Boston Private Financial Holdings 10-Q 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2006
For the transition period from to .
Commission File Number: 0-17089
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (888) 666-1363
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock as of July 31, 2006:
TABLE OF CONTENTS
Consolidated Balance Sheets
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Operations
See accompanying notes to unaudited consolidated financial statements
Consolidated Statements of Changes in Stockholders Equity
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows
See accompanying notes to unaudited consolidated financial statements.
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation and Summary of Significant Accounting Policies
The consolidated financial statements of Boston Private Financial Holdings, Inc. (the Company) include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, which consist of four private banks, and seven registered investment advisers. The Companys four private banks include; Boston Private Bank & Trust Company (Boston Private Bank), a Massachusetts chartered trust company; Borel Private Bank & Trust Company (Borel) and First Private Bank & Trust (FPB), California state banking corporations; and Gibraltar Private Bank & Trust Company (Gibraltar), a federal saving association. The Companys seven registered investment advisers include: Westfield Capital Management Company, LLC (Westfield), Dalton, Greiner, Hartman, Maher & Co., LLC (DGHM), Sand Hill Advisors, Inc. (Sand Hill), Boston Private Value Investors, Inc. (BPVI), KLS Professional Advisors Group, LLC (KLS), and RINET Company LLC (RINET). The Company also owns 100% of Anchor Capital Holdings LLC (Anchor). Anchor is the parent company and 80% owner of two separate operating companies, Anchor Capital Advisers LLC and Anchor/Rusell Capital Advisors LLC, both of which are registered investment advisers. In addition, the Company holds an approximately 28.7% minority interest in Coldstream Holdings, Inc., (Coldstream Holdings) and a 39.7% minority interest in Bingham, Osborn, & Scarborough, LLC (BOS) at June 30, 2006. See Note 6 Subsequent Event, regarding an additional 10% investment in BOS. Coldstream Holdings is the parent company of Coldstream Capital Management Inc., a registered investment adviser and Coldstream Securities Inc., a registered broker dealer. BOS is a registered investment adviser. The Company conducts substantially all of its business through its wholly-owned and majority-owned subsidiaries, Boston Private Bank, Borel, FPB and Gibraltar, (together, the Banks), Westfield, Sand Hill, BPVI, DGHM, KLS, RINET, and Anchor (together, the Registered Investment Advisers). All significant intercompany accounts and transactions have been eliminated in consolidation. The minority investments in Coldstream Holdings and BOS are accounted for using the equity method, and such net investments are included in Other Assets.
The unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, and include all necessary adjustments of a normal recurring nature, which in the opinion of management, are required for a fair presentation of the results and financial condition of the Company. The interim results of consolidated operations are not necessarily indicative of the results for the entire year.
The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (SEC). Certain prior year information has been reclassified to conform to current year presentation.
The Companys significant accounting policies are described in Note 3 in the Companys Annual Report on Form 10-K for the two years ended December 31, 2005 filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies with the exception of stock-based compensation as described below.
At June 30, 2006, the Company has three stock-based compensation plans. These plans encourage and enable the officers, employees, non-employee directors and other key persons of the Company to acquire a proprietary interest in the Company. Prior to January 1, 2006, the Company accounted for these plans under the intrinsic-value based method under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)), using the modified retrospective application method. Under the modified retrospective application method, the Company has adjusted all applicable prior periods to reflect the effects of applying FAS 123(R).
The following table presents the difference between the Companys previously reported financial results and adjustments for FAS 123(R):
Prior to the adoption of FAS 123(R), the Company was required to record tax savings resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. FAS 123(R) requires the cash flows resulting from the excess tax benefits resulting from tax deductions in excess of the compensation costs recognized for those options to be classified as financing cash flows. The $1.6 million, and $1.4 million excess tax savings on stock options exercised classified as a financing cash inflow, for the six months ended June 30, 2006 and 2005, respectively, would have been classified as an operating cash inflow if the Company had not adopted FAS 123(R).
Under the 2004 Stock Option and Incentive Plan (the Plan), the Company may grant options or stock to its officers, employees, non-employee directors and other key persons of the Company for an amount not to exceed 5% of the total shares of common stock outstanding as of the last business day of the preceding fiscal year. Under the Plan, the exercise price of each option shall not be less than 100% of the fair market value of the stock on the date the options are granted except for non-employee directors in which the exercise price shall be equal to the fair market value on the date the stock option is granted. Generally, options expire ten years from the date granted and vest over a three-year graded vesting period for officers and employees and a one-year or less period for non-employee directors. Stock grants generally vest over a one to five-year cliff vesting period.
The Company maintains both a qualified and non-qualified Employee Stock Purchase Plan (the ESPPs) with similar provisions. The non-qualified plan was approved in 2006 and allows for employees of certain subsidiaries that are structured as limited liability companies to participate. Under the ESPPs eligible employees may purchase common stock of the Company at 85 percent of the lower of the closing price of the Companys common stock on the first or last day of a six month purchase period on the NASDAQ® stock exchange. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 percent to 15 percent. Participants have a right to a full reimbursement of ESPP deferrals through the end of the offering period. Such a deferral would result in a reversal of the compensation expense attributed to that participant. There were no shares issued under the plan during the quarter ended June 30, 2006. The Company issues shares under the ESPPs in January and July of each year. As of June 30, 2006, there were 550,023 shares reserved for future issuance, 500,023 under the qualified plan and 50,000 under the non-qualified plan.
Share-based payments recorded in salaries and benefits is as follows:
Not included in the above table is $315 thousand of share-based payments to holding company directors which is recorded in professional services.
