance sheet and are classified as Level 2. 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 and are classified as Level 2.
Securities sold under agreements to repurchase
The fair value of securities sold under agreements to repurchase is estimated based on contractual cash flows discounted at the Bank’s incremental borrowing rate for FHLB borrowings with similar maturities and have been classified as Level 2.
Federal funds purchased
The carrying amounts of federal funds purchased approximate fair value due to their short-term nature and therefore these funds have been classified as Level 2.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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 Bank’s estimated current incremental borrowing rate for FHLB borrowings of similar maturities and therefore these borrowings have been classified as Level 2.
Junior subordinated debentures
The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I and Boston Private Capital Trust II were estimated using Level 3 inputs such as the interest rates on these securities, current rates for similar debt, a consideration for illiquidity of trading in the debt, and regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt.
Other financial liabilities
Other financial liabilities consists of accrued interest payable for which the carrying amount approximates fair value and is classified as Level 2.
Financial instruments with off-balance sheet risk
The Bank’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. Loan Portfolio and Credit Quality
The Bank’s lending activities are conducted principally in the regions of New England, the San Francisco Bay Area, and Southern California. The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, commercial tax-exempt loans, construction and land loans, and home equity and other consumer loans. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank’s single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank’s lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including, in particular, the performance of the construction sector. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changing conditions in the New England, the San Francisco Bay Area, and Southern California economies and real estate markets.
The following table presents a summary of the loan portfolio based on the portfolio segment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
531,093
|
|
|
$
|
520,992
|
|
|
Commercial tax-exempt
|
420,757
|
|
|
418,698
|
|
|
Total commercial and industrial
|
951,850
|
|
|
939,690
|
|
|
Commercial real estate
|
2,465,003
|
|
|
2,440,220
|
|
|
Construction and land
|
165,240
|
|
|
164,990
|
|
|
Residential
|
2,737,369
|
|
|
2,682,533
|
|
|
Home equity
|
94,331
|
|
|
99,958
|
|
|
Consumer and other
|
188,534
|
|
|
177,637
|
|
|
Total
|
$
|
6,602,327
|
|
|
$
|
6,505,028
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents nonaccrual loans receivable by class of receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
1,669
|
|
|
$
|
748
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
Total commercial and industrial
|
1,669
|
|
|
748
|
|
|
Commercial real estate
|
1,839
|
|
|
1,985
|
|
|
Construction and land
|
109
|
|
|
110
|
|
|
Residential
|
9,932
|
|
|
8,470
|
|
|
Home equity
|
2,816
|
|
|
2,840
|
|
|
Consumer and other
|
15
|
|
|
142
|
|
|
Total
|
$
|
16,380
|
|
|
$
|
14,295
|
|
The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, although infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were
no
loans 90 days or more past due, but still accruing as of both
March 31, 2018
and
December 31, 2017
. The Bank’s policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six consecutive months). For troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months in accordance with the restructured loan terms, along with meeting other criteria.
The following tables show the payment status of loans receivable by class of receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Accruing Past Due
|
|
Nonaccrual Loans
|
|
|
|
|
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
Total Accruing Past Due
|
|
Current
|
|
30-89 Days Past Due
|
|
90 Days or
Greater
Past Due
|
|
Total Non-Accrual Loans
|
|
Current Accruing Loans
|
|
Total
Loans
Receivable
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
3,894
|
|
|
$
|
700
|
|
|
$
|
4,594
|
|
|
$
|
311
|
|
|
$
|
100
|
|
|
$
|
1,258
|
|
|
$
|
1,669
|
|
|
$
|
524,830
|
|
|
$
|
531,093
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
420,757
|
|
|
420,757
|
|
|
Commercial real estate
|
2,507
|
|
|
—
|
|
|
2,507
|
|
|
1
|
|
|
151
|
|
|
1,687
|
|
|
1,839
|
|
|
2,460,657
|
|
|
2,465,003
|
|
|
Construction and land
|
64
|
|
|
—
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
109
|
|
|
109
|
|
|
165,067
|
|
|
165,240
|
|
|
Residential
|
12,489
|
|
|
—
|
|
|
12,489
|
|
|
3,183
|
|
|
3,115
|
|
|
3,634
|
|
|
9,932
|
|
|
2,714,948
|
|
|
2,737,369
|
|
|
Home equity
|
325
|
|
|
339
|
|
|
664
|
|
|
67
|
|
|
—
|
|
|
2,749
|
|
|
2,816
|
|
|
90,851
|
|
|
94,331
|
|
|
Consumer and other
|
58
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
6
|
|
|
9
|
|
|
15
|
|
|
188,461
|
|
|
188,534
|
|
|
Total
|
$
|
19,337
|
|
|
$
|
1,039
|
|
|
$
|
20,376
|
|
|
$
|
3,562
|
|
|
$
|
3,372
|
|
|
$
|
9,446
|
|
|
$
|
16,380
|
|
|
$
|
6,565,571
|
|
|
$
|
6,602,327
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Accruing Past Due
|
|
Nonaccrual Loans
|
|
|
|
|
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
Total Accruing Past Due
|
|
Current
|
|
30-89 Days Past Due
|
|
90 Days or Greater Past Due
|
|
Total Non-Accrual Loans
|
|
Current Accruing Loans
|
|
Total Loans Receivable
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
10,903
|
|
|
$
|
849
|
|
|
$
|
11,752
|
|
|
$
|
355
|
|
|
$
|
—
|
|
|
$
|
393
|
|
|
$
|
748
|
|
|
$
|
508,492
|
|
|
$
|
520,992
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
418,698
|
|
|
418,698
|
|
|
Commercial real estate
|
4,043
|
|
|
—
|
|
|
4,043
|
|
|
163
|
|
|
—
|
|
|
1,822
|
|
|
1,985
|
|
|
2,434,192
|
|
|
2,440,220
|
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
110
|
|
|
110
|
|
|
164,880
|
|
|
164,990
|
|
|
Residential
|
7,239
|
|
|
1,635
|
|
|
8,874
|
|
|
805
|
|
|
3,172
|
|
|
4,493
|
|
|
8,470
|
|
|
2,665,189
|
|
|
2,682,533
|
|
|
Home equity
|
355
|
|
|
—
|
|
|
355
|
|
|
—
|
|
|
71
|
|
|
2,769
|
|
|
2,840
|
|
|
96,763
|
|
|
99,958
|
|
|
Consumer and other
|
24
|
|
|
—
|
|
|
24
|
|
|
17
|
|
|
125
|
|
|
—
|
|
|
142
|
|
|
177,471
|
|
|
177,637
|
|
|
Total
|
$
|
22,564
|
|
|
$
|
2,484
|
|
|
$
|
25,048
|
|
|
$
|
1,340
|
|
|
$
|
3,368
|
|
|
$
|
9,587
|
|
|
$
|
14,295
|
|
|
$
|
6,465,685
|
|
|
$
|
6,505,028
|
|
Nonaccrual and delinquent loans are affected by many factors, such as economic and business conditions, interest rates, unemployment levels, and real estate collateral values, among others. In periods of prolonged economic decline, borrowers may become more severely affected over time as liquidity levels decline and the borrower’s ability to continue to make payments deteriorates. With respect to real estate collateral values, the declines from the peak, as well as the value of the real estate at the time of origination versus the current value, can impact the level of problem loans. For instance, if the loan to value ratio at the time of renewal has increased due to the decline in the real estate value since origination, the loan may no longer meet the Bank’s underwriting standards and may be considered for classification as a problem loan dependent upon a review of risk factors.
Generally when a collateral dependent loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank will continue to obtain updated appraisals as deemed necessary, especially during periods of declining property values.
The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more.
Credit Quality Indicators
The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management’s judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in general economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers’ ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company’s financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company’s analysis of credit risk. Generally, only commercial loans, including commercial real estate, other commercial and industrial loans, commercial tax-exempt loans, and construction and land loans, are given a numerical grade.
