UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20172018
Or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)  
  
Commonwealth of Massachusetts04-2976299
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
  
Ten Post Office Square
Boston, Massachusetts
02109
(Address of principal executive offices)(Zip Code)
  
Registrant’s telephone number, including area code: (617) 912-1900
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
   
Accelerated filer o    
 
 
Non-accelerated filer o   
 (Do not check if a smaller reporting company) 
Smaller reporting company o    
 
     
Emerging growth company o    
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of April 28, 201727, 2018:
Common Stock, Par Value $1.00 Per Share84,135,35984,219,494
(class)(outstanding)
 

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
Item 1 
  
  
  
  
  
  
Item 2 
  
  
  Results of Operations
  
  
  
  
  
  
Item 3 
Item 4 
PART II—OTHER INFORMATION
Item 1 
Item 1A 
Item 2 
Item 3 
Item 4 
Item 5 
Item 6 
  
  Certifications 



i



PART I. FINANCIAL INFORMATION, ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
(In thousands, except share and per share data)(In thousands, except share and per share data)
Assets:      
Cash and cash equivalents$165,186
 $106,557
$77,085
 $120,541
Investment securities available-for-sale (amortized cost of $1,271,760 and $1,283,161 at March 31, 2017 and December 31, 2016, respectively)1,256,208
 1,264,132
Investment securities held-to-maturity (fair value of $98,044 and $92,604 at March 31, 2017 and December 31, 2016, respectively)98,424
 93,079
Stock in Federal Home Loan Banks50,133
 44,077
Investment securities available-for-sale (amortized cost of $1,148,526 and $1,182,427 at March 31, 2018 and December 31, 2017, respectively)1,118,497
 1,170,328
Investment securities held-to-maturity (fair value of $68,887 and $73,781 at March 31, 2018 and December 31, 2017, respectively)70,809
 74,576
Stock in Federal Home Loan Bank and Federal Reserve Bank54,455
 59,973
Loans held for sale350
 3,464
3,918
 4,697
Total loans6,250,217
 6,114,354
6,602,327
 6,505,028
Less: Allowance for loan losses78,031
 78,077
72,898
 74,742
Net loans6,172,186
 6,036,277
6,529,429
 6,430,286
Other real estate owned (“OREO”)
 1,690
Premises and equipment, net32,974
 31,827
43,627
 37,640
Goodwill142,554
 142,554
75,598
 75,598
Intangible assets, net25,299
 26,725
15,334
 16,083
Fees receivable12,230
 13,400
10,640
 11,154
Accrued interest receivable20,790
 20,479
22,614
 22,322
Deferred income taxes, net53,686
 55,460
32,058
 29,031
Other assets185,100
 130,753
264,295
 259,515
Total assets$8,215,120
 $7,970,474
$8,318,359
 $8,311,744
Liabilities:      
Deposits$6,246,620
 $6,085,146
$6,584,322
 $6,510,246
Securities sold under agreements to repurchase67,249
 59,624
85,257
 32,169
Federal funds purchased
 80,000

 30,000
Federal Home Loan Bank borrowings885,445
 734,205
611,588
 693,681
Junior subordinated debentures106,363
 106,363
106,363
 106,363
Other liabilities110,310
 119,683
125,004
 135,880
Total liabilities7,415,987
 7,185,021
7,512,534
 7,508,339
Redeemable Noncontrolling Interests17,232
 16,972
16,322
 17,461
Shareholders’ Equity:      
Preferred stock, $1.00 par value; authorized: 2,000,000 shares;
Series D, 6.95% Non-Cumulative Perpetual, issued and outstanding: 50,000 shares at March 31, 2017 and December 31, 2016; liquidation preference: $1,000 per share
47,753
 47,753
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 84,134,104 shares at March 31, 2017 and 83,731,769 shares at December 31, 201684,134
 83,732
Preferred stock, $1.00 par value; authorized: 2,000,000 shares;
Series D, 6.95% Non-Cumulative Perpetual, issued and outstanding: 50,000 shares at March 31, 2018 and December 31, 2017; liquidation preference: $1,000 per share
47,753
 47,753
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 84,194,267 shares at March 31, 2018 and 84,208,538 shares at December 31, 201784,194
 84,208
Additional paid-in capital602,748
 597,454
612,526
 607,929
Retained earnings53,510
 47,929
61,518
 49,526
Accumulated other comprehensive income/ (loss)(10,237) (12,548)(21,313) (8,658)
Total Company’s shareholders’ equity777,908
 764,320
784,678
 780,758
Noncontrolling interests3,993
 4,161
4,825
 5,186
Total shareholders’ equity781,901
 768,481
789,503
 785,944
Total liabilities, redeemable noncontrolling interests and shareholders’ equity$8,215,120
 $7,970,474
$8,318,359
 $8,311,744
See accompanying notes to consolidated financial statements.

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

 Three months ended March 31,
 2018 2017
 (In thousands, except share and per share data)
Interest and dividend income:   
Loans$60,929
 $53,636
Taxable investment securities1,510
 1,670
Non-taxable investment securities1,730
 1,606
Mortgage-backed securities3,178
 3,504
Federal funds sold and other1,009
 600
Total interest and dividend income68,356
 61,016
Interest expense:   
Deposits6,524
 4,531
Federal Home Loan Bank borrowings3,344
 2,111
Junior subordinated debentures846
 671
Repurchase agreements and other short-term borrowings259
 61
Total interest expense10,973
 7,374
Net interest income57,383
 53,642
Provision/ (credit) for loan losses(1,795) (181)
Net interest income after provision/ (credit) for loan losses59,178
 53,823
Fees and other income:   
Investment management fees11,425
 10,839
Wealth advisory fees13,512
 12,823
Wealth management and trust fees12,151
 10,826
Other banking fee income2,273
 1,694
Gain on sale of loans, net74
 138
Gain/ (loss) on sale of investments, net(24) 19
Gain/ (loss) on OREO, net
 (46)
Other332
 213
Total fees and other income39,743
 36,506
Operating expense:   
Salaries and employee benefits47,084
 45,665
Occupancy and equipment7,748
 7,185
Professional services3,177
 3,314
Marketing and business development1,593
 1,660
Information systems5,886
 5,379
Amortization of intangibles750
 1,426
FDIC insurance744
 766
Other3,875
 3,385
Total operating expense70,857
 68,780
Income before income taxes28,064
 21,549
Income tax expense6,026
 6,553
Net income from continuing operations22,038
 14,996
Net income from discontinued operations1,698
 1,632
Net income before attribution to noncontrolling interests23,736
 16,628
(Continued)   

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

 Three months ended March 31,
 2017 2016
 (In thousands, except share and per share data)
Interest and dividend income:   
Loans$53,636
 $50,046
Taxable investment securities1,670
 1,594
Non-taxable investment securities1,606
 1,390
Mortgage-backed securities3,504
 3,065
Federal funds sold and other600
 507
Total interest and dividend income61,016
 56,602
Interest expense:   
Deposits4,531
 4,182
Federal Home Loan Bank borrowings2,111
 1,953
Junior subordinated debentures671
 578
Repurchase agreements and other short-term borrowings61
 10
Total interest expense7,374
 6,723
Net interest income53,642
 49,879
Provision/ (credit) for loan losses(181) (3,133)
Net interest income after provision/ (credit) for loan losses53,823
 53,012
Fees and other income:   
Investment management fees10,839
 10,658
Wealth advisory fees12,823
 12,712
Wealth management and trust fees10,826
 10,916
Other banking fee income1,694
 3,233
Gain on sale of loans, net138
 209
Gain/ (loss) on sale of investments, net19
 1
Gain/ (loss) on OREO, net(46) 280
Other213
 13
Total fees and other income36,506
 38,022
Operating expense:   
Salaries and employee benefits45,825
 42,560
Occupancy and equipment10,649
 9,587
Professional services3,314
 3,515
Marketing and business development1,660
 2,170
Contract services and data processing1,580
 1,679
Amortization of intangibles1,426
 1,586
FDIC insurance766
 1,020
Restructuring
 1,112
Other3,560
 3,480
Total operating expense68,780
 66,709
Income before income taxes21,549
 24,325
Income tax expense6,553
 7,438
Net income from continuing operations14,996
 16,887
Net income from discontinued operations1,632
 2,065
Net income before attribution to noncontrolling interests16,628
 18,952
(Continued)   
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

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

Three months ended March 31,Three months ended March 31,
2017 20162018 2017
Less: Net income attributable to noncontrolling interests966
 911
1,050
 966
Net income attributable to the Company$15,662
 $18,041
$22,686
 $15,662
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders$(1,166) $(289)$(23) $(1,166)
Net income attributable to common shareholders for earnings per share calculation$14,496
 $17,752
$22,663
 $14,496
Basic earnings per share attributable to common shareholders:      
From continuing operations:$0.16
 $0.19
$0.25
 $0.16
From discontinued operations:$0.02
 $0.03
$0.02
 $0.02
Total attributable to common shareholders:$0.18
 $0.22
$0.27
 $0.18
Weighted average basic common shares outstanding81,951,179
 81,301,499
83,097,758
 81,951,179
Diluted earnings per share attributable to common shareholders:      
From continuing operations:$0.15
 $0.19
$0.25
 $0.15
From discontinued operations:$0.02
 $0.02
$0.02
 $0.02
Total attributable to common shareholders:$0.17
 $0.21
$0.27
 $0.17
Weighted average diluted common shares outstanding84,560,918
 83,279,866
85,271,650
 84,560,918

 See accompanying notes to consolidated financial statements.

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

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

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

Three months ended March 31,Three months ended March 31,
2017 20162018 2017
(In thousands)(In thousands)
Net income attributable to the Company$15,662
 $18,041
$22,686
 $15,662
Other comprehensive income/ (loss), net of tax:      
Unrealized gain/ (loss) on securities available-for-sale2,094
 9,088
(12,895) 2,094
Reclassification adjustment for net realized gain/ (loss) included in net income(11) (1)
Reclassification adjustment for net realized (gain)/ loss included in net income
 (11)
Net unrealized gain/ (loss) on securities available-for-sale2,083
 9,087
(12,895) 2,083
Unrealized gain/ (loss) on cash flow hedges36
 (1,146)588
 36
Reclassification adjustment for net realized gain/ (loss) included in net income180
 246
Reclassification adjustment for net realized (gain)/ loss included in net income(14) 180
Net unrealized gain/ (loss) on cash flow hedges216
 (900)574
 216
Net unrealized gain/ (loss) on other12
 

 12
Other comprehensive income/ (loss), net of tax2,311
 8,187
(12,321) 2,311
Total comprehensive income attributable to the Company, net$17,973
 $26,228
$10,365
 $17,973
 See accompanying notes to consolidated financial statements.


BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/
(Loss)
 
Non-
controlling
Interests
 Total
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/
(Loss)
 
Non-
controlling
Interests
 Total
(In thousands, except share data)
Balance, December 31, 2015$47,753
 $83,411
 $600,670
 $12,886
 $(1,500) $3,393
 $746,613
Net income attributable to the Company
 
 
 18,041
 
 
 18,041
Other comprehensive income/ (loss), net
 
 
 
 8,187
 
 8,187
Dividends paid to common shareholders: $0.10 per share
 
 
 (8,318) 
 
 (8,318)
Dividends paid to preferred shareholders
 
 
 (869) 
 
 (869)
Net change in noncontrolling interests
 
 
 
 
 (277) (277)
Repurchase of 245,000 shares of common stock
 (245) (2,505) 
 
 
 (2,750)
Net proceeds from issuance of:             
76,596 shares of common stock
 77
 662
 
 
 
 739
51,810 shares of incentive stock grants, net of 294,524 shares canceled or forfeited and 14,480 shares withheld for employee taxes
 (257) 96
 
 
 
 (161)
Amortization of stock compensation and employee stock purchase plan
 
 (442) 
 
 
 (442)
Stock options exercised
 38
 243
 
 
 
 281
Tax benefit/ (deficiency) from certain stock compensation awards
 
 (658) 
 
 
 (658)
Other equity adjustments
 
 1,759
 
 
 
 1,759
Balance at March 31, 2016$47,753
 $83,024
 $599,825
 $21,740
 $6,687
 $3,116
 $762,145
             (In thousands, except share data)
Balance, December 31, 2016$47,753
 $83,732
 $597,454
 $47,929
 $(12,548) $4,161
 $768,481
$47,753
 $83,732
 $597,454
 $47,929
 $(12,548) $4,161
 $768,481
Net income attributable to the Company
 
 
 15,662
 
 
 15,662

 
 
 15,662
 
 
 15,662
Other comprehensive income/ (loss), net
 
 
 
 2,311
 
 2,311

 
 
 
 2,311
 
 2,311
Dividends paid to common shareholders:
$0.11 per share

 
 
 (9,212) 
 
 (9,212)
 
 
 (9,212) 
 
 (9,212)
Dividends paid to preferred shareholders
 
 
 (869) 
 
 (869)
 
 
 (869) 
 
 (869)
Net change in noncontrolling interests
 
 
 
 
 (168) (168)
 
 
 
 
 (168) (168)
Net proceeds from issuance of:                          
72,811 shares of common stock
 73
 648
 
 
 
 721

 73
 648
 
 
 
 721
15,596 incentive stock grant shares canceled or forfeited
 (16) 16
 
 
 
 

 (16) 16
 
 
 
 
Exercise of warrants
 260
 1,616
 
 
 
 1,876

 260
 1,616
 
 
 
 1,876
Amortization of stock compensation and employee stock purchase plan
 
 2,000
 
 
 
 2,000

 
 2,000
 
 
 
 2,000
Stock options exercised
 85
 595
 
 
 
 680

 85
 595
 
 
 
 680
Other equity adjustments
 
 419
 
 
 
 419

 
 419
 
 
 
 419
Balance at March 31, 2017$47,753
 $84,134
 $602,748
 $53,510
 $(10,237) $3,993
 $781,901
$47,753
 $84,134
 $602,748
 $53,510
 $(10,237) $3,993
 $781,901
             
Balance, December 31, 2017$47,753
 $84,208
 $607,929
 $49,526
 $(8,658) $5,186
 $785,944
Reclassification due to change in accounting principles
 
 
 334
 (334) 
 
Net income attributable to the Company
 
 
 22,686
 
 
 22,686
Other comprehensive income/ (loss), net
 
 
 
 (12,321) 
 (12,321)
Dividends paid to common shareholders:
$0.12 per share

 
 
 (10,159) 
 
 (10,159)
Dividends paid to preferred shareholders
 
 
 (869) 
 
 (869)
Net change in noncontrolling interests
 
 
 
 
 (361) (361)
Net proceeds from issuance of:             
63,434 shares of common stock
 63
 770
 
 
 
 833
110,846 incentive stock grant shares canceled or forfeited and 40,825 shares withheld for employee taxes
 (151) (487) 
 
 
 (638)
Amortization of stock compensation and employee stock purchase plan
 
 1,730
 
 
 
 1,730
Stock options exercised
 74
 595
 
 
 
 669
Other equity adjustments
 
 1,989
 
 
 
 1,989
Balance at March 31, 2018$47,753
 $84,194
 $612,526
 $61,518
 $(21,313) $4,825
 $789,503

See accompanying notes to consolidated financial statements.

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

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

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

Three months ended March 31,Three months ended March 31,
2017 20162018 2017
(In thousands)(In thousands)
Cash flows from operating activities:      
Net income attributable to the Company$15,662
 $18,041
$22,686
 $15,662
Adjustments to arrive at net income from continuing operations      
Net income attributable to noncontrolling interests966
 911
1,050
 966
Less: Net income from discontinued operations(1,632) (2,065)(1,698) (1,632)
Net income from continuing operations14,996
 16,887
22,038
 14,996
Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities:      
Depreciation and amortization5,325
 5,196
4,638
 5,325
Net income attributable to noncontrolling interests(966) (911)(1,050) (966)
Stock compensation, net of cancellations2,000
 (442)1,730
 2,000
Provision/ (credit) for loan losses(181) (3,133)(1,795) (181)
Loans originated for sale(9,078) (18,411)(11,875) (9,078)
Proceeds from sale of loans held for sale12,330
 21,309
12,732
 12,330
Deferred income tax expense/ (benefit)217
 2,348
1,769
 217
Net decrease/ (increase) in other operating activities(11,272) (4,163)(13,079) (11,272)
Net cash provided by/ (used in) operating activities of continuing operations13,371
 18,680
15,108
 13,371
Net cash provided by/ (used in) operating activities of discontinued operations1,632
 2,065
1,698
 1,632
Net cash provided by/ (used in) operating activities15,003
 20,745
16,806
 15,003
Cash flows from investing activities:      
Available-for-sale investment securities:   
Investment securities available-for-sale:   
Purchases(71,498) (100,759)(21,953) (71,498)
Sales32,717
 15,292
15,877
 32,717
Maturities, calls, redemptions, and principal payments47,994
 32,051
Held-to-maturity investment securities:   
Maturities, redemptions, and principal payments37,912
 47,994
Investment securities held-to-maturity:   
Purchases(9,970) 

 (9,970)
Principal payments4,485
 4,851
3,650
 4,485
(Investments)/ distributions in trusts, net(296) (240)(125) (296)
Purchase of additional Bank Owned Life Insurance (“BOLI”)(50,000) 

 (50,000)
(Purchase)/ redemption of Federal Home Loan Banks stock(6,056) 979
Net (increase)/ decrease in portfolio loans(135,514) 57,880
(Purchase)/ redemption of Federal Home Loan Bank and Federal Reserve Bank stock5,518
 (6,056)
Net increase in portfolio loans(97,432) (135,514)
Proceeds from recoveries of loans previously charged-off193
 4,076
340
 193
Proceeds from sale of OREO1,644
 958

 1,644
Capital expenditures, net of sale proceeds(3,153) (2,284)(8,396) (3,153)
Net cash provided by/ (used in) investing activities of continuing operations(189,454) 12,804
Net cash provided by/ (used in) investing activities(189,454) 12,804
(64,609) (189,454)
(Continued)      

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

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

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

Three months ended March 31,Three months ended March 31,
2017 20162018 2017
Cash flows from financing activities:      
Net increase/ (decrease) in deposits161,474
 (253,577)74,076
 161,474
Net increase/ (decrease) in securities sold under agreements to repurchase7,625
 4,967
53,088
 7,625
Net increase/ (decrease) in federal funds purchased(80,000) 40,000
(30,000) (80,000)
Net increase/ (decrease) in short-term Federal Home Loan Bank borrowings140,000
 70,000
(120,000) 140,000
Advances of long-term Federal Home Loan Bank borrowings34,435
 25,800
90,000
 34,435
Repayments of long-term Federal Home Loan Bank borrowings(23,195) (33,172)(52,093) (23,195)
Dividends paid to common shareholders(9,212) (8,318)(10,159) (9,212)
Dividends paid to preferred shareholders(869) (869)(869) (869)
Proceeds from warrant exercises1,876
 

 1,876
Repurchase of common stock
 (2,750)
Tax benefit/ (deficiency) from certain stock compensation awards
 (658)
Proceeds from stock option exercises680
 281
669
 680
Proceeds from issuance of common stock, net721
 578
195
 721
Distributions paid to noncontrolling interests(938) (846)(1,018) (938)
Other equity adjustments483
 267
458
 483
Net cash provided by/ (used in) financing activities of continuing operations233,080
 (158,297)
Net cash provided by/ (used in) financing activities233,080
 (158,297)4,347
 233,080
Net increase/ (decrease) in cash and cash equivalents58,629
 (124,748)(43,456) 58,629
Cash and cash equivalents at beginning of year106,557
 238,694
120,541
 106,557
Cash and cash equivalents at end of period$165,186
 $113,946
$77,085
 $165,186
Supplementary schedule of non-cash investing and financing activities:      
Cash paid for interest$7,431
 $6,717
$11,204
 $7,431
Cash paid for income taxes, net of (refunds received)2,362
 3,785
Cash paid for income taxes, (net of refunds received)(783) 2,362
Change in unrealized gain/ (loss) on available-for-sale securities, net of tax2,083
 9,087
(12,895) 2,083
Change in unrealized gain/ (loss) on cash flow hedges, net of tax216
 (900)574
 216
Change in unrealized gain/ (loss) on other, net of tax12
 

 12
Non-cash transactions:      
Loans charged-off(58) (3,016)(389) (58)

See accompanying notes to consolidated financial statements.


7

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements



1.     Basis of Presentation and Summary of Significant Accounting Policies
Boston Private Financial Holdings, Inc. (the ��Company”“Company” or “BPFH”), is a bank holding company (the “Holding Company”) with four reportable segments: Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory.
The Private Banking segment is comprised of the banking operations of Boston Private Bank & Trust Company (the “Bank” or “Boston Private Bank”), a trust company chartered by The Commonwealth of Massachusetts, insured by the Federal Deposit Insurance Corporation (the “FDIC”), and a wholly-owned subsidiary of the Company. Boston Private Bank currentlyis a member of the Federal Reserve Bank of Boston. Boston Private Bank primarily operates in three geographic markets: New England, the San Francisco Bay Area, and Southern California.
The Wealth Management and Trust segment is comprised of the operations of Boston Private Wealth LLC (“Boston Private Wealth”), a wholly-owned subsidiary of Boston Private Bank, and the trust operations of Boston Private Bank. The segment offers investment management, wealth management, family office, and trust services to individuals, families, and institutions. The Wealth Management and Trust segment operates in New England; South Florida; California; and Madison, Wisconsin.
The Investment Management segment hashad two consolidated affiliates, consisting of Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”) and Anchor Capital Advisors, LLC (“Anchor”) (together, the “Investment Managers”). included in its results for the first quarter of 2018, while the assets and liabilities of Anchor were classified as held for sale. Assets held for sale were$60.2 million and $58.8 million at March 31, 2018 and December 31, 2017, respectively, and liabilities held for sale were $4.7 million and $3.2 million at March 31, 2018 and December 31, 2017, respectively. In December 2017, the Company entered into an agreement to sell its entire ownership interest in Anchor in a transaction that would result in Anchor being majority-owned by members of its management team. The transaction closed in April 2018.
The Wealth Advisory segment has two consolidated affiliates, consisting of KLS Professional Advisors Group, LLC (“KLS”) and Bingham, Osborn & Scarborough, LLC (“BOS”) (together, the “Wealth Advisors” and, together with the Wealth Management and Trust and Investment Management segments, the “Wealth and Investment businesses”).
The Company conducts substantially all of its business through its four reportable segments. All significant intercompany accounts and transactions have been eliminated in consolidation.
The unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and include all necessary adjustments of a normal recurring nature which, in the opinion of management, are required for a fair presentation of the results of operations and financial condition of the Company. The interim results of consolidated operations are not necessarily indicative of the results for the entire year.
The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2016,2017, as filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation.
The Company’s significant accounting policies are described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, as filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies, except for the following new accounting pronouncements from the Financial Accounting Standards Board (the “FASB”) that were adopted effective January 1, 2017, 2018:
Accounting Standards Update (“ASU”) 2016-09,2017-12, Stock CompensationDerivatives and Hedging (Topic 718)815): Targeted Improvements to Employee Share-Based Payment Accounting for Hedging Activities(“ (“ASU 2016-09”), and ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”2017-12”). ASU 2016-09 had no cumulative effectAs a result of implementing this standard, the Company reclassified $5 thousand in unrealized losses on prior periods, and for cash flow purposes the provisions were adopted prospectively. The Company electedderivatives related to early adopt ASU 2017-04hedge ineffectiveness from accumulated other comprehensive income to retained earnings as of January 1, 2018. This ASU will provide more flexibility in the Company’s risk management activities and we believe it will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.


ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This amendment requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. As a result of the retrospective adoption of this ASU, $160 thousand for the three months ended March 31, 2017 has been reclassified from salaries and employee benefits expense to other expense within the Company’s consolidated statement of operations. For the three months ended March 31, 2018, $135 thousand is presented within other expense that would have been presented within salaries and employee benefits prior to adoption of ASU 2017-04 could increase or decrease2017-07.
ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”).  This update is intended to reduce diversity in practice in how certain transactions are classified in the amountstatement of cash flows. This ASU is effective for the Company beginning on January 1, 2018. The guidance requires application using a goodwill impairment charge should any ofretrospective transition method. This ASU did not have an impact on the Company’s reporting units with goodwill fail a Step 1 test in the future, as comparedconsolidated financial statements.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This amendment requires equity investments to the amount of a goodwill impairment charge under the existing standards depending on thebe measured at fair value with changes in fair value, net of tax, recognized in net income. As a result of implementing this standard, the reporting unit’s assets.Company reclassified $339 thousand in unrealized gains on available-for-sale equity investments, net of tax, from accumulated other comprehensive income to retained earnings as of January 1, 2018.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which was subsequently amended by additional ASUs, including ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, collectively, “ASU 2014-09 et al.” ASU 2014-09 et al. was adopted using the modified retrospective transition method as of January 1, 2018, however no cumulative effect adjustment was required. This new guidance was applied to all revenue contracts in place at the date of adoption. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 13: Revenue Recognition” for further details.



9

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

2.    Earnings Per Share
The treasury stock method of calculating earnings per share (“EPS”) is presented below for the three months ended March 31, 20172018 and 20162017. The following tables present the computations of basic and diluted EPS:
 Three months ended March 31,
 2018 2017
 (In thousands, except share and per share data)
Basic earnings per share - Numerator:   
Net income from continuing operations$22,038
 $14,996
Less: Net income attributable to noncontrolling interests1,050
 966
Net income from continuing operations attributable to the Company20,988
 14,030
Decrease/ (increase) in noncontrolling interests’ redemption values (1)846
 (297)
Dividends on preferred stock(869) (869)
Total adjustments to income attributable to common shareholders(23) (1,166)
Net income from continuing operations attributable to common shareholders, treasury stock method20,965
 12,864
Net income from discontinued operations1,698
 1,632
Net income attributable to common shareholders, treasury stock method$22,663
 $14,496
    
Basic earnings per share - Denominator:   
Weighted average basic common shares outstanding83,097,758
 81,951,179
Per share data - Basic earnings per share from:   
Continuing operations$0.25
 $0.16
Discontinued operations$0.02
 $0.02
Total attributable to common shareholders$0.27
 $0.18



10

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

 Three months ended March 31,
 2017 2016
(In thousands, except share and per share data) 
Basic earnings per share - Numerator:   
Net income from continuing operations$14,996
 $16,887
Less: Net income attributable to noncontrolling interests966
 911
Net income from continuing operations attributable to the Company14,030
 15,976
Decrease/ (increase) in noncontrolling interests’ redemption values (1)(297) 580
Dividends on preferred stock(869) (869)
Total adjustments to income attributable to common shareholders(1,166) (289)
Net income from continuing operations attributable to common shareholders, treasury stock method12,864
 15,687
Net income from discontinued operations1,632
 2,065
Net income attributable to common shareholders, treasury stock method$14,496
 $17,752
    
Basic earnings per share - Denominator:   
Weighted average basic common shares outstanding81,951,179
 81,301,499
Per share data - Basic earnings per share from:   
Continuing operations$0.16
 $0.19
Discontinued operations$0.02
 $0.03
Total attributable to common shareholders$0.18
 $0.22


Three months ended March 31,Three months ended March 31,
2017 20162018 2017
(In thousands, except share and per share data)   
(In thousands, except share and per share data)
Diluted earnings per share - Numerator:      
Net income from continuing operations attributable to common shareholders, after assumed dilution$12,864
 $15,687
$20,965
 $12,864
Net income from discontinued operations1,632
 2,065
1,698
 1,632
Net income attributable to common shareholders, after assumed dilution$14,496
 $17,752
$22,663
 $14,496
Diluted earnings per share - Denominator:      
Weighted average basic common shares outstanding81,951,179
 81,301,499
83,097,758
 81,951,179
Dilutive effect of:      
Stock options and performance-based and time-based restricted stock (2)1,455,333
 1,048,428
Stock options, performance-based and time-based restricted stock, and performance-based and time-based restricted stock units, and other dilutive securities (2)1,136,145
 1,455,333
Warrants to purchase common stock (2)1,154,406
 929,939
1,037,747
 1,154,406
Dilutive common shares2,609,739
 1,978,367
2,173,892
 2,609,739
Weighted average diluted common shares outstanding (2)84,560,918
 83,279,866
85,271,650
 84,560,918
Per share data - Diluted earnings per share from:      
Continuing operations$0.15
 $0.19
$0.25
 $0.15
Discontinued operations$0.02
 $0.02
$0.02
 $0.02
Total attributable to common shareholders$0.17
 $0.21
$0.27
 $0.17
Dividends per share declared and paid on common stock$0.11
 $0.10
$0.12
 $0.11
_____________________
(1)
See Part II. Item 8. “Financial Statements and Supplementary Data—Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the Financial Accounting Standards Board (“FASB”)FASB Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), an increase in redemption value from period to period reduces income attributable to common shareholders. Decreases in redemption value from period to period increase income attributable to common shareholders, but only to the extent that the cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.
(2)The diluted EPS computations for the three months ended March 31, 20172018 and 20162017 do not assume the conversion, exercise, or contingent issuance of the following shares for the following periods because the result would have been anti-dilutive for the periods indicated. As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:
Three months ended March 31,Three months ended March 31,
2017 20162018 2017
Shares excluded due to exercise price exceeding the average market price of common shares during the period (total outstanding):(In thousands)(In thousands)
Potential common shares from:      
Stock options, restricted stock, or other dilutive securities121
 387
Stock options39
 121
Total shares excluded due to exercise price exceeding the average market price of common shares during the period121
 387
39
 121

3.    Reportable segments
Management Reporting
The Company has four reportable segments (Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory), and the Holding Company (Boston Private Financial Holdings, Inc.). The financial performance of the Company is managed and evaluated by these five areas, including the four reportable segments.areas. The segments are managed separately as a result of the concentrations in each function.

11

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

Measurement of Segment Profit and Assets
The accounting policies of the segments are the same as those described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017.
Revenues, expenses, and assets are recorded by each segment, and separate financial statements are reviewed by their management and the Company’s segment chief executive officers.
Reconciliation of Reportable Segment Items
The following tables present a reconciliation of the revenues, profits, assets, and other significant items of reportable segments as of and for the three months ended March 31, 20172018 and 20162017. Interest expense on junior subordinated debentures is reported at the Holding Company.
Three months ended March 31,Three months ended March 31,
2017 20162018 2017
Private Banking(In thousands)(In thousands)
Net interest income$54,256
 $50,420
$58,131
 $54,256
Fees and other income1,828
 3,378
2,475
 1,828
Total revenues56,084
 53,798
60,606
 56,084
Provision/ (credit) for loan losses(181) (3,133)(1,795) (181)
Operating expense35,058
 31,275
39,627
 35,058
Income before income taxes21,207
 25,656
22,774
 21,207
Income tax expense6,269
 8,374
4,613
 6,269
Net income from continuing operations14,938
 17,282
18,161
 14,938
Net income attributable to the Company$14,938
 $17,282
$18,161
 $14,938
      
Assets$8,058,121
 $7,250,371
$8,185,803
 $8,058,121
Depreciation$1,371
 $1,146
$1,584
 $1,371
 Three months ended March 31,
 2018 2017
Wealth Management and Trust(In thousands)
Fees and other income$12,274
 $10,921
Operating expense10,694
 13,873
Income/ (loss) before income taxes1,580
 (2,952)
Income tax expense/ (benefit)475
 (1,166)
Net income/ (loss) from continuing operations1,105
 (1,786)
Net income/ (loss) attributable to the Company$1,105
 $(1,786)
    
Assets$71,560
 $74,408
Amortization of intangibles$701
 $727
Depreciation$321
 $337

12

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

 Three months ended March 31,
 2017 2016
Wealth Management and Trust(In thousands)
Fees and other income$10,921
 $11,056
Operating expense (1)13,873
 15,852
Income/ (loss) before income taxes(2,952) (4,796)
Income tax expense/ (benefit)(1,166) (1,939)
Net income/ (loss) from continuing operations(1,786) (2,857)
Net income/ (loss) attributable to the Company$(1,786) $(2,857)
    
Assets$74,408
 $84,253
Amortization of intangibles$727
 $745
Depreciation$337
 $231
 Three months ended March 31,
 2018 2017
Investment Management (1)(In thousands)
Net interest income$4
 $4
Fees and other income11,408
 10,859
Total revenues11,412
 10,863
Operating expense8,525
 8,354
Income before income taxes2,887
 2,509
Income tax expense671
 844
Net income from continuing operations2,216
 1,665
Noncontrolling interests488
 462
Net income attributable to the Company$1,728
 $1,203
    
Assets$66,996
 $92,255
Amortization of intangibles$
 $650
Depreciation$34
 $66
Three months ended March 31,Three months ended March 31,
2017 20162018 2017
Investment Management(In thousands)
Wealth Advisory(In thousands)
Net interest income$4
 $4
$48
 $17
Fees and other income10,859
 10,659
13,539
 12,843
Total revenues10,863
 10,663
13,587
 12,860
Operating expense8,354
 8,024
10,536
 9,443
Income before income taxes2,509
 2,639
3,051
 3,417
Income tax expense844
 879
786
 1,287
Net income from continuing operations1,665
 1,760
2,265
 2,130
Noncontrolling interests462
 477
562
 504
Net income attributable to the Company$1,203
 $1,283
$1,703
 $1,626
      
Assets$92,255
 $93,396
$73,054
 $73,182
Amortization of intangibles$650
 $650
$49
 $49
Depreciation$66
 $73
$163
 $226

13
 Three months ended March 31,
 2017 2016
Wealth Advisory(In thousands)
Net interest income$17
 $3
Fees and other income12,843
 12,742
Total revenues12,860
 12,745
Operating expense9,443
 9,694
Income before income taxes3,417
 3,051
Income tax expense1,287
 1,148
Net income from continuing operations2,130
 1,903
Noncontrolling interests504
 434
Net income attributable to the Company$1,626
 $1,469
    
Assets$73,182
 $74,901
Amortization of intangibles$49
 $191
Depreciation$226
 $215

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

Three months ended March 31,Three months ended March 31,
2017 20162018 2017
Holding Company and Eliminations(In thousands)(In thousands)
Net interest income$(635) $(548)$(800) $(635)
Fees and other income55
 187
47
 55
Total revenues(580) (361)(753) (580)
Operating expense2,052
 1,864
1,475
 2,052
Income/ (loss) before income taxes(2,632) (2,225)(2,228) (2,632)
Income tax expense/ (benefit)(681) (1,024)(519) (681)
Net income/ (loss) from continuing operations(1,951) (1,201)(1,709) (1,951)
Discontinued operations1,632
 2,065
1,698
 1,632
Net income/ (loss) attributable to the Company$(319) $864
$(11) $(319)
      
Assets$(82,846) $(89,258)
Depreciation$
 $11
Assets (including eliminations)$(79,054) $(82,846)
Three months ended March 31,Three months ended March 31,
2017 20162018 2017
Total Company(In thousands)(In thousands)
Net interest income$53,642
 $49,879
$57,383
 $53,642
Fees and other income36,506
 38,022
39,743
 36,506
Total revenues90,148
 87,901
97,126
 90,148
Provision/ (credit) for loan losses(181) (3,133)(1,795) (181)
Operating expense68,780
 66,709
70,857
 68,780
Income before income taxes21,549
 24,325
28,064
 21,549
Income tax expense6,553
 7,438
6,026
 6,553
Net income from continuing operations14,996
 16,887
22,038
 14,996
Noncontrolling interests966
 911
1,050
 966
Discontinued operations1,632
 2,065
1,698
 1,632
Net income attributable to the Company$15,662
 $18,041
$22,686
 $15,662
      
Assets$8,215,120
 $7,413,663
$8,318,359
 $8,215,120
Amortization of intangibles$1,426
 $1,586
$750
 $1,426
Depreciation$2,000
 $1,676
$2,102
 $2,000
_____________________
(1)Operating expense includes no restructuring expenseResults for the Investment Management Segment for the three months ended March 31, 2018 and 2017 include results for DGHM and $1.1 million of restructuring expensesAnchor. Assets for the three months endedInvestment Management Segment at March 31, 2016 related to the Wealth Management2018 and Trust segment.2017 include assets of DGHM and Anchor; however, Anchor’s assets and liabilities are classified as held for sale at March 31, 2018.



14

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

4.    Investments
The following table presentstables present a summary of investment securities:
Amortized
Cost
 Unrealized 
Fair
Value
Amortized
Cost
 Unrealized 
Fair
Value
Gains Losses Gains Losses 
(In thousands)
As of March 31, 2017       
Available-for-sale securities at fair value:       
U.S. government and agencies$45,344
 $70
 $(746) $44,668
Government-sponsored entities346,363
 949
 (1,965) 345,347
Municipal bonds298,751
 3,089
 (3,911) 297,929
Mortgage-backed securities (1)573,879
 753
 (14,225) 560,407
Other7,423
 436
 (2) 7,857
Total$1,271,760
 $5,297
 $(20,849) $1,256,208
       
Held-to-maturity securities at amortized cost:       
U.S. government and agencies$9,977
 $
 (7) $9,970
Mortgage-backed securities (1)$88,447
 $72
 $(445) $88,074
Total$98,424
 $72
 $(452) $98,044
       
As of December 31, 2016       
At March 31, 2018       
Available-for-sale securities at fair value:              
U.S. government and agencies$40,704
 $86
 $(854) $39,936
$35,060
 $
 $(1,253) $33,807
Government-sponsored entities337,865
 1,058
 (2,259) 336,664
285,992
 
 (5,429) 280,563
Municipal bonds296,271
 2,116
 (4,990) 293,397
302,556
 1,800
 (4,073) 300,283
Mortgage-backed securities (1)584,960
 928
 (15,561) 570,327
508,009
 341
 (21,415) 486,935
Other23,361
 447
 
 23,808
16,909
 
 
 16,909
Total$1,283,161
 $4,635
 $(23,664) $1,264,132
$1,148,526
 $2,141
 $(32,170) $1,118,497
              
Held-to-maturity securities at amortized cost:              
Mortgage-backed securities (1)$93,079
 $1
 $(476) $92,604
$70,809
 $
 $(1,922) $68,887
Total$93,079
 $1
 $(476) $92,604
$70,809
 $
 $(1,922) $68,887
       
At December 31, 2017       
Available-for-sale securities at fair value:       
U.S. government and agencies$35,132
 $
 $(833) $34,299
Government-sponsored entities305,101
 22
 (2,622) 302,501
Municipal bonds299,647
 4,559
 (1,148) 303,058
Mortgage-backed securities (1)521,753
 491
 (12,568) 509,676
Other20,794
 
 
 20,794
Total$1,182,427
 $5,072
 $(17,171) $1,170,328
       
Held-to-maturity securities at amortized cost:       
Mortgage-backed securities (1)$74,576
 $
 $(795) $73,781
Total$74,576
 $
 $(795) $73,781
_____________________
(1) All mortgage-backed securities are guaranteed by U.S. government agencies or government-sponsored entities.
The following table presents the maturities of available-for-sale investment securities, based on contractual maturity, as of March 31, 20172018. Certain securities are callable before their final maturity. Additionally, certain securities (such as mortgage-backed securities) are shown within the table below based on their final (contractual) maturity, but due to prepayments and amortization are expected to have shorter lives.
Available-for-sale SecuritiesAvailable-for-sale Securities
Amortized
cost
 
Fair
value
Amortized
cost
 
Fair
value
(In thousands)
Within one year$49,047
 $49,545
$73,320
 $73,128
After one, but within five years378,158
 379,294
334,864
 329,235
After five, but within ten years346,856
 337,295
304,561
 291,757
Greater than ten years497,699
 490,074
435,781
 424,377
Total$1,271,760
 $1,256,208
$1,148,526
 $1,118,497

15

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

The following table presents the maturities of held-to-maturity investment securities, based on contractual maturity, as of March 31, 20172018.
Held-to-maturity SecuritiesHeld-to-maturity Securities
Amortized
cost
 
Fair
value
Amortized
cost
 
Fair
value
(In thousands)
Within one year$9,977
 $9,970
After one, but within five years
 
After five, but within ten years10,098
 10,075
$20,817
 $20,198
Greater than ten years78,349
 77,999
49,992
 48,689
Total$98,424
 $98,044
$70,809
 $68,887
The following table presents the proceeds from sales, gross realized gains and gross realized losses for available-for-sale securities that were sold or called during the following periods:periods as well as changes in the fair value of equity securities as prescribed by ASC 321, Investment - Equity Securities. ASU 2016-01, Recognition and Measurements of Financial Assets and Financial Liabilities was adopted on January 1, 2018, at which time a cumulative effect adjustment of $339 thousand was recorded to reclassify the amount of accumulated unrealized gains related to equity securities from accumulated other comprehensive income to retained earnings.
Three months ended March 31,Three months ended March 31,
2017 20162018 2017
(In thousands)
Proceeds from sales and calls$32,717
 $15,292
$15,877
 $32,717
Realized gains19
 2
7
 19
Realized losses
 (1)(1) 
Change in unrealized gain/ (loss) on equity securities reflected in the consolidated statement of operations(30) n/a
The following table presentstables present information regarding securities as ofat March 31, 20172018 and December 31, 20162017 having temporary impairment, due to the fair values having declined below the amortized cost of the individual securities, and the time period that the investments have been temporarily impaired.
Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
# of
securities
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
# of
securities
March 31, 2017             
(In thousands, except number of securities)
March 31, 2018             
Available-for-sale securities(In thousands)             
U.S. government and agencies$19,194
 $(740) $293
 $(6) $19,487
 $(746) 3
$14,844
 $(138) $18,963
 $(1,115) $33,807
 $(1,253) 6
Government-sponsored entities156,195
 (1,965) 
 
 156,195
 (1,965) 21
223,047
 (3,391) 57,516
 (2,038) 280,563
 (5,429) 41
Municipal bonds111,601
 (3,900) 1,218
 (11) 112,819
 (3,911) 66
141,784
 (1,811) 49,429
 (2,262) 191,213
 (4,073) 102
Mortgage-backed securities (1)484,350
 (12,662) 44,271
 (1,563) 528,621
 (14,225) 104
100,689
 (2,908) 370,008
 (18,507) 470,697
 (21,415) 109
Other18
 (2) 
 
 18
 (2) 2
Total$771,358
 $(19,269) $45,782
 $(1,580) $817,140
 $(20,849) 196
$480,364
 $(8,248) $495,916
 $(23,922) $976,280
 $(32,170) 258
                          
Held-to-maturity securities                          
U.S. government and agencies9,970
 (7) 
 
 9,970
 (7) 2
Mortgage-backed securities (1)$70,807
 $(445) $
 $
 $70,807
 $(445) 13
$55,189
 $(1,505) $13,698
 $(417) $68,887
 $(1,922) 16
Total$80,777
 $(452) $
 $
 $80,777
 $(452) 15
$55,189
 $(1,505) $13,698
 $(417) $68,887
 $(1,922) 16

16

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

Less than 12 months 12 months or longer TotalLess than 12 months 12 months or longer Total
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
# of
securities
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
# of
securities
(In thousands, except number of securities)(In thousands, except number of securities)
December 31, 2016             
December 31, 2017             
Available-for-sale securities                          
U.S. government and agencies$19,094
 $(838) $643
 $(16) $19,737
 $(854) 4
$14,902
 $(79) $19,397
 $(754) $34,299
 $(833) 6
Government-sponsored entities125,412
 (2,259) 
 
 125,412
 (2,259) 18
220,275
 (1,350) 38,273
 (1,272) 258,548
 (2,622) 36
Municipal bonds182,395
 (4,957) 2,720
 (33) 185,115
 (4,990) 109
46,112
 (131) 50,842
 (1,017) 96,954
 (1,148) 63
Mortgage-backed securities (1)492,008
 (13,988) 41,544
 (1,573) 533,552
 (15,561) 99
97,117
 (903) 386,785
 (11,665) 483,902
 (12,568) 103
Other
 
 
 
 
 
 
Total$818,909
 $(22,042) $44,907
 $(1,622) $863,816
 $(23,664) 230
$378,406
 $(2,463) $495,297
 $(14,708) $873,703
 $(17,171) 208
                          
Held-to-maturity securities                          
Mortgage-backed securities (1)$87,483
 $(476) $
 $
 $87,483
 $(476) 15
$59,218
 $(534) $14,563
 $(261) $73,781
 $(795) 16
Total$87,483
 $(476) $
 $
 $87,483
 $(476) 15
$59,218
 $(534) $14,563
 $(261) $73,781
 $(795) 16
_____________________
(1) All mortgage-backed securities are guaranteed by U.S. government agencies or government-sponsored entities.
TheAs of March 31, 2018, the U.S. government and agencies securities, government-sponsored entities securities and mortgage-backed securities in the first table above had current Standard and Poor’s credit ratings of AA.AAA. The municipal bonds in the first table above had a current Standard and Poor’s credit rating of at least AA-. The other securities consisted of equity securities. At March 31, 2017,2018, the Company does not consider these investments other-than-temporarily impaired because the decline in fair value on investments is primarily attributed to changes in interest rates and not credit quality.
At March 31, 20172018 and December 31, 2016,2017, the amount of investment securities in an unrealized loss position greater than 12 months, as well as in total, was primarily due to changes in interest rates. As of March 31, 2017,2018, the Company had no intent to sell any securities in an unrealized loss position and it is not more likely than not that the Company would be forced to sell any of these securities prior to the full recovery of all unrealized loss amounts.
Cost method investments, which are included in other assets, can be temporarily impaired when the fair values decline below the amortized costs of the individual investments. There were no cost method investments with unrealized losses as of March 31, 20172018 or December 31, 2016.2017. The Company’s cost method investments primarily include low income housing partnerships which generate tax credits. The Company also holds partnership interests in venture capital funds formed to provide financing to small businesses and to promote community development. The Company had $34.7$41.8 million and $34.2$39.4 million in cost method investments included in other assets as of March 31, 20172018 and December 31, 2016,2017, respectively.