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatility is determined based on historical volatility of the Companys stock, historical volatility of industry peers and other factors. The Company uses historical data to estimate employee option exercise behavior, and post-vesting cancellation for use in determining the expected life assumption. The risk-free rate is determined on the grant date of each award using the yield on a U.S. Treasury zero-coupon issue with a remaining term that approximates the expected term for the award. The dividend yield is based on expectations of future dividends paid by the Company and the market price of the Companys stock on the date of grant. Compensation expense is recognized using the straight-line method over the vesting period of the option. Options issued to retirement eligible employees are expensed on the date of grant. Option expense, related to options granted to employees who will become retirement eligible during the vesting period, are amortized over the period until the employee becomes retirement eligible.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
A summary of option activity under the Plan for the six months ended June 30, 2006 is as follows:
* The intrinsic value was calculated by the excess value of the closing price of the Companys common stock on June 30, 2006 as compared to the option exercise price. If the exercise price of the stock option was above the closing price, an intrinsic value of $0 was assigned.
The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $7.60 and $6.28, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was approximately $7.1 million and $4.1 million, respectively. As of June 30, 2006, there was approximately $8.3 million of total unrecognized compensation cost related to stock option arrangements granted under the Plan that is expected to be recognized over a weighted-average period of 2.2 years.
A summary of the Companys nonvested shares as of June 30, 2006 and changes during the six months ended June 30, 2006 is as follows:
The fair value of nonvested shares is determined based on the closing price of the Companys stock on the grant date. The weighted-average grant-date fair value of shares granted during the six months ended June 30, 2006 and 2005 was
$30.52 and $26.80 respectively. At June 30, 2006, there was approximately $6.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under the Plan. That cost is expected to be recognized over a weighted-average period of 1.8 years. The total fair value of shares that vested during the six months ended June 30, 2006 and 2005 was approximately $660 thousand and $569 thousand, respectively.
(2) Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The dilutive effect of convertible securities are reflected in diluted EPS by application of the if-converted method. Under the if-converted method, the interest expense on the convertible securities, net of tax, is added back to net income and the convertible shares are assumed to have been converted at the beginning of the period. The if-converted method is only used if the effect is dilutive.
The following table is a reconciliation of the components of basic and diluted EPS computations for the three months and six months ended June 30, 2006 and 2005, respectively.
(3) Business Segments
The Company has 12 reportable segments: Boston Private Bank, Borel, FPB, Gibraltar, Westfield, DGHM, Sand Hill, BPVI, KLS, RINET, Anchor, and the Holding Company (HC). The financial performance of the Company is managed and evaluated by business segment. The segments are managed separately as each business is a company with different clients, employees, systems, risks, and marketing strategies.
Description of Business Segments
Boston Private Bank pursues a private banking business strategy and is principally engaged in providing banking, investment and fiduciary products to high net worth individuals, their families and businesses in the greater Boston area and New England. Boston Private Bank offers its clients a broad range of deposit and loan products. In addition, it provides investment management and trust services to high net worth individuals and institutional clients. Boston Private Bank specializes in separately managed mid to large cap equity and fixed income portfolios.
Borel serves the financial needs of individuals, their families and their businesses in northern California. Borel conducts a commercial banking business, which includes deposit and lending activities. Additionally, Borel offers trust services and provides a variety of other fiduciary services including investment management, advisory and administrative services to individuals.
FPB provides a range of deposit and loan banking products and services to its customers. Its primary focus is on small and medium sized businesses and professionals located in the Los Angeles and San Bernardino counties. On October 1, 2004, FPB acquired Encino State Bank (Encino). Upon consummation of the acquisition, Encino was merged into FPB with FPB as the surviving entity.
Gibraltar provides private banking and wealth management services to professionals, as well as business owners, entrepreneurs, corporate executives and individuals primarily in Miami-Dade, Monroe, Broward, Collier, and Palm Beach counties.
Westfield serves the investment management needs of pension funds, endowments and foundations, mutual funds and high net worth individuals throughout the United States and abroad. Westfield specializes in separately managed domestic growth equity portfolios in all areas of the capitalization spectrum and acts as the investment manager for several limited partnerships.
DGHM is a value driven investment manager specializing in smaller capitalization equities. The firm manages investments for institutional clients and high net worth individuals in mid, small, and micro cap portfolios. The firm is headquartered in New York City.
Sand Hill provides wealth management services to high net worth investors and select institutions in northern California. The firm manages investments covering a wide range of asset classes for both taxable and tax-exempt portfolios.
BPVI serves the investment needs of institutions and high net worth individuals managing large capitalization US equities and balanced portfolios with a value orientation.
Anchor is the parent holding company of Anchor Capital and Anchor/Russell. Anchor Capital is a value-oriented investment adviser specializing in active investment management for families, trusts, and institutions, including foundations and endowments. Anchor Capital serves clients through its Discretionary Management Accounts division and its Separately Managed Accounts division, and offers four core disciplines, which include balanced, all-cap, mid-cap, and small-cap styles. Anchor Capitals sister company, Anchor/Russell, structures diversified investment management programs for clients utilizing a host of sophisticated management solutions including institutional multi-manager, multi-style, multi-asset mutual funds and Separately Managed Accounts programs sponsored by the Frank Russell Company.
KLS is a wealth management firm specializing in investment management, estate and insurance planning, retirement planning, financial decision making and income tax planning services. The firm is headquartered in New York City.
RINET provides fee-only financial planning, tax planning and investment management services to high net worth individuals and their families in the greater Boston area, New England, and other areas of the United States. Its capabilities include tax planning and preparation, asset allocation, estate planning, charitable planning, planning for employment benefits, including 401(k) plans, alternative investment analysis and mutual fund investing. It also offers an independent mutual fund rating service.
Measurement of Segment Profit and Assets
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Revenues, expenses, and assets are recorded by each segment, and management reviews separate financial statements for each segment.