A summary of the rating system used by the Bank, repeated here from 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, follows:
Pass
- All loans graded as pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan losses. For residential, home equity and consumer loans, the Bank classifies loans as pass unless there is known information such as delinquency or client requests for modifications which, due to financial difficulty, would then generally result in a risk rating such as special mention or more severe depending on the factors.
Special Mention
- Loans rated in this category are defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
deterioration of the repayment prospects for the credit or the Bank’s credit position. These loans are currently protected but have the potential to deteriorate to a substandard rating. For commercial loans, the borrower’s financial performance may be inconsistent or below forecast, creating the possibility of liquidity problems and shrinking debt service coverage. In loans having this rating, the primary source of repayment is still good, but there is increasing reliance on collateral or guarantor support. Collectability of the loan is not yet in jeopardy. In particular, loans in this category are considered more variable than other categories, since they will typically migrate through categories more quickly.
Substandard
- Loans rated in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard credit has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans may be either still accruing or nonaccruing depending upon the severity of the risk and other factors such as the value of the collateral, if any, and past due status.
Doubtful
- Loans rated in this category indicate that collection or liquidation in full on the basis of currently existing facts, conditions, and values, is highly questionable and improbable. Loans in this category are usually on nonaccrual and classified as impaired.
The following tables present the loan portfolio’s credit risk profile by internally assigned grade and class of receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
By Loan Grade or Nonaccrual Status
|
|
|
|
|
Pass
|
|
Special
Mention
|
|
Accruing
Substandard
|
|
Nonaccrual
Loans
|
|
Total
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
512,546
|
|
|
$
|
11,452
|
|
|
$
|
5,426
|
|
|
$
|
1,669
|
|
|
$
|
531,093
|
|
|
Commercial tax-exempt
|
420,757
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
420,757
|
|
|
Commercial real estate
|
2,380,144
|
|
|
51,636
|
|
|
31,384
|
|
|
1,839
|
|
|
2,465,003
|
|
|
Construction and land
|
158,108
|
|
|
—
|
|
|
7,023
|
|
|
109
|
|
|
165,240
|
|
|
Residential
|
2,726,100
|
|
|
—
|
|
|
1,337
|
|
|
9,932
|
|
|
2,737,369
|
|
|
Home equity
|
91,515
|
|
|
—
|
|
|
—
|
|
|
2,816
|
|
|
94,331
|
|
|
Consumer and other
|
188,516
|
|
|
—
|
|
|
3
|
|
|
15
|
|
|
188,534
|
|
|
Total
|
$
|
6,477,686
|
|
|
$
|
63,088
|
|
|
$
|
45,173
|
|
|
$
|
16,380
|
|
|
$
|
6,602,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
By Loan Grade or Nonaccrual Status
|
|
|
|
|
Pass
|
|
Special
Mention
|
|
Accruing
Substandard
|
|
Nonaccrual
Loans
|
|
Total
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
496,395
|
|
|
$
|
12,898
|
|
|
$
|
10,951
|
|
|
$
|
748
|
|
|
$
|
520,992
|
|
|
Commercial tax-exempt
|
413,139
|
|
|
5,559
|
|
|
—
|
|
|
—
|
|
|
418,698
|
|
|
Commercial real estate
|
2,346,833
|
|
|
56,947
|
|
|
34,455
|
|
|
1,985
|
|
|
2,440,220
|
|
|
Construction and land
|
146,514
|
|
|
11,770
|
|
|
6,596
|
|
|
110
|
|
|
164,990
|
|
|
Residential
|
2,672,714
|
|
|
—
|
|
|
1,349
|
|
|
8,470
|
|
|
2,682,533
|
|
|
Home equity
|
97,118
|
|
|
—
|
|
|
—
|
|
|
2,840
|
|
|
99,958
|
|
|
Consumer and other
|
177,494
|
|
|
—
|
|
|
1
|
|
|
142
|
|
|
177,637
|
|
|
Total
|
$
|
6,350,207
|
|
|
$
|
87,174
|
|
|
$
|
53,352
|
|
|
$
|
14,295
|
|
|
$
|
6,505,028
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present, by class of receivable, the balance of impaired loans with and without a related allowance, the associated allowance for those impaired loans with a related allowance, and the total unpaid principal on impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31, 2018
|
|
|
Recorded Investment (1)
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
YTD Average Recorded Investment
|
|
YTD Interest Income Recognized while Impaired
|
|
|
(In thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,100
|
|
|
$
|
3,129
|
|
|
n/a
|
|
$
|
1,689
|
|
|
$
|
7
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
n/a
|
|
—
|
|
|
—
|
|
|
Commercial real estate
|
2,947
|
|
|
4,710
|
|
|
n/a
|
|
2,103
|
|
|
25
|
|
|
Construction and land
|
109
|
|
|
109
|
|
|
n/a
|
|
109
|
|
|
—
|
|
|
Residential
|
10,717
|
|
|
11,077
|
|
|
n/a
|
|
9,608
|
|
|
101
|
|
|
Home equity
|
1,759
|
|
|
1,759
|
|
|
n/a
|
|
1,770
|
|
|
10
|
|
|
Consumer and other
|
—
|
|
|
—
|
|
|
n/a
|
|
—
|
|
|
—
|
|
|
Subtotal
|
17,632
|
|
|
20,784
|
|
|
n/a
|
|
15,279
|
|
|
143
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
181
|
|
|
2
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate
|
5,525
|
|
|
5,954
|
|
|
241
|
|
|
6,510
|
|
|
156
|
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential
|
821
|
|
|
821
|
|
|
83
|
|
|
825
|
|
|
6
|
|
|
Home equity
|
36
|
|
|
36
|
|
|
20
|
|
|
36
|
|
|
—
|
|
|
Consumer and other
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
3
|
|
|
Subtotal
|
6,382
|
|
|
6,811
|
|
|
344
|
|
|
7,583
|
|
|
167
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
2,100
|
|
|
3,129
|
|
|
—
|
|
|
1,870
|
|
|
9
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate
|
8,472
|
|
|
10,664
|
|
|
241
|
|
|
8,613
|
|
|
181
|
|
|
Construction and land
|
109
|
|
|
109
|
|
|
—
|
|
|
109
|
|
|
—
|
|
|
Residential
|
11,538
|
|
|
11,898
|
|
|
83
|
|
|
10,433
|
|
|
107
|
|
|
Home equity
|
1,795
|
|
|
1,795
|
|
|
20
|
|
|
1,806
|
|
|
10
|
|
|
Consumer and other
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
3
|
|
|
Total
|
$
|
24,014
|
|
|
$
|
27,595
|
|
|
$
|
344
|
|
|
$
|
22,862
|
|
|
$
|
310
|
|
_____________________
|
|
|
|
(1)
|
Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31, 2017
|
|
|
Recorded Investment (1)
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
YTD Average Recorded Investment
|
|
YTD Interest Income Recognized while Impaired
|
|
|
(In thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,670
|
|
|
$
|
2,045
|
|
|
n/a
|
|
$
|
1,731
|
|
|
$
|
13
|
|
|
Commercial tax-exempt
|
4,337
|
|
|
4,337
|
|
|
n/a
|
|
3,253
|
|
|
—
|
|
|
Commercial real estate
|
3,747
|
|
|
8,787
|
|
|
n/a
|
|
4,269
|
|
|
246
|
|
|
Construction and land
|
147
|
|
|
479
|
|
|
n/a
|
|
164
|
|
|
—
|
|
|
Residential
|
9,401
|
|
|
9,773
|
|
|
n/a
|
|
8,465
|
|
|
101
|
|