5.    Fair Value Measurements
Fair value is defined under GAAP as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy established in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

17

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

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 20172018 and December 31, 2016,2017, aggregated by the level in the fair value hierarchy within which those measurements fall:
As of March 31, 2017 Fair value measurements at reporting date using:As of March 31, 2018 Fair value measurements at reporting date using:
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
(In thousands)
Assets:              
Available-for-sale securities:              
U.S. government and agencies$44,668
 $44,375
 $293
 $
$33,807
 $33,676
 $131
 $
Government-sponsored entities345,347
 
 345,347
 
280,563
 
 280,563
 
Municipal bonds297,929
 
 297,929
 
300,283
 
 300,283
 
Mortgage-backed securities560,407
 
 560,407
 
486,935
 
 486,935
 
Other7,857
 7,857
 
 
16,909
 16,909
 
 
Total available-for-sale securities1,256,208
 52,232
 1,203,976
 
1,118,497
 50,585
 1,067,912
 
Derivatives - interest rate customer swaps16,654
 
 16,654
 
22,810
 
 22,810
 
Derivatives - risk participation agreement13
 
 13
 
Derivatives - customer foreign exchange forwards1
 
 1
 
Derivatives - interest rate swaps1,286
 
 1,286
 
Other investments6,406
 6,406
 
 
7,187
 7,187
 
 
              
Liabilities:              
Derivatives - interest rate customer swaps$16,504
 $
 $16,504
 $
$23,097
 $
 $23,097
 $
Derivatives - interest rate swaps666
 
 666
 
Derivatives - customer foreign exchange forwards1
 
 1
 
Derivatives - risk participation agreement5
 
 5
 
142
 
 142
 
Other liabilities6,406
 6,406
 
 
7,187
 7,187
 
 



18

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

  Fair value measurements at reporting date using:  Fair value measurements at reporting date using:
As of December 31, 2016 
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
As of December 31, 2017 
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
(In thousands)
Assets:              
Available-for-sale securities:              
U.S. government and agencies$39,936
 $39,293
 $643
 $
$34,299
 $34,096
 $203
 $
Government-sponsored entities336,664
 
 336,664
 
302,501
 
 302,501
 
Municipal bonds293,397
 
 293,397
 
303,058
 
 303,058
 
Mortgage-backed securities570,327
 
 570,327
 
509,676
 
 509,676
 
Other23,808
 23,808
 
 
20,794
 20,794
 
 
Total available-for-sale securities1,264,132
 63,101
 1,201,031
 
1,170,328
 54,890
 1,115,438
 
Derivatives - interest rate customer swaps17,032
 
 17,032
 
18,575
 
 18,575
 
Derivatives - risk participation agreement15
 
 15
 
Derivatives - interest rate swaps555
 
 555
 
Derivatives - risk participation agreements1
 
 1
 
Derivatives - customer foreign exchange forwards2
 
 2
 
Other investments6,110
 6,110
 
 
7,062
 7,062
 
 
              
Liabilities:              
Derivatives - interest rate customer swaps$16,560
 $
 $16,560
 $
$18,953
 $
 $18,953
 $
Derivatives - interest rate swaps1,040
 
 1,040
 
80
 
 80
 
Derivatives - risk participation agreement6
 
 6
 
Derivatives - risk participation agreements108
 
 108
 
Derivatives - customer foreign exchange forwards2
 
 2
 
Other liabilities6,110
 6,110
 
 
7,062
 7,062
 
 
As of March 31, 20172018 and December 31, 2016,2017, available-for-sale securities consisted primarily of U.S. government and agenciesagency securities, government-sponsored entities securities, municipal bonds, mortgage-backed securities, and other available-for-sale securities. The equities (which are categorized as other available-for-sale securities)Available-for-sale Level 1 securities are valued with prices quoted in active markets. Sixmarkets and include U.S. Treasury securities as of March 31, 2017 and five U.S. Treasury securities as of December 31, 2016, are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. The government-sponsored entities securities, municipal bonds, mortgage-backed securities, and certain investments in Small Business Administration (“SBA”) loans (which are categorized as U.S. government and agencies securities) and equities (which are categorized as other available-for-sale securities). Available-for-sale Level 2 securities generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets. Therefore, they have beenassets and include government-sponsored entities securities, municipal bonds, mortgage-backed securities, and certain investments in SBA loans (which are categorized as a Level 2 measurement.U.S. government and agencies securities). No investments held as of March 31, 20172018 or December 31, 20162017 were categorized as Level 3. There were no changes in the valuation techniques used for measuring the fair value of available-for-sale securities in the three month periodsmonths ended March 31, 2017 or 2016.2018.
In managing its interest rate and credit risk, the Company utilizes derivative instruments such asincluding interest rate customer swaps, interest rate swaps, and risk participation agreements. As a service to its customers, the Company may utilize derivative instruments such asincluding customer foreign exchange forward contracts to manage its foreign exchange risk, if any. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore,volatilities, and therefore, they have been categorized as a Level 2 measurement as of March 31, 20172018 and December 31, 2016.2017. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements-NoteStatements - Note 8: Derivatives and Hedging Activities” for further details.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position.

19

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

The Company has determined that the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As a result, the Company has
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy as of March 31, 20172018 and December 31, 2016.2017.
Other investments, which are not considered available-for-sale investments, consist of deferred compensation trusts, which consist of publicly traded mutual fund investments held in deferred compensation trusts that are valued at prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement as of March 31, 20172018 and December 31, 2016.2017.
There were no transfers between levels for assets or liabilities recorded at fair value on a recurring basis during the three month periodsmonths ended March 31, 20172018 and 2016.2017.
There were no Level 3 assets valued on a recurring basis at March 31, 20172018 or December 31, 2016.2017.
The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis during the period ended March 31, 2018, aggregated by the level in the fair value hierarchy within which those measurements fall. There were no collateral-dependent impaired loans held at March 31, 2017 that had write-downs in fair value or whose specific reserve changed during the first three months of 2017. The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis during the period ended March 31, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall:
As of March 31, 2016 Fair value measurements at reporting date using: Gain (losses) from fair value changesAs of March 31, 2018 Fair value measurements at reporting date using: Gain (losses) from fair value changes
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
 Three months ended March 31, 2016
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
 Three months ended March 31, 2018
(In thousands) (In thousands)
Assets:                  
Impaired loans (1)$2,428
 $
 $
 $2,428
 $(2,064)$1,835
 $
 $
 $1,835
 $(216)
_____________________
(1)Collateral-dependent impaired loans held at March 31, 20162018 that had write-downs in fair value or whose specific reserve changed during the first three months of 2016.2018.
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
As of March 31, 2016As of March 31, 2018
Fair Value 
Valuation
technique
 
Unobservable
Input
 
Range of
Inputs
Utilized
 
Weighted
Average of
Inputs
Utilized
Fair Value 
Valuation
Technique
 
Unobservable
Input
 
Range of
Inputs
Utilized
 
Weighted
Average of
Inputs
Utilized
(In thousands) (In thousands) 
Impaired Loans$2,428
 Appraisals of Collateral Discount for costs to sell 0% - 7% 5%$1,835
 Appraisals of Collateral Discount for costs to sell 0% - 24% 14%
Appraisal adjustments 10% - 33% 16%Appraisal adjustments 0% - 26% 16%

Impaired loans include those loans that were adjusted to the fair value of underlying collateral as required under ASC 310, Receivables. The amount does not include impaired loans that are measured based on expected future cash flows discounted at the respective loan’s original effective interest rate, as that amount is not considered a fair value measurement. The Company uses appraisals, which management may adjust to reflect estimated fair value declines, or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property or consideration of broker quotes. The appraisers use a market, income, and/or a cost approach in determining the value of the collateral. Therefore they have been categorized as a Level 3 measurement.

20

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

The following tables present the carrying values and fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis (other than certain loans, as noted below):basis:
As of March 31, 2017As of March 31, 2018
Book Value Fair Value 
Quoted prices 
in active
markets for
identical assets 
(Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
Book Value Fair Value 
Quoted prices 
in active
markets for
identical
assets 
(Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
(In thousands)
FINANCIAL ASSETS:                  
Cash and cash equivalents$165,186
 $165,186
 $165,186
 $
 $
$77,085
 $77,085
 $77,085
 $
 $
Investment securities held-to-maturity98,424
 98,044
 9,970
 88,074
 
70,809
 68,887
 
 68,887
 
Loans held for sale350
 356
 
 356
 
3,918
 3,967
 
 3,967
 
Loans, net6,172,186
 6,162,133
 
 
 6,162,133
6,529,429
 6,474,781
 
 
 6,474,781
Other financial assets83,153
 83,153
 
 83,153
 
87,709
 87,709
 
 87,709
 
FINANCIAL LIABILITIES:                  
Deposits6,246,620
 6,246,452
 
 6,246,452
 
6,584,322
 6,582,187
 
 6,582,187
 
Securities sold under agreements to repurchase67,249
 67,249
 
 67,249
 
85,257
 85,257
 
 85,257
 
Federal Home Loan Bank borrowings885,445
 886,546
 
 886,546
 
611,588
 607,606
 
 607,606
 
Junior subordinated debentures106,363
 96,363
 
 
 96,363
106,363
 96,363
 
 
 96,363
Other financial liabilities1,884
 1,884
 
 1,884
 
1,993
 1,993
 
 1,993
 

As of December 31, 2016As of December 31, 2017
Book Value Fair Value 
Quoted prices 
in active
markets for
identical assets 
(Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
Book Value Fair Value 
Quoted prices 
in active
markets for
identical
assets 
(Level 1)
 
Significant 
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
(In thousands)
FINANCIAL ASSETS:                  
Cash and cash equivalents$106,557
 $106,557
 $106,557
 $
 $
$120,541
 $120,541
 $120,541
 $
 $
Investment securities held-to-maturity93,079
 92,604
 
 92,604
 
74,576
 73,781
 
 73,781
 
Loans held for sale3,464
 3,428
 
 3,428
 
4,697
 4,737
 
 4,737
 
Loans, net6,036,277
 6,021,611
 
 
 6,021,611
6,430,286
 6,388,297
 
 
 6,388,297
Other financial assets77,956
 77,956
 
 77,956
 
93,449
 93,449
 
 93,449
 
FINANCIAL LIABILITIES:                  
Deposits6,085,146
 6,084,765
 
 6,084,765
 
6,510,246
 6,509,197
 
 6,509,197
 
Securities sold under agreements to repurchase59,624
 59,624
 
 59,624
 
32,169
 32,169
 
 32,169
 
Federal funds purchased80,000
 80,000
 
 80,000
 
30,000
 30,000
 
 30,000
 
Federal Home Loan Bank borrowings734,205
 734,941
 
 734,941
 
693,681
 692,402
 
 692,402
 
Junior subordinated debentures106,363
 96,363
 
 
 96,363
106,363
 96,363
 
 
 96,363
Other financial liabilities1,942
 1,942
 
 1,942
 
2,224
 2,224
 
 2,224
 
The estimated fair values have been determined by using available quoted market information or other appropriate valuation methodologies. The aggregate fair value amounts presented above do not represent the underlying value toof the financial assets and liabilities of the Company taken as a whole.whole as they do not reflect any premium or discount the Company might recognize if the assets were sold or the liabilities sold, settled, or redeemed. An excess of fair value over book value on financial assets represents a premium, or gain, the Company might recognize if the assetassets were sold, while an excess of book value over fair value on financial liabilities represents a premium, or gain, the companyCompany might recognize if the liabilityliabilities were sold. Conversely, losses would be recognized if an asset was sold where the book value exceeded the fair value or a liability was sold where the fair value exceeded the book value.

21

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

sold, settled, or redeemed prior to maturity. Conversely, losses would be recognized if assets were sold where the book value exceeded the fair value or liabilities were sold where the fair value exceeded the book value.
The fair value estimates provided are made at a specific point in time, based on relevant market information and the characteristics of the financial instrument. The estimates do not provide for any premiums or discounts that could result from concentrations of ownership of a financial instrument. Because no active market exists for some of the Company’s financial instruments, certain fair value estimates are based on subjective judgments regarding current economic conditions, risk characteristics of the financial instruments, future expected loss experience, prepayment assumptions, and other factors. The resulting estimates involve uncertainties and are considered best estimates. Changes made to any of the underlying assumptions could significantly affect the estimates.
Cash and cash equivalents
The carrying value reported in the balance sheetssheet for cash and cash equivalents approximates fair value due to the short-term nature of their maturities and are classified as Level 1.
Held-to-maturity investment securities
Held-to-maturity securities currently include mortgage-backed securities and a U.S. Treasury security. One U.S. Treasury security as of March 31, 2017 is valued with prices quoted in active markets. Therefore, it has been categorized as a Level 1 measurement. There were no U.S. Treasury securities held-to-maturity as of December 31, 2016.securities. The mortgage-backed securities are fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities is based on quoted market prices obtained from external pricing services. The principal market for our securities portfolio is the secondary institutional market, with an exit price that is predominantly reflective of bid level pricing in that market. Accordingly, these held-to-maturity mortgage-backed securities are included in the Level 2 fair value category.
Loans held for sale
Loans held for sale are recorded at the lower of cost or fair value in the aggregate. Fair value estimates are based on actual commitments to sell the loans to investors at an agreed upon price or current market prices if rates have changed since the time the loan closed. Accordingly, loans held for sale are included in the Level 2 fair value category.
Loans, net
Fair value estimates are based on loans with similar financial characteristics. Fair values of commercial and residential mortgage loans are estimated by discounting contractual cash flows adjusted for prepayment estimates and using discount rates approximately equal to current market rates on loans with similar credit and interest rate characteristics and maturities. The fair value estimates for home equity and other loans are based on outstanding loan terms and pricing in the local markets. The method of estimating the fair value of the loans disclosed in the table above does not incorporate the exit price concept in the presentation of the fair value of these financial instruments. Net loans are included in the Level 3 fair value category based upon the inputs and valuation techniques used.
Other financial assets
Other financial assets consist of accrued interest and fees receivable, and stock in the Federal Home Loan Bank of Boston (“FHLB”) and the Federal Reserve Bank (“FRB”), for which the carrying amount approximates fair value, and are classified as Level 2.
Deposits
The fair values reported for transaction accounts (demand, NOW, savings, and money market) equal their respective book values reported on the balance sheetssheet and are classified as Level 2. The fair values disclosed are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on certificates of deposit with similar remaining maturities and are classified as Level 2.
Securities sold under agreements to repurchase
The fair value of securities sold under agreements to repurchase is estimated based on contractual cash flows discounted at the Bank’s incremental borrowing rate for FHLB borrowings with similar maturities and therefore these securities have been classified as Level 2.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

Federal funds purchased
The carrying amounts of federal funds purchased approximate fair value due to their short-term nature and therefore these funds have been classified as Level 2.

22

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

Federal Home Loan Bank borrowings
The fair value reported for FHLB borrowings is estimated based on the discounted value of contractual cash flows. The discount rate used is based on the Bank’s estimated current incremental borrowing rate for FHLB borrowings of similar maturities and therefore these borrowings have been classified as Level 2.
Junior subordinated debentures
The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I and Boston Private Capital Trust II were estimated using Level 3 inputs such as the interest rates on these securities, current rates for similar debt, a consideration for illiquidity of trading in the debt, and regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt.
Other financial liabilities
Other financial liabilities consistconsists of accrued interest payable for which the carrying amount approximates fair value and is classified as Level 2.
Financial instruments with off-balance sheet risk
The Bank’s commitments to originate loans and for unused lines and outstanding letters of credit are primarily at market interest rates and therefore, the carrying amount approximates fair value.

6.    Loan Portfolio and Credit Quality
The Bank’s lending activities are conducted principally in the regions of New England, the San Francisco Bay Area, and Southern California. The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, commercial tax exempttax-exempt loans, construction and land loans, and home equity and other consumer loans. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank’s single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank’s lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including, in particular, the performance of the construction sector. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changing conditions in the New England, the San Francisco Bay Area, and Southern California economies and real estate markets.
Total loans include deferred loan origination (fees)/ costs, net, of $6.3 million and $5.9 million as of March 31, 2017 and December 31, 2016, respectively.
The following table presents a summary of the loan portfolio bybased on the portfolio segment and class of receivable as of the dates indicated:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
(In thousands)(In thousands)
Commercial and industrial$580,354
 $611,370
$531,093
 $520,992
Commercial tax exempt409,432
 398,604
Commercial tax-exempt420,757
 418,698
Total commercial and industrial989,786
 1,009,974
951,850
 939,690
Commercial real estate2,368,627
 2,302,244
2,465,003
 2,440,220
Construction and land117,007
 104,839
165,240
 164,990
Residential2,463,616
 2,379,861
2,737,369
 2,682,533
Home equity114,536
 118,817
94,331
 99,958
Consumer and other196,645
 198,619
188,534
 177,637
Total$6,250,217
 $6,114,354
$6,602,327
 $6,505,028

23

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

The following table presents nonaccrual loans receivable by portfolio segment and class of receivable as of the dates indicated:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
(In thousands)(In thousands)
Commercial and industrial$572
 $572
$1,669
 $748
Commercial tax exempt4,337
 
Commercial tax-exempt
 
Total commercial and industrial4,909
 572
1,669
 748
Commercial real estate3,856
 4,583
1,839
 1,985
Construction and land147
 179
109
 110
Residential10,962
 10,908
9,932
 8,470
Home equity1,070
 1,072
2,816
 2,840
Consumer and other1
 1
15
 142
Total$20,945
 $17,315
$16,380
 $14,295
The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, although infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were no loans 90 days or more past due, but still accruing as of both March 31, 20172018 and December 31, 2016.2017. The Bank’s policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six consecutive months). For troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months in accordance with the restructured loan terms, along with meeting other criteria.
The following tables show the payment status of loans receivable by class of receivable as of the dates indicated:
March 31, 2017March 31, 2018
Accruing Past Due Nonaccrual Loans    Accruing Past Due Nonaccrual Loans    
30-59 Days Past Due 60-89 Days Past Due Total Accruing Past Due Current 30-89 Days Past Due 
90 Days or
Greater
Past Due
 Total Non-Accrual Loans Current Accruing Loans 
Total
Loans
Receivable
30-59 Days Past Due 60-89 Days Past Due Total Accruing Past Due Current 30-89 Days Past Due 
90 Days or
Greater
Past Due
 Total Non-Accrual Loans Current Accruing Loans 
Total
Loans
Receivable
(In thousands)(In thousands)
Commercial and industrial$2,115
 $223
 $2,338
 $491
 $
 $81
 $572
 $577,444
 $580,354
$3,894
 $700
 $4,594
 $311
 $100
 $1,258
 $1,669
 $524,830
 $531,093
Commercial tax exempt
 
 
 
 4,337
 
 4,337
 405,095
 409,432
Commercial tax-exempt
 
 
 
 
 
 
 420,757
 420,757
Commercial real estate8,251
 9,518
 17,769
 1,673
 546
 1,637
 3,856
 2,347,002
 2,368,627
2,507
 
 2,507
 1
 151
 1,687
 1,839
 2,460,657
 2,465,003
Construction and land109
 
 109
 85
 28
 34
 147
 116,751
 117,007
64
 
 64
 
 
 109
 109
 165,067
 165,240
Residential6,078
 
 6,078
 7,618
 954
 2,390
 10,962
 2,446,576
 2,463,616
12,489
 
 12,489
 3,183
 3,115
 3,634
 9,932
 2,714,948
 2,737,369
Home equity780
 
 780
 
 
 1,070
 1,070
 112,686
 114,536
325
 339
 664
 67
 
 2,749
 2,816
 90,851
 94,331
Consumer and other1,406
 245
 1,651
 1
 
 
 1
 194,993
 196,645
58
 
 58
 
 6
 9
 15
 188,461
 188,534
Total$18,739
 $9,986
 $28,725
 $9,868
 $5,865
 $5,212
 $20,945
 $6,200,547
 $6,250,217
$19,337
 $1,039
 $20,376
 $3,562
 $3,372
 $9,446
 $16,380
 $6,565,571
 $6,602,327

24

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

December 31, 2016December 31, 2017
Accruing Past Due Nonaccrual Loans    Accruing Past Due Nonaccrual Loans    
30-59 Days Past Due 60-89 Days Past Due Total Accruing Past Due Current 30-89 Days Past Due 90 Days or Greater Past Due Total Non-Accrual Loans Current Accruing Loans Total Loans Receivable30-59 Days Past Due 60-89 Days Past Due Total Accruing Past Due Current 30-89 Days Past Due 90 Days or Greater Past Due Total Non-Accrual Loans Current Accruing Loans Total Loans Receivable
(In thousands)(In thousands)
Commercial and industrial$541
 $1,078
 $1,619
 $537
 $
 $35
 $572
 $609,179
 $611,370
$10,903
 $849
 $11,752
 $355
 $
 $393
 $748
 $508,492
 $520,992
Commercial tax exempt
 
 
 
 
 
 
 398,604
 398,604
Commercial tax-exempt
 
 
 
 
 
 
 418,698
 418,698
Commercial real estate3,096
 
 3,096
 2,311
 835
 1,437
 4,583
 2,294,565
 2,302,244
4,043
 
 4,043
 163
 
 1,822
 1,985
 2,434,192
 2,440,220
Construction and land
 
 
 129
 12
 38
 179
 104,660
 104,839

 
 
 
 
 110
 110
 164,880
 164,990
Residential3,646
 536
 4,182
 2,148
 1,274
 7,486
 10,908
 2,364,771
 2,379,861
7,239
 1,635
 8,874
 805
 3,172
 4,493
 8,470
 2,665,189
 2,682,533
Home equity245
 
 245
 
 80
 992
 1,072
 117,500
 118,817
355
 
 355
 
 71
 2,769
 2,840
 96,763
 99,958
Consumer and other5,995
 
 5,995
 1
 
 
 1
 192,623
 198,619
24
 
 24
 17
 125
 
 142
 177,471
 177,637
Total$13,523
 $1,614
 $15,137
 $5,126
 $2,201
 $9,988
 $17,315
 $6,081,902
 $6,114,354
$22,564
 $2,484
 $25,048
 $1,340
 $3,368
 $9,587
 $14,295
 $6,465,685
 $6,505,028
Nonaccrual and delinquent loans are affected by many factors, such as economic and business conditions, interest rates, unemployment levels, and real estate collateral values, among others. In periods of prolonged economic decline, borrowers may become more severely affected over time as liquidity levels decline and the borrower’s ability to continue to make payments deteriorates. With respect to real estate collateral values, the declines from the peak, as well as the value of the real estate at the time of origination versus the current value, can impact the level of problem loans. For instance, if the loan to value ratio at the time of renewal has increased due to the decline in the real estate value since origination, the loan may no longer meet the Bank’s underwriting standards and may be considered for classification as a problem loan dependent upon a review of risk factors.
Generally when a collateral dependent loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank will continue to obtain updated appraisals as deemed necessary, especially during periods of declining property values.
The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more.
Credit Quality Indicators
The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management’s judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in general economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers’ ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company’s financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company’s analysis of credit risk. Generally, only commercial loans, including commercial real estate, other commercial and industrial loans, commercial tax exempttax-exempt loans, and construction and land loans, are given a numerical grade.
A summary of the rating system used by the Bank, repeated here from Part II. Item 8. “Financial Statements and Supplementary Data—Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, follows:
Pass - All loans graded as pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan losses. For residential, home equity and consumer loans, the Bank classifies loans as pass unless there is known information such as delinquency or client requests for modifications which, due to financial difficulty, would then generally result in a risk rating such as special mention or more severe depending on the factors.
Special Mention - Loans rated in this category are defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the

25

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

deterioration of the repayment prospects for the credit or the Bank’s credit position. These loans are currently protected but have the potential to deteriorate to a substandard rating. For commercial loans, the borrower’s financial performance may be inconsistent or below forecast, creating the possibility of liquidity problems and shrinking debt service coverage. In loans having this rating, the primary source of repayment is still good, but there is increasing reliance on collateral or guarantor support. Collectability of the loan is not yet in jeopardy. In particular, loans in this category are considered more variable than other categories, since they will typically migrate through categories more quickly.
Substandard - Loans rated in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard credit has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans may be either still accruing or nonaccruing depending upon the severity of the risk and other factors such as the value of the collateral, if any, and past due status.
Doubtful - Loans rated in this category indicate that collection or liquidation in full on the basis of currently existing facts, conditions, and values, is highly questionable and improbable. Loans in this category are usually on nonaccrual and classified as impaired.
The following tables present the loan portfolio’s credit risk profile by internally assigned grade and class of receivable as of the dates indicated:
March 31, 2017March 31, 2018
By Loan Grade or Nonaccrual Status  By Loan Grade or Nonaccrual Status  
Pass Special Mention Accruing Substandard Nonaccrual Loans TotalPass 
Special
Mention
 
Accruing
Substandard
 
Nonaccrual
Loans
 Total
(In thousands)(In thousands)
Commercial and industrial$558,621
 $10,743
 $10,418
 $572
 $580,354
$512,546
 $11,452
 $5,426
 $1,669
 $531,093
Commercial tax exempt399,442
 5,653
 
 4,337
 409,432
Commercial tax-exempt420,757
 
 
 
 420,757
Commercial real estate2,282,055
 33,291
 49,425
 3,856
 2,368,627
2,380,144
 51,636
 31,384
 1,839
 2,465,003
Construction and land113,604
 109
 3,147
 147
 117,007
158,108
 
 7,023
 109
 165,240
Residential2,451,267
 
 1,387
 10,962
 2,463,616
2,726,100
 
 1,337
 9,932
 2,737,369
Home equity113,466
 
 
 1,070
 114,536
91,515
 
 
 2,816
 94,331
Consumer and other196,642
 
 2
 1
 196,645
188,516
 
 3
 15
 188,534
Total$6,115,097
 $49,796
 $64,379
 $20,945
 $6,250,217
$6,477,686
 $63,088
 $45,173
 $16,380
 $6,602,327
December 31, 2016December 31, 2017
By Loan Grade or Nonaccrual Status  By Loan Grade or Nonaccrual Status  
Pass Special Mention Accruing Substandard Nonaccrual Loans TotalPass Special
Mention
 Accruing
Substandard
 Nonaccrual
Loans
 Total
(In thousands)(In thousands)
Commercial and industrial$591,388
 $10,133
 $9,277
 $572
 $611,370
$496,395
 $12,898
 $10,951
 $748
 $520,992
Commercial tax exempt388,544
 10,060
 
 
 398,604
Commercial tax-exempt413,139
 5,559
 
 
 418,698
Commercial real estate2,230,732
 17,233
 49,696
 4,583
 2,302,244
2,346,833
 56,947
 34,455
 1,985
 2,440,220
Construction and land101,254
 109
 3,297
 179
 104,839
146,514
 11,770
 6,596
 110
 164,990
Residential2,367,554
 
 1,399
 10,908
 2,379,861
2,672,714
 
 1,349
 8,470
 2,682,533
Home equity117,745
 
 
 1,072
 118,817
97,118
 
 
 2,840
 99,958
Consumer and other198,616
 
 2
 1
 198,619
177,494
 
 1
 142
 177,637
Total$5,995,833
 $37,535
 $63,671
 $17,315
 $6,114,354
$6,350,207
 $87,174
 $53,352
 $14,295
 $6,505,028

26

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

The following tables present, by class of receivable, the balance of impaired loans with and without a related allowance, the associated allowance for those impaired loans with a related allowance, and the total unpaid principal on impaired loans:
 As of and for the three months ended March 31, 2017
 Recorded Investment (1) Unpaid Principal Balance Related Allowance YTD Average Recorded Investment YTD Interest Income Recognized while Impaired
 (In thousands)
With no related allowance recorded:         
Commercial and industrial$1,670
 $2,045
 n/a $1,731
 $13
Commercial tax exempt4,337
 4,337
 n/a 3,253
 
Commercial real estate3,747
 8,787
 n/a 4,269
 246
Construction and land147
 479
 n/a 164
 
Residential9,401
 9,773
 n/a 8,465
 101
Home equity
 
 n/a 
 
Consumer and other
 
 n/a 
 
Subtotal19,302
 25,421
 n/a 17,882
 360
With an allowance recorded:         
Commercial and industrial
 
 $
 
 
Commercial tax exempt
 
 
 
 
Commercial real estate7,041
 7,470
 475
 7,073
 75
Construction and land
 
 
 
 
Residential2,931
 2,931
 517
 3,917
 39
Home equity37
 37
 21
 37
 
Consumer and other
 
 
 
 
Subtotal10,009
 10,438
 1,013
 11,027
 114
Total:         
Commercial and industrial1,670
 2,045
 
 1,731
 13
Commercial tax exempt4,337
 4,337
 
 3,253
 
Commercial real estate10,788
 16,257
 475
 11,342
 321
Construction and land147
 479
 
 164
 
Residential12,332
 12,704
 517
 12,382
 140
Home equity37
 37
 21
 37
 
Consumer and other
 
 
 
 
Total$29,311
 $35,859
 $1,013
 $28,909
 $474
_____________________
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.