Reconciliation of Reportable Segment Items
The following tables provide a reconciliation of the revenues, profit, assets, and other significant items of reportable segments as of and for the quarters ended June 30, 2006 and 2005 and for the six months ended June 30, 2006 and 2005.
At and For the Three Months Ended
June 30, 2006
At and For the Three Months Ended
June 30, 2005
At and For the Six Months Ended
June 30, 2006
At and For the Six Months Ended
June 30, 2005
Boston Private Bank, Borel and Gibraltar also provide investment advisory and trust services which are included in the Banks segment profit and are not included with the segment profit of the Registered Investment Advisers.
(4) Excess of Cost Over Net Assets Acquired (Goodwill) and Intangible Assets
The following is an analysis of the activity in goodwill and intangible assets:
The value attributed to the advisory contracts was based on the time period over which the advisory contracts are expected to generate economic benefits. The intangible values of advisory contracts for Sand Hill and BPVI are being amortized on the straight-line method over their estimated useful lives, which range from ten to fifteen years. DGHM, KLS, and Gibraltar advisory contracts are being amortized on the declining balance method. Under the declining balance method for DGHM, approximately 11% of the net advisory contracts will be amortized each year for seven years. The Company expects to amortize the remaining unamortized cost over an eight-year life using the straight-line method. Under the declining balance method for KLS, approximately 10% of the net advisory contracts will be amortized each year for six years. The Company expects to amortize the remaining unamortized cost over a nine-year life using the straight-line method. Under the declining balance method for Gibraltar, approximately 10% of the net advisory contracts will be amortized each year for five years. The Company expects to amortize the remaining unamortized cost over a ten-year life using the straight-line method. The intangible values of advisory contracts for Anchor are comprised of Separately Managed Accounts (SMA), Discretionary Managed Accounts (DMA), and Anchor Russell Capital Accounts (ARCA). The SMA accounts are further segregated into two distinct intangible assets relating to new accounts referred through the broker sponsor network and existing client contracts. The new SMA accounts were valued at $9.9 million and are being amortized on a straight-line method over the estimated useful life of fifteen years. The existing SMA client contracts were valued at $13.2 million, and the DMA and ARCA intangibles were valued at $9.2 million and $1.9 million, respectively. The existing SMA, DMA, and ARCA contracts are being amortized over the estimated useful life of twelve years using the declining balance method. Approximately 10% of the net existing SMA, DMA, and ARCA contracts will be amortized each year for three years. The Company expects to amortize the remaining unamortized costs over a nine year life using the straight-line method.
The value attributable to the core deposit intangibles (CDI) is a function of the expected longevity of the core deposit accounts, and the expected cost savings associated with the use of the existing core deposit base rather than alternative funding sources. The intangible value of CDI is being amortized over fifteen years for FPB and eight years for Encino, included within FPB, on a straight-line basis. The intangible value of CDI for Gibraltar is being amortized on a 175% declining balance for the first seven years. The Company expects to amortize the remaining unamortized cost over an eight-year life using the straight-line method.
The value attributable to the non-compete agreements was based on the expected receipt of future economic benefits protected by clauses in the non-compete agreements that restrict competitive behavior. The intangible value of non-compete agreements is being amortized on a straight-line basis over the contractual lives of the agreements, which range from two to seven years.
The value attributed to the Anchor trade names were based on the relief-from-royalty methodology, which assumes the value of an asset can be measured by estimating the costs of licensing and paying a royalty fee for the asset that the assets owner avoids by owning the assets. The Anchor Capital trade name was valued at $1.6 million. The Company expects to maintain the Anchor Capital trade name and has no plans to retire it. As such, there is no legal limitation to its remaining useful life and the Company does not plan to amortize this asset. The value attributed to the right to use the Anchor/Russell name was $300 thousand and was valued using the same methodology as described above. Anchor expects to maintain and use the Anchor/Russell name into the foreseeable future. As such, the Company does plan to amortize this asset.
The annual amortization expense for the intangibles above is estimated to be $13.3 million for 2006, $13.4 million for 2007, $12.1 million for 2008, $11.1 million for 2009, and $10.2 million for 2010 for an aggregate of $60.1 million over the next five years. The goodwill is expected to be deductible for tax purposes except for Gibraltar and FPB, which includes Encino, Anchor, and a portion of BPVI.
(5) Recent Accounting Developments
On December 16, 2004, the Financial Accounting Standards Board (the FASB) issued Statement No. 123 (Revised 2004), Share-Based Payment (FAS 123(R)) which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. FAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends FASB Statement No. 95, Statement of Cash Flows. The statement requires companies to expense the fair value of employee stock options, certain employee stock purchase plans and other forms of stock-based compensation. The Company was required to adopt FAS 123(R) effective on January 1, 2006. See Note 1 for the effects of the adoption.
Emerging Issues Task Force (EITF) Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, (EITF 04-5) and FASB Staff Position No. SOP 78-9-1, Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5 were ratified by the FASB in June 2005. EITF 04-5 provides a framework for addressing when a general partner controls a limited partnership or similar entity and should therefore consolidate the partnership. The FASB Staff Position (FSP) eliminates the concept of important rights in AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures and replaces it with the concepts of kickout-rights and substantive participating rights as defined in EITF 04-5. This issue was effective June 29, 2005 for new or modified arrangements and no later than for fiscal years beginning after December 15, 2005 for unmodified existing arrangements. The adoption of this standard did not have a material impact on the Companys financial condition or results of operations.