|
Home equity
|
—
|
|
|
—
|
|
|
n/a
|
|
—
|
|
|
—
|
|
|
Consumer and other
|
—
|
|
|
—
|
|
|
n/a
|
|
—
|
|
|
—
|
|
|
Subtotal
|
19,302
|
|
|
25,421
|
|
|
n/a
|
|
17,882
|
|
|
360
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate
|
7,041
|
|
|
7,470
|
|
|
475
|
|
|
7,073
|
|
|
75
|
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential
|
2,931
|
|
|
2,931
|
|
|
517
|
|
|
3,917
|
|
|
39
|
|
|
Home equity
|
37
|
|
|
37
|
|
|
21
|
|
|
37
|
|
|
—
|
|
|
Consumer and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Subtotal
|
10,009
|
|
|
10,438
|
|
|
1,013
|
|
|
11,027
|
|
|
114
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
1,670
|
|
|
2,045
|
|
|
—
|
|
|
1,731
|
|
|
13
|
|
|
Commercial tax-exempt
|
4,337
|
|
|
4,337
|
|
|
—
|
|
|
3,253
|
|
|
—
|
|
|
Commercial real estate
|
10,788
|
|
|
16,257
|
|
|
475
|
|
|
11,342
|
|
|
321
|
|
|
Construction and land
|
147
|
|
|
479
|
|
|
—
|
|
|
164
|
|
|
—
|
|
|
Residential
|
12,332
|
|
|
12,704
|
|
|
517
|
|
|
12,382
|
|
|
140
|
|
|
Home equity
|
37
|
|
|
37
|
|
|
21
|
|
|
37
|
|
|
—
|
|
|
Consumer and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
29,311
|
|
|
$
|
35,859
|
|
|
$
|
1,013
|
|
|
$
|
28,909
|
|
|
$
|
474
|
|
_____________________
|
|
|
|
(1)
|
Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2017
|
|
|
Recorded Investment (1)
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
Average Recorded Investment
|
|
Interest Income Recognized while Impaired
|
|
|
(In thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,434
|
|
|
$
|
2,238
|
|
|
n/a
|
|
$
|
1,594
|
|
|
$
|
50
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
n/a
|
|
1,001
|
|
|
80
|
|
|
Commercial real estate
|
1,832
|
|
|
3,453
|
|
|
n/a
|
|
3,098
|
|
|
1,546
|
|
|
Construction and land
|
109
|
|
|
109
|
|
|
n/a
|
|
172
|
|
|
—
|
|
|
Residential
|
9,337
|
|
|
9,709
|
|
|
n/a
|
|
9,033
|
|
|
360
|
|
|
Home equity
|
1,779
|
|
|
1,779
|
|
|
n/a
|
|
413
|
|
|
—
|
|
|
Consumer and other
|
—
|
|
|
—
|
|
|
n/a
|
|
—
|
|
|
—
|
|
|
Subtotal
|
14,491
|
|
|
17,288
|
|
|
n/a
|
|
15,311
|
|
|
2,036
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
242
|
|
|
242
|
|
|
$
|
58
|
|
|
156
|
|
|
4
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate
|
6,855
|
|
|
7,284
|
|
|
362
|
|
|
6,980
|
|
|
322
|
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential
|
828
|
|
|
828
|
|
|
89
|
|
|
2,469
|
|
|
89
|
|
|
Home equity
|
36
|
|
|
36
|
|
|
20
|
|
|
36
|
|
|
1
|
|
|
Consumer and other
|
125
|
|
|
250
|
|
|
125
|
|
|
10
|
|
|
—
|
|
|
Subtotal
|
8,086
|
|
|
8,640
|
|
|
654
|
|
|
9,651
|
|
|
416
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
1,676
|
|
|
2,480
|
|
|
58
|
|
|
1,750
|
|
|
54
|
|
|
Commercial tax-exempt
|
—
|
|
|
—
|
|
|
—
|
|
|
1,001
|
|
|
80
|
|
|
Commercial real estate
|
8,687
|
|
|
10,737
|
|
|
362
|
|
|
10,078
|
|
|
1,868
|
|
|
Construction and land
|
109
|
|
|
109
|
|
|
—
|
|
|
172
|
|
|
—
|
|
|
Residential
|
10,165
|
|
|
10,537
|
|
|
89
|
|
|
11,502
|
|
|
449
|
|
|
Home equity
|
1,815
|
|
|
1,815
|
|
|
20
|
|
|
449
|
|
|
1
|
|
|
Consumer and other
|
125
|
|
|
250
|
|
|
125
|
|
|
10
|
|
|
—
|
|
|
Total
|
$
|
22,577
|
|
|
$
|
25,928
|
|
|
$
|
654
|
|
|
$
|
24,962
|
|
|
$
|
2,452
|
|
_____________________
|
|
|
|
(1)
|
Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.
|
When management determines that it is probable that the Bank will not collect all principal and interest on a loan in accordance with the original loan terms, the loan is designated as impaired.
Loans that are designated as impaired require an analysis to determine the amount of impairment, if any. Impairment would be indicated as a result of the carrying value of the loan exceeding the estimated collateral value, less costs to sell, for collateral dependent loans or the net present value of the projected cash flow, discounted at the loan’s contractual effective interest rate, for loans not considered to be collateral dependent. Generally, shortfalls in the analysis on collateral dependent loans would result in the impairment amount being charged-off to the allowance for loan losses. Shortfalls on cash flow dependent loans may be carried as specific allocations to the general reserve unless a known loss is determined to have occurred, in which case such known loss is charged-off.
Loans in the held for sale category are carried at the lower of amortized cost or estimated fair value in the aggregate and are excluded from the allowance for loan losses analysis.
The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
forgiveness. As of
March 31, 2018
and
December 31, 2017
, TDRs totaled
$13.2 million
and
$13.6 million
, respectively. As of
March 31, 2018
,
$10.9 million
of the
$13.2 million
in TDRs were on accrual status. As of
December 31, 2017
,
$11.1 million
of the
$13.6 million
in TDRs were on accrual status.
Since all TDR loans are considered impaired loans, they are individually evaluated for impairment. The resulting impairment, if any, would have an impact on the allowance for loan losses as a specific reserve or charge-off. If, prior to the classification as a TDR, the loan was not impaired, there would have been a general or allocated reserve on the particular loan. Therefore, depending upon the result of the impairment analysis, there could be an increase or decrease in the related allowance for loan losses. Many loans initially categorized as TDRs are already on nonaccrual status and are already considered impaired. Therefore, there is generally not a material change to the allowance for loan losses when a nonaccruing loan is categorized as a TDR. There were
no
loans that were restructured or defaulted during the three months ended March 31, 2018 or 2017.
Loan participations serviced for others and loans serviced for others are not included in the Company’s total loans. The following table presents a summary of the loan participations serviced for others and loans serviced for others based on class of receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
8,397
|
|
|
$
|
8,484
|
|
|
Commercial tax-exempt
|
19,582
|
|
|
19,805
|
|
|
Commercial real estate
|
43,965
|
|
|
49,783
|
|
|
Construction and land
|
34,081
|
|
|
37,840
|
|
|
Total loan participations serviced for others
|
$
|
106,025
|
|
|
$
|
115,912
|
|
|
|
|
|
|
|
Residential
|
$
|
41,207
|
|
|
$
|
41,440
|
|
|
Total loans serviced for others
|
$
|
41,207
|
|
|
$
|
41,440
|
|
Total loans include deferred loan origination (fees)/ costs, net, of
$7.5 million
and
$6.9 million
as of
March 31, 2018
and
December 31, 2017
, respectively.
7. Allowance for Loan Losses
The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled
$72.9 million
and
$74.7 million
at
March 31, 2018
and
December 31, 2017
, respectively.