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

As of and for the three months ended March 31, 2016As of and for the three months ended March 31, 2018
Recorded Investment (1) Unpaid Principal Balance Related Allowance YTD Average Recorded Investment YTD Interest Income Recognized while ImpairedRecorded Investment (1) Unpaid Principal Balance Related Allowance YTD Average Recorded Investment YTD Interest Income Recognized while Impaired
(In thousands)(In thousands)
With no related allowance recorded:                  
Commercial and industrial$2,446
 $4,431
 n/a $2,132
 $12
$2,100
 $3,129
 n/a $1,689
 $7
Commercial tax exempt
 
 n/a 
 
Commercial tax-exempt
 
 n/a 
 
Commercial real estate11,900
 20,038
 n/a 12,017
 38
2,947
 4,710
 n/a 2,103
 25
Construction and land2,850
 4,446
 n/a 1,520
 
109
 109
 n/a 109
 
Residential6,821
 7,181
 n/a 7,071
 57
10,717
 11,077
 n/a 9,608
 101
Home equity
 
 n/a 
 
1,759
 1,759
 n/a 1,770
 10
Consumer and other
 
 n/a 
 

 
 n/a 
 
Subtotal24,017
 36,096
 n/a 22,740
 107
17,632
 20,784
 n/a 15,279
 143
With an allowance recorded:                  
Commercial and industrial48
 48
 $23
 22
 1

 
 $
 181
 2
Commercial tax exempt
 
 
 
 
Commercial tax-exempt
 
 
 
 
Commercial real estate7,299
 7,728
 671
 7,323
 80
5,525
 5,954
 241
 6,510
 156
Construction and land
 
 
 1,650
 

 
 
 
 
Residential5,578
 5,578
 473
 6,192
 43
821
 821
 83
 825
 6
Home equity
 
 
 
 
36
 36
 20
 36
 
Consumer and other
 
 
 
 

 
 
 31
 3
Subtotal12,925
 13,354
 1,167
 15,187
 124
6,382
 6,811
 344
 7,583
 167
Total:                  
Commercial and industrial2,494
 4,479
 23
 2,154
 13
2,100
 3,129
 
 1,870
 9
Commercial tax exempt
 
 
 
 
Commercial tax-exempt
 
 
 
 
Commercial real estate19,199
 27,766
 671
 19,340
 118
8,472
 10,664
 241
 8,613
 181
Construction and land2,850
 4,446
 
 3,170
 
109
 109
 
 109
 
Residential12,399
 12,759
 473
 13,263
 100
11,538
 11,898
 83
 10,433
 107
Home equity
 
 
 
 
1,795
 1,795
 20
 1,806
 10
Consumer and other
 
 
 
 

 
 
 31
 3
Total$36,942
 $49,450
 $1,167
 $37,927
 $231
$24,014
 $27,595
 $344
 $22,862
 $310
_____________________
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.


27

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

As of and for the year ended December 31, 2016As of and for the three months ended March 31, 2017
Recorded Investment (1) Unpaid Principal Balance Related Allowance  Average Recorded Investment Interest Income Recognized while ImpairedRecorded Investment (1) Unpaid Principal Balance Related Allowance YTD Average Recorded Investment YTD Interest Income Recognized while Impaired
(In thousands)(In thousands)
With no related allowance recorded:                  
Commercial and industrial$1,793
 $2,155
 n/a $5,288
 $249
$1,670
 $2,045
 n/a $1,731
 $13
Commercial tax exempt
 
 n/a 
 
Commercial tax-exempt4,337
 4,337
 n/a 3,253
 
Commercial real estate4,488
 9,647
 n/a 8,520
 1,032
3,747
 8,787
 n/a 4,269
 246
Construction and land179
 507
 n/a 1,069
 48
147
 479
 n/a 164
 
Residential8,134
 8,506
 n/a 7,446
 211
9,401
 9,773
 n/a 8,465
 101
Home equity
 
 n/a 
 

 
 n/a 
 
Consumer and other
 
 n/a 
 

 
 n/a 
 
Subtotal14,594
 20,815
 n/a 22,323
 1,540
19,302
 25,421
 n/a 17,882
 360
With an allowance recorded:                  
Commercial and industrial
 
 $
 31
 1

 
 $
 
 
Commercial tax exempt
 
 
 
 
Commercial tax-exempt
 
 
 
 
Commercial real estate7,115
 7,544
 548
 7,230
 314
7,041
 7,470
 475
 7,073
 75
Construction and land
 
 
 507
 

 
 
 
 
Residential4,284
 4,284
 565
 5,505
 143
2,931
 2,931
 517
 3,917
 39
Home equity37
 37
 22
 3
 
37
 37
 21
 37
 
Consumer and other
 
 
 
 

 
 
 
 
Subtotal11,436
 11,865
 1,135
 13,276
 458
10,009
 10,438
 1,013
 11,027
 114
Total:                  
Commercial and industrial1,793
 2,155
 
 5,319
 250
1,670
 2,045
 
 1,731
 13
Commercial tax exempt
 
 
 
 
Commercial tax-exempt4,337
 4,337
 
 3,253
 
Commercial real estate11,603
 17,191
 548
 15,750
 1,346
10,788
 16,257
 475
 11,342
 321
Construction and land179
 507
 
 1,576
 48
147
 479
 
 164
 
Residential12,418
 12,790
 565
 12,951
 354
12,332
 12,704
 517
 12,382
 140
Home equity37
 37
 22
 3
 
37
 37
 21
 37
 
Consumer and other
 
 
 
 

 
 
 
 
Total$26,030
 $32,680
 $1,135
 $35,599
 $1,998
$29,311
 $35,859
 $1,013
 $28,909
 $474
_____________________
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.



28

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

 As of and for the year ended December 31, 2017
 Recorded Investment (1) Unpaid Principal Balance Related Allowance  Average Recorded Investment Interest Income Recognized while Impaired
 (In thousands)
With no related allowance recorded:         
Commercial and industrial$1,434
 $2,238
 n/a $1,594
 $50
Commercial tax-exempt
 
 n/a 1,001
 80
Commercial real estate1,832
 3,453
 n/a 3,098
 1,546
Construction and land109
 109
 n/a 172
 
Residential9,337
 9,709
 n/a 9,033
 360
Home equity1,779
 1,779
 n/a 413
 
Consumer and other
 
 n/a 
 
Subtotal14,491
 17,288
 n/a 15,311
 2,036
With an allowance recorded:         
Commercial and industrial242
 242
 $58
 156
 4
Commercial tax-exempt
 
 
 
 
Commercial real estate6,855
 7,284
 362
 6,980
 322
Construction and land
 
 
 
 
Residential828
 828
 89
 2,469
 89
Home equity36
 36
 20
 36
 1
Consumer and other125
 250
 125
 10
 
Subtotal8,086
 8,640
 654
 9,651
 416
Total:         
Commercial and industrial1,676
 2,480
 58
 1,750
 54
Commercial tax-exempt
 
 
 1,001
 80
Commercial real estate8,687
 10,737
 362
 10,078
 1,868
Construction and land109
 109
 
 172
 
Residential10,165
 10,537
 89
 11,502
 449
Home equity1,815
 1,815
 20
 449
 1
Consumer and other125
 250
 125
 10
 
Total$22,577
 $25,928
 $654
 $24,962
 $2,452
_____________________
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.
When management determines that it is probable that the Bank will not collect all principal and interest on a loan in accordance with the original loan terms, the loan is designated as impaired.
Loans that are designated as impaired require an analysis to determine the amount of impairment, if any. Impairment would be indicated as a result of the carrying value of the loan exceeding the estimated collateral value, less costs to sell, for collateral dependent loans or the net present value of the projected cash flow, discounted at the loan’s contractual effective interest rate, for loans not considered to be collateral dependent. Generally, shortfalls in the analysis on collateral dependent loans would result in the impairment amount being charged-off to the allowance for loan losses. Shortfalls on cash flow dependent loans may be carried as specific allocations to the general reserve unless a known loss is determined to have occurred, in which case such known loss is charged-off.
Loans in the held for sale category are carried at the lower of amortized cost or estimated fair value in the aggregate and are excluded from the allowance for loan losses analysis.
The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal

29

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

forgiveness. As of March 31, 20172018 and December 31, 2016,2017, TDRs totaled $17.2$13.2 million and $18.1$13.6 million, respectively. As of March 31, 2017, $12.12018, $10.9 million of the $17.2$13.2 million in TDRs were on accrual status. As of December 31, 2016, $12.42017, $11.1 million of the $18.1$13.6 million in TDRs were on accrual status.
Since all TDR loans are considered impaired loans, they are individually evaluated for impairment. The resulting impairment, if any, would have an impact on the allowance for loan losses as a specific reserve or charge-off. If, prior to the classification as a TDR, the loan was not impaired, there would have been a general or allocated reserve on the particular loan. Therefore, depending upon the result of the impairment analysis, there could be an increase or decrease in the related allowance for loan losses. Many loans initially categorized as TDRs are already on nonaccrual status and are already considered impaired. Therefore, there is generally not a material change to the allowance for loan losses when a nonaccruing loan is categorized as a TDR.
The following tables present the balance of TDRs that were restructured or defaulted during the periods indicated and the types of concessions granted. There were no loans that were restructured or defaulted during the three months ended March 31, 2017:2018 or 2017.
Loan participations serviced for others and loans serviced for others are not included in the Company’s total loans. The following table presents a summary of the loan participations serviced for others and loans serviced for others based on class of receivable as of the dates indicated:
As of and for the three months ended March 31, 2016
Restructured in the current quarter 
TDRs that defaulted
that were
restructured in prior twelve months
# of
Loans
 
Pre-
modification
recorded
investment
 
Post-
modification
recorded
investment
 
# of
Loans
 
Post-
modification
recorded
investment
March 31, 2018 December 31, 2017
(Dollars in thousands)(In thousands)
Commercial and industrial1
 $175
 $
 
 $
$8,397
 $8,484
Commercial tax exempt
 
 
 
 
Commercial tax-exempt19,582
 19,805
Commercial real estate
 
 
 
 
43,965
 49,783
Construction and land
 
 
 
 
34,081
 37,840
Total loan participations serviced for others$106,025
 $115,912
   
Residential1
 145
 145
 
 
$41,207
 $41,440
Home equity
 
 
 
 
Consumer and other
 
 
 
 
Total2
 $320
 $145
 
 $
Total loans serviced for others$41,207
 $41,440
Total loans include deferred loan origination (fees)/ costs, net, of $7.5 million and $6.9 million as of March 31, 2018 and December 31, 2017, respectively.
 As of and for the three months ended March 31, 2016
 Extension of term Temporary rate reduction Payment deferral Combination of concessions (1) Total concessions
 # of
Loans
 
Post-
modifi-
cation
recorded
invest-
ment
 # of
Loans
 Post-
modifi-
cation
recorded
invest-
ment
 # of
Loans
 Post-
modifi-
cation
recorded
invest-
ment
 # of
Loans
 Post-
modifi-
cation
recorded
invest-
ment
 # of
Loans
 Post-
modifi-
cation
recorded
invest-
ment
 (Dollars in thousands)
Commercial and industrial
 $
 
 $
 
 $
 1
 $
 1
 $
Commercial tax exempt
 
 
 
 
 
 
 
 
 
Commercial real estate
 
 
 
 
 
 
 
 
 
Construction and land
 
 
 
 
 
 
 
 
 
Residential
 
 1
 145
 
 
 
 
 1
 145
Home equity
 
 
 
 
 
 
 
 
 
Consumer and other
 
 
 
 
 
 
 
 
 
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

_____________________
(1)Combination of concessions includes loans that have had more than one modification, including extension of term, temporary reduction of interest rate, and/or payment deferral.

7.    Allowance for Loan Losses
The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled $78.0$72.9 million and $78.1$74.7 million at March 31, 20172018 and December 31, 2016,2017, respectively.
The following tables present a summary of the changes in the allowance for loan losses for the periods indicated:
As of and for the three months ended March 31,As of and for the three months ended March 31,
2017 20162018 2017
(In thousands)(In thousands)
Allowance for loan losses, beginning of period:      
Commercial and industrial$12,751
 $15,814
$11,735
 $12,751
Commercial real estate50,412
 44,215
46,820
 50,412
Construction and land3,039
 6,322
4,949
 3,039
Residential10,449
 10,544
9,773
 10,449
Home equity1,035
 1,085
835
 1,035
Consumer and other391
 520
630
 391
Total allowance for loan losses, beginning of period78,077
 78,500
74,742
 78,077
Provision/ (credit) for loan losses:   
Commercial and industrial(547) (657)
Commercial real estate702
 (1,847)
Construction and land158
 (998)
Residential(348) 591
Home equity(48) (6)
Consumer and other(98) (216)
Total provision/(credit) for loan losses(181) (3,133)
Loans charged-off:   
Commercial and industrial
 (2,108)
Commercial real estate
 
Construction and land
 (400)
Residential(58) (501)
Home equity
 
Consumer and other
 (7)
Total charge-offs(58) (3,016)
Recoveries on loans previously charged-off:   
Commercial and industrial87
 1,294
Commercial real estate50
 2,151
Construction and land
 627
Residential47
 
Home equity
 
Consumer and other9
 4
Total recoveries193
 4,076
   

30

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

As of and for the three months ended March 31,As of and for the three months ended March 31,
2017 20162018 2017
(In thousands)(In thousands)
Loans charged-off:   
Commercial and industrial(214) 
Commercial real estate(135) 
Construction and land
 
Residential(16) (58)
Home equity
 
Consumer and other(24) 
Total charge-offs(389) (58)
Recoveries on loans previously charged-off:   
Commercial and industrial82
 87
Commercial real estate125
 50
Construction and land
 
Residential
 47
Home equity1
 
Consumer and other132
 9
Total recoveries340
 193
Provision/ (credit) for loan losses:   
Commercial and industrial(160) (547)
Commercial real estate(694) 702
Construction and land(416) 158
Residential139
 (348)
Home equity(52) (48)
Consumer and other(612) (98)
Total provision/(credit) for loan losses(1,795) (181)
Allowance for loan losses at end of period:      
Commercial and industrial12,291
 14,343
11,443
 12,291
Commercial real estate51,164
 44,519
46,116
 51,164
Construction and land3,197
 5,551
4,533
 3,197
Residential10,090
 10,634
9,896
 10,090
Home equity987
 1,079
784
 987
Consumer and other302
 301
126
 302
Total allowance for loan losses at end of period$78,031
 $76,427
$72,898
 $78,031

The allowance for loan losses is an estimate of the inherent risk of loss in the loan portfolio as of the consolidated balance sheet dates. Management estimates the level of the allowance based on all relevant information available. Changes to the required level in the allowance result in either a provision for loan loss expense, if an increase is required, or a credit to the provision, if a decrease is required. Loan losses are charged to the allowance when available information confirms that specific loans, or portions thereof, are uncollectible. Recoveries on loans previously charged-off are credited to the allowance when received in cash.
The provision/ (credit) for loan losses and related balance in the allowance for loan losses for tax exempt
tax-exempt commercial and industrial loans are included with commercial and industrial. The provision/ (credit) for loan losses and related
balance in the allowance for loan losses for tax exempttax-exempt commercial real estate loans are included with commercial real estate.
There were no charge-offs or recoveries, for any period presented, for both commercial and industrial and commercial real
estate tax exempttax-exempt loans.

31

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

The following tables present the Company’s allowance for loan losses and loan portfolio at March 31, 20172018 and December 31, 20162017 by portfolio segment, disaggregated by method of impairment analysis. The Company had no loans acquired with deteriorated credit quality at March 31, 20172018 or December 31, 2016.2017.
 March 31, 2017
 
Individually Evaluated
for Impairment
 
Collectively Evaluated
for Impairment
 Total
 
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses
 (In thousands)
Commercial and industrial$6,007
 $
 $983,779
 $12,291
 $989,786
 $12,291
Commercial real estate10,788
 475
 2,357,839
 50,689
 2,368,627
 51,164
Construction and land147
 
 116,860
 3,197
 117,007
 3,197
Residential12,332
 517
 2,451,284
 9,573
 2,463,616
 10,090
Home equity37
 21
 114,499
 966
 114,536
 987
Consumer
 
 196,645
 302
 196,645
 302
Total$29,311
 $1,013
 $6,220,906
 $77,018
 $6,250,217
 $78,031
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

 March 31, 2018
 
Individually Evaluated
for Impairment
 
Collectively Evaluated
for Impairment
 Total
 
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses
 (In thousands)
Commercial and industrial$2,100
 $
 $949,750
 $11,443
 $951,850
 $11,443
Commercial real estate8,472
 241
 2,456,531
 45,875
 2,465,003
 46,116
Construction and land109
 
 165,131
 4,533
 165,240
 4,533
Residential11,538
 83
 2,725,831
 9,813
 2,737,369
 9,896
Home equity1,795
 20
 92,536
 764
 94,331
 784
Consumer
 
 188,534
 126
 188,534
 126
Total$24,014
 $344
 $6,578,313
 $72,554
 $6,602,327
 $72,898
December 31, 2016December 31, 2017
Individually Evaluated
for Impairment
 
Collectively Evaluated
for Impairment
 Total
Individually Evaluated
for Impairment
 
Collectively Evaluated
for Impairment
 Total
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses 
Recorded investment
(loan balance)
 Allowance for loan losses
(In thousands)(In thousands)
Commercial and industrial$1,793
 $
 $1,008,181
 $12,751
 $1,009,974
 $12,751
$1,676
 $58
 $938,014
 $11,677
 $939,690
 $11,735
Commercial real estate11,603
 548
 2,290,641
 49,864
 2,302,244
 50,412
8,687
 362
 2,431,533
 46,458
 2,440,220
 46,820
Construction and land179
 
 104,660
 3,039
 104,839
 3,039
109
 
 164,881
 4,949
 164,990
 4,949
Residential12,418
 565
 2,367,443
 9,884
 2,379,861
 10,449
10,165
 89
 2,672,368
 9,684
 2,682,533
 9,773
Home equity37
 22
 118,780
 1,013
 118,817
 1,035
1,815
 20
 98,143
 815
 99,958
 835
Consumer
 
 198,619
 391
 198,619
 391
125
 125
 177,512
 505
 177,637
 630
Total$26,030
 $1,135
 $6,088,324
 $76,942
 $6,114,354
 $78,077
$22,577
 $654
 $6,482,451
 $74,088
 $6,505,028
 $74,742

8.    Derivatives and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and, to a lesser extent, the use of derivative financial instruments. Additionally, as a service to its customers, the Company may utilize derivative instruments such as customer foreign exchange forward contracts to manage its foreign exchange risk, if any. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are generally determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain loans, deposits, and borrowings. As a service to its customers, the Company may utilize
derivative instruments including customer foreign exchange forward contracts to manage its foreign exchange risk, if any.

32

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

The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 20172018 and December 31, 2016:2017:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
Asset derivatives Liability derivatives Asset derivatives Liability derivativesAsset derivatives Liability derivatives Asset derivatives Liability derivatives
Balance
sheet
location
 Fair value (1) 
Balance
sheet
location
 Fair value (1) 
Balance
sheet
location
 Fair value (1) 
Balance
sheet
location
 Fair value (1)
Balance
sheet
location
 Fair value (1) 
Balance
sheet
location
 Fair value (1) 
Balance
sheet
location
 Fair value (1) 
Balance
sheet
location
 Fair value (1)
(In thousands)(In thousands)
Derivatives designated as hedging instruments:                
Interest rate products
Other
assets
 $
 
Other
liabilities
 $(666) 
Other
assets
 $
 
Other
liabilities
 $(1,040)
Other
assets
 $1,286
 
Other
liabilities
 $
 
Other
assets
 $555
 Other
liabilities
 $(80)
Derivatives not designated as hedging instruments:                
Interest rate products
Other
assets
 16,654
 
Other
liabilities
 (16,504) 
Other
assets
 17,032
 
Other
liabilities
 (16,560)
Other
assets
 22,810
 
Other
liabilities
 (23,097) 
Other
assets
 18,575
 Other
liabilities
 (18,953)
Foreign exchange contractsOther assets 1
 Other
liabilities
 (1) Other assets 2
 Other
liabilities
 (2)
Risk participation agreements
Other
assets
 13
 
Other
liabilities
 (5) 
Other
assets
 15
 
Other
liabilities
 (6)
Other
assets
 
 
Other
liabilities
 (142) 
Other
assets
 1
 Other liabilities (108)
Total $16,667
 $(17,175) $17,047
 $(17,606) $24,097
 $(23,240) $19,133
 $(19,143)
_____________________
(1)For additional details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements-NoteStatements - Note 5: Fair Value Measurements.”
The following table presents the effect of the Company’s derivative financial instruments on accumulated other comprehensive income for the three months ended March 31, 2018 and 2017:
Derivatives in cash
flow hedging
relationships
Amount of gain or (loss) recognized in OCI on derivatives (1) 
Location of (gain) or
loss reclassified from
accumulated OCI
into income
Amount of (gain) or loss reclassified from accumulated OCI into income
Three months ended March 31, Three months ended March 31,
2018 2017 2018 2017
 (In thousands)  (In thousands)
Interest rate products$836
 $67
 Interest expense$(21) $303
Total$836
 $67
  $(21) $303
____________________
(1)There was an additional $(4) thousand loss related to the ineffective portion for the three months ended as of March 31, 2017. The guidance in ASU 2017-12 requires that amounts in accumulated other comprehensive income that are included in the assessment of effectiveness should be reclassified into earnings in the same period in which the hedged forecasted transactions impact earnings. Transition guidance for this ASU further states that upon adoption, previously recorded cumulative ineffectiveness for cash flow hedges existing at the adoption date be eliminated by means of a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the initial application date. There was a $5 thousand reclassification related to the adoption of ASU 2017-12 effective January 1, 2018.