In January 2003, the FASB ratified EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which requires certain quantitative and qualitative disclosures with respect to investments accounted for under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The consensus reached on this Issue is effective for reporting of periods beginning after June 15, 2004, except for the measurement and recognition guidance contained in paragraphs 10-20, which was deferred by FSP EITF Issue No. 03-1-1, The Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, posted on September 30, 2004. The guidance in paragraphs 10-20 of EITF 03-1 has subsequently been replaced by guidance in FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Although the guidance in EITF 03-1 has been replaced by the FSP, the requirement to recognize other-than-temporary impairments under other authoritative guidance and the disclosure requirements of EITF 03-1 continue to be effective. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005. The adoption of this standard did not have a material impact on the Companys financial condition or results of operations.
In May 2005, the FASB issued Statement No. 154, Accounting for Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB No. 3 (FAS 154). This statement requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. FAS 154s retrospective-application requirement replaces a previous requirement to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS 154 also distinguishes between retrospective application for changes in accounting principle and restatement for correction of an error. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard did not have a material impact on the Companys financial condition or results of operations.
In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instrument, (FAS 155). FAS 155 amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities and FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments, and allows an entity to remeasure at fair value a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation from the host, if the holder irrevocably elects to account for the whole instrument on a fair value basis. FAS 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. Management does not believe the adoption of FAS 155 will have a material impact on the Companys financial position or results of operations.
In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets An Amendment of FASB Statement No. 140 (FAS 156). FAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. FAS 156 is effective four fiscal years that begin after September 15, 2006. The Company does not believe that the adoption of FAS 156 will have a material impact on the Companys financial condition or results of operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty with respect to income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109 Accounting for Income Taxes by providing guidance on the recognition, derecognition and classification of taxes, interest and penalties and the accounting during interim periods of uncertain tax positions including financial statement disclosure. This interpretation will become effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact the interpretation will have on the financial statements and believes that, when adopted, this interpretation will not have a material impact on the Companys financial condition or results of operations.
(6) Subsequent Event
On August 2, 2006 the Company announced the increase in its investment in BOS to approximately a 49.7% interest. Over the next 2 years, the Company has the option to increase its investment interest an additional 10% per year, up to approximately 70%. The Company completed its initial 20% investment in BOS in February 2004 and purchased the additional 10% interests in August 2004, and August 2005. The Companys investment was slightly diluted as a result of the admission of a new principal to the partnership effective January 1, 2005.
RESULTS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarter Ended June 30, 2006
The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, including statements regarding our strategy, effectiveness of investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth in assets, deposits and results of operations, success of acquisitions, future operations, market position, financial position, and prospects, plans and objectives of management, are forward-looking statements. These forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. Our actual results could differ materially from those projected in the forward-looking statements as the result of, among other factors, changes in interest rates, changes in the securities or financial markets, a deterioration in general economic conditions on a national basis or in the local markets in which we operate, including changes which adversely affect borrowers ability to service and repay our loans, changes in loan defaults and charge-off rates, reduction in deposit levels necessitating increased borrowing to fund loans and investments, the risk that difficulties will arise in connection with the integration of the operations of acquired businesses with the operations of our banking or investment management businesses, the passing of adverse government regulation, and changes in assumptions used in making such forward looking statements. These forward-looking statements are made as of the date of this report and we do not intend or undertake to update any such forward-looking statement.
Critical Accounting Policies
Critical accounting policies are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:
Allowance for Loan Losses
The allowance for loan losses is established through a charge to operations. When management believes that the collection of a loans principal balance is unlikely, the principal amount is charged against the allowance. Recoveries on loans that have been previously charged-off are credited to the allowance as amounts are received.
The allowance for loan losses is determined using a systematic analysis and procedural discipline based on historical experience, product types, and industry benchmarks. The allowance is segregated into three components: general, specific and unallocated. The general component is determined by applying coverage percentages to groups of loans based on risk. A system of periodic loan reviews is performed to assess the inherent risk and assign risk ratings to each loan individually. Coverage percentages applied are determined based on industry practice and managements judgment. The specific component is established by allocating a portion of the allowance for loan losses to individual classified loans on the basis of specific circumstances and assessments. The unallocated component supplements the first two components based on managements judgment of the effect of current and forecasted economic conditions on borrowers abilities to repay, an evaluation of the allowance for loan losses in relation to the size of the overall loan portfolio, and consideration of the relationship of the allowance for loan losses to nonperforming loans, net charge-off trends, and other factors. While this evaluation process utilizes historical and other objective information, the classification of loans and the establishment of the allowance for loan losses rely to a great extent on the judgment and experience of management.
While management evaluates currently available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institutions allowance for loan losses. Such agencies may require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Valuation of Goodwill/Intangible Assets and Analysis for Impairment
For acquisitions under the purchase method of accounting, assets acquired and liabilities assumed are required to be recorded at their fair value. Intangible assets acquired are primarily comprised of investment management advisory contracts and core deposit intangibles. The values of these intangible assets were estimated using valuation techniques, based on discounted cash flow analysis. They are being amortized over the period the assets are expected to contribute to the cash flows of the Company, which reflect the expected pattern of benefit. These intangible assets are being amortized, generally using an accelerated method, based upon the projected cash flows the Company will receive from the customer relationships during the estimated useful lives.
These intangible assets are subject to impairment tests in accordance with Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The carrying value of the investment advisory contracts and core deposit intangibles are reviewed for impairment on an annual basis, or sooner, whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable. A review of the amount of assets under management is made to determine if there has been a reduction since acquisition that could indicate possible impairment of the advisory contracts. Deposit levels and interest rate changes are also reviewed for banks with core deposit intangibles to determine if there is potential impairment. Impairment would be recognized if the carrying value exceeded the sum of the undiscounted expected future cash flows from the intangible assets. Impairment would result in a write-down to the estimated fair value based on the anticipated discounted future cash flows.