The following tables present a summary of the changes in the allowance for loan losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Allowance for loan losses, beginning of period:
|
|
|
|
|
Commercial and industrial
|
$
|
11,735
|
|
|
$
|
12,751
|
|
|
Commercial real estate
|
46,820
|
|
|
50,412
|
|
|
Construction and land
|
4,949
|
|
|
3,039
|
|
|
Residential
|
9,773
|
|
|
10,449
|
|
|
Home equity
|
835
|
|
|
1,035
|
|
|
Consumer and other
|
630
|
|
|
391
|
|
|
Total allowance for loan losses, beginning of period
|
74,742
|
|
|
78,077
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Loans charged-off:
|
|
|
|
|
Commercial and industrial
|
(214
|
)
|
|
—
|
|
|
Commercial real estate
|
(135
|
)
|
|
—
|
|
|
Construction and land
|
—
|
|
|
—
|
|
|
Residential
|
(16
|
)
|
|
(58
|
)
|
|
Home equity
|
—
|
|
|
—
|
|
|
Consumer and other
|
(24
|
)
|
|
—
|
|
|
Total charge-offs
|
(389
|
)
|
|
(58
|
)
|
|
Recoveries on loans previously charged-off:
|
|
|
|
|
Commercial and industrial
|
82
|
|
|
87
|
|
|
Commercial real estate
|
125
|
|
|
50
|
|
|
Construction and land
|
—
|
|
|
—
|
|
|
Residential
|
—
|
|
|
47
|
|
|
Home equity
|
1
|
|
|
—
|
|
|
Consumer and other
|
132
|
|
|
9
|
|
|
Total recoveries
|
340
|
|
|
193
|
|
|
Provision/ (credit) for loan losses:
|
|
|
|
|
Commercial and industrial
|
(160
|
)
|
|
(547
|
)
|
|
Commercial real estate
|
(694
|
)
|
|
702
|
|
|
Construction and land
|
(416
|
)
|
|
158
|
|
|
Residential
|
139
|
|
|
(348
|
)
|
|
Home equity
|
(52
|
)
|
|
(48
|
)
|
|
Consumer and other
|
(612
|
)
|
|
(98
|
)
|
|
Total provision/(credit) for loan losses
|
(1,795
|
)
|
|
(181
|
)
|
|
Allowance for loan losses at end of period:
|
|
|
|
|
Commercial and industrial
|
11,443
|
|
|
12,291
|
|
|
Commercial real estate
|
46,116
|
|
|
51,164
|
|
|
Construction and land
|
4,533
|
|
|
3,197
|
|
|
Residential
|
9,896
|
|
|
10,090
|
|
|
Home equity
|
784
|
|
|
987
|
|
|
Consumer and other
|
126
|
|
|
302
|
|
|
Total allowance for loan losses at end of period
|
$
|
72,898
|
|
|
$
|
78,031
|
|
The allowance for loan losses is an estimate of the inherent risk of loss in the loan portfolio as of the consolidated balance sheet dates. Management estimates the level of the allowance based on all relevant information available. Changes to the required level in the allowance result in either a provision for loan loss expense, if an increase is required, or a credit to the provision, if a decrease is required. Loan losses are charged to the allowance when available information confirms that specific loans, or portions thereof, are uncollectible. Recoveries on loans previously charged-off are credited to the allowance when received in cash.
The provision/ (credit) for loan losses and related balance in the allowance for loan losses for tax-exempt commercial and industrial loans are included with commercial and industrial. The provision/ (credit) for loan losses and related balance in the allowance for loan losses for tax-exempt commercial real estate loans are included with commercial real estate. There were no charge-offs or recoveries, for any period presented, for both commercial and industrial and commercial real estate tax-exempt loans.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the Company’s allowance for loan losses and loan portfolio at
March 31, 2018
and
December 31, 2017
by portfolio segment, disaggregated by method of impairment analysis. The Company had
no
loans acquired with deteriorated credit quality at
March 31, 2018
or
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Individually Evaluated
for Impairment
|
|
Collectively Evaluated
for Impairment
|
|
Total
|
|
|
Recorded investment
(loan balance)
|
|
Allowance for loan losses
|
|
Recorded investment
(loan balance)
|
|
Allowance for loan losses
|
|
Recorded investment
(loan balance)
|
|
Allowance for loan losses
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
2,100
|
|
|
$
|
—
|
|
|
$
|
949,750
|
|
|
$
|
11,443
|
|
|
$
|
951,850
|
|
|
$
|
11,443
|
|
|
Commercial real estate
|
8,472
|
|
|
241
|
|
|
2,456,531
|
|
|
45,875
|
|
|
2,465,003
|
|
|
46,116
|
|
|
Construction and land
|
109
|
|
|
—
|
|
|
165,131
|
|
|
4,533
|
|
|
165,240
|
|
|
4,533
|
|
|
Residential
|
11,538
|
|
|
83
|
|
|
2,725,831
|
|
|
9,813
|
|
|
2,737,369
|
|
|
9,896
|
|
|
Home equity
|
1,795
|
|
|
20
|
|
|
92,536
|
|
|
764
|
|
|
94,331
|
|
|
784
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
188,534
|
|
|
126
|
|
|
188,534
|
|
|
126
|
|
|
Total
|
$
|
24,014
|
|
|
$
|
344
|
|
|
$
|
6,578,313
|
|
|
$
|
72,554
|
|
|
$
|
6,602,327
|
|
|
$
|
72,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Individually Evaluated
for Impairment
|
|
Collectively Evaluated
for Impairment
|
|
Total
|
|
|
Recorded investment
(loan balance)
|
|
Allowance for loan losses
|
|
Recorded investment
(loan balance)
|
|
Allowance for loan losses
|
|
Recorded investment
(loan balance)
|
|
Allowance for loan losses
|
|
|
(In thousands)
|
|
Commercial and industrial
|
$
|
1,676
|
|
|
$
|
58
|
|
|
$
|
938,014
|
|
|
$
|
11,677
|
|
|
$
|
939,690
|
|
|
$
|
11,735
|
|
|
Commercial real estate
|
8,687
|
|
|
362
|
|
|
2,431,533
|
|
|
46,458
|
|
|
2,440,220
|
|
|
46,820
|
|
|
Construction and land
|
109
|
|
|
—
|
|
|
164,881
|
|
|
4,949
|
|
|
164,990
|
|
|
4,949
|
|
|
Residential
|
10,165
|
|
|
89
|
|
|
2,672,368
|
|
|
9,684
|
|
|
2,682,533
|
|
|
9,773
|
|
|
Home equity
|
1,815
|
|
|
20
|
|
|
98,143
|
|
|
815
|
|
|
99,958
|
|
|
835
|
|
|
Consumer
|
125
|
|
|
125
|
|
|
177,512
|
|
|
505
|
|
|
177,637
|
|
|
630
|
|
|
Total
|
$
|
22,577
|
|
|
$
|
654
|
|
|
$
|
6,482,451
|
|
|
$
|
74,088
|
|
|
$
|
6,505,028
|
|
|
$
|
74,742
|
|
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 loans, deposits, and borrowings. As a service to its customers, the Company may utilize
derivative instruments including customer foreign exchange forward contracts to manage its foreign exchange risk, if any.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
Asset derivatives
|
|
Liability derivatives
|
|
Asset derivatives
|
|
Liability derivatives
|
|
|
Balance
sheet
location
|
|
Fair value (1)
|
|
Balance
sheet
location
|
|
Fair value (1)
|
|
Balance
sheet
location
|
|
Fair value (1)
|
|
Balance
sheet
location
|
|
Fair value (1)
|
|
|
(In thousands)
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
Other
assets
|
|
$
|
1,286
|
|
|
Other
liabilities
|
|
$
|
—
|
|
|
Other
assets
|
|
$
|
555
|
|
|
Other
liabilities
|
|
$
|
(80
|
)
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
Other
assets
|
|
22,810
|
|
|
Other
liabilities
|
|
(23,097
|
)
|
|
Other
assets
|
|
18,575
|
|
|
Other
liabilities
|
|
(18,953
|
)
|
|
Foreign exchange contracts
|
Other assets
|
|
1
|
|
|
Other
liabilities
|
|
(1
|
)
|
|
Other assets
|
|
2
|
|
|
Other
liabilities
|
|
(2
|
)
|
|
Risk participation agreements
|
Other
assets
|
|
—
|
|
|
Other
liabilities
|
|
(142
|
)
|
|
Other
assets
|
|
1
|
|
|
Other liabilities
|
|
(108
|
)
|
|
Total
|
|
|
$
|
24,097
|
|
|
|
|
$
|
(23,240
|
)
|
|
|
|
$
|
19,133
|
|
|
|
|
$
|
(19,143
|
)
|
_____________________
|
|
|
|
(1)
|
For additional details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 5: Fair Value Measurements.”