33

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

The following table presents the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three months ended March 31, 20172018 and 2016:
Derivatives in cash
flow hedging
relationships
 Amount of gain or (loss) recognized in OCI on derivatives (effective portion) (1) Location of gain or (loss) reclassified from accumulated OCI into income (effective portion) Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)
 three months ended March 31,  three months ended March 31,
 2017 2016  2017 2016
(In thousands)
Interest rate products $67
 $(1,948) Interest expense $(303) $(461)
Total $67
 $(1,948)   $(303) $(461)
_____________________
(1)There was an additional $(4) thousand related to the ineffective portion for the three months ended as of March 31, 2017 and no ineffective portion for the three months ended as of March 31, 2016.
The following table presents the components of the Company’s accumulated other comprehensive income/ (loss) related to the derivatives for the three months ended March 31, 2017 and 2016:2017:
  Three months ended March 31,
  2017 2016
 (In thousands)
Accumulated other comprehensive income/ (loss) on cash flow hedges, balance at beginning of period $(605) $(1,123)
Net change in unrealized gain/ (loss) on cash flow hedges 216
 (900)
Accumulated other comprehensive income/ (loss) on cash flow hedges, balance at end of period $(389) $(2,023)
 Location of (gain) or
loss reclassified from
accumulated OCI
into income
Amount of (gain) or loss recognized in income
on cash flow hedging relationships
Three months ended March 31,
2018 2017
  (In thousands)
Total amounts of (income) and expense line items presented in the statement of operations in which the effects of fair value or cash flow hedges are recordedInterest expense$(21) n/a
The effects of cash flow hedging:    
(Gain) or loss on cash flow hedging relationships in
Subtopic 815-20
    
Interest contracts - amount of (gain) or loss reclassified from accumulated other comprehensive income into incomeInterest expense$(21) n/a
The Bank has agreements with its derivative counterparties that contain provisions where, if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The Bank was in compliance with these provisions as of March 31, 20172018 and December 31, 2016.2017.
The Bank also has agreements with certain of its derivative counterparties that contain provisions where, if the Bank fails to maintain its status as a well- or adequately-capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations under the agreements. The Bank was in compliance with these provisions as of March 31, 20172018 and December 31, 2016.2017.
Certain of the Bank’s agreements with its derivative counterparties contain provisions where, if specified, events or conditions occur that materially change the Bank’s creditworthiness in an adverse manner, the Bank may be required to fully collateralize its obligations under the derivative instruments. The Bank was in compliance with these provisions as of March 31, 20172018 and December 31, 2016.2017.
As of March 31, 2017 and December 31, 2016, the2018 there were no termination amounts related to collateral determinations of derivatives in a liability position were $1.5 million and $3.4 million, respectively.as of December 31, 2017, the termination amount was $3.1 million. The Company has minimum collateral posting thresholds with its derivative counterparties and pledged securities with market values of $2.2 million and $1.9$2.3 million, respectively, as of March 31, 20172018 and December 31, 20162017, against its obligations under these agreements. The collateral posted is typically greater than the current liability position; however, due to timing of liability position changes at period end, the funding of a collateral shortfall may take place shortly following period end.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectiveobjectives in using interest rate derivatives isare to add stability to interest income and expense and to manage the risk related toits exposure to changes in interest rates. The Bank’s risk management strategy for utilizingrate movements. To accomplish this objective, the Company has entered into interest rate swaps isas part of its interest rate risk management strategy.  These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments.  The Company has entered into interest rate swaps to reduce its exposure to variability in interest-related cash outflows attributable to changes in thehedge London Interbank Offered Rate (“LIBOR”) swap rate associated with borrowing programs for each of the periods, to be accomplished with LIBOR-indexed-indexed brokered deposits and the LIBOR component of the total cost of certain FHLB advances and repurchase agreements.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

borrowings.
To accomplish this objective and strategy, the Bank has entered into a total of eightsix interest rate swaps, two during 2017 with effective dates of March 22, 2017 one during 2014 with an effective date of June 1, 2014, and fivefour during 2013 with effective dates of December 1, 2014, September 2, 2014, June 1, 2014, March 1, 2014, and August 1, 2013.
The two interest rate swaps entered into during 2017 have notional amounts of $40 million and $60 million with terms of 1.75 and 2.25 years, respectively. These interest rate swaps will effectively fix the Bank’s interest payments on $100 million in interest-related cash outflows attributable to changes in the LIBOR component of FHLB borrowing liabilities at rates of 1.55% and 1.65%, respectively, with a weighted average rate of 1.61%. The borrowings hedged will initially be expected to be issuances and quarterly rollovers of 3-monththree-month FHLB advances but may also then include future issuances of 3-monththree-month repurchase agreements with similar characteristics and/or future issuances of either floating or fixed rate borrowings that are issued with the specific intent to replace the quarterly rollovers of the advances or repurchase agreements.

34

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

The sixfour interest rate swaps entered into during 2014 and 2013 each have a notional amount of $25 million and have terms ranging from threefour to six years.years from their respective effective dates. The interest rate swaps will effectively fix the Bank’s interest payments on $150$125 million of its LIBOR-indexed deposit liabilities at rates between 1.17%1.68% and 2.32%, andwith a weighted average rate of 1.85%1.95%.
ThePrior to the implementation of ASU 2017-12, which was implemented on a modified retrospective basis on January 1, 2018, the Company usesused the “Hypothetical Derivative Method” described in ASC 815, Derivatives and Hedging (“ASC 815”), for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge ineffectiveness. Under this method, the Company assessesassessed the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The effective portion of changes in the fair value of the derivative iswas initially reported in other comprehensive income (“OCI”) (outside of earnings) and subsequently reclassified to earnings in interest and dividend income when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge iswas recorded as a gain or loss in the consolidated statement of operations as part of fees and other income. There was an immaterial amount
Upon implementation of hedge ineffectivenessASU 2017-12, for derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the three months ended March 31, 2017 and no hedge ineffectiveness during the three months ended March 31, 2016. The Company monitors the risk of counterparty default on an ongoing basis.
hedged transaction affects earnings. A portion of the balance reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are made or received on the Company’s interest rate swaps. During the next twelve months, the Company estimates that $0.9$1.1 million will be reclassified as an increasea decrease in interest expense. The Company monitors the risk of counterparty default on an ongoing basis.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from two different services the Bank provides to qualified commercial clients. The Bank offers certain derivative products directly to such clients. The Bank economically hedges derivative transactions executed with commercial clients by entering into mirror-image, offsetting derivatives with third parties. Derivative transactions executed as part of these programs are not designated in ASC 815-qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. Because the derivatives have mirror-image contractual terms, the changes in fair value substantially offset through earnings. The net effect on earnings is primarily driven by changes in the credit valuation adjustment (“CVA”). The CVA represents the dollar amount of fair value adjustment related to nonperfomancenonperformance risk of both the Bank and its counterparties. Fees earned in connection with the execution of derivatives related to this program are recognized in the consolidated statement of operations in other income. As of March 31, 20172018 and December 31, 2016,2017, the Bank had 138148 and 136142 derivatives, respectively, related to this program, comprised of interest rate swaps and caps, with an aggregate notional amount of $1.2 billion as of March 31, 2018 and $1.1 billion for both periods.as of December 31, 2017. As of March 31, 2017,2018, there were nofour foreign currency exchange contracts with an aggregate notional amount of $0.3 million outstanding related to this program, and as of December 31, 2016,2017, there was onewere three foreign currency exchange contractcontracts with an aggregate notional amount of less than $0.1$0.2 million.
In addition, as a participant lender, the Bank has guaranteed performance on the pro-rated portion of two swaps executed by other financial institutions. As the participant lender, the Bank is providing a partial guarantee, but is not a direct party to the related swap transactions. The Bank has no obligations under the risk participation agreements unless the borrower defaults on their swap transaction with the lead bank and the swap is in a liability position to the borrower. In that instance, the Bank has agreed to pay the lead bank a portion of the swap’s termination value at the time of the default. The derivative transactions entered into as part of these agreements are not designated, as per ASC 815, as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. The pro-rated notional amountAs of March 31, 2018, there were seven of these risk participation transactions was $13.3with an aggregate notional amount of $60.3 million and, as of both MarchDecember 31, 2017, and December 31, 2016.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

there were six of these risk participation transactions with an aggregate notional amount of $48.0 million.
The Bank has also participated out to another financial institution a pro-rated portion of two swaps executed by the Bank. The other financial institution has no obligations under the risk participation agreements unless the borrowers default on their swap transactions with the Bank and the swaps are in liability positions to the borrower. In those instances, the other financial institution has agreed to pay the Bank a portion of the swap’s termination value at the time of the default. The derivative transactions entered into as part of these agreements are not designated, as per ASC 815, as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. The pro-rated notional amount of these risk participation transactions was $6.1 million as of both March 31, 20172018 and December 31, 2016.2017.
The following table presents the effect of the Bank’s derivative financial instruments not designated as hedging instruments in the consolidated statement of operations for the three months ended March 31, 20172018 and 2016.2017.

35

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

 Amount of gain or (loss), net, recognized in income on derivatives Amount of gain or (loss), net, recognized in income on derivatives
Derivatives not designated as
hedging instruments
 Location of gain or (loss) recognized in income on derivatives Three months ended March 31, Location of gain or (loss) recognized in income on derivatives Three months ended March 31,
2017 2016 2018 2017
 (In thousands) (In thousands)
Interest rate products Other income/ (expense) $(322) $(605) Other income/ (expense) $92
 $(322)
Risk participation agreements Other income/ (expense) 
 6
 Other income/ (expense) 166
 
Total $(322) $(599) $258
 $(322)

9.    Income Taxes
The following table presents the components of income tax expense for continuing operations, discontinued operations, noncontrolling interests and the Company:
Three months ended March 31,Three months ended March 31,
2017 20162018 2017
(In thousands)(In thousands)
Income from continuing operations:      
Income before income taxes$21,549
 $24,325
$28,064
 $21,549
Income tax expense6,553
 7,438
6,026
 6,553
Net income from continuing operations$14,996
 $16,887
$22,038
 $14,996
Effective tax rate, continuing operations30.4% 30.6%21.5% 30.4%
      
Income from discontinued operations:      
Income before income taxes$2,788
 $3,530
$2,388
 $2,788
Income tax expense1,156
 1,465
690
 1,156
Net income from discontinued operations$1,632
 $2,065
$1,698
 $1,632
Effective tax rate, discontinued operations41.5% 41.5%28.9% 41.5%
      
Less: Income attributable to noncontrolling interests:      
Income before income taxes$966
 $911
$1,050
 $966
Income tax expense
 

 
Net income attributable to noncontrolling interests$966
 $911
$1,050
 $966
Effective tax rate, noncontrolling interests% %% %
      
Income attributable to the Company      
Income before income taxes$23,371
 $26,944
$29,402
 $23,371
Income tax expense7,709
 8,903
6,716
 7,709
Net income attributable to the Company$15,662
 $18,041
$22,686
 $15,662
Effective tax rate attributable to the Company33.0% 33.0%22.8% 33.0%
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NotesThe effective tax rate for continuing operations for the three months ended March 31, 2018 of 21.5%, with related tax expense of $6.0 million, was calculated based on a projected 2018 annual effective tax rate. The effective tax rate was more than the statutory rate of 21% due primarily to Unaudited Consolidated Financial Statements - (Continued)

state and local income taxes and the accounting for investments in affordable housing projects. These items were partially offset by earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests.
The effective tax rate for continuing operations for the three months ended March 31, 2017 of 30.4%, with related tax expense of $6.6 million, was calculated based on a projected 2017 annual effective tax rate. The effective tax rate was less than the statutory rate of 35% due primarily

36

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests. These items were partially offset by state and local income taxes.Unaudited Consolidated Financial Statements - (Continued)

The effective tax rate for continuing operations for the three months ended March 31, 2016 of 30.6%, with related tax expense of $7.4 million, was calculated based on a projected 2016 annual effective tax rate. The effective tax rate was less than the statutory rate of 35% due primarily to earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests. These items were partially offset by state and local income taxes.
The effective tax rate for continuing operations for the three months ended March 31, 20172018 is lower than the effective tax rate for the same period in 20162017 due primarily to the reduction in the federal corporate tax rate from 35% to 21% as a projected increase in earnings from tax-exempt investments and loans in 2017 as compared to 2016.
In the first quarter of 2017, the Company adopted ASU 2016-09. The impact of ASU 2016-09 for the three months ended March 31, 2017 was an increase in income tax expense of $0.2 million due primarily to employee stock options expiring unexercised due to being outresult of the money. ThereTax Cuts and Jobs Act (the “Tax Act”) that was no significant change to the Company’s effective tax rate related to the adoption of this ASU.enacted on December 22, 2017.

10.    Noncontrolling Interests
At the Company, noncontrolling interests consist of equity owned by management of the Company’s respective majority-owned affiliates. Net income attributable to noncontrolling interests in the consolidated statements of operations represents the net income allocated to the noncontrolling interest owners of the affiliates. Net income allocated to the noncontrolling interest owners was $1.0$1.1 million and $0.9$1.0 million for the three monththree-month periods ended March 31, 20172018 and 2016,2017, respectively.
On the consolidated balance sheets, noncontrolling interests are included as the sum of the capital and undistributed profits allocated to the noncontrolling interest owners. Typically, this balance is included in a company’s permanent shareholders’ equity in the consolidated balance sheets. When the noncontrolling interest owners’ rights include certain redemption features, as described in ASC 480, Distinguishing Liabilities from Equity, such redeemable noncontrolling interests are classified as mezzanine equity and are not included in permanent shareholders’ equity. Due to the redemption features of the noncontrolling interests, the Company had redeemable noncontrolling interests held in mezzanine equity in the accompanying consolidated balance sheets of $17.2$16.3 million and $17.0$17.5 million at March 31, 20172018 and December 31, 2016,2017, respectively. The aggregate amount of such redeemable noncontrolling equity interests are recorded at the estimated maximum redemption values. In addition, the Company had $4.0$4.8 million and $4.2$5.2 million in noncontrolling interests included in permanent shareholder’s equity at March 31, 20172018 and December 31, 2016,2017, respectively.
Each non-wholly owned affiliate operating agreement provides the Company and/or the noncontrolling interests with contingent call or put redemption features used for the orderly transfer of noncontrolling equity interests between the affiliate noncontrolling interest owners and the Company at either a contractually predetermined fair value; multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA); or fair value. The Company may liquidate these noncontrolling interests in cash, shares of the Company’s common stock, or other forms of consideration dependent on the operating agreement. These agreements are discussed in Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Generally, these put and call redemption features refer to shareholder rights of both the Company and the noncontrolling interest owners of the Company’s majority-owned affiliate companies. The affiliate company noncontrolling interests generally take the form of limited liability company (LLC) units, profits interests, or common stock (collectively, the “noncontrolling equity interests”). In most circumstances, the put and call redemption features generally relate to the Company’s right and, in some cases, obligation to purchase and the noncontrolling equity interests’ right to sell their equity interests. There are various events that could cause the puts or calls to be exercised, such as a change in control, death, disability, retirement, resignation or termination. The puts and calls are generally to be exercised at the then fair value or a contractually agreed upon approximation thereof. The terms of these rights vary and are governed by the respective individual operating and legal documents.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)

The following table presents, by affiliate, the noncontrolling interests included as redeemable noncontrolling interests and noncontrolling interests in mezzanine and permanent equity, respectively, at the periods indicated:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
(In thousands)(In thousands)
Anchor(1)$10,946
 $10,934
$9,574
 $9,761
BOS6,564
 6,782
7,590
 8,057
DGHM (1)(2)3,715
 3,417
3,983
 4,829
Total$21,225
 $21,133
$21,147
 $22,647
Redeemable noncontrolling interests$17,232
 $16,972
$16,322
 $17,461
Noncontrolling interests$3,993
 $4,161
$4,825
 $5,186

37

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

_____________________
(1)Assets and liabilities at Anchor were classified as held for sale on the Company’s consolidated balance sheets at March 31, 2018 and December 31, 2017. The Company completed the sale of Anchor in April 2018.
(1)(2)    Only includes redeemable noncontrolling interests.
The following tables present a rollforward of the Company’s redeemable noncontrolling interests and noncontrolling interests for the periods indicated:
Three months endedThree months ended
March 31, 2017March 31, 2018
Redeemable noncontrolling interests Noncontrolling interestsRedeemable noncontrolling interests Noncontrolling interests
(In thousands)(In thousands)
Noncontrolling interests at beginning of period$16,972
 $4,161
$17,461
 $5,186
Net income attributable to noncontrolling interests724
 242
758
 291
Distributions(703) (235)(736) (282)
Purchases/ (sales) of ownership interests66
 
167
 
Amortization of equity compensation102
 256
122
 161
Adjustments to fair value71
 (431)(1,450) (531)
Noncontrolling interests at end of period$17,232
 $3,993
$16,322
 $4,825
Three months endedThree months ended
March 31, 2016March 31, 2017
Redeemable noncontrolling interests Noncontrolling interestsRedeemable noncontrolling interests Noncontrolling interests
(In thousands)(In thousands)
Noncontrolling interests at beginning of period$18,088
 $3,393
$16,972
 $4,161
Net income attributable to noncontrolling interests718
 193
724
 242
Distributions(616) (242)(703) (235)
Purchases/ (sales) of ownership interests142
 
66
 
Amortization of equity compensation111
 132
102
 256
Adjustments to fair value(1,505) (360)71
 (431)
Noncontrolling interests at end of period$16,938
 $3,116
$17,232
 $3,993


38

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

11.    Accumulated Other Comprehensive Income
The following table presents a summary of the amounts reclassified from accumulated other comprehensive income/ (loss) for the three months ended March 31, 20172018 and 2016:2017:
Description of component of accumulated other comprehensive income/ (loss) Three months ended March 31, 
Affected line item in
Statement of Operations
 Three months ended March 31, 
Affected line item in
Statement of Operations
2017 2016  2018 2017 
 (In thousands)  (In thousands) 
Adjustment for realized gains/ (losses) on available-for-sale securities, net:          
Pre-tax $19
 $1
 Gain on sale of investments, net $
 $19
 Gain on sale of investments, net
Tax expense/ (benefit) 8
 
 Income tax expense 
 8
 Income tax expense
Net $11
 $1
 Net income attributable to the Company $
 $11
 Net income attributable to the Company
Net realized gain/ (loss) on cash flow hedges:          
Hedges related to deposits:          
Pre-tax $(303) $(461) Interest expense on deposits $21
 $(303) Interest expense on deposits
Pre-tax (3) 42
 Other income 
 (3) Other income
Tax expense/ (benefit) (126) (173) Income tax expense 7
 (126) Income tax expense
Net $(180) $(246) Net income attributable to the Company $14
 $(180) Net income attributable to the Company
Total reclassifications for the period, net of tax $(169) $(245)  $14
 $(169) 
On January 1, 2018, the Company elected to early adopt ASU No. 2017-12. As a result, the Company reclassified unrealized losses on cash flow hedges of $5 thousand from accumulated other comprehensive income/ (loss) to beginning retained earnings.
On January 1, 2018, the Company adopted ASU No. 2016-01. As a result, the Company reclassified unrealized gains on equity securities available-for-sale, net of tax, of $339 thousand from accumulated other comprehensive income/ (loss) to beginning retained earnings.
 Components of accumulated other comprehensive income/ (loss)  
 
Unrealized
gain/ (loss)
on securities
available-for-sale
 
Unrealized
gain/ (loss)
on cash flow
hedges
 
Unrealized
gain/ (loss)
on other
 
Accumulated
other
comprehensive
income/ (loss)
 (In thousands)
Balance at December 31, 2016$(11,194) $(605) $(749) $(12,548)
Other comprehensive income/ (loss) before reclassifications2,094
 36
 12
 2,142
Amounts reclassified from other comprehensive income/ (loss)(11) 180
 
 169
Other comprehensive income/ (loss), net2,083
 216
 12
 2,311
Balance at March 31, 2017$(9,111) $(389) $(737) $(10,237)
        
Balance at December 31, 2017$(8,140) $332
 $(850) $(8,658)
Other comprehensive income/ (loss) before reclassifications(12,895) 588
 
 (12,307)
Amounts reclassified from other comprehensive income/ (loss)
 (14) 
 (14)
Other comprehensive income/ (loss), net(12,895) 574
 
 (12,321)
Reclassification due to the adoption of ASUs 2017-12 and 2016-01(339) 5
 
 (334)
Balance at March 31, 2018$(21,374) $911
 $(850) $(21,313)


39

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

12.    Restructuring
In the fourth quarter of 2014, the Company incurred restructuring charges related to the acquisition of Banyan Partners, LLC. The purpose of this restructuring was to realign the management structure within the Wealth Management and Trust segment. The total cost of the restructuring incurred in Q4 2014 was $0.7 million. In 2015, the Company incurred additional restructuring charges to further refine the management structure within the Wealth Management and Trust segment. The total cost of the restructuring charges in 2015 was $3.7 million.
In the first and second quarters of 2016, the Company incurred additional costs of $1.1 million and $0.9 million, respectively, in continued refinement of the management structure within the Wealth Management and Trust segment. The Company does not anticipate any additional restructuring costs related to this plan as of the date of this filing.
Restructuring expenses incurred since the plan of restructuring was first implemented in 2014 totaled $6.4 million, all within the Wealth Management and Trust segment.
The following table presents a summary of the restructuring activity for the three months ended March 31, 20172018 and 2016:2017:
Severance Charges TotalSeverance Charges Total
(In thousands)(In thousands)
Accrued charges at December 31, 2017$337
 $337
Costs paid(254) (254)
Accrued charges at March 31, 2018$83
 $83
   
Accrued charges at December 31, 2016$1,977
 $1,977
$1,977
 $1,977
Costs incurred
 
Costs paid(618) (618)(618) (618)
Accrued charges at March 31, 2017$1,359
 $1,359
$1,359
 $1,359
   
   
Accrued charges at December 31, 2015$3,305
 $3,305
Costs incurred1,112
 1,112
Costs paid(849) (849)
Accrued charges at March 31, 2016$3,568
 $3,568

13.    Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09 et al. As stated in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies,” the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, Revenue from Contracts with Customers (“ASC 606”), while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition.
ASC 606 does not apply to revenue associated with financial instruments, including interest income on loans and investment securities. In addition, certain noninterest income such as fees associated with mortgage servicing rights, late fees, BOLI income, and derivatives are also not in scope of the new guidance. ASC 606 is applicable to noninterest income such as investment management fees, wealth advisory fees, wealth management and trust fees, and certain banking fees. However, the recognition of this revenue did not change upon adoption of ASC 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest income considered in-scope of ASC 606 is discussed below.
Investment management fees
Investment management fees are earned for the management of a series of accounts and funds in which clients invest directly, acting as a sub-advisor to larger investment management companies, or private client account management. The Company’s performance obligation is satisfied over time and the resulting fees are recognized monthly, based upon either the beginning-of quarter (in advance) or quarter-end (in arrears) market value of the assets under management and the applicable fee rate, depending on the terms of the contract. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company may earn performance-based incentives on certain contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item.
All of the investment management fee income on the consolidated statement of operations for the three months ended March 31, 2018 is considered in-scope of ASC 606.