The Company makes certain estimates and assumptions that affect the determination of the expected future cash flows from the advisory contracts and the core deposit intangibles. These estimates and assumptions include account attrition, market appreciation for assets under management, discount rates and anticipated fee rates, interest rates, projected costs and other factors. Significant changes in these estimates and assumptions could cause a different valuation for the intangible assets. Changes in the original assumptions could change the amount of the intangible recognized and the resulting amortization. Subsequent changes in assumptions could result in recognition of impairment of the intangible assets.
Goodwill is recorded as part of the Companys acquisitions of businesses where the purchase price exceeds the fair market value of the net tangible and identifiable intangible assets. Goodwill is not amortized, but rather is subject to ongoing periodic impairment tests upon the occurrence of significant adverse events such as the loss of key clients or management and at least annually in accordance with Statement of Financial accounting Standards No. 142, Goodwill and Other Intangible Assets. Goodwill was reviewed during the fourth quarter of 2005 using discounted cash flow analysis and no indicators of impairment were noted. No additional testing or analysis was required in the second quarter of 2006.
The discounted cash flow analysis is based on the projected net cash flows discounted at a rate that reflects both the current return requirements of the market and the risks inherent in the specific entity that is being tested. Significant assumptions used to test goodwill for impairment include estimated discount rates and the timing and amount of projected cash flows. These assumptions are susceptible to change based on changes in economic conditions and other factors. Any change in the estimates which the Company uses to determine the carrying value of the Companys goodwill and identifiable intangible assets, or which otherwise adversely affects their value or estimated lives could adversely affect our results of operations.
At June 30, 2006, the Company has three stock-based compensation plans, which are described more fully in Note 1 Basis of Presentation and Summary of Significant Accounting Policies. These plans encourage and enable the officers, employees, non-employee directors and other key persons of the Company to acquire a proprietary interest in the Company. Prior to January 1, 2006, the Company accounted for these plans under the intrinsic-value based method under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (FAS 123(R)), using the modified retrospective application method.
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that factors in assumptions for expected volatility, expected dividend yield, expected term (in years), and a risk-free rate assumption.
Under the modified retrospective application method, the Company adjusted the 2004 and 2005 financial statements to reflect the effects of applying FAS 123(R) and has recorded the cumulative effect of the change upon adoption of FAS 123(R) on periods prior to those in the carrying amounts of assets and equity as of January 1, 2004.
The Company accounts for income taxes by deferring income taxes based on estimated future tax effects of temporary differences between the tax and book basis of assets and liabilities considering enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in the Companys consolidated balance sheets. The Company also will assess the likelihood that any deferred tax assets will be recovered from future taxable income and establish a valuation allowance if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Although the Company has determined that a valuation allowance is not required for deferred tax assets at June 30, 2006, there is no guarantee that these assets will ultimately be realized.
Due to the continued historical ability of the Company to generate taxable income, management believes it is more likely than not, that the balance of deferred tax assets at June 30, 2006 is realizable and no valuation allowance is needed.
The Company is a wealth management company that offers comprehensive financial services to high net worth individuals, families, businesses, and select institutions. This Executive Summary provides an overview of the most significant aspects of our operating subsidiaries and the Companys operations in the second quarter of 2006. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following.
On October 1, 2005 and June 1, 2006 the Company acquired Gibraltar and Anchor (together, the Acquisitions), respectively. The financial results of the acquired entities have had a significant impact on our results of operations for the three months and six months ended June 30, 2006 and should be considered in comparing the Companys results of operations. The following table provides additional detail for these acquisitions. The assets, revenues, expenses and assets under management and advisory (AUM) of the entities acquired, are disclosed in Note 3Business Segments.
The Company, through its 11 wholly-owned and majority-owned subsidiaries offers a full range of wealth management services through three core financial disciplines: private banking, wealth advisory, and investment management. Within the private banking discipline, the operating segments are Boston Private Bank, Borel, FPB and Gibraltar. Within the wealth advisory and investment management disciplines, the operating segments are Westfield, DGHM, Sand Hill, BPVI, KLS, RINET, and Anchor. The Company also owns a minority interest in BOS and Coldstream Holdings.
At June 30, 2006, Boston Privates consolidated subsidiaries managed or advised approximately $27.7 billion in client investment assets and had balance sheet assets of approximately $5.3 billion.
During the second quarter of 2006, through growth in its organic businesses, and the acquisition of Gibraltar and Anchor, the Company earned revenues of $83.5 million, an increase of 37.7% over revenues of $60.7 million for the same
period in 2005. Total operating expenses, including minority interest, was $62.8 million for the second quarter of 2006, a 44.1% increase over total operating expenses of $43.6 million, including minority interest, for the same period in 2005. Net income for the second quarter of 2006 was $12.3 million, or $0.33 per diluted share, as compared to net income for the second quarter of 2005 of $10.3 million, or $0.35 per diluted share. The Company adopted FAS 123(R), using the modified retrospective application, on January 1, 2006. Prior period results have been adjusted for purposes of comparison. See Note 1 Basis of Presentation and Summary of Significant Accounting Policies, for more details.
Gibraltar and Anchor had revenues of $15.6 million and $2.3 million, respectively for the three months ending June 30, 2006. Total operating expenses and minority interest in the second quarter of 2006 for Gibraltar and Anchor were $11.0 million, and $1.9 million, respectively. Gibraltar and Anchor had net income of $2.3 million and $244 thousand, respectively in the second quarter of 2006. Included in net interest income, which is a component of revenue, is interest expense on the junior subordinated debentures issued and assumed in the Gibraltar acquisition of $1.9 million. Net of estimated taxes, the impact on net income from the junior subordinated debentures interest expense, was $1.1 million for the three months ending June 30, 2006.