|
The following table presents the effect of the Company’s derivative financial instruments on accumulated other comprehensive income for
the three months ended March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in cash
flow hedging
relationships
|
Amount of gain or (loss) recognized in OCI on derivatives (1)
|
|
Location of (gain) or
loss reclassified from
accumulated OCI
into income
|
Amount of (gain) or loss reclassified from accumulated OCI into income
|
|
Three months ended March 31,
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Interest rate products
|
$
|
836
|
|
|
$
|
67
|
|
|
Interest expense
|
$
|
(21
|
)
|
|
$
|
303
|
|
|
Total
|
$
|
836
|
|
|
$
|
67
|
|
|
|
$
|
(21
|
)
|
|
$
|
303
|
|
____________________
|
|
|
|
(1)
|
There was an additional
$(4) thousand
loss related to the ineffective portion for the three months ended as of
March 31, 2017
. The guidance in ASU 2017-12 requires that amounts in accumulated other comprehensive income that are included in the assessment of effectiveness should be reclassified into earnings in the same period in which the hedged forecasted transactions impact earnings. Transition guidance for this ASU further states that upon adoption, previously recorded cumulative ineffectiveness for cash flow hedges existing at the adoption date be eliminated by means of a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the initial application date. There was a
$5 thousand
reclassification related to the adoption of ASU 2017-12 effective January 1, 2018.
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents the effect of the Company’s derivative financial instruments in the consolidated statements of operations for
the three months ended March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Location of (gain) or
loss reclassified from
accumulated OCI
into income
|
Amount of (gain) or loss recognized in income
on cash flow hedging relationships
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
|
|
|
(In thousands)
|
|
Total amounts of (income) and expense line items presented in the statement of operations in which the effects of fair value or cash flow hedges are recorded
|
Interest expense
|
$
|
(21
|
)
|
|
n/a
|
|
The effects of cash flow hedging:
|
|
|
|
|
|
(Gain) or loss on cash flow hedging relationships in
Subtopic 815-20
|
|
|
|
|
|
Interest contracts - amount of (gain) or loss reclassified from accumulated other comprehensive income into income
|
Interest expense
|
$
|
(21
|
)
|
|
n/a
|
The Bank has agreements with its derivative counterparties that contain provisions where, if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The Bank was in compliance with these provisions as of
March 31, 2018
and
December 31, 2017
.
The Bank also has agreements with certain of its derivative counterparties that contain provisions where, if the Bank fails to maintain its status as a well- or adequately-capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations under the agreements. The Bank was in compliance with these provisions as of
March 31, 2018
and
December 31, 2017
.
Certain of the Bank’s agreements with its derivative counterparties contain provisions where, if specified, events or conditions occur that materially change the Bank’s creditworthiness in an adverse manner, the Bank may be required to fully collateralize its obligations under the derivative instruments. The Bank was in compliance with these provisions as of
March 31, 2018
and
December 31, 2017
.
As of
March 31, 2018
there were
no
termination amounts related to collateral determinations of derivatives in a liability position and as of
December 31, 2017
, the termination amount was
$3.1 million
. The Company has minimum collateral posting thresholds with its derivative counterparties and pledged securities with market values of
$2.2 million
and
$2.3 million
, respectively, as of
March 31, 2018
and
December 31, 2017
, against its obligations under these agreements. The collateral posted is typically greater than the current liability position; however, due to timing of liability position changes at period end, the funding of a collateral shortfall may take place shortly following period end.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements.
To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments. The Company has entered into interest rate swaps to hedge London Interbank Offered Rate (“LIBOR”) -indexed brokered deposits and the LIBOR component of the total cost of certain FHLB borrowings.
To accomplish this objective and strategy, the Bank has entered into a total of
six
interest rate swaps, two during 2017 with effective dates of March 22, 2017 and four during 2013 with effective dates of September 2, 2014, June 1, 2014, March 1, 2014, and August 1, 2013.
The two interest rate swaps entered into during 2017 have notional amounts of $40 million and $60 million with terms of 1.75 and 2.25 years, respectively. These interest rate swaps will effectively fix the Bank’s interest payments on $100 million in interest-related cash outflows attributable to changes in the LIBOR component of FHLB borrowing liabilities at rates of 1.55% and 1.65%, respectively, with a weighted average rate of 1.61%. The borrowings hedged will initially be expected to be issuances and quarterly rollovers of three-month FHLB advances but may also then include future issuances of three-month repurchase agreements with similar characteristics and/or future issuances of either floating or fixed rate borrowings that are issued with the specific intent to replace the quarterly rollovers of the advances or repurchase agreements.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The four interest rate swaps entered into during 2013 each have a notional amount of $25 million and have terms ranging from four to six years from their respective effective dates. The interest rate swaps effectively fix the Bank’s interest payments on $125 million of its LIBOR-indexed deposit liabilities at rates between 1.68% and 2.32%, with a weighted average rate of 1.95%.
Prior to the implementation of ASU 2017-12, which was implemented on a modified retrospective basis on January 1, 2018, the Company used 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 assessed 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 was initially reported in other comprehensive income (“OCI”) (outside of earnings) and subsequently reclassified to earnings in interest and dividend income when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge was recorded as a gain or loss in the consolidated statement of operations as part of fees and other income.
Upon implementation of ASU 2017-12, for derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. A portion of the balance reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made or received on the Company’s interest rate swaps. During the next twelve months, the Company estimates that
$1.1 million
will be reclassified as a decrease in interest expense. The Company monitors the risk of counterparty default on an ongoing basis.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from different services the Bank provides to qualified commercial clients. The Bank offers certain derivative products directly to such clients. The Bank 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. The net effect on earnings is primarily driven by changes in the credit valuation adjustment (“CVA”). The CVA represents the dollar amount of fair value adjustment related to nonperformance risk of both the Bank and its counterparties. Fees earned in connection with the execution of derivatives related to this program are recognized in the consolidated statement of operations in other income.
As of March 31, 2018
and
December 31, 2017
, the Bank had
148
and
142
derivatives, respectively, related to this program, comprised of interest rate swaps and caps, with an aggregate notional amount of
$1.2 billion
as of March 31, 2018 and
$1.1 billion
as of December 31, 2017.
As of March 31, 2018
, there were
four
foreign currency exchange contracts with an aggregate notional amount of
$0.3 million
outstanding related to this program, and as of
December 31, 2017
, there were
three
foreign currency exchange contracts with an aggregate notional amount of
$0.2 million
.
In addition, as a participant lender, the Bank has guaranteed performance on the pro-rated portion of swaps executed by other financial institutions. As the participant lender, the Bank is providing a partial guarantee, but is not a direct party to the related swap transactions.
The Bank has no obligations under the risk participation agreements unless the borrower defaults on their swap transaction with the lead bank and the swap is in a liability position to the borrower. In that instance, the Bank has agreed to pay the lead bank a portion of the swap’s termination value at the time of the default.
The derivative transactions entered into as part of these agreements are not designated, as per ASC 815, as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period.
As of March 31, 2018
, there were
seven
of these risk participation transactions with an aggregate notional amount of
$60.3 million
and, as of
December 31, 2017
, there were
six
of these risk participation transactions with an aggregate notional amount of
$48.0 million
.
The Bank has also participated out to another financial institution a pro-rated portion of
two
swaps executed by the Bank.
The other financial institution has no obligations under the risk participation agreements unless the borrowers default on their swap transactions with the Bank and the swaps are in liability positions to the borrower. In those instances, the other financial institution has agreed to pay the Bank a portion of the swap’s termination value at the time of the default.
