A "toxic" Southern California residential and construction loan portfolio hampered Boston Private Financial Holdings Inc. last year and forced it to cut expenses this year, and analysts said it must learn from its mistakes before expanding into another region.
Boston Private said its fourth-quarter loss shrank 20.2% from a year earlier, to $24.9 million, or 47 cents per diluted share. The results included a $133.2 million charge related to loan losses, included those on Southern California loans that the company spent most of last year trying to sell.
It took a $25 million impairment charge in the first quarter of last year as a result of loan losses suffered by First Private Bank and Trust of Los Angeles, which it bought in 2003. In the third quarter, Boston Private announced plans to sell the loan portfolio. As of Dec. 31, it has sold 52 of the 72 loans.
James Dawson, the chief executive officer of Boston Private's private banking group, said during its quarterly earnings call Thursday that the First Private portfolio "was dirtier than any portfolio I've seen in my 35 years in banking."
Timothy L. Vaill, Boston Private's chairman and chief executive officer, called 2008 "a very disappointing year" for his company.
It would be easy to blame the losses on broader economic issues, but "we had our own issues," Mr. Vaill said. "We were lending in nonstrategic markets in Southern California. We knew about problems there and didn't get out there quickly enough. Had we moved more quickly, it might have been a different story."
Boston Private plans to reduce its head count by 17% and cut expenses by 12% this year.
"The results of 2008 were unacceptable," Mr. Vaill said, and as a result, executives will not receive bonuses for last year, and salaries have been frozen for this year.
"Our main focus is to return to profit," he said. "We recognize our shortfalls in 2008, and we are preparing for 2009."
Mark Fitzgibbon, the head of research at Sandler O'Neill & Partners LP, said he thinks there are a lot of problems in Boston Private's loan portfolio in other places, including the Pacific Northwest and Florida. "When they downplayed the problems in Southern California, it was an expensive lesson, and I think they haven't learned the lesson yet."
In February, Mr. Dawson became First Private's interim CEO, and the credit team that approved the Southern California loans was fired. During an interview in August, he said First Private had stopped lending to land developers over the past year and had started to focus on its core private banking businesses.
He said Thursday that Boston Private made the mistake of lending in a region where it did not have a well-established banking operation and "getting into a region where we were giving highly speculative land loans and large track loans" in the Inland Empire.
The company has reduced its exposure in Southern California by 90%. It also raised $173 million of private equity and received $154 million from the Treasury Department's Troubled Asset Relief Program to improve its Tier 1 capital ratio.
Mr. Dawson said that as a result of its losses in Southern California, Boston Private now has "stronger credit practices in place to ride out the downturn and reduce risk and our exposure."
Mr. Fitzgibbon said it has a series of regulatory examinations scheduled for next month concerning its businesses in Florida and the Pacific Northwest.
A similar exam last year in Southern California was "a catalyst for the company dealing with the loan problems" in that region, he said. "I think we might see the same sequence coming up."
Mr. Dawson said he does not expect the company to sell loan portfolios in other regions.
Walter M. Pressey, Boston Private's president, said it is looking to acquire.
"The turmoil that exists in the this market is apt to provide opportunities either in the forms of individuals leaving organizations and going to another company or in terms of weaker organizations that can't make loans," he said. "Our current focus is to look for opportunities in markets that we currently exist in to increase our density and improve market share, rather than go to new markets."
Nevertheless, "at some point we'd like to expand into new markets," Mr. Pressey said.
Boston Private has offices in seven regions, but "there are 12 to 15 that we'd love be in … perhaps as many as 30," he said. "I mean we don't plan to be there anytime soon, because of this recession, but we don't plan to abandon this business model."
Mr. Fitzgibbon said he was surprised the company was even considering more deals.
"I would think, given that the company has been through the ringer in the past six to nine months, that they would be more focused on getting things fixed internally rather than looking for deals," he said. "Even companies that haven't gone through the wringer in the past few quarters are bunkering down."