In the second quarter of 2006, the Banks had significant loan growth and decreased deposits. The decrease in deposits caused the Banks to fund their loan growth by reducing liquidity and in some cases by additional borrowings. The funding of the new loans with higher priced borrowings has a negative impact on the Companys net interest margin. The increased loan growth caused an increase in the provision for loan losses of $541 thousand as compared to the 1st quarter of 2006.
Other items that impacted the Companys results in the second quarter 2006 includes; severance expenses of approximately $600 thousand, stock compensation expenses for the Companys Board of Directors annual retainer payment of approximately $614 thousand, and the write-off of an equity investment for approximately $136 thousand. In addition, the Boston FHLB has not yet declared their dividend payment for the second quarter 2006, as a result Boston Private Bank did not record the related revenue in the second quarter 2006. The dividend Boston Private Bank recorded in the 1st quarter of 2006 was approximately $240 thousand.
The private banking segment has benefited from an increase in net interest margin, on a fully taxable equivalent basis, from 3.77% in the second quarter of 2005 to 3.92% in the second quarter of 2006. The increase from 2005 was due to the acquisition of Gibraltar as well as the increase in short-term interest rates. Net interest margins are down 10 basis points from the first quarter of 2006. Future net interest margins will be affected by the growth of the Banks interest bearing assets and the corresponding funding as well as the interest rate yield curve.
The investment management business has benefited from the acquisition of Anchor in the second quarter of 2006. Assets under management and advisory increased $4.8 billion to $27.7 billion at June 30, 2006, from $22.9 billion at March 31, 2006. Anchor contributed $5.4 billion of the increase, which was partially offset by market value decline of $594 million and net outflows for the quarter of $120 million, or 2% on an annualized basis, from the Banks and investment management firms, excluding the wealth advisory firms KLS and Rinet. The Companys earnings on assets under management is affected by net new business flows as well as the equity market.
The return on average assets decreased 23 basis points to 0.95% for the quarter ended June 30, 2006 compared to 1.18% during the same period in 2005. Average assets increased $1.7 billion, or 48.8%, from $3.5 billion in the second quarter of 2005 to $5.2 billion in the second quarter of 2006. The increase in average assets was primarily due to the acquisition of Gibraltar.
The return on average equity decreased 344 basis points to 8.62% for the quarter ended June 30, 2006 compared to 12.06% during the same period in 2005. The decrease was primarily due to additional equity issued in connection with the Companys recent acquisitions. Average equity increased $230.1 million, or 67.6%, from $340.3 million in the second quarter of 2005 to $570.4 million in the second quarter of 2006.
The effective tax rate for the second quarter of 2006 was 35.5% and the related income tax expense was $6.8 million. The effective tax rate for the same period in 2005 was 37.2% and the related income tax expense was $6.1 million. The decrease in the Companys effective tax rate was due to state taxes, incentive stock options and the increased earnings from tax-free state and municipal investments as a percentage of total pre-tax earnings.
On June 1, 2006 the Company successfully completed the acquisition of an 80% interest in each of Anchor Capital and Anchor/Russell. The acquisition was effected through the establishment of Anchor Capital Holdings LLC, a newly created holding company that owns 80% each of Anchor Capital and Anchor/Russell. The Company owns 100% of Anchor Capital Holdings LLC and the financial results of Anchor Capital and Anchor Russell are consolidated for financial reporting purposes. At the closing of the transaction, the Company paid approximately $56.5 million, in a combination of cash and common stock, which represents approximately 68% of the total consideration. The remaining 32% will be made in payments of Boston Private common stock over five years. The amount of these future payments is not determinable beyond a reasonable doubt and contingent upon Anchor achieving certain earnings goals through a five-year earn-out period. The consideration paid at closing consisted of approximately 1.0 million shares of newly issued Boston Private common stock (of which 278,465 have been registered for resale on Form S-3 effective May 31, 2006) and approximately $25.9 million in cash. The Company completed the initial purchase price allocation which resulted in the assignment of $31.5 million to Goodwill and $37.8 million to intangible assets. See Footnote
4 for more information on the intangibles assets acquired. The acquisition gives the Company access to the rapidly growing Separately Managed Accounts (SMA) market, expands the Companys investment value disciplines and enhances asset allocation services within the Company.
Management will continue to focus on identifying attractive acquisition candidates in areas where the Company can build regional platforms from which to serve the targeted client base. The Company will continue to look at acquisition targets with an eye towards further geographic and business line diversification. By diversifying geographically, the Company mitigates the impact of regional economic risks. By diversifying by revenue stream between the three distinct lines of business, the Company expects to achieve more stable revenue and earnings. And lastly, with any acquisition, management will consider the types of assets under management or advisory and the diversification impact on our existing investment management concentrations.
Total Assets. Total assets increased $160.5 million, or 3.1%, to $5.3 billion at June 30, 2006 from $5.1 billion at December 31, 2005. This increase was primarily driven by organic growth in loans which were funded by reducing liquidity, and additional Federal Home Loan Bank borrowings.
Investments. Total investments (consisting of cash and cash equivalents, investment securities, and stock in Federal Home Loan Banks and Bankers Bank) decreased $236.7 million or 24.7% to $720.5 million, or 13.6% of total assets, at June 30, 2006, from $957.2 million, or 18.7% of total assets, at December 31, 2005. The Banks acquire securities for various purposes such as providing a source of income through interest income, or subsequent sale of the securities, liquidity, and to manage interest rate and liquidity risk. Due to the decrease in deposits in the second quarter of 2006, investments decreased to provide liquidity for additional loan funding.
The following table is a summary of investment securities:
Loans held for sale. Loans held for sale decreased $4.8 million, or 36.9%, during the first six months of 2006 to $8.1 million from $12.9 million at December 31, 2005. This decrease was primarily the result of the timing of loan sales, the type of residential loans originated at the Banks, and in the case of FPB, liquidity and the availability of this product from an unaffiliated loan broker. The Banks generally sell their fixed rate residential loan originations and hold all variable rate loans to mitigate interest rate risk.