The derivative transactions entered into as part of these agreements are not designated, as per ASC 815, as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. The pro-rated notional amount of these risk participation transactions was
$6.1 million
as of both
March 31, 2018
and
December 31, 2017
.
The following table presents the effect of the Bank’s derivative financial instruments not designated as hedging instruments in the consolidated statement of operations for
the three months ended March 31, 2018
and
2017
.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss), net, recognized in income on derivatives
|
|
Derivatives not designated as
hedging instruments
|
|
Location of gain or (loss) recognized in income on derivatives
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
(In thousands)
|
|
Interest rate products
|
|
Other income/ (expense)
|
|
$
|
92
|
|
|
$
|
(322
|
)
|
|
Risk participation agreements
|
|
Other income/ (expense)
|
|
166
|
|
|
—
|
|
|
Total
|
|
|
|
$
|
258
|
|
|
$
|
(322
|
)
|
9. Income Taxes
The following table presents the components of income tax expense for continuing operations, discontinued operations, noncontrolling interests and the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Income from continuing operations:
|
|
|
|
|
Income before income taxes
|
$
|
28,064
|
|
|
$
|
21,549
|
|
|
Income tax expense
|
6,026
|
|
|
6,553
|
|
|
Net income from continuing operations
|
$
|
22,038
|
|
|
$
|
14,996
|
|
|
Effective tax rate, continuing operations
|
21.5
|
%
|
|
30.4
|
%
|
|
|
|
|
|
|
Income from discontinued operations:
|
|
|
|
|
Income before income taxes
|
$
|
2,388
|
|
|
$
|
2,788
|
|
|
Income tax expense
|
690
|
|
|
1,156
|
|
|
Net income from discontinued operations
|
$
|
1,698
|
|
|
$
|
1,632
|
|
|
Effective tax rate, discontinued operations
|
28.9
|
%
|
|
41.5
|
%
|
|
|
|
|
|
|
Less: Income attributable to noncontrolling interests:
|
|
|
|
|
Income before income taxes
|
$
|
1,050
|
|
|
$
|
966
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
Net income attributable to noncontrolling interests
|
$
|
1,050
|
|
|
$
|
966
|
|
|
Effective tax rate, noncontrolling interests
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
Income attributable to the Company
|
|
|
|
|
Income before income taxes
|
$
|
29,402
|
|
|
$
|
23,371
|
|
|
Income tax expense
|
6,716
|
|
|
7,709
|
|
|
Net income attributable to the Company
|
$
|
22,686
|
|
|
$
|
15,662
|
|
|
Effective tax rate attributable to the Company
|
22.8
|
%
|
|
33.0
|
%
|
The effective tax rate for continuing operations for the
three months ended March 31, 2018
of
21.5%
, with related tax expense of
$6.0 million
, was calculated based on a projected 2018 annual effective tax rate. The effective tax rate was more than the statutory rate of
21%
due primarily to state and local income taxes and the accounting for investments in affordable housing projects. These items were partially offset by earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests.
The effective tax rate for continuing operations for the
three months ended March 31, 2017
of
30.4%
, with related tax expense of
$6.6 million
, was calculated based on a projected 2017 annual effective tax rate. The effective tax rate was less
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
than the statutory rate of
35%
due primarily to earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests. These items were partially offset by state and local income taxes.
The effective tax rate for continuing operations for the
three months ended March 31, 2018
is lower than the effective tax rate for the same period in 2017 due primarily to the reduction in the federal corporate tax rate from
35%
to
21%
as a result of the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on December 22, 2017.
10. Noncontrolling Interests
At the Company, noncontrolling interests consist of equity owned by management of the Company’s respective majority-owned affiliates. Net income attributable to noncontrolling interests in the consolidated statements of operations represents the net income allocated to the noncontrolling interest owners of the affiliates. Net income allocated to the noncontrolling interest owners was
$1.1 million
and
$1.0 million
for the
three-month
periods ended
March 31, 2018
and
2017
, respectively.
On the consolidated balance sheets, noncontrolling interests are included as the sum of the capital and undistributed profits allocated to the noncontrolling interest owners. Typically, this balance is included in a company’s permanent shareholders’ equity in the consolidated balance sheets. When the noncontrolling interest owners’ rights include certain redemption features, as described in ASC 480,
Distinguishing Liabilities from Equity
, such redeemable noncontrolling interests are classified as mezzanine equity and are not included in permanent shareholders’ equity. Due to the redemption features of the noncontrolling interests, the Company had redeemable noncontrolling interests held in mezzanine equity in the accompanying consolidated balance sheets of
$16.3 million
and
$17.5 million
at
March 31, 2018
and
December 31, 2017
, respectively. The aggregate amount of such redeemable noncontrolling equity interests are recorded at the estimated maximum redemption values. In addition, the Company had
$4.8 million
and
$5.2 million
in noncontrolling interests included in permanent shareholder’s equity at
March 31, 2018
and
December 31, 2017
, respectively.
Each non-wholly owned affiliate operating agreement provides the Company and/or the noncontrolling interests with contingent call or put redemption features used for the orderly transfer of noncontrolling equity interests between the affiliate noncontrolling interest owners and the Company at either a contractually predetermined fair value; multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA); or fair value. The Company may liquidate these noncontrolling interests in cash, shares of the Company’s common stock, or other forms of consideration dependent on the operating agreement. These agreements are discussed in Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
Generally, these put and call redemption features refer to shareholder rights of both the Company and the noncontrolling interest owners of the Company’s majority-owned affiliate companies. The affiliate company noncontrolling interests generally take the form of limited liability company (LLC) units, profits interests, or common stock (collectively, the “noncontrolling equity interests”). In most circumstances, the put and call redemption features generally relate to the Company’s right and, in some cases, obligation to purchase and the noncontrolling equity interests’ right to sell their equity interests. There are various events that could cause the puts or calls to be exercised, such as a change in control, death, disability, retirement, resignation or termination. The puts and calls are generally to be exercised at the then fair value or a contractually agreed upon approximation thereof. The terms of these rights vary and are governed by the respective individual operating and legal documents.
The following table presents, by affiliate, the noncontrolling interests included as redeemable noncontrolling interests and noncontrolling interests in mezzanine and permanent equity, respectively, at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
(In thousands)
|
|
Anchor (1)
|
$
|
9,574
|
|
|
$
|
9,761
|
|
|
BOS
|
7,590
|
|
|
8,057
|
|
|
DGHM (2)
|
3,983
|
|
|
4,829
|
|
|
Total
|
$
|
21,147
|
|
|
$
|
22,647
|
|
|
Redeemable noncontrolling interests
|
$
|
16,322
|
|
|
$
|
17,461
|
|
|
Noncontrolling interests
|
$
|
4,825
|
|
|
$
|
5,186
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
_____________________
|
|
|
|
(1)
|
Assets and liabilities at Anchor were classified as held for sale on the Company’s consolidated balance sheets at March 31, 2018 and December 31, 2017. The Company completed the sale of Anchor in April 2018.
|
(2) Only includes redeemable noncontrolling interests.