40

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

Wealth advisory fees
Wealth advisory fees are earned for providing financial advisory services to clients. The Company’s performance obligation under these contracts is satisfied over time as the financial advisory services are provided. Fees are recognized monthly based either on a fixed fee amount or are based on the quarter-end (in arrears) market value of the assets under management and the applicable fee rate (“asset based fees”), depending on the terms of the contract. Payment on fixed fee contracts is received based on a schedule outlined in the contract, while payment on asset based fees are generally received a few days after quarter end through a direct charge to customers’ accounts. No performance based incentives are earned on wealth advisory contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item. Deferred revenues related to the fixed fee contracts of $6.2 million and $6.6 million at March 31, 2018 and December 31, 2017, respectively, are recorded on the consolidated balance sheet within the other liabilities line item.
All of the wealth advisory fee income on the consolidated statement of operations for the three months ended March 31, 2018 is considered in-scope of ASC 606.
Wealth management and trust fees
Wealth management fees are earned for providing investment management, retirement plan advisory, family office, and financial planning services to clients. The Company’s performance obligation under these contracts is satisfied over time as the wealth management services are provided. Fees are recognized monthly based on the average monthly, beginning-of-quarter, or, for a small number of clients, end-of-quarter market value of the assets under management and the applicable fee rate, depending on the terms of the contract. No performance based incentives are earned on wealth management contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item.
Trust fees are earned when the Company is appointed as trustee for clients. As trustee, the Company administers the client’s trust and manages the assets of the trust including investments and property. The Company’s performance obligation under these agreements is satisfied over time as the administration and management services are provided. Fees are recognized monthly based on a percentage of the market value of the account as outlined in the agreement. Payment frequency is defined in the individual contracts which primarily stipulate monthly in arrears. No performance based incentives are earned on trust fee contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item.
All of the wealth management and trust fee income on the consolidated statement of operations for the three months ended March 31, 2018 is considered in-scope of ASC 606.
Other banking fee income
The Bank charges a variety of fees to its clients for services provided on the deposit and deposit management related accounts. Each fee is either transaction-based or assessed monthly. The types of fees include service charges on accounts, overdraft fees, maintenance fees, ATM fee charges, credit card charges, and other miscellaneous charges related to the accounts. These fees are not governed by individual contracts with clients. They are charges to clients based on disclosures presented to clients upon opening these accounts along with updated disclosures when changes are made to the fee structures. The transaction-based fees are recognized in revenue when charged to the client based on specific activity on the client’s account. Monthly service/maintenance charges are recognized in the month they are earned and are charged directly to the client’s account.
The Bank also charges fees for treasury activities such as foreign exchange fees for clients with a banking relationship. These fees are recorded when earned via completion of the transaction for the client. The completion of the transaction is deemed to be the performance obligation of the transaction. The related revenue is recorded through a direct charge to the client’s account. There are no individual agreements or contracts with clients as it relates to foreign exchange fees as they are governed by client disclosure statements and the Bank’s internal policies and procedures.
For both three month periods ended March 31, 2018 and 2017, $0.9 million of other banking fee income as described above is considered in-scope for ASC 606.

13.14.    Recent Accounting Pronouncements
In May 2014 and at various other dates after May 14, the FASB issued ASU 2014-09Revenue from Contracts with Customers (Topic 606)  et al.(“ASU 2014-09”). ASU 2014-09 replaces existing revenue recognition standards and expands the disclosure requirements for revenue agreements with customers. Under the new standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 et aldoes not apply to revenue associated with financial instruments such as loans and securities. Therefore,On January 1, 2018, we adopted ASU 2014-09 et al. using the modified retrospective transition method, however no cumulative effect adjustment to opening retained

41

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

earnings as of January 1, 2018 was required. For additional disclosure details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies and Note 13: Revenue Recognition.”
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Instruments - Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management must evaluate whether conditions and events raise substantial doubt about an entity’s ability to continue as a going concern and then whether its plans alleviate that doubt. ASU 2014-15 was effective in 2016 and management performed the required evaluation and concluded that there were no such conditions or events that raised substantial doubt about the Company’s ability to continue as a going concern.
In January 2016, the FASB issued ASU 2016-01. This ASU requires equity investments to be measured at fair value with changes in fair value, net interest income will not be impacted byof tax, recognized in net income. As a result of implementing this new standard. ASU 2014-09 is effective in the first quarter of 2018. Althoughstandard, the Company does not anticipate any material impactreclassified $339 thousand in unrealized gains on available-for-sale equity investments, net of ASU 2014-09, the Company is still assessing the full impacttax, from accumulated other comprehensive income to retained earnings as of implementation on its consolidated financial statements and does expect additional financial statement disclosures and associated internal controls to be implemented along with the adoption of this ASU.January 1, 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU update amends current lease accounting and requires all leases, other than short-term leases, to be reported on the balance sheet through the recognition of a right-of-use asset and a corresponding liability for future lease obligations. The amended guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and will require transition utilizing a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption of this ASU is permitted although the Company does not plan to early adopt. The Company does not anticipate a material impact to revenue or operating expenses as a result of the adoption of this ASU. The Company expects that this ASU will gross up the assets and liabilities on the balance sheet related to the lease assets and liabilities.liabilities and reduce regulatory capital ratios.
In March 2016, the FASB issued ASU 2016-09.2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update is intended to simplify several aspects of the accounting for employee share-based plans such as income tax consequences, classification of awards as either liabilities or equity on the balance sheet, and classification on the statement of cash flows. This ASU was effective for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company adopted this ASU on January 1, 2017. The adoption of this ASU has resulted in, and will continue to result in, fluctuations in the Company’s earnings due to changes in the Company’s stock price between issuance date and settlement date of employee share-based transactions. In addition, the Company anticipates that certain stock options will expire unexercised, due to being out of the money, and this ASU requires the previous tax benefits to be reversed.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) (“ASU 2016-13”). This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018. The Company does not plan on adopting early. The Company is currently evaluating the impact of this ASU on itsthe Company’s consolidated financial statements.statements will depend on factors at the time of adoption such as the balance and type of loans on the balance sheet, the Company’s loan loss history, and various qualitative factors.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”).2016-15.  This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for the Company beginning on January 1, 2018. Early adoption was permitted, provided that all of the amendments are adopted in the same period, however the Company did not early adopt. The guidance requires application using a retrospective transition method. This ASU did not have an impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07. This amendment requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application usingAs a retrospective transition method. The Company does not expect that this ASU will have a significant impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04. This update is the result of the first phase of a two phase project by the FASB to reduce the cost and complexity of the goodwill impairment test. The objective of Phase 1 of the project, which resulted in ASU 2017-04, is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. Under the provisions of this update, an entity still has the option to perform the qualitative assessment, or Step 0 test, for a reporting unit to determine if the quantitative impairment test is necessary. This ASU will be effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company elected to early adopt this ASU as of January 1, 2017. The adoption of this ASU, could increase or decrease the amount of a goodwill impairment charge should any of$160 thousand has been reclassified from salaries and employee benefits expense to other expense within the Company’s reporting units withconsolidated statement of operations for the three months ended March 31, 2017. For the three months ended

42

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

goodwill fail a Step 1 test in the future, as comparedMarch 31, 2018, $135 thousand is presented within other expense that would have been presented within salaries and employee benefits prior to the amountadoption of a goodwill impairment charge under the existing standards depending on the fair value of the reporting unit’s assets.ASU 2017-07.
In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). This update amends the amortization period for certain purchased callable debt securities held at a premium. The amortization period for the premium on such securities is being shortened to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted, including in an interim period. The guidance requires application using a modified retrospective transition method through a cumulative-effect adjustment to beginning retained earnings. The Company plans to early adopt in the third quarter of 2017 and does not expect thatadopted this ASU will haveas of July 1, 2017, which had a significantminimal impact on itsthe consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12. The standard is intended to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company elected to early adopt this ASU as of January 1, 2018 with a modified retrospective transition. As a result of implementing this standard, the Company reclassified $5 thousand in unrealized losses on derivatives from accumulated other comprehensive income to retained earnings as of January 1, 2018. This ASU will provide more flexibility in the Company’s risk management activities and we believe it will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update was issued to address a narrow-scope financial reporting issue that arose as a consequence of the change in the tax law. On December 22, 2017, the U.S. federal government enacted the Tax Act which, among other significant changes, lowers the federal corporate tax rate from 35% to 21% effective January 1, 2018. This update requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the Tax Act. ASC 740 requires that the tax effects of changes in tax rates be recognized in income tax expense/ (benefit) attributable to continuing operations in the period in which the law is enacted. As a result, the tax effect of accumulated other comprehensive income does not reflect the appropriate tax rate. The amendments in this ASU eliminate the stranded tax effects associated with the change in the federal corporate income tax rate related to the Tax Act and improve the usefulness of information reported to financial statement users. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted for public business entities for reporting periods for which financial statements have not yet been issued. The Company early adopted this ASU on December 31, 2017 and reclassified $1.5 million from accumulated other comprehensive income to retained earnings.

15.    Subsequent Event
In April 2018, the Company completed the sale of its ownership interest in Anchor. Anchor’s results remain consolidated in the Company’s results during current and prior periods. The transaction had previously been announced in December 2017. The Company classified the assets and liabilities of Anchor as held for sale at March 31, 2018 and December 31, 2017, which are included with other assets and other liabilities, respectively, on the Company’s consolidated balance sheets.
As a result of the transaction, Boston Private received approximately $32 million of cash and will receive future revenue share payments that have a net present value of approximately $15 million. During the second quarter, the Company will recognize a tax expense of approximately $11 million to $12 million attributable to the transaction, which is primarily the result of a book to tax basis difference associated with nondeductible goodwill. The net financial impact will increase the Company’s Tier 1 common equity by approximately $34 million to $35 million. Accordingly, the results of Anchor after the completion of the sale in April 2018 will not be included in the results of the Company.


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of and for the three months ended March 31, 20172018
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute 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 (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding our strategy, effectiveness of our investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth in assets, deposits and results of operations, receipt of regulatory approval for pending acquisitions, success of acquisitions, future operations, market position, financial position, and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond the Company’s control.
Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned “Risk Factors”; adverse conditions in the capital and debt markets and the impact of such conditions on the Company’s private banking, wealth management and trust, investment management, and wealth advisory activities; changes in interest rates; competitive pressures from other financial institutions; the effects of weakness in general economic conditions on a national basis or in the local markets in which the Company operates; changes in the value of securities and other assets; changes in loan default and charge-off rates; the adequacy of loan loss reserves; reductions in deposit levels necessitating increased borrowing to fund loans and investments; operational risks including, but not limited to, cybersecurity, fraud, and natural disasters; changes in government regulation; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; the risk that the Company’s deferred tax assets may not be realized; risks related to the identification and implementation of acquisitions, dispositions and restructurings; and changes in assumptions used in making such forward-looking statements, as well as the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K and updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.


Executive Summary
Boston Private Financial Holdings, Inc.The Company offers a wide range of private banking and wealth management and private banking services to high net worth individuals, families, businesses and select institutions through its four reportable segments: Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory. This Executive Summary provides an overview of the most significant aspects of our operating segments and the Company’s operations in the first quarter of 2017.2018. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following.
As of and for the three months ended March 31,    As of and for the three months ended March 31,    
2017 2016 $ Change % Change2018 2017 $ Change % Change
(In thousands, except per share data)  (In thousands, except per share data)  
Total revenues$90,148
 $87,901
 $2,247
 3 %$97,126
 $90,148
 $6,978
 8%
Provision/ (credit) for loan losses(181) (3,133) 2,952
 nm
(1,795) (181) (1,614) nm
Total operating expense68,780
 66,709
 2,071
 3 %70,857
 68,780
 2,077
 3%
Net income from continuing operations14,996
 16,887
 (1,891) (11)%22,038
 14,996
 7,042
 47%
Net income attributable to noncontrolling interests966
 911
 55
 6 %1,050
 966
 84
 9%
Net income attributable to the Company15,662
 18,041
 (2,379) (13)%22,686
 15,662
 7,024
 45%
Diluted earnings per share:              
From continuing operations$0.15
 $0.19
 $(0.04) (21)%$0.25
 $0.15
 $0.10
 67%
From discontinued operations$0.02
 $0.02
 $
  %$0.02
 $0.02
 $
 %
Total attributable to common shareholders$0.17
 $0.21
 $(0.04) (19)%$0.27
 $0.17
 $0.10
 59%
              
ASSETS UNDER MANAGEMENT AND ADVISORY:              
Wealth Management and Trust$7,260,000
 $7,137,000
 $123,000
 2 %$7,831,000
 $7,260,000
 $571,000
 8%
Investment Managers10,907,000
 9,838,000
 1,069,000
 11 %
Wealth Advisory10,579,000
 9,857,000
 722,000
 7 %11,446,000
 10,579,000
 867,000
 8%
Investment Managers (1)10,962,000
 10,907,000
 55,000
 1%
Less: Inter-company Relationship(11,000) (21,000) 10,000
 (48)%(11,000) (11,000) 
 %
Total Assets Under Management and Advisory$28,735,000
 $26,811,000
 $1,924,000
 7 %$30,228,000
 $28,735,000
 $1,493,000
 5%
_____________________
nm    -    not meaningful
(1)Includes the assets under management at Anchor of $9.0 billion and $9.1 billion at March 31, 2018 and 2017, respectively.
Net income attributable to the Company was $15.7$22.7 million for the three months ended March 31, 20172018 and $18.0$15.7 million for the same period in 2016.2017. The Company recognized diluted earnings per share of $0.17$0.27 and $0.21$0.17 for the three monththree-month periods ended March 31, 20172018 and 2016,2017, respectively.
Key items that affected the Company’s results in the first quarter of 20172018 compared to the same period of 20162017 include:
The Company recorded a $0.2 million creditNet interest income increased 7%, to the provision for loan losses for the three months ended March 31, 2017, compared to a credit to the provision for loan losses of $3.1 million for the same period of 2016. The credit to the provision for the three months ended March 31, 2017 was primarily due to decreases in loss factors, and net recoveries of $0.1 million, partially offset by an increase in criticized loans and loan growth.
Fees and other income decreased 4% to $36.5$57.4 million for the three months ended March 31, 2017,2018, compared to $38.0$53.6 million for the same period of 2016.2017. The increase for the three months is due to higher volume and yields on loans and higher yield on investments, partially offset by higher volumes and average rates paid on interest-bearing deposits and the Company’s borrowings as well as lower volume of investments. The net interest margin (“NIM”) was 2.95% for the three months ended March 31, 2018, an increase of one basis point compared to the same period in 2017.
Total fees and other income increased 9% to $39.7 million for the three months ended March 31, 2018, compared to $36.5 million for the same period of 2017. This decreaseincrease was driven by lower banking fee revenue, due to lower swap volume,a 12% increase in wealth management and trust fees, a loss on the sale of an OREO property, partially offset by a 2%5% increase in both investment management fees and wealth advisory fees, and a 1%34% increase in wealth advisory fees.other banking fee income related to swap fee and BOLI income. Total fees and other income represents 40%41% of total revenue for the three months ended March 31, 2017,2018, compared to 43%40% of total revenue for the same period of 2016.2017.

OperatingTotal operating expenses increased 3% to $68.8$70.9 million for the three months ended March 31, 2017,2018, compared to $66.7$68.8 million for the same period of 2016.2017. Increases in salaries and employee benefits, and occupancy and equipment, expensesand information systems were partially offset by decreases in marketingamortization of intangibles and business development, professional services, and FDIC insurance expenses. Additionally, the Company incurred no restructuringfees.
Income tax expense duringdecreased 8% to $6.0 million for the three months ended March 31, 2017,2018, compared to $1.1$6.6 million duringfor the same period in 2016 relatedof 2017. The decrease was primarily due to the Wealth Management and Trust segment.reduction in the federal corporate tax rate from 35% to 21% as a result of the Tax Act that was enacted on December 22, 2017, partially offset by the increase in pre-tax earnings. 
The Company’s Private Banking segment reported net income attributable to the Company of $14.9$18.2 million in the first quarter of 2017,2018, compared to net income attributable to the Company of $17.3$14.9 million for the same period of 2016.2017. The $2.3$3.2 million, or 14%22%, decreaseincrease was a result of the decreasean increase in thenet interest income, a larger credit to the provision for loan losses, and a decrease in income tax expense, partially offset by an increase in operating expenses. The increase in operating expenses particularlywas driven by salaries and employee benefits, and occupancy and equipment, expenses, and ainformation systems expenses. The decrease in banking fee revenue relatedincome tax expense was primarily due to swap fees. These changes were partially offset by the increasereduction in net interest income.the federal corporate tax rate. 
The Company’s Wealth Management and Trust segment reported net income attributable to the Company of $1.1 million in the first quarter of 2018, compared to a net loss attributable to the Company of $1.8 million in the first quarter of 2017, compared to a net loss attributable to the Company of $2.9 million for the same period of 2016.2017. The 2017 losschange was attributeddue to a combination of the impact on revenue related to employee turnover and the related loss of clients who followed the departed employees23% decrease in 2015 and 2016 as well as elevated operating expenses resulting from the continued integration of the acquisition of Banyan Partners, LLC. Wealthand a 12% increase in wealth management and trust fee revenue decreased $0.1 million, or 1%, as comparedfees, partially offset by income tax expense. The decrease in operating expense primarily related to decreases in salaries and employee benefits. The decrease in the effective income tax rate was primarily due to the same periodreduction in 2016, while operating expenses decreased $2.0 million, or 12%, as compared to the same period in 2016.federal corporate tax rate. Fee-based revenue in the Wealth Management and Trust segment is determined based on average monthly, beginning-of-quarter, end-of-month, or, for a small number of clients, end-of-quarter AUM data,balances, depending on the custodian. Wealth Management and Trust AUM increased $0.1$0.6 billion, or 2%8%, to $7.8 billion at March 31, 2018 from $7.3 billion at March 31, 2017 from $7.1 billion at March 31, 2016.2017. The increase in AUM is due to net inflows of $0.3 billion and positive market action of $0.3$0.2 billion for the twelve months ending March 31, 2017, partially offset by net outflows of $0.2 billion over the same period.2018.
The Company’s Investment Management segment reported net income attributable to the Company of $1.2$1.7 million in the first quarter of 2017,2018, compared to net income attributable to the Company of $1.3$1.2 million for the same period of 2016.2017. The 6% decrease44% increase was due primarily to lower amortization of intangibles and depreciation expenses due to Anchor being classified as held for sale during the first quarter of 2018, as well as a 4% increase in operating expenses, primarily in salaries and employee benefits, partially offset by a 2%5% increase in investment management fee revenue.income and a 20% decrease in allocated income tax expense. These changes were partially offset by a $0.4 million trade error, and higher legal fees related to the Anchor transaction, and higher recruiting fees. The decrease in income tax expense was primarily due to the reduction in the federal corporate tax rate. Most fee-based revenue in the investment management segment is determined based on beginning-of-period AUM data.balances. Investment Management AUM, including both DGHM and Anchor, increased $1.1$0.1 billion, or 11%1%, to $11.0 billion at March 31, 2018 from $10.9 billion at March 31, 2017, from $9.8 billion at March 31, 2016, primarily due to positive market action of $1.4$0.8 billion, partially offset by net outflows of $0.7 billion for the twelve months ending March 31, 2018.
The sale of Anchor was completed in April 2018. While the results of Anchor while it was an affiliate of the Company will continue to be reported in the Company’s continuing operations, results for the remaining period of 2018 will not include Anchor operations following the transaction close in mid-April. For the three months ended March 31, 2018, Anchor represented 74% of segment total revenues, 75% of segment total operating expense, 70% of segment net income attributable to the Company, and 82% of segment assets under management. For the three months ended March 31, 2017, partially offset byAnchor represented 74% of segment total revenues, 76% of segment total operating expense, 69% of segment net outflowsincome attributable to the Company, and 83% of $0.3 billion.segment assets under management.
The Company’s Wealth Advisory segment reported net income attributable to the Company of $1.6$1.7 million in the first quarter of 2017,2018, compared to net income attributable to the Company of $1.5$1.6 million for the same period of 2016.2017. The 11%5% increase was due to a 3% decrease in operating expenses, primarily due to decreased professional fees and intangible amortization expense, and a 1%5% increase in wealth advisory fee revenue.income and a 39% decrease in allocated income tax expense, partially offset by a 12% increase in operating expenses. Fee-based revenue in the Wealth Advisory segment is determined based on either a fixed fee or end-of-quarter AUM balances. The operating expense increase was primarily due to additional performance bonus accruals. The decrease in income tax expense was primarily due to the reduction in the federal corporate tax rate. Wealth Advisory AUM increased $0.7$0.9 billion, or 7%8%, to $11.4 billion at March 31, 2018 from $10.6 billion at March 31, 2017, from $9.9 billion at March 31, 2016, primarily due to positive market action of $0.6$0.9 billion and flat net inflows of $0.1 billion for the twelve months ending March 31, 2017.2018.

Critical Accounting Policies
Critical accounting policies reflect 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 the allowance for loan and lease losses, the valuation of goodwill and intangible assets and analysis for impairment, and tax estimates. These policies are discussed in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017. There have been no changes to these policies through the filing of this Quarterly Report on Form 10-Q.

Results of operations for the three months ended March 31, 20172018 versus March 31, 20162017
Net Income. The Company recorded net income from continuing operations for the three months ended March 31, 20172018 of $15.0$22.0 million, compared to $16.9$15.0 million for the same period in 2016.2017. Net income attributable to the Company, which includes income from both continuing and discontinued operations, for the three months ended March 31, 20172018 was $15.7$22.7 million, compared to $18.0$15.7 million for the same period in 2016.2017.
The Company recognized diluted EPS attributable to common shareholders, which includes both continuing and discontinued operations, for the three months ended March 31, 20172018 of $0.17$0.27 per share, compared to $0.21$0.17 per share for the same period in 2016.

2017. Net income from continuing operations in both 2018 and 2017 and 2016 was partially offset by charges that reduce income available to common shareholders. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 2: Earnings Per Share” for further detail on these charges to income available to common shareholders.
The following discussions are based on the Company’s continuing operations, unless otherwise stated.
The following table presents selected financial highlights:
Three months ended March 31, % ChangeThree months ended March 31, 
$
Change
 
%
Change
2017 2016 2018 2017 
(In thousands)(In thousands)
Net interest income$53,642
 $49,879
 8 %$57,383
 $53,642
 $3,741
 7 %
Fees and other income36,506
 38,022
 (4)%39,743
 36,506
 3,237
 9 %
Total revenue90,148
 87,901
 3 %97,126
 90,148
 6,978
 8 %
Provision/ (credit) for loan losses(181) (3,133) nm
(1,795) (181) (1,614) nm
Operating expense68,780
 66,709
 3 %70,857
 68,780
 2,077
 3 %
Income tax expense6,553
 7,438
 (12)%6,026
 6,553
 (527) (8)%
Net income from continuing operations14,996
 16,887
 (11)%22,038
 14,996
 7,042
 47 %
Net income from discontinued operations1,632
 2,065
 (21)%1,698
 1,632
 66
 4 %
Less: Net income attributable to noncontrolling interests966
 911
 6 %1,050
 966
 84
 9 %
Net income attributable to the Company$15,662
 $18,041
 (13)%$22,686
 $15,662
 $7,024
 45 %
_____________________
nm = not meaningful
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 between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net Interest Margin (“NIM”)NIM is calculated by taking annualizedthe amount of net interest income, for the period, 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. When credit quality declines and loans are placed on nonaccrual status, NIM can decrease because the same assets are earning less income. Loans graded as substandard but still accruing interest income totaled $64.4$45.2 million at March 31, 20172018 and could be placed on nonaccrual status if their credit quality declines further.

Net interest income for the three months ended March 31, 20172018 was $53.6$57.4 million, an increase of $3.8$3.7 million, or 8%7%, compared to the same period in 2016.2017. The increase for the three monthsthree-month period is due to higher loanyields and volume on loans and higher volume and yields on cash and investments, partially offset by higher volume and average rates paid on the Company’s borrowings and interest-bearing deposits, lower yieldsvolume on loanscash and investments, and higher volume of deposits and borrowings.rates paid on the Company’s junior subordinated debentures. The NIM was 2.94%2.95% for the three months ended March 31, 2017, a decrease2018, an increase of twoone basis pointspoint compared to the same period in 2016.2017. Due to the lower federal tax rate in 2018, the FTE adjustment has a lower impact on the interest gross-up for NIM purposes. The estimated impact on NIM due to the lower tax rate in 2018 is 10 basis points.
The following tables present the composition of the Company’s NIM on a FTE basis for the three months ended March 31, 20172018 and 2016;2017; however, the discussion following these tables reflects non-FTE data.