Loans. Total portfolio loans increased $326.7 million, or 9.0%, during the first six months of 2006 to $4.0 billion, or 74.8% of total assets, at June 30, 2006, from $3.6 billion, or 70.8% of total assets, at December 31, 2005. This increase was primarily driven by organic growth of commercial (including construction) and residential loans which increased $158.2 million, or 7.8%, and $144.0 million, or 10.8%, respectively. Commercial (including construction) loans accounted for 55.7% of the total loan portfolio, residential loans 37.5%, and home equity and other consumer loans 6.8%, as compared to 56.3%, 36.9%, and 6.8% respectively at December 31, 2005. The shift in loan mix from commercial to residential is driven by the Companys acquisition of Gibraltar.
Risk Elements. Total non-performing assets, which consist of non-accrual loans and other real estate owned (OREO), decreased $2.1 million during the first six months of 2006 to $5.8 million or 0.11% of total assets, at June 30, 2006, from $7.9 million, or 0.15% of total assets, at December 31, 2005. There was no OREO at June 30, 2006 or December 31, 2005. The decrease in non-accrual loans was primarily driven by payoffs on the previously reported non-accrual loans and non-accrual loans returning to performing status.
At June 30, 2006, loans with an aggregate balance of $7.7 million, or 0.19% of total loans, were 30-89 days past due, a decrease of $224 thousand, as compared to $7.9 million at December 31, 2005. The Company believes most of these loans are adequately secured and the payment performance of these borrowers varies from month to month.
Non-performing assets and delinquent loans are impacted by factors such as the economic conditions in our Banks locations, interest rates, and seasonality. These factors are generally not within the Companys control.
We discontinue the accrual of interest on a loan when the collectibility of principal or interest is in doubt. In certain instances, loans that have become 90 days past due may remain on accrual status if the Company believes that full principal and interest due on the loan is collectible.
Allowance for Credit Losses. The allowance for loan losses and the reserve for unfunded loan commitments when combined are referred to as the allowance for credit losses. The allowance for loan losses is reported as a reduction of outstanding loan balances and the reserve for unfunded loan commitments is included within other liabilities. At June 30, 2006, the allowance for credit losses totaled $45.4 million and was comprised of the allowance for loan losses of $39.9 million and the reserve for unfunded loan commitments of $5.5 million.
The following table is an analysis of the Companys allowance for loan losses for the periods indicated:
The following table is an analysis of the Companys reserve for unfunded loan commitments for the periods indicated:
The decline in the percentage of allowance for loan losses and allowance for credit losses to ending gross loans at June 30, 2006 compared to June 30, 2005 was primarily due to the acquisition of Gibraltar. Gibraltars loan portfolio has a high proportion of residential loans, which generally have a lower allowance than commercial loans.
While management evaluates currently available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institutions allowance for loan losses and carrying amounts of OREO. Such agencies may require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Goodwill. Goodwill increased $31.4 million during the first six months of 2006 to $318.1 million from $286.8 million. The increase was primarily due to the Anchor acquisition.
Intangible Assets. Intangible assets increased $31.7 million during the first six months of 2006 to $129.3 million from $97.7 million at December 31, 2005. The increase was primarily due to the acquisition of Anchor, offset by the amortization recorded during the first six months of 2006.
Other Assets. Other assets increased $11.5 million during the first six months of 2006. The increase is primarily due to the acquisition of Anchor and the change in the balance of current and deferred tax assets.
Deposits. The Company experienced a decrease in total deposits of $86.7 million, or 2.3%, during the first six months of 2006, to $3.7 billion, or 69.4% of total assets, at June 30, 2006, from $3.7 billion, or 73.2% of total assets, at December 31, 2005. The decrease in deposits can be attributed to customers transferring a portion of their deposit balances to higher yielding money market mutual funds, lower escrows due to a slow down in the South Florida real estate market, and timing of venture capital funds deposit and subsequent capital calls.
The following table shows the composition of our deposits at June 30, 2006 and December 31, 2005:
Borrowings. Total borrowings (consisting of Federal Home Loan Bank (FHLB) borrowings, securities sold under agreements to repurchase (repurchase agreements), junior subordinated debentures, and federal funds purchased) increased $184.2 million, or 26.2%, during the first half of 2006 to $887.6 million from $703.4 million at December 31, 2005. FHLB Borrowings increased $141.8 million, or 39.2%. To better manage interest rate risk, Boston Private Bank utilizes FHLB fixed rate borrowings to fund a portion of its loans. Due to the decrease in deposits in the second quarter of 2006, Boston Private Bank and Gibraltar used additional FHLB borrowings to fund a portion of loan demand. Repurchase Agreements decreased $562 thousand, or 0.5%.
The following table shows the composition of our borrowings at June 30, 2006 and December 31, 2005:
Deferred Acquisition Obligations. A portion of the purchase price for business acquisitions is often deferred and the deferred payments are contingent upon future performance of the entity being acquired. The obligations, which are recorded at the acquisition date for contingencies that are determinable beyond a reasonable doubt, are recorded at their estimated present value and the imputed interest accrued is included in Other Operating Expenses. Deferred acquisition obligations were $13.4 million at June 30, 2006, a decrease of $4.2 million, or 23.9%, from December 31, 2005. This decrease was primarily due to the payments made during the first six months of 2006, pursuant to the terms of the acquisition agreement.
Other liabilities. Other liabilities increased $5.0 million during the first half of 2006. The increase is primarily due to the acquisition of Anchor.
Liquidity. Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers as well as to earnings enhancement opportunities in a changing marketplace. Primary sources of liquidity consist of investment management fees, wealth advisory fees, deposit inflows, loan repayments, borrowed funds, and cash flows from investment securities. These sources fund our lending and investment activities.
