| BOSTON PRIVATE FINANCIAL HOLDINGS INC ITEM 1A RISK FACTORS Our business strategy contemplates significant growth and there are challenges and risks inherent in such a growth strategy |
| In recent years, we have experienced rapid growth, both due to the expansion of our existing businesses as well as acquisitions |
| Among the challenges facing us is the ongoing need to continue to maintain and develop an infrastructure appropriate to support such growth, including in the areas of management personnel, systems, compliance, and risk management, while taking steps to ensure that the related expense incurred is commensurate with the growth in revenues |
| Accordingly, there is risk inherent in our pursuit of a growth strategy that revenue will not be sufficient to support such expense and generate profitability at the levels we historically have achieved |
| A significant decrease in revenues or increases in costs may adversely affect our results of operations or financial condition |
| In connection with our recent acquisitions and to the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent in such acquisitions |
| We continue to consider the acquisition of other banking, investment management, and wealth advisory companies |
| To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent in such acquisitions |
| These risks include, but are not limited to the following: • the risk that we will incur substantial expenses in pursuing potential acquisitions without completing such acquisitions; • the risk that we may lose key clients of the acquired business as a result of the change of ownership to us; • the risk that the acquired business will not perform in accordance with our expectations; • the risk that difficulties will arise in connection with the integration of the operations of the acquired business with the operations of our private banking, investment management, or wealth advisory businesses, particularly to the extent we are entering new geographic markets; • the risk that we will need to make significant investments in infrastructure, controls, staff, emergency backup facilities or other critical business functions that become strained by our growth; • the risk that management will divert its attention from other aspects of our business; • the risk that we may lose key employees of the acquired business; • the risk that unanticipated costs relating to potential acquisitions could reduce our earnings per share; • the risk associated with entering into geographic and product markets in which we have limited or no direct prior experience; • the risk that we may assume potential liabilities of the acquired company as a result of the acquisition; and • the risk that an acquisition will dilute our earnings per share, in both the short and long term, or that it will reduce our tangible capital ratios |
| As a result of these risks, any given acquisition, if and when consummated, may adversely affect our results of operations or financial condition |
| In addition, because the consideration for an acquisition may involve cash, debt or the issuance of shares of our stock and may involve the payment of a premium over book and market values, existing stockholders may experience dilution in connection with any acquisition |
| Attractive acquisition opportunities may not be available to us in the future |
| We will continue to consider the acquisition of other businesses |
| However, we may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact 24 ______________________________________________________________________ [75]Table of Contents the growth of our business |
| We expect that other banking and financial companies, many of which have significantly greater resources than we do, will compete with us to acquire compatible businesses |
| This competition could increase prices for acquisitions that we would likely pursue |
| Also, acquisitions of regulated businesses such as banks are subject to various regulatory approvals |
| If we fail to receive the necessary regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests |
| Competition in the local banking industry may impair our ability to attract and retain banking customers at current levels |
| Competition in the local banking industry coupled with our relatively small size may limit the ability of our banking subsidiaries to attract and retain banking customers |
| In particular, the Banks’ competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns |
| Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are able to serve the credit and investment needs of larger customers |
| Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range and quality of services provided |
| Our Banks also face competition from out-of-state financial intermediaries which have opened low-end production offices or which solicit deposits in their respective market areas |
| Because our Banks maintain smaller staffs and have fewer financial and other resources than larger institutions with which they compete, they may be limited in their ability to attract customers |
| In addition, some of the Banks’ current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than our Banks can accommodate |
| If our Banks are unable to attract and retain banking customers, they may be unable to continue their loan growth and their results of operations and financial condition may otherwise be negatively impacted |
| We may not be able to attract and retain investment management and wealth advisory clients at current levels |
| Due to intense competition, our investment management and wealth advisory subsidiaries may not be able to attract and retain clients at current levels |
| Competition is especially strong in our geographic market area, because there are numerous well-established and successful investment management and wealth advisory firms in these areas |
| Many of our competitors have greater resources than we have |
| Our ability to successfully attract and retain investment management and wealth advisory clients is dependent upon our ability to compete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities |
| If we are not successful, our results of operations and financial condition may be negatively impacted |
| For the year ended December 31, 2005, approximately 47dtta5prca of our revenues were derived from investment management and trust fees and wealth advisory contracts |
| Investment management contracts are typically terminable upon less than 30 days’ notice |
| Most of our investment management clients may withdraw funds from accounts under management generally in their sole discretion |
| Wealth advisory client contracts must typically be renewed on an annual basis and are terminable upon relatively short notice |
| The combined financial performance of our investment management and wealth advisory subsidiaries is a significant factor in our overall results of operations and financial condition |
| 25 ______________________________________________________________________ [76]Table of Contents Our investment management business is highly dependent on people to produce investment returns and to solicit and retain clients |
| We rely on our investment managers to produce investment returns |
| We believe that investment performance is one of the most important factors for the growth of our assets under management |