 Average Balance Interest Income/Expense Average Yield/Rate
 As of and for the three months ended March 31,
AVERAGE BALANCE SHEET:2017 2016 2017 2016 2017 2016
AVERAGE ASSETS(In thousands)    
Interest-Earning Assets:           
Cash and Investments: (1)           
Taxable investment securities$395,728
 $392,579
 $1,670
 $1,594
 1.69% 1.63%
Non-taxable investment securities (2)295,015
 262,227
 2,471
 2,138
 3.35% 3.26%
Mortgage-backed securities672,683
 564,826
 3,504
 3,065
 2.08% 2.17%
Federal funds sold and other160,001
 185,253
 600
 507
 1.51% 1.08%
Total Cash and Investments1,523,427
 1,404,885
 8,245
 7,304
 2.17% 2.08%
Loans (3):           
Commercial and Industrial (2)983,697
 1,065,614
 9,303
 10,920
 3.78% 4.05%
Commercial Real Estate (2)2,324,367
 1,859,557
 23,544
 19,797
 4.05% 4.21%
Construction and Land113,963
 174,867
 1,244
 1,648
 4.36% 3.73%
Residential2,424,772
 2,229,680
 18,991
 17,302
 3.13% 3.10%
Home Equity117,702
 119,349
 1,089
 1,082
 3.75% 3.65%
Other Consumer192,136
 157,508
 1,420
 965
 3.00% 2.47%
Total Loans6,156,637
 5,606,575
 55,591
 51,714
 3.61% 3.66%
Total Earning Assets7,680,064
 7,011,460
 63,836
 59,018
 3.33% 3.35%
Less: Allowance for Loan Losses78,122
 80,273
        
Cash and due From Banks (Non-interest Bearing)41,469
 39,943
        
Other Assets398,751
 420,909
        
TOTAL AVERAGE ASSETS$8,042,162
 $7,392,039
        
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY           
Interest-Bearing Liabilities:           
Interest-Bearing Deposits (4):           
NOW$576,915
 $542,617
 $110
 $87
 0.08% 0.06%
Savings75,123
 75,433
 18
 23
 0.10% 0.12%
Money Market3,213,092
 3,055,242
 3,122
 2,902
 0.39% 0.38%
Certificates of Deposit589,900
 578,310
 1,281
 1,170
 0.88% 0.81%
Total Interest Bearing Deposits4,455,030
 4,251,602
 4,531
 4,182
 0.41% 0.40%
Junior Subordinated Debentures106,363
 106,363
 671
 578
 2.52% 2.15%
FHLB Borrowings and Other Borrowings726,978
 524,892
 2,172
 1,963
 1.19% 1.48%
Total Interest Bearing Liabilities5,288,371
 4,882,857
 7,374
 6,723
 0.56% 0.55%
Non-interest Bearing Demand Deposits (4)1,843,830
 1,621,666
        
Payables and Other Liabilities117,132
 110,959
        
Total Average Liabilities7,249,333
 6,615,482
        
Redeemable Noncontrolling Interests18,578
 21,157
        
Average Shareholders’ Equity774,251
 755,400
        
TOTAL AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY$8,042,162
 $7,392,039
        
Net Interest Income - on a FTE Basis    $56,462
 $52,295
    
FTE Adjustment (2)    2,820
 2,416
    
Net Interest Income (GAAP Basis)    $53,642
 $49,879
    
Interest Rate Spread        2.77% 2.80%
Net Interest Margin        2.94% 2.96%
 Average Balance Interest Income/Expense Average Yield/Rate
 As of and for the three months ended March 31,
AVERAGE BALANCE SHEET:2018 2017 2018 2017 2018 2017
AVERAGE ASSETS(In thousands)    
Interest-earning assets:           
Cash and investments: (1)           
Taxable investment securities$333,253
 $395,728
 $1,510
 $1,670
 1.81% 1.69%
Non-taxable investment securities (2)296,958
 295,015
 2,190
 2,471
 2.95% 3.35%
Mortgage-backed securities588,461
 672,683
 3,178
 3,504
 2.16% 2.08%
Federal funds sold and other161,573
 160,001
 1,009
 600
 2.51% 1.51%
Total cash and investments1,380,245
 1,523,427
 7,887
 8,245
 2.29% 2.17%
Loans: (3)           
Commercial and industrial (2)933,209
 983,697
 8,756
 9,303
 3.75% 3.78%
Commercial real estate (2)2,441,215
 2,324,367
 26,341
 23,544
 4.32% 4.05%
Construction and land (2)169,384
 113,963
 1,965
 1,244
 4.64% 4.36%
Residential2,702,317
 2,424,772
 21,766
 18,991
 3.22% 3.13%
Home equity97,191
 117,702
 1,042
 1,089
 4.35% 3.75%
Other consumer185,596
 192,136
 1,573
 1,420
 3.44% 3.00%
Total loans6,528,912
 6,156,637
 61,443
 55,591
 3.77% 3.61%
Total earning assets7,909,157
 7,680,064
 69,330
 63,836
 3.51% 3.33%
LESS: Allowance for loan losses74,834
 78,122
        
Cash and due from banks (non-interest bearing)51,944
 41,469
        
Other assets425,617
 398,751
        
TOTAL AVERAGE ASSETS$8,311,884
 $8,042,162
        
AVERAGE LIABILITIES, REDEEMABLE
NONCONTROLLING INTERESTS, AND
SHAREHOLDERS’ EQUITY
           
Interest-bearing liabilities:           
Interest-bearing deposits:           
Savings and NOW$716,930
 $652,038
 $215
 $128
 0.12% 0.08%
Money market3,141,564
 3,213,092
 4,314
 3,122
 0.56% 0.39%
Certificates of deposit657,109
 589,900
 1,995
 1,281
 1.23% 0.88%
Total interest-bearing deposits4,515,603
 4,455,030
 6,524
 4,531
 0.59% 0.41%
Junior subordinated debentures106,363
 106,363
 846
 671
 3.18% 2.52%
FHLB borrowings and other878,093
 726,978
 3,603
 2,172
 1.64% 1.19%
Total interest-bearing liabilities5,500,059
 5,288,371
 10,973
 7,374
 0.80% 0.56%
Non-interest bearing demand deposits1,872,472
 1,843,830
        
Payables and other liabilities133,243
 117,132
        
Total average liabilities7,505,774
 7,249,333
        
Redeemable noncontrolling interests22,085
 18,578
        
Average shareholders’ equity784,025
 774,251
        
TOTAL AVERAGE LIABILITIES,
REDEEMABLE NONCONTROLLING
INTERESTS, AND SHAREHOLDERS’
EQUITY
$8,311,884
 $8,042,162
        
Net interest income - on a fully taxable equivalent basis (FTE)    $58,357
 $56,462
    
LESS: FTE adjustment (2)    974
 2,820
    
Net interest income (GAAP basis)    $57,383
 $53,642
    
Interest rate spread        2.71% 2.77%
Net interest margin        2.95% 2.94%
_________________________________________

(1)Investments classified as available-for-sale and held-to-maturity are shown in the average balance sheet at amortized cost.

(2)Interest income on non-taxable investments and loans is presented on a FTE basis using statutory rates. The discussion following these tables reflects non-FTE data.
(3)Includes loans held for sale and nonaccrual loans.
(4)Includes deposits held for sale, if any.
Interest and Dividend Incomedividend income. InterestTotal interest and dividend income for the three months ended March 31, 20172018 was $61.0$68.4 million, an increase of $4.4$7.3 million, or 8%12%, compared to the same period in 2016.2017. The increase for the three months was primarily due to higher loanyields and volume on loans and higher volume and yields on cash and investments, partially offset by lower yields on loans.volume of cash and investments.
The Bank generally has interest income that is either recoveredcollected or reversed related to nonaccrual loans each quarter. Based on the net amount recoveredcollected or reversed, the impact on interest income and related yields can be either positive or negative. In addition, the Bank collects prepayment penalties on certain commercial loans that pay off prior to maturity which could also impact interest income and related yields positively. The amount and timing of prepayment penalties varies from quarter to quarter.
Interest income on commercial and industrial loans, on a non-FTE basis, for the three months ended March 31, 20172018 was $8.0$8.5 million, a decreasean increase of $1.2$0.4 million, or 13%5%, compared to the same period in 2016,2017, as a result of an 8%a 36 basis point increase in the average yield on a non-FTE basis, partially offset by a 5% decrease in the average balance and a 20 basis point decrease in the average yield.balance. The decrease in the average balance for the three month period is related to the reclassification in the fourth quarter of 2016 of tax-exempt multifamily loans into commercial real estate loans. The decrease in average balance is also related to seasonal fluctuations of the commercial loan portfolio at the Bank. The decreaseincrease in the average yield for the three monththree-month period is the result of market conditions and the fluctuations in the indicies to which the variable rate loans are tied, as well as lower interest income recoveries on previous nonaccrual loanstied. The decrease in the firstaverage balance for the three-month period is related to a few large paydowns during the quarter, of 2017 of $0.3 million, as compared to $1.1 million in interest income recoveries on previous nonaccrual loansincreased competition and the narrowing pricing spread in the first quartercurrent environment of 2016.increasing interest rates.
Interest income on commercial real estate loans, on a non-FTE basis, for the three months ended March 31, 20172018 was $22.9$26.2 million, an increase of $3.1$3.3 million, or 15%14%, compared to the same period in 2016,2017, as a result of a 25%5% increase in the average balance partially offset byand a 3335 basis point decreaseincrease in the average yield.yield on a non-FTE basis. The increase in the average balance for the three monththree-month period is related to the reclassification in the fourth quarter of 2016 of certain tax-exempt multifamily loans into commercial real estate loans.customer demand. The increase in average balance is also related to the organic growth of the commercial real estate loan portfolio at the Bank. The decrease in the average yield for the three monththree-month period is the result of competitive market conditions leading to lower rates on new loans, as well as fluctuations in the indicies to which the variable rate loans are tied.
Interest income on construction and land loans for the three months ended March 31, 20172018 was $1.2$1.9 million, a decreasean increase of $0.4$0.7 million, or 25%56%, compared to the same period in 2016,2017, as a result of a 35% decrease49% increase in the average balance partially offset byand a 6321 basis point increase in the average yield.yield on a non-FTE basis. The decreaseincrease in the average balance for the three monththree-month period is related to customer demand. The increase in the average yield for the three monththree-month period is the result of market conditions as well as fluctuations in the indicies to which the variable rate loans are tied.
Interest income on residential mortgage loans for the three months ended March 31, 20172018 was $19.0$21.8 million, an increase of $1.7$2.8 million, or 10%15%, compared to the same period in 2016,2017, as a result of a nine percentan 11% increase in the average balance and a threenine basis point increase in the average yield. The increase in the average balance for the three monththree-month period is related to the organic growth of the residential loan portfolio at the Bank. The increase in the average yield for the three-month period is related to higher yields on residential mortgage originations and adjustable rate mortgage (“ARM”) loans repricing at higher rates.
Interest income on home equity loans for the three months ended March 31, 20172018 was $1.1$1.0 million, consistent witha decrease of 4% compared to the same period in 2016,2017, as a result of a 1017% decrease in the average balance, partially offset by a 60 basis point increase in the average yield offset by a one percentyield. The decrease in the average balance.balance for the three-month period is primarily due to the timing of customer demand related to origination and utilization of loans. The increase in the average yield for the three monththree-month period is the result of increases in the Prime rate.
Interest income on other consumer loans for the three months ended March 31, 20172018 was $1.4$1.6 million, an increase of $0.5$0.2 million, or 47%11%, compared to the same period in 2016,2017, as a result of a 22% increase in the average balance and a 5344 basis point increase in the average yield.yield, partially offset by a 3% decrease in the average balance. The increase in the average yield for the three monththree-month period is primarily the result of increases in the Prime rate.LIBOR. The increasedecrease in the average balance for the three monththree-month period is primarily due to client demand.customer demand related to origination and utilization of lines of credit.
Investment income, on a non-FTE basis, for the three months ended March 31, 20172018 was $7.4 million, an increase of $0.8 million, or 13%, compared toconsistent with the same period in 2016,2017, as a result of an 8% increase in the average balance and a 715 basis point increase in the average yield.yield on a non-FTE basis, offset by a 9% decrease in the average balance. The increase in the average yield for the three monththree-month period is partiallyprimarily due to dividends from the Federal Reserve Bank, of which the Bank became a member in the third quarter of 2017, and the FHLB, as well as increases in short-term interest rates.the federal discount rate. The increasedecrease in the average balance for the three monththree-month period is primarily due to timing

and volume of deposit and borrowing balances as compared to the level of loans outstanding. Investment decisions are made based on anticipated liquidity, loan demand, and asset-liability management considerations.

Total interestInterest expense. Total interest expense for the three months ended March 31, 20172018 was $7.4$11.0 million, an increase of $0.7$3.6 million, or 10%49%, compared to the same period in 2016.2017.
Interest expense on interest-bearing deposits for the three months ended March 31, 20172018 was $4.5$6.5 million, an increase of $0.3$2.0 million, or 8%44%, compared to the same period in 2016,2017, as a result of a five percent increase in average balance and a onean 18 basis point increase in the average rate paid.paid, and a 1% increase in the average balance.
Interest paid on borrowingsnon-deposit interest-bearing liabilities for the three months ended March 31, 20172018 was $2.8$4.4 million, an increase of $0.3$1.6 million, or 12%56%, compared to the same period in 2016,2017, as a result of a 39%45 basis point increase in the average rate paid on FHLB borrowings and other borrowings, a 21% increase in the average balance of FHLB borrowings and other borrowings, and a 3766 basis point increase in the average rate paid on junior subordinated debentures, partially offset by a 29 basis point decrease in the average rate paid on FHLB borrowings and other borrowings, with no change in the average balance of junior subordinated debentures. The increase for the three monththree-month period in the average rate paid on borrowings is due to the increases in benchmark interest rates as well as the mix and terms of borrowings.rates.
Provision/ (credit) for loan losses. The Company recorded a credit to the provision for loan losses of $0.2$1.8 million for the three months ended March 31, 2017,2018, compared to a credit to the provision for loan losses of $3.1$0.2 million for the same period in 2016.2017. The credit to the provision for loan losses for the three months ended March 31, 2017 was2018 were the result of a decrease in criticized loans and improved loss factors, and net recoveries, partially offset by an increaseloan growth and the mix in criticized loans andthe loan growth.portfolio.
The provision/ (credit) for loan losses is determined as a result of the required level of the allowance for loan losses, estimated by management, which reflects the inherent risk of loss in the loan portfolio as of the balance sheet dates. The Company incorporates both quantitative and qualitative loss factors to determine the appropriate level of the allowance for loan losses. Quantitative loss factors are based on historical net charge-offs by loan portfolio. Qualitative factors are estimated by management and include trends in problem loans, economic and business conditions, strength of management, real estate collateral values, and underwriting standards. For further details, see “Loan Portfolio and Credit Quality” above.below.

Fees and other income.income Fees
 Three months ended March 31, 
$
Change
 
%
Change
 2018 2017  
 (In thousands)
Investment management fees$11,425
 $10,839
 $586
 5 %
Wealth advisory fees13,512
 12,823
 689
 5 %
Wealth management and trust fees12,151
 10,826
 1,325
 12 %
Other banking fee income2,273
 1,694
 579
 34 %
Gain on sale of loans, net74
 138
 (64) (46)%
Total core fees and income39,435
 36,320
 3,115
 9 %
Total other income308
 186
 122
 66 %
Total fees and other income$39,743
 $36,506
 $3,237
 9 %
Total fees and other income for the three months ended March 31, 2017 was $36.5 million, a decrease of $1.52018 increased $3.2 million, or 4%9%, compared to the same period in 2016. The decrease2017. Factors affecting the increase in the three monththree-month period is primarily related to a decrease in loan swapinclude higher fee revenue, which declinedincome in the first quarter of 2017 due to low customer demandWealth Management and was elevated in the first quarter of 2016 as compared to historical periods. This decrease was partially offset by increases in fee revenues in theTrust, Investment Management, and Wealth Advisory segments.segments due to higher levels of AUM.
Investment management fee income for the three months ended March 31, 2017 was $10.8 million, an increase of $0.2 million, or 2%, compared to the same period in 2016. AUM as of March 31, 2017 managed or advised by the Investment Managers was $10.9$11.0 billion at March 31, 2018, an increase of $1.1$0.1 billion, or 11%, compared to 2016.2017. The increase in AUM is primarily due towas driven by positive market action of $1.4$0.8 billion, partially offset by negative net flows of $0.7 billion for the twelve months ending March 31, 2017, partially offset2018. AUM managed by net outflowsAnchor represents $9.0 billion of $0.3 billion.
Wealth advisory fee incomethe balance at March 31, 2018 and $9.1 billion of the balance at March 31, 2017. Annualized investment management fees for the remaining 9 months of 2018 will be lower than the annualized investment management fees for the three months ended March 31, 2017 was $12.8 million, an increase of $0.1 million, or 1%, compared2018 due to the same periodcompletion of the sale of Anchor in 2016. April 2018. Anchor represented 74% of the investment management fee revenue for both of the three month periods ended March 31, 2018 and 2017.

AUM managed or advised by the Wealth Advisors was $10.6$11.4 billion at March 31, 2017,2018, an increase of $0.7$0.9 billion, or 8%, compared to March 31, 2016.2017. The increase in AUM is primarily due towas driven by positive market action of $0.6 billion and net inflows of $0.1$0.9 billion for the twelve months ending March 31, 2017.
Wealth management and trust fee income2018. Net flows were flat for the threetwelve months endedending March 31, 2017 was $10.8 million, a decrease of $0.1 million, or 1%, compared to the same period in 2016. 2018.
AUM as of March 31, 2017 managed or advised by Boston Private Wealth was $7.3$7.8 billion at March 31, 2018, an increase of $0.1$0.6 billion, or 2%8%, compared to March 31, 2016.2017. The increase in AUM is due to net inflows of $0.3 billion and positive market action of $0.3of$0.2 billion for the twelve months ending March 31, 2017, partially offset by net outflows of $0.2 billion over the same period.2018.
Other banking fee income for the three months ended March 31, 2017 was $1.7 million, a decrease of $1.5 million, or 48%,2018 increased compared to the same period in 2016.2017. The decrease forincrease was due to the three month period is related to 2016 loanincrease in Bank Owned Life Insurance (“BOLI”) income, as the Company made an additional $50.0 million investment in BOLI in the first quarter of 2017, and as well as an increase in swap fee income due to increasedreflecting higher client demand for loan swap agreementsagreements.
Total other income for the three months ended March 31, 2018 increased compared to the same period in the first quarter of 2016.2017 related to fluctuations in gains and losses on fair market value adjustments on derivative agreements.

Operating Expense.Expense Operating
 Three months ended March 31, 
$
Change
 
%
Change
 2018 2017  
 (In thousands)  
Salaries and employee benefits$47,084
 $45,665
 $1,419
 3 %
Occupancy and equipment7,748
 7,185
 563
 8 %
Professional services3,177
 3,314
 (137) (4)%
Marketing and business development1,593
 1,660
 (67) (4)%
Information systems5,886
 5,379
 507
 9 %
Amortization of intangibles750
 1,426
 (676) (47)%
FDIC insurance744
 766
 (22) (3)%
Other3,875
 3,385
 490
 14 %
Total operating expense$70,857
 $68,780
 $2,077
 3 %
Total operating expense for the three months ended March 31, 2017 was $68.8 million, an increase of2018 increased $2.1 million, or 3% as, compared to the same period in 2016. The changes for the three months ended March 31, 2017 are primarily due to increases in salaries and employee benefits, and occupancy and equipment, expenses,and information systems, and other expense, partially offset by decreases in marketingamortization of intangibles and business development, professional services, and FDIC insurance expense. Additionally, the Company incurred no restructuring charges in the three months ended March 31, 2017, compared to restructuring charges of $1.1 million for the same period in 2016.

services.
Salaries and employee benefits expense, the largest component of operating expense, for the three months ended March 31, 2017 was $45.8 million, an increase of $3.3 million, or 8%,2018 increased compared to the same period in 2016. The increase for the three month period is2017 primarily due to additionalhigher performance-based compensation, salaries and related benefits, due to growth at the Companypartially offset by lower commissions, sales incentives, and new initiatives, such as information technology upgrades, which include additional hires.stock compensation.
Occupancy and equipment expense for the three months ended March 31, 2017 was $10.6 million, an increase of $1.1 million, or 11%,2018 increased compared to the same period in 2016. The increase for the three month period is2017 primarily due to an increase in rent expense due to additional leased space, telecommunications and technology expenses, and software depreciation due to the implementation of aat new client relationship product.
Professional services expense for the three months ended March 31, 2017 was $3.3 million, a decrease of $0.2 million, or 6%, compared to the same period in 2016. The decrease for the three month period is primarily due to a decrease in legal expense and recruitment expense, partially offset by an increase in consulting fees. Recruiting fees can vary from period to period based on the timing, volume, and level of the employees hired through recruiters.office locations.
Marketing and business development expense for the three months ended March 31, 2017 was $1.7 million, a decrease of $0.5 million, or 24%,2018 decreased compared to the same period in 2016. The three month decrease is2017 primarily related to the timing of marketing programsand advertising campaigns in the Private Banking segment.and Wealth Advisory segments.
FDIC insuranceInformation systems expense for the three months ended March 31, 2017 was $0.8 million, a decrease of $0.3 million, or 25%,2018 increased compared to the same period in 2016. The decrease for the three month period is2017 primarily due to changesan increase in technology service agreements, telecom, and telephone expenses, partially offset by lower custody and recordkeeping expenses and software depreciation.
In 2017, the Bank began working on an initiative to upgrade its information technology. This initiative required the Bank to hire additional employees with expertise in information technology. Recruiters were generally used in the pricing for deposit insurance for small institutions, suchplacement of these professionals. The Bank has utilized consultants and temporary employees to assist with the initiative in addition to the new hires. Generally the expenditures in the preliminary project stage were expensed as incurred. Other expenditures related to

the Bank, which were adopted byapplication development stage have been capitalized. The capitalized expenditures will be depreciated over the FDIC in 2016 and were effective asuseful life of the third quarter of 2016.asset when the asset is placed in service. The Bank anticipates that the capitalized assets will be placed in service in 2018 through early 2019.
Income Tax Expense. Income tax expense for continuing operations for the three months ended March 31, 20172018 was $6.6$6.0 million. The effective tax rate for continuing operations for the three months ended March 31, 20172018 was 30.4%21.5%, compared to an effective tax rate of 30.6%30.4% for the same period in 2016.2017. The effective tax rate for 2018 was lower than 2017 primarily due to the impact of the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on December 22, 2017. Among the significant changes to the Code, the Tax Act reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 9: Income Taxes” for further detail.