Management is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. In general, the Company believes that it maintains a relatively high degree of liquidity. At June 30, 2006, liquid assets consisting of cash and cash equivalents and investment securities available-for-sale amounted to $669.2 million, or 12.7% of total assets of the Company. This compares to $885.1 million, or 17.3% of total assets, at December 31, 2005. The decrease in liquidity is primarily due to the decrease in deposits and the increase in loans in the second quarter 2006.
Liquidity of the Company on an unconsolidated basis (which the Company refers to as the Holding Company) should also be considered separately from the consolidated liquidity since there are restrictions on the ability of the Banks to distribute funds to the Holding Company. The Holding Companys primary sources of funds are dividends and distributions from its subsidiaries, proceeds from the issuance of its common stock, a $75.0 million committed line of credit, and access to the capital markets. The purpose of the line of credit is to provide short-term working capital to the Holding Company and its subsidiaries, if necessary. The Company is required to maintain various loan covenants in conjunction with the revolving credit agreement. As of June 30, 2006 the Company was in compliance with these covenants and there were no outstanding borrowings under this line of credit. In the short-term, management anticipates the cost of borrowing under the line of credit will be lower than the cost of accessing the capital markets to issue additional common stock. However, it may be necessary to raise capital to meet regulatory requirements even though it would be less expensive to borrow the cash needed.
At June 30, 2006, the estimated remaining cash outlay related to the Companys deferred purchase obligations was approximately $10.8 million. The timing of these payments varies depending on the specific terms of each business acquisition agreement. Variability exists in these estimated cash flows because certain payments may be based on amounts yet to be determined, such as earn out agreements that may be based on adjusted earnings, and/or revenues on selected AUM. These
contingent deferred purchase payments are typically spread out over three to five years. Additionally, the Company, along with DGHM and KLS, have put and call options that would require the Company to purchase (and the principals of DGHM and KLS to sell) the remaining minority ownership interests in these two companies within the next five years at the then fair market value. The future fair market value of the remaining ownership interests in DGHM and KLS cannot be reasonably estimated at this time.
Upon the acquisition of Anchor, the Company sold profits interests (i.e. LLC points) to certain existing Anchor employees at fair value. Generally, each profits interest holder has the right to put his or her LLC points to the Company and the Company has an obligation to purchase the LLC points at fair market value if the points interest holders employment with the Company is terminated for certain reasons. The Company has the right to call the LLC points of a profits interest holder whose employment is terminated for any reason. Under certain circumstances, but not limited to termination for cause or resignation without the required notice, the exercise price of the put or call is equal to 50% of the then fair value of the LLC points. The profits interest holders can also choose to sell their LLC points to other profits interest holders at fair value, subject to certain restrictions.
The Company is required to pay interest quarterly on its trust preferred debt. The estimated cash outlay for the interest payments in 2006 is approximately $13.0 million. The Company presently plans to pay cash dividends on its common stock on a quarterly basis. Based on the current dividend rate, the Company estimates the amount to be paid out in 2006 for dividends to shareholders will be approximately $11.5 million.
The Company believes that the Holding Company has adequate liquidity to meet its commitments for the foreseeable future. Liquidity at the Holding Company is dependent upon the liquidity of its subsidiaries. The Company believes that the subsidiaries are well capitalized, and the Banks also have access to borrowings from the Federal Reserve Bank and other sources as more fully described in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.
The Companys stockholders equity at June 30, 2006 was $600.3 million, or 11.4% of total assets, compared to $539.3 million, or 10.5% of total assets at December 31, 2005. The increase was primarily the result of the Companys current year earnings, equity issued in the Anchor acquisition, proceeds from options exercised, including tax benefits, if any, and common stock issued in connection with stock compensation, the Anchor acquisition, and deferred acquisition payments. These increases were partially offset by dividends paid to stockholders and the change in accumulated other comprehensive income.
As a bank holding company, the Company is subject to a number of regulatory capital requirements that have been adopted by the Federal Reserve Board. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. For example, under capital adequacy guidelines and the regulatory framework for prompt corrective action, Boston Private Bank, Borel, FPB and Gibraltar must each meet specific capital guidelines that involve quantitative measures of each of their respective assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Boston Private Banks, Borels, FPBs and Gibraltars respective capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Similarly, the Company is also subject to capital requirements administered by the Federal Reserve Bank with respect to certain non-banking activities, including adjustments in connection with off-balance sheet items.
The following table presents actual capital amounts and regulatory capital requirements as of June 30, 2006 and December 31, 2005:
Results of Operations for the Three Months Ended June 30, 2006
Net Income. The Company recorded net income of $12.3 million, or $0.33 per diluted share for the quarter ended June 30, 2006 compared to net income of $10.3 million, or $0.35 per diluted share, for the quarter ended June 30, 2005.
The following table sets forth the change in the Companys statement of operations excluding the results of operations for the Acquisitions and the interest expense on the junior subordinated debentures issued and assumed in connection with the Gibraltar acquisition.
Net Interest Income. Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference of the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on a fully taxable-equivalent (FTE) basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities. For the second quarter of 2006, net interest income was $43.4 million, an increase of $15.1 million, or 53.4%, over the same period of 2005. This change was due to the increase in the average balance primarily through the acquisition of Gibraltar and rate on earning assets, partially offset by an increase in the average balance primarily through the acquisition of Gibraltar and rate on interest-bearing liabilities. The Companys net interest margin was 3.92% for the second quarter of 2006, an increase of 15 basis points compared to the same period of 2005.
The following table sets forth the composition of the Companys net interest margin on a FTE basis for the three months ended June 30, 2006 and June 30, 2005.