The following tables present a rollforward of the Company’s redeemable noncontrolling interests and noncontrolling interests for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2018
|
|
|
Redeemable noncontrolling interests
|
|
Noncontrolling interests
|
|
|
(In thousands)
|
|
Noncontrolling interests at beginning of period
|
$
|
17,461
|
|
|
$
|
5,186
|
|
|
Net income attributable to noncontrolling interests
|
758
|
|
|
291
|
|
|
Distributions
|
(736
|
)
|
|
(282
|
)
|
|
Purchases/ (sales) of ownership interests
|
167
|
|
|
—
|
|
|
Amortization of equity compensation
|
122
|
|
|
161
|
|
|
Adjustments to fair value
|
(1,450
|
)
|
|
(531
|
)
|
|
Noncontrolling interests at end of period
|
$
|
16,322
|
|
|
$
|
4,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2017
|
|
|
Redeemable noncontrolling interests
|
|
Noncontrolling interests
|
|
|
(In thousands)
|
|
Noncontrolling interests at beginning of period
|
$
|
16,972
|
|
|
$
|
4,161
|
|
|
Net income attributable to noncontrolling interests
|
724
|
|
|
242
|
|
|
Distributions
|
(703
|
)
|
|
(235
|
)
|
|
Purchases/ (sales) of ownership interests
|
66
|
|
|
—
|
|
|
Amortization of equity compensation
|
102
|
|
|
256
|
|
|
Adjustments to fair value
|
71
|
|
|
(431
|
)
|
|
Noncontrolling interests at end of period
|
$
|
17,232
|
|
|
$
|
3,993
|
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
11. Accumulated Other Comprehensive Income
The following table presents a summary of the amounts reclassified from accumulated other comprehensive income/ (loss) for
the three months ended March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of component of accumulated other comprehensive income/ (loss)
|
|
Three months ended March 31,
|
|
Affected line item in
Statement of Operations
|
|
|
2018
|
|
2017
|
|
|
|
|
(In thousands)
|
|
|
|
Adjustment for realized gains/ (losses) on available-for-sale securities, net:
|
|
|
|
|
|
|
|
Pre-tax
|
|
$
|
—
|
|
|
$
|
19
|
|
|
Gain on sale of investments, net
|
|
Tax expense/ (benefit)
|
|
—
|
|
|
8
|
|
|
Income tax expense
|
|
Net
|
|
$
|
—
|
|
|
$
|
11
|
|
|
Net income attributable to the Company
|
|
Net realized gain/ (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
Hedges related to deposits:
|
|
|
|
|
|
|
|
Pre-tax
|
|
$
|
21
|
|
|
$
|
(303
|
)
|
|
Interest expense on deposits
|
|
Pre-tax
|
|
—
|
|
|
(3
|
)
|
|
Other income
|
|
Tax expense/ (benefit)
|
|
7
|
|
|
(126
|
)
|
|
Income tax expense
|
|
Net
|
|
$
|
14
|
|
|
$
|
(180
|
)
|
|
Net income attributable to the Company
|
|
Total reclassifications for the period, net of tax
|
|
$
|
14
|
|
|
$
|
(169
|
)
|
|
|
On January 1, 2018, the Company elected to early adopt ASU No. 2017-12. As a result, the Company reclassified unrealized losses on cash flow hedges of
$5 thousand
from accumulated other comprehensive income/ (loss) to beginning retained earnings.
On January 1, 2018, the Company adopted ASU No. 2016-01. As a result, the Company reclassified unrealized gains on equity securities available-for-sale, net of tax, of
$339 thousand
from accumulated other comprehensive income/ (loss) to beginning retained earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of accumulated other comprehensive income/ (loss)
|
|
|
|
|
Unrealized
gain/ (loss)
on securities
available-for-sale
|
|
Unrealized
gain/ (loss)
on cash flow
hedges
|
|
Unrealized
gain/ (loss)
on other
|
|
Accumulated
other
comprehensive
income/ (loss)
|
|
|
(In thousands)
|
|
Balance at December 31, 2016
|
$
|
(11,194
|
)
|
|
$
|
(605
|
)
|
|
$
|
(749
|
)
|
|
$
|
(12,548
|
)
|
|
Other comprehensive income/ (loss) before reclassifications
|
2,094
|
|
|
36
|
|
|
12
|
|
|
2,142
|
|
|
Amounts reclassified from other comprehensive income/ (loss)
|
(11
|
)
|
|
180
|
|
|
—
|
|
|
169
|
|
|
Other comprehensive income/ (loss), net
|
2,083
|
|
|
216
|
|
|
12
|
|
|
2,311
|
|
|
Balance at March 31, 2017
|
$
|
(9,111
|
)
|
|
$
|
(389
|
)
|
|
$
|
(737
|
)
|
|
$
|
(10,237
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
(8,140
|
)
|
|
$
|
332
|
|
|
$
|
(850
|
)
|
|
$
|
(8,658
|
)
|
|
Other comprehensive income/ (loss) before reclassifications
|
(12,895
|
)
|
|
588
|
|
|
—
|
|
|
(12,307
|
)
|
|
Amounts reclassified from other comprehensive income/ (loss)
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
(14
|
)
|
|
Other comprehensive income/ (loss), net
|
(12,895
|
)
|
|
574
|
|
|
—
|
|
|
(12,321
|
)
|
|
Reclassification due to the adoption of ASUs 2017-12 and 2016-01
|
(339
|
)
|
|
5
|
|
|
—
|
|
|
(334
|
)
|
|
Balance at March 31, 2018
|
$
|
(21,374
|
)
|
|
$
|
911
|
|
|
$
|
(850
|
)
|
|
$
|
(21,313
|
)
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
12. Restructuring
In the fourth quarter of 2014, the Company incurred restructuring charges related to the acquisition of Banyan Partners, LLC. The purpose of this restructuring was to realign the management structure within the Wealth Management and Trust segment. The total cost of the restructuring incurred in Q4 2014 was
$0.7 million
. In 2015, the Company incurred additional restructuring charges to further refine the management structure within the Wealth Management and Trust segment. The total cost of the restructuring charges in 2015 was
$3.7 million
.
In the first and second quarters of 2016, the Company incurred additional costs of
$1.1 million
and
$0.9 million
, respectively, in continued refinement of the management structure within the Wealth Management and Trust segment. The Company does not anticipate any additional restructuring costs related to this plan as of the date of this filing.
Restructuring expenses incurred since the plan of restructuring was first implemented in 2014 totaled
$6.4 million
, all within the Wealth Management and Trust segment.
The following table presents a summary of the restructuring activity
for the three months ended March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Charges
|
|
Total
|
|
|
(In thousands)
|
|
Accrued charges at December 31, 2017
|
$
|
337
|
|
|
$
|
337
|
|
|
Costs paid
|
(254
|
)
|
|
(254
|
)
|
|
Accrued charges at March 31, 2018
|
$
|
83
|
|
|
$
|
83
|
|
|
|
|
|
|
|
Accrued charges at December 31, 2016
|
$
|
1,977
|
|
|
$
|
1,977
|
|
|
Costs paid
|
(618
|
)
|
|
(618
|
)
|
|
Accrued charges at March 31, 2017
|
$
|
1,359
|
|
|
$
|
1,359
|
|
13. Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09
et al
. As stated in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies,” the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606,
Revenue from Contracts with Customers
(“ASC 606”), while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under ASC 605,
Revenue Recognition
.
ASC 606 does not apply to revenue associated with financial instruments, including interest income on loans and investment securities. In addition, certain noninterest income such as fees associated with mortgage servicing rights, late fees, BOLI income, and derivatives are also not in scope of the new guidance. ASC 606 is applicable to noninterest income such as investment management fees, wealth advisory fees, wealth management and trust fees, and certain banking fees. However, the recognition of this revenue did not change upon adoption of ASC 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest income considered in-scope of ASC 606 is discussed below.
Investment management fees
Investment management fees are earned for the management of a series of accounts and funds in which clients invest directly, acting as a sub-advisor to larger investment management companies, or private client account management. The Company’s performance obligation is satisfied over time and the resulting fees are recognized monthly, based upon either the beginning-of quarter (in advance) or quarter-end (in arrears) market value of the assets under management and the applicable fee rate, depending on the terms of the contract. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company may earn performance-based incentives on certain contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item.
All of the investment management fee income on the consolidated statement of operations for the three months ended March 31, 2018 is considered in-scope of ASC 606.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Wealth advisory fees
Wealth advisory fees are earned for providing financial advisory services to clients. The Company’s performance obligation under these contracts is satisfied over time as the financial advisory services are provided. Fees are recognized monthly based either on a fixed fee amount or are based on the quarter-end (in arrears) market value of the assets under management and the applicable fee rate (“asset based fees”), depending on the terms of the contract. Payment on fixed fee contracts is received based on a schedule outlined in the contract, while payment on asset based fees are generally received a few days after quarter end through a direct charge to customers’ accounts. No performance based incentives are earned on wealth advisory contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item. Deferred revenues related to the fixed fee contracts of
$6.2 million
and
$6.6 million
at March 31, 2018 and December 31, 2017, respectively, are recorded on the consolidated balance sheet within the other liabilities line item.