| Poor investment performance could impair our revenues and growth because: • existing clients might withdraw funds in favor of better performing products, which would result in lower investment management fees; or • our ability to attract funds from existing and new clients might diminish |
| The market for investment managers is extremely competitive and is increasingly characterized by frequent movement of investment managers among different firms |
| In addition, our individual investment managers often have regular direct contact with particular clients, which can lead to a strong client relationship based on the client’s trust in that individual manager |
| The loss of a key investment manager could jeopardize our relationships with our clients and lead to the loss of client accounts |
| Losses of such accounts could have a material adverse effect on our results of operations and financial condition |
| In addition to the loss of key investment managers, our investment management business is dependent on the integrity of our asset managers and our employees |
| If an asset manager or employee were to misappropriate any client funds, the reputation of our asset management business could be negatively affected, which may result in the loss of accounts and have a material adverse effect on our results of operations and financial condition |
| If we are required to write down goodwill and other intangible assets, our financial condition and results of operations would be negatively affected |
| When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets |
| The amount of the purchase price which is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired |
| At December 31, 2005, our goodwill and other identifiable intangible assets were approximately dlra384dtta4 million |
| Under current accounting standards, if we determine goodwill or intangible assets are impaired, we will be required to write down the value of these assets |
| We conduct an annual review to determine whether goodwill and other identifiable intangible assets are impaired |
| We cannot assure you that we will not be required to take an impairment charge in the future |
| Any impairment charge would have a negative effect on our stockholders’ equity and financial results |
| Defaults in the repayment of loans may negatively impact our business |
| A borrower’s default on its obligations under one or more of the Banks’ loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out of the loan |
| In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, our Banks may have to write-off the loan in whole or in part |
| In such situations, the Banks may acquire real estate or other assets, if any, which secure the loan through foreclosure or other similar available remedies |
| In such cases, the amount owed under the defaulted loan often exceeds the value of the assets acquired |
| Our Banks’ management periodically makes a determination of an allowance for loan losses based on available information, including the quality of their loan portfolio, certain economic conditions, and the value of the underlying collateral and the level of its non-accruing loans |
| Provisions to this allowance result in an expense for the period |
| If, as a result of general economic conditions or an increase in defaulted loans, management determines that additional increases in the allowance for loan losses are necessary, the Banks will incur additional expenses |
| 26 ______________________________________________________________________ [77]Table of Contents In addition, bank regulatory agencies periodically review our Banks’ allowances for loan losses and the values they attribute to real estate acquired through foreclosure or other similar remedies |
| Such regulatory agencies may require the Banks to adjust their determination of the value for these items |
| These adjustments could negatively impact our results of operations or financial condition |
| A downturn in local economies or real estate markets could negatively impact our banking business |
| A downturn in the local economies or real estate markets could negatively impact our banking business |
| Primarily, our Banks serve individuals and smaller businesses located in four geographic regions: eastern Massachusetts, northern California, southern California, and southern Florida |
| The ability of the Banks’ customers to repay their loans is impacted by the economic conditions in these areas |
| The Banks’ commercial loans are generally concentrated in the following customer groups: • real estate developers and investors; • financial service providers; • technology companies; • manufacturing and communications companies; • professional service providers; • general commercial and industrial companies; and • individuals |
| Our Banks’ commercial loans, with limited exceptions, are secured by real estate (usually income producing residential and commercial properties), marketable securities or corporate assets (usually accounts receivable, equipment or inventory) |
| Substantially all of our Banks’ residential mortgage and home equity loans are secured by residential property |
| Consequently, our Banks’ ability to continue to originate real estate loans may be impaired by adverse changes in local and regional economic conditions in the real estate markets, or by acts of nature, including earthquakes, hurricanes and flooding |
| Due to the concentration of real estate collateral in the geographic regions in which we operate, these events could have a material adverse impact on the ability of our Banks’ borrowers to repay their loans and affect the value of the collateral securing these loans |
| Environmental liability associated with commercial lending could result in losses |
| In the course of business, our Banks may acquire, through foreclosure, properties securing loans they have originated or purchased which are in default |
| Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties |
| In this event, we, or our Banks, might be required to remove these substances from the affected properties at our sole cost and expense |
| The cost of this removal could substantially exceed the value of affected properties |
| We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties |
| These events could have a material adverse effect on our business, results of operations and financial condition |
| Fluctuations in interest rates may negatively impact our banking business |
| Fluctuations in interest rates may negatively impact the business of our Banks |
| Our Banks’ main source of income from operations is net interest income, which is equal to the difference between the interest income received on interest-bearing assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings) |
| These rates are highly sensitive to many factors beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities |
| Our Banks’ net interest income can be affected significantly by changes in market interest rates |
| Changes in relative interest rates may reduce our Banks’ net interest income as the difference between interest income 27 ______________________________________________________________________ [78]Table of Contents and interest expense decreases |
| As a result, our Banks have adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources |
| However, even with these policies in place, a decrease in interest rates can impact our results of operations or financial condition |
| An increase in interest rates could also have a negative impact on our Banks’ results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to the Banks’ allowances for loan losses |
| Increases in interest rates, in certain circumstances, may also lead to high levels of loan prepayments, which may also have an adverse impact on our net interest income |
| Prepayments of loans may negatively impact our business |
| Generally, our Banks’ customers may prepay the principal amount of their outstanding loans at any time |
| The speed at which such prepayments occur, as well as the size of such prepayments, are within our customers’ discretion |
| If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced |
| A significant reduction in interest income could have a negative impact on our results of operations and financial condition |
| Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures |
| Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures |
| Our Banks have traditionally obtained funds principally through deposits and through borrowings |
| As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings |
| Historically and in comparison to commercial banking averages, our Banks have had a higher percentage of their time deposits in denominations of dlra100cmam000 or more |
| Within the banking industry, the amounts of such deposits are generally considered more likely to fluctuate than deposits of smaller denominations |
| If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at our Banks decreases relative to their overall banking operations, our Banks may have to rely more heavily on borrowings as a source of funds in the future |
| Our investment management business may be negatively impacted by changes in economic and market conditions |
| Our investment management business may be negatively impacted by changes in general economic and market conditions because the performance of such business is directly affected by conditions in the financial and securities markets |
| The financial markets and businesses operating in the securities industry are highly volatile (meaning that performance results can vary greatly within short periods of time) and are directly affected by, among other factors, domestic and foreign economic conditions and general trends in business and finance, all of which are beyond our control |
| We cannot assure you that broad market performance will be favorable in the future |
| The world financial and securities markets will likely continue to experience significant volatility as a result of, among other things, world economic and political conditions |
| Decline in the financial markets or a lack of sustained growth may result in a corresponding decline in our performance and may adversely affect the assets that we manage |
| In addition, our management contracts generally provide for fees payable for investment management services based on the market value of assets under management, although a portion of Westfield’s and DGHM’s contracts also provide for the payment of fees based on investment performance in addition to a base fee |
| Because most contracts provide for a fee based on market values of securities, fluctuations in securities prices may have a material adverse effect on our results of operations and financial condition |
| 28 ______________________________________________________________________ [79]Table of Contents Our investment management and wealth advisory businesses are highly regulated, which could limit or restrict our activities and impose fines or suspensions on the conduct of our business |
| Our investment management and wealth advisory businesses are highly regulated, primarily at the federal level |
| The failure of any of our subsidiaries that provide investment management and wealth advisory services to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other sanctions including revocation of such subsidiary’s registration as an investment adviser |
| All of our investment adviser and wealth advisory affiliates are registered investment advisers under the Investment Advisers Act |
| The Investment Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary, record keeping, operational and disclosure obligations |
| These subsidiaries, as investment advisers, are also subject to regulation under the federal and state securities laws and the fiduciary laws of certain states |
| In addition, Westfield, Sand Hill, and DGHM act as sub-advisers to mutual funds which are registered under the Investment Company Act of 1940 and are subject to that act’s provisions and regulations |
| We are also subject to the provisions and regulations of the Employee Retirement Income Security Act of 1974 (“ERISA”), to the extent we act as a “fiduciary” under ERISA with respect to certain of our clients |
| ERISA and the applicable provisions of the federal tax laws, impose a number of duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving the assets of each ERISA plan which is a client, as well as certain transactions by the fiduciaries (and certain other related parties) to such plans |
| In addition, applicable law provides that all investment contracts with mutual fund clients may be terminated by the clients, without penalty, upon no more than 60 days notice |
| Investment contracts with institutional and other clients are typically terminable by the client, also without penalty, upon 30 days notice |
| Our banking business is highly regulated which could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business |
| Bank holding companies and banks operate in a highly regulated environment and are subject to supervision and examination by federal and state regulatory agencies |
| We are subject to the Bank Holding Company Act and to regulation and supervision by the Board of Governors of the Federal Reserve System |
| Boston Private Bank, as a Massachusetts chartered trust company, the deposits of which are insured by the FDIC, is subject to regulation and supervision by the Massachusetts Commissioner of Banks and the FDIC Borel and FPB, as California banking corporations, are subject to regulation and supervision by the California Department of Financial Institutions and the FDIC Gibraltar, as a federally chartered bank, is subject to regulation and supervision by the OTS Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible nonbanking activities, the level of reserves against deposits and restrictions on dividend payments |
| The FDIC, the OTS, the California Department of Financial Institutions and the Massachusetts Commissioner of Banks possess cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the Federal Reserve Board possesses similar powers with respect to bank holding companies |
| These and other restrictions limit the manner in which our Banks and we may conduct business and obtain financing |
| Furthermore, our banking business is affected by the monetary policies of the Federal Reserve Board |
| Changes in monetary or legislative policies may affect the interest rates our Banks must offer to attract deposits and the interest rates they must charge on their loans, as well as the manner in which they offer deposits and make loans |
| These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally, including our Banks |