All of the wealth advisory fee income on the consolidated statement of operations for the three months ended March 31, 2018 is considered in-scope of ASC 606.
Wealth management and trust fees
Wealth management fees are earned for providing investment management, retirement plan advisory, family office, and financial planning services to clients. The Company’s performance obligation under these contracts is satisfied over time as the wealth management services are provided. Fees are recognized monthly based on the average monthly, beginning-of-quarter, or, for a small number of clients, end-of-quarter market value of the assets under management and the applicable fee rate, depending on the terms of the contract. No performance based incentives are earned on wealth management contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item.
Trust fees are earned when the Company is appointed as trustee for clients. As trustee, the Company administers the client’s trust and manages the assets of the trust including investments and property. The Company’s performance obligation under these agreements is satisfied over time as the administration and management services are provided. Fees are recognized monthly based on a percentage of the market value of the account as outlined in the agreement. Payment frequency is defined in the individual contracts which primarily stipulate monthly in arrears. No performance based incentives are earned on trust fee contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item.
All of the wealth management and trust fee income on the consolidated statement of operations for the three months ended March 31, 2018 is considered in-scope of ASC 606.
Other banking fee income
The Bank charges a variety of fees to its clients for services provided on the deposit and deposit management related accounts. Each fee is either transaction-based or assessed monthly. The types of fees include service charges on accounts, overdraft fees, maintenance fees, ATM fee charges, credit card charges, and other miscellaneous charges related to the accounts. These fees are not governed by individual contracts with clients. They are charges to clients based on disclosures presented to clients upon opening these accounts along with updated disclosures when changes are made to the fee structures. The transaction-based fees are recognized in revenue when charged to the client based on specific activity on the client’s account. Monthly service/maintenance charges are recognized in the month they are earned and are charged directly to the client’s account.
The Bank also charges fees for treasury activities such as foreign exchange fees for clients with a banking relationship. These fees are recorded when earned via completion of the transaction for the client. The completion of the transaction is deemed to be the performance obligation of the transaction. The related revenue is recorded through a direct charge to the client’s account. There are no individual agreements or contracts with clients as it relates to foreign exchange fees as they are governed by client disclosure statements and the Bank’s internal policies and procedures.
For both three month periods ended March 31, 2018 and 2017,
$0.9 million
of other banking fee income as described above is considered in-scope for ASC 606.
14. Recent Accounting Pronouncements
In May 2014 and at various other dates after May 14, the FASB issued ASU 2014-09
et al.
Under the new standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09
et al
. does not apply to revenue associated with financial instruments such as loans and securities. On January 1, 2018, we adopted ASU 2014-09
et al.
using the modified retrospective transition method, however no cumulative effect adjustment to opening retained
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
earnings as of January 1, 2018 was required. For additional disclosure details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies and Note 13: Revenue Recognition.”
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Instruments - Going Concern
(“ASU 2014-15”). ASU 2014-15 requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management must evaluate whether conditions and events raise substantial doubt about an entity’s ability to continue as a going concern and then whether its plans alleviate that doubt. ASU 2014-15 was effective in 2016 and management performed the required evaluation and concluded that there were no such conditions or events that raised substantial doubt about the Company’s ability to continue as a going concern.
In January 2016, the FASB issued ASU 2016-01. This ASU 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.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This ASU update amends current lease accounting and requires all leases, other than short-term leases, to be reported on the balance sheet through the recognition of a right-of-use asset and a corresponding liability for future lease obligations. The amended guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and will require transition utilizing a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption of this ASU is permitted although the Company does not plan to early adopt. The Company does not anticipate a material impact to revenue or operating expenses as a result of the adoption of this ASU. The Company expects that this ASU will gross up the assets and liabilities on the balance sheet related to the lease assets and liabilities and reduce regulatory capital ratios.
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update is intended to simplify several aspects of the accounting for employee share-based plans such as income tax consequences, classification of awards as either liabilities or equity on the balance sheet, and classification on the statement of cash flows. This ASU was effective for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company adopted this ASU on January 1, 2017. The adoption of this ASU has resulted in, and will continue to result in, fluctuations in the Company’s earnings due to changes in the Company’s stock price between issuance date and settlement date of employee share-based transactions. In addition, the Company anticipates that certain stock options will expire unexercised, due to being out of the money, and this ASU requires the previous tax benefits to be reversed.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments (Topic 326)
(“ASU 2016-13”). This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018. The Company does not plan on adopting early. The impact of this ASU on the Company’s consolidated financial statements will depend on factors at the time of adoption such as the balance and type of loans on the balance sheet, the Company’s loan loss history, and various qualitative factors.
In August 2016, the FASB issued 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. Early adoption was permitted, provided that all of the amendments are adopted in the same period, however the Company did not early adopt. The guidance requires application using a retrospective transition method. This ASU did not have an impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued 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. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. As a result of the adoption of this ASU,
$160 thousand
has been reclassified from salaries and employee benefits expense to other expense within the Company’s consolidated statement of operations for the three months ended March 31, 2017. For the three months ended
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
March 31, 2018,
$135 thousand
is presented within other expense that would have been presented within salaries and employee benefits prior to adoption of ASU 2017-07.
In March 2017, the FASB issued ASU 2017-08,
Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities
(“ASU 2017-08”). This update amends the amortization period for certain purchased callable debt securities held at a premium. The amortization period for the premium on such securities is being shortened to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted, including in an interim period. The guidance requires application using a modified retrospective transition method through a cumulative-effect adjustment to beginning retained earnings. The Company early adopted this ASU as of July 1, 2017, which had a minimal impact on the consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12. The standard is intended to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company elected to early adopt this ASU as of January 1, 2018 with a modified retrospective transition. As a result of implementing this standard, the Company reclassified
$5 thousand
in unrealized losses on derivatives 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.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
This update was issued to address a narrow-scope financial reporting issue that arose as a consequence of the change in the tax law. On December 22, 2017, the U.S. federal government enacted the Tax Act which, among other significant changes, lowers the federal corporate tax rate from
35%
to
21%
effective January 1, 2018. This update requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the Tax Act. ASC 740 requires that the tax effects of changes in tax rates be recognized in income tax expense/ (benefit) attributable to continuing operations in the period in which the law is enacted. As a result, the tax effect of accumulated other comprehensive income does not reflect the appropriate tax rate. The amendments in this ASU eliminate the stranded tax effects associated with the change in the federal corporate income tax rate related to the Tax Act and improve the usefulness of information reported to financial statement users. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted for public business entities for reporting periods for which financial statements have not yet been issued. The Company early adopted this ASU on December 31, 2017 and reclassified
$1.5 million
from accumulated other comprehensive income to retained earnings.
15. Subsequent Event
In
April 2018
,
the Company completed the sale of its ownership interest in Anchor. Anchor’s results remain consolidated in the Company’s results during current and prior periods. The transaction had previously been announced in December 2017. The Company classified the assets and liabilities of Anchor as held for sale at March 31, 2018 and December 31, 2017, which are included with other assets and other liabilities, respectively, on the Company’s consolidated balance sheets.
As a result of the transaction, Boston Private received approximately
$32 million
of cash and will receive future revenue share payments that have a net present value of approximately
$15 million
. During the second quarter, the Company will recognize a tax expense of approximately
$11 million
to
$12 million
attributable to the transaction, which is primarily the result of a book to tax basis difference associated with nondeductible goodwill. The net financial impact will increase the Company’s Tier 1 common equity by approximately
$34 million
to
$35 million
. Accordingly, the results of Anchor after the completion of the sale in April 2018 will not be included in the results of the Company.