Financial Condition

Condensed Consolidated Balance Sheets and Discussion
 March 31,
2017
 December 31, 2016 
Increase/
(decrease)
 
%
Change
 (In thousands)
Assets:       
Total cash and investments$1,569,951
 $1,507,845
 $62,106
 4 %
Loans held for sale350
 3,464
 (3,114) (90)%
Total loans6,250,217
 6,114,354
 135,863
 2 %
Less: Allowance for loan losses78,031
 78,077
 (46)  %
Net loans6,172,186
 6,036,277
 135,909
 2 %
Goodwill and intangible assets, net167,853
 169,279
 (1,426) (1)%
Total other assets304,780
 253,609
 51,171
 20 %
Total assets$8,215,120
 $7,970,474
 $244,646
 3 %
Liabilities and Equity:       
Deposits$6,246,620
 $6,085,146
 $161,474
 3 %
Total borrowings1,059,057
 980,192
 78,865
 8 %
Total other liabilities110,310
 119,683
 (9,373) (8)%
Total liabilities7,415,987
 7,185,021
 230,966
 3 %
Redeemable Noncontrolling Interests (“RNCI”)17,232
 16,972
 260
 2 %
Total shareholders’ equity781,901
 768,481
 13,420
 2 %
Total liabilities, RNCI and shareholders’ equity$8,215,120
 $7,970,474
 $244,646
 3 %
_____________________
nm     not meaningful


 March 31,
2018
 December 31, 2017 
Increase/
(decrease)
 
%
Change
 (In thousands)
Assets:       
Total cash and investments$1,320,846
 $1,425,418
 $(104,572) (7)%
Loans held for sale3,918
 4,697
 (779) (17)%
Total loans6,602,327
 6,505,028
 97,299
 1 %
Less: Allowance for loan losses72,898
 74,742
 (1,844) (2)%
Net loans6,529,429
 6,430,286
 99,143
 2 %
Goodwill and intangible assets, net90,932
 91,681
 (749) (1)%
Total other assets373,234
 359,662
 13,572
 4 %
Total assets$8,318,359
 $8,311,744
 $6,615
  %
Liabilities and Equity:       
Deposits$6,584,322
 $6,510,246
 $74,076
 1 %
Total borrowings803,208
 862,213
 (59,005) (7)%
Total other liabilities125,004
 135,880
 (10,876) (8)%
Total liabilities7,512,534
 7,508,339
 4,195
  %
Redeemable Noncontrolling Interests (“RNCI”)16,322
 17,461
 (1,139) (7)%
Total shareholders’ equity789,503
 785,944
 3,559
  %
Total liabilities, RNCI and shareholders’ equity$8,318,359
 $8,311,744
 $6,615
  %
Total Assets. Total assets increased $0.2 billion to $8.2remained flat at $8.3 billion at March 31, 2017 from $8.0 billion at2018 and December 31, 2016. This increase was due to the increase2017. Increases in total loans were offset by decreases in total cash and investments.
Cash and Investments. Total cash and investments (consisting of cash and cash equivalents, investment securities, and stock in the FHLB) increased $62.1 million, or 4%, to $1.6 billion, or 19%FHLB and the FRB) represent 16% of total assets at March 31, 2017 from $1.5 billion, or 19%2018 and 17% of total assets at December 31, 2016.2017. The increasedecrease was due to the $58.6 million, or 55%, increasedecreases in cash and cash equivalents, the $6.1 million, or 14%, increase inavailable-for-sale securities, held-to-maturity securities, stock in the FHLB and the $5.3 million, or 6% increase in held-to-maturity securities, partially offset by the $7.9 million, or 1%, decrease in available-for-sale securities.FRB, and cash and cash equivalents. The changes in cash and investments were the net result of short-term fluctuations in liquidity due to changes in levels of deposits, borrowings and loans outstanding.
The majority of the investments held by the Company are held by the Bank. The Bank’s investment policy requires management to maintain a portfolio of securities which will provide liquidity necessary to facilitate funding of loans, to cover deposit fluctuations, and to mitigate the Bank’s overall balance sheet exposure to interest rate risk, while at the same time earning a satisfactory return on the funds invested. The securities in which the Bank may invest are subject to regulation and are generally limited to securities that are considered “investment grade.”
Investment maturities, calls,redemptions, principal payments, and sales of securities, net of purchases, provided $85.2$35.5 million of cash proceeds during the three months ended March 31, 2018, compared to $3.7 million in the same period of 2017. Net proceeds are generally used to purchase new investments or fund a portion of loan growth. The timing of sales and reinvestments is based on various factors, including management’s evaluation of interest rate trends, the credit risk, of municipal securities and the


Company’s liquidity. The Company’s available-for-sale investment portfolio carried a total of $5.3$2.1 million of unrealized gains and $20.8$32.2 million of unrealized losses at March 31, 2017,2018, compared to $4.6$5.1 million of unrealized gains and $23.7$17.2 million of unrealized losses at December 31, 2016.2017.
No impairment losses were recognized through earnings related to investment securities during the three months ended March 31, 20172018 and 2016.2017. The total amount of unrealized losses was primarily due to changes in interest rates since the securities were purchased.
Additionally, at March 31, 20172018 and December 31, 2016,2017, the Company held $98.4$70.8 million and $93.1$74.6 million, respectively, of held-to-maturity securities at amortized cost. All of the held-to-maturity securities were mortgage-backed securities which were guaranteed by U.S. government agencies or government-sponsored entities, or U.S. Treasury securities.entities.
See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 4: Investments” for further details of the Company’s investment securities.
Loans held for sale. Loans held for sale decreased $3.1 million, or 90%, to $0.4 million at March 31, 2017 from $3.5 million2018 decreased compared to the balance at December 31, 2016.2017. The balance of loans held for sale usually relates to the timing and volume of residential loans originated for sale and the ultimate sale transaction which is typically executed within a short time following the loan origination. From time to time, the Company may also sell loans that have been held in the loan portfolio. The sale of such loans may improve the Bank’s liquidity and capital position or may provide the Bank additional flexibility for more profitable and strategic future lending opportunities.
Goodwill and intangible assets, net. Goodwill and intangible assets, net, decreased $1.4 million, or 1%, to $167.9 million at March 31, 2017 from $169.3 million at December 31, 2016. The decrease was due to amortization of intangible assets. There was no change to goodwill during the three months ended March 31, 2018.
Goodwill and indefinite-lived intangible assets such as trade names are subject to annual impairment tests, or more frequently, if there is indication of impairment, based on guidance in ASC 350, Intangibles-Goodwill and Other. Long-lived intangible assets such as advisory contracts are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable in accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”).
Management performed its annual goodwill and indefinite-lived intangible asset impairment testing during the fourth quarter of 20162017 for applicable reporting units. The 2016 goodwill impairment testing indicated that Boston Private Wealth failed Step 1 and the resulting Step 2 test indicated goodwill impairment of $9.5 million. The estimated fair value for all other applicable reporting units exceeded the carrying value in 2016, and as a result no other impairment was evident. There was no additional testing required for long-lived intangible assets in 2016.
The estimated fair value of BOS, KLS, and Boston Private Wealth was $68.0each exceeded their carrying value in 2017. The 2017 goodwill impairment testing resulted in a $24.9 million as compared to agoodwill impairment charge at Anchor. The reduced carrying value of $76.9goodwill at Anchor of $42.1 million, resulting in a deficit of $8.9 million, or 11.6%. The estimated fair valuealong with the other assets and liabilities of Anchor, were classified as held for sale at March 31, 2018 and December 31, 2017 and are included within other assets and other liabilities, respectively, on the Company’s consolidated balance sheet. The sale transaction was $87.0 million as compared to a carrying value of $81.6 million, an excess of $5.4 million, or 6.6%.


Due to the narrow margin between the fair value and the carrying value of Anchor, Anchor will continue to be at risk for potential goodwill impairment. The Company will monitor Anchor’s actual results versus the projections usedcompleted in the 2016 valuation, changes in AUM, as well as changes to the various inputs used in the 2016 valuation for a triggering event prior to the 2017 annual impairment testing.
Even though the Company recorded a goodwill impairment charge for Boston Private Wealth in 2016, there could be additional goodwill impairment in the future should Boston Private Wealth’s actual results not meet projections. In addition to financial results, other inputs to the valuation, such as the discount rate and market assumptions, could negatively affect the estimated fair value of Boston Private Wealth in the future. The Company will continue to monitor Boston Private Wealth’s actual results versus the projections used in the 2016 valuation, changes in AUM, as well as changes to the various inputs used in the 2016 valuation for a triggering event prior to the 2017 annual impairment testing.April 2018.
Total other assets. Total other assets, as presented in the table above, consists of the following line items from the consolidated balance sheet: other real estate owned (“OREO”) (if any), premises and equipment, fees receivable, accrued interest receivable, deferred income taxes, net, and other assets.assets including assets held for sale. Total other assets increased $51.2 million, or 20%, to $304.8 million at March 31, 2017 as2018 increased compared to $253.6 millionthe balance at December 31, 2016.2017. The increase was the result of increases in premises and equipment, other assets, partially offset by a decrease inand deferred income taxes, net, OREO,net.
Premises and fees receivable.
OREO decreased $1.7equipment increased $6.0 million, or 16%, to zero$43.6 million at March 31, 20172018 from $1.7$37.6 million at December 31, 2016.2017. In 2017, the one property heldBank began working on an initiative to upgrade its information technology. The increase was primarily due to expenditures related to this initiative. Generally the expenditures in OREO at December 31, 2016 was sold for a small loss.the preliminary project stage were expensed as incurred. Other expenditures related to the application development stage have been capitalized. The capitalized expenditures will be depreciated over the useful life of the asset when the asset is placed in service. The capitalized assets will be placed in service beginning in early 2018 through early 2019.
Deferred income taxes, net, decreased $1.8increased $3.0 million, or 3%10%, to $53.7$32.1 million at March 31, 20172018 from $55.5$29.0 million at December 31, 2016.2017. The decreaseincrease was primarily due to the current year tax effect of other comprehensive income.income/ (loss), partially offset by deferred tax expense. At March 31, 2017,2018, no valuation allowance on the net deferred tax asset was required due primarily to the expectation of future taxable income as well as the availabilityincome. Our use of currentthese deferred tax benefits may depend on a number of factors including future changes in laws or regulations relating to tax rates, tax credits, tax deductions, and historical taxable income.net operating losses.
Other assets, which consist primarily of Bank-owned life insurance (BOLI), prepaid expenses,BOLI, assets held for sale, investment in partnerships, prepaid expenses, the fair value of interest rate derivatives, and other receivables, increased $54.3$4.8 million, or 42%2%, to $185.1$264.3 million at March 31, 20172018 from $130.8$259.5 million at December 31, 2016.2017. The increase was primarily due to an additional $50.0 million investmentcost


method investments, and increases in derivative assets and the value of BOLI policies.policies, partially offset by a decrease in income taxes receivable.
Deposits. Total deposits increased $161.5 million, or 3%, to $6.2 billion,Deposits at March 31, 2017 from $6.1 billion2018 increased compared to the balance at December 31, 2016.2017. Deposits are the principal source of the Bank’s funds for use in lending, investments, and liquidity. Certificates of deposits represented approximately 10% of total deposits at both March 31, 2017 and December 31, 2016. Deposit levels can fluctuate from quarter to quarter as a result of large short-term transactions by commercial clients. Seasonality can also affect the deposit balances. The Bank typically experiences deposit outflows in the second quarter as a result of clients withdrawing funds for tax payments.
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. If, as a result of general economic conditions, market interest rates, competitive pressures, or otherwise, the amount of deposits at the Bank decreases relative to its overall banking operations, the Bank may be limited in its ability to grow its loan portfolio or may have to rely more heavily on higher cost borrowings as a source of funds in the future.
The following table presents the composition of the Company’s deposits at March 31, 20172018 and December 31, 2016:2017:
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
Balance as a % of total Balance as a % of totalBalance as a % of total Balance as a % of total
(In thousands)(In thousands)
Demand deposits (noninterest-bearing)$1,772,854
 28% $1,753,648
 29%$1,932,732
 29% $2,025,690
 31%
NOW (1)620,280
 10% 578,657
 9%689,526
 11% 645,361
 10%
Savings74,293
 1% 74,162
 1%73,580
 1% 70,935
 1%
Money market (1)3,176,472
 51% 3,102,048
 51%3,177,692
 48% 3,121,811
 48%
Certificates of deposit under $100,000 (1)240,065
 4% 236,001
 4%297,591
 5% 250,070
 4%
Certificates of deposit of $100,000 or greater362,656
 6% 340,630
 6%
Certificates of deposit $100,000 or more to less than $250,00083,072
 1% 82,665
 1%
Certificates of deposit $250,000 or more330,129
 5% 313,714
 5%
Total deposits$6,246,620
 100% $6,085,146
 100%$6,584,322
 100% $6,510,246
 100%
_____________________
(1)Includes brokered deposits.deposits of $536.9 million and $780.2 million at March 31, 2018 and December 31, 2017, respectively.
Borrowings.Total borrowings. Total borrowings (consisting of securities sold under agreements to repurchase, federal funds purchased (if any), FHLB borrowings, and junior subordinated debentures) increased $78.9 million, or 8%, to $1.1 billion at March 31, 2017 from $1.0 billion2018 decreased compared to the balance at December 31, 2016.2017.


Repurchase agreements increased $7.6FHLB borrowings decreased $82.1 million, or 13%12%, to $67.2$611.6 million at March 31, 20172018 from $59.6$693.7 million at December 31, 2016. Repurchase agreements are generally linked2017. The decrease was primarily due to commercial demand deposit accounts with an overnight sweep feature.
From time to time,asset liability management considerations regarding the Company purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. At March 31, 2017, the Company had no federal funds purchased outstanding. The Company had $80.0 million in federal funds purchased outstanding at December 31, 2016.
FHLB borrowings increased $151.2 million, or 21%, to $885.4 million at March 31, 2017 from $734.2 million at December 31, 2016.pricing of funds. FHLB borrowings are generally used to provide additional funding for loan growth when it is in excess of deposit growth and to manage interest rate risk, but can also be used as an additional source of liquidity for the Bank.
From time to time, the Company purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. At March 31, 2018, the Company had no federal funds purchased outstanding. The Company had $30.0 million in federal funds purchased outstanding at December 31, 2017.
Repurchase agreements increased $53.1 million to $85.3 million at March 31, 2018 from $32.2 million at December 31, 2017. Repurchase agreements are generally linked to commercial demand deposit accounts with an overnight sweep feature.
Total other liabilities. Total other liabilities, which consist primarily of accrued interest, liabilities held for sale, accrued bonus, the fair value of interest rate derivatives, and other accrued expenses, decreased $9.4 million, or 8%, to $110.3 million at March 31, 2017 from $119.7 million2018 decreased compared to the balance at December 31, 2016.2017. The decrease was primarily due to the payment in the first quarter of 20172018 of accrued variable compensation, bonuses and employee benefits in 2017 that had been accrued for at December 31, 2016.2017, partially offset by increases in derivative liabilities.



Loan Portfolio and Credit Quality
Loans. Total portfolio loans increased $135.9$97.3 million, or 2%1%, to $6.3$6.6 billion, or 76%79% of total assets, at March 31, 2017,2018, from $6.1$6.5 billion, or 77%78% of total assets, at December 31, 2016.2017. Increases were recorded in residential loans of $83.8$54.8 million, or 4%,2%; commercial real estate loans of $66.4$24.8 million, or 3%,1%; consumer loans of $10.9 million, or 6%; commercial and industrial loans of $10.1 million, or 2%; commercial tax-exempt loans of $2.1 million, or less than one percent; and construction and land loans of $12.2$0.2 million, or 12%, commercial tax exempt loans of $10.8 million, or 3%,less than one percent, partially offset by decreasesa decrease in commercial and industrial loans of $31.0 million, or 5%, home equity loans of $4.3$5.6 million, or 4%, and consumer and other6%.
The ability to grow the loan portfolio is partially related to the Bank’s ability to increase deposit levels. Deposits are generally a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures, or otherwise, the amount of deposits at the Bank decreases relative to its overall banking operations, the Bank may be limited in its ability to grow its loan portfolio or may have to rely more heavily on higher cost borrowings as a source of funds in the future. The Bank’s use of wholesale funding is limited as a result of internal policies such as the loans of $2.0 million, or 1%.to deposits ratio.
The Bank specializes in lending to individuals, real estate investors, and middle market businesses, including corporations, partnerships, associations and nonprofit organizations. Loans made by the Bank to individuals may include residential mortgage loans and mortgage loans on investment or vacation properties, unsecured and secured personal lines of credit, home equity loans, and overdraft protection. Loans made by the Bank to businesses include commercial and mortgage loans, revolving lines of credit, working capital loans, equipment financing, community lending programs, and construction and land loans. The types and sizes of loans the Bank originates are limited by regulatory requirements.
The Bank’s loans are affected by the economic and real estate markets in which they are located. Generally, commercial real estate, construction, and land loans are affected more than residential loans in an economic downturn.
The Bank’s commercial real estate loan portfolio, the largest portfolio segment after residential, includes loans secured by the following types of collateral at March 31, 2018: $713.9 million secured by multifamily and residential investment property; $641.3 million secured by retail property; $546.7 million secured by office and medical property; $206.2 million secured by manufacturing, industrial, and warehouse property; $161.3 million secured by hospitality property; and $195.6 million secured by other property. The Bank’s commercial real estate loan portfolio as of December 31, 2017 included loans secured by the following types of collateral:  $729.8 million secured by multifamily and residential investment property; $634.8 million secured by retail property; $543.9 million secured by office and medical property; $197.9 million secured by manufacturing, industrial, and warehouse property; $148.4 million secured by hospitality property; and $185.4 million secured by other property.


Geographic concentration. The following table presentstables present the Company’s outstanding loan balance concentrations at March 31, 2017the dates indicated based on the location of the regional offices to which they are attributed.
As of March 31, 2018
New England San Francisco Bay Area Southern California TotalNew England San Francisco Bay Area Southern California Total
Amount Percent Amount Percent Amount Percent Amount PercentAmount Percent Amount Percent Amount Percent Amount Percent
(In thousands)(In thousands)
Commercial and industrial$458,687
 7% $55,289
 1% $66,378
 1% $580,354
 9%$444,419
 7% $23,491
 % $63,183
 1% $531,093
 8%
Commercial tax exempt318,137
 5% 79,517
 2% 11,778
 % 409,432
 7%
Commercial tax-exempt313,955
 5% 95,380
 1% 11,422
 % 420,757
 6%
Commercial real estate1,017,565
 16% 686,019
 11% 665,043
 11% 2,368,627
 38%1,046,178
 16% 721,871
 11% 696,954
 11% 2,465,003
 38%
Construction and land58,737
 1% 28,148
 % 30,122
 1% 117,007
 2%79,563
 1% 34,050
 % 51,627
 1% 165,240
 2%
Residential1,508,138
 24% 474,294
 8% 481,184
 7% 2,463,616
 39%1,619,856
 25% 511,903
 8% 605,610
 9% 2,737,369
 42%
Home equity80,904
 2% 26,006
 % 7,626
 % 114,536
 2%65,434
 1% 19,314
 % 9,583
 % 94,331
 1%
Consumer and other175,096
 3% 17,163
 % 4,386
 % 196,645
 3%166,413
 3% 13,569
 % 8,552
 % 188,534
 3%
Total loans (1)$3,617,264
 58% $1,366,436
 22% $1,266,517
 20% $6,250,217
 100%$3,735,818
 58% $1,419,578
 20% $1,446,931
 22% $6,602,327
 100%
 As of December 31, 2017
 New England San Francisco Bay Area Southern California Total
 Amount Percent Amount Percent Amount Percent Amount Percent
 (In thousands)
Commercial and industrial$438,322
 7% $23,311
 % $59,359
 1% $520,992
 8%
Commercial tax-exempt305,792
 5% 101,340
 1% 11,566
 % 418,698
 6%
Commercial real estate1,002,092
 15% 725,454
 11% 712,674
 11% 2,440,220
 37%
Construction and land86,874
 1% 27,891
 1% 50,225
 1% 164,990
 3%
Residential1,598,072
 24% 512,189
 8% 572,272
 9% 2,682,533
 41%
Home equity67,435
 1% 22,462
 1% 10,061
 % 99,958
 2%
Consumer and other149,022
 3% 14,707
 % 13,908
 % 177,637
 3%
Total loans (1)$3,647,609
 56% $1,427,354
 22% $1,430,065
 22% $6,505,028
 100%
________________________
(1)Regional percentage totals may not reconcile due to rounding.

Allowance for loan losses. The allowance for loan losses is reported as a reduction of outstanding loan balances and totaled $78.0$72.9 million and $78.1$74.7 million as of March 31, 20172018 and December 31, 2016,2017, respectively.


The allowance for loan losses decreased $1.8 million to $72.9 million, or 1.10% of total loans, as of March 31, 2017 decreased $0.12018 from $74.7 million, fromor 1.15% of total loans, as of December 31, 20162017. The decrease in the overall allowance for loan losses was due to a decline in thecriticized loans and a decline in loss factors, partially offset by an increase in criticized loans,loan growth and the mix in the loan portfolio, and loan growth. The allowance for loan losses as a percentage of total loans decreased 3 basis points to 1.25% as of March 31, 2017 from 1.28% as of December 31, 2016. The decrease in the ratio of allowance for loan losses to total loans is due to a decline in the loss factors, a combination of the mix in the loan portfolio, and the change in the volume and type of criticized loans.portfolio. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses” for an analysis of the Company’s allowance for loan losses.
An analysis of the risk in the loan portfolio as well as management judgment is used to determine the estimated appropriate amount of the allowance for loan losses. The Company’s allowance for loan losses is comprised of three primary components (general reserves, allocated reserves on non-impaired special mention and substandard loans, and allocated reserves on impaired loans). See Part II. Item 8. “Notes to Unaudited Consolidated Financial Statements - Note 6: Allowance for Loan Losses” and the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 for further information.


The following table presents a summary of loans charged-off, net of recoveries, by geography for the periods indicated. The geography assigned to the data is based on the location of the regional offices to which the loans are attributed.
Three months ended March 31,Three months ended March 31,
2017 20162018 2017
(In thousands)(In thousands)
Net loans (charged-off)/ recovered:      
New England$79
 $(2,146)$(285) $79
San Francisco Bay Area35
 3,454
67
 35
Southern California21
 (248)169
 21
Total net loans (charged-off)/ recovered$135
 $1,060
$(49) $135
Net recoveries ofThere were less than $0.1 million werein net charge-offs recorded in the first quarter of 2017,2018, compared to $1.1$0.1 million of net recoveries for the same period of 2016. The $0.1 million in net recoveries recorded in the first three months of 2017 related primarily to commercial and industrial loans and commercial real estate loans.2017.
Despite the current year net recoveries on previously charged-off commercial loans (which include construction and land loans, commercial real estate, and commercial and industrial loans), theThe Company believes that commercial loans represent the greatest risk of loss due to the size and nature of these loans and the related collateral. Local economic and business conditions in the markets where our offices are located have a significant impact on our commercial loan customers and their ability to service their loans.
Nonperforming assets. The Company’s nonperforming assets include nonaccrual loans and OREO. OREO, if any. OREO, if any, consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of deeds in lieu of foreclosure. As of March 31, 2017,2018, nonperforming assets totaled $20.9$16.4 million, or 0.25%0.20% of total assets, an increase of $1.9$2.1 million, or 10%15%, compared to $19.0$14.3 million, or 0.24%0.17% of total assets, as of December 31, 2016.2017.
The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest in accordance with the contractual terms of the loan agreement is in doubt. Despite a loan having a current payment status, if the Bank has reason to believe it may not collect all principal and interest on the loan in accordance with the related contractual terms, the Bank will generally discontinue the accrual of interest income and will apply any future interest payments received to principal. Of the $20.9$16.4 million of loans on nonaccrual status as of March 31, 2017, $9.92018, $3.6 million, or 47%22%, had a current payment status, $5.8$3.4 million, or 28%20%, were 30-89 days past due, and $5.2$9.4 million, or 25%58%, were 90 days or more past due. Of the $17.3$14.3 million of loans on nonaccrual status as of December 31, 2016, $5.12017, $1.3 million, or 29%9%, had a current payment status, $2.2$3.4 million, or 13%24%, were 30-89 days past due, and $10.0$9.6 million, or 58%67%, were 90 days or more past due.
The Bank continues to evaluate the underlying collateral of each nonperforming loan and pursue the collection of interest and principal. Where appropriate, the Bank obtains updated appraisals on collateral. Reductions in fair values of the collateral for nonaccrual loans, if they are collateral dependent, could result in additional future provision for loan losses depending on the timing and severity of the decline. Reductions in fair values of the collateral for nonaccrual loans, if they are collateral dependent, could result in additional future provision for loan losses depending on the timing and severity of the decline. See Part I. Item 1. “Financial Statements and Supplementary Data - Note 6: Loans Receivable”Portfolio and Credit Quality” for further information on nonperforming loans.


The Bank’s policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six consecutive months). For nonaccruing troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months in accordance with restructured terms, along with meeting other criteria.
Delinquencies. The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more. Loans 30-89 days past due increased $13.6decreased $4.6 million, or 90%18%, to $28.7$20.4 million as of March 31, 20172018 from $15.1$25.0 million as of December 31, 2016. The increase was primarily due to one CRE loan for $9.2 million which subsequently paid off in April 2017. Loan delinquencies can be attributed to many factors, such as continuing weakness in, or deteriorating, economic conditions in the region in which the collateral is located, the loss of a tenant or lower lease rates for commercial borrowers, renewal and administrative issues, or the loss of income for consumers and the resulting liquidity impacts on the borrowers. Further deterioration in the credit condition of these delinquent loans could lead to the loans going to nonaccrual status and/or being downgraded. Downgrades would generally result in additional provision for loan losses. Past due loans may be included with accruing substandard loans.
In certain instances, although very infrequently, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the


process of collection. There were no loans 90 days or more past due, but still accruing, respectively, as of March 31, 20172018 and December 31, 2016.2017.
Impaired Loans. When management determines that it is probable that the Bank will not collect all principal and interest on a loan in accordance with the original loan terms, the loan is considered impaired. Certain impaired loans may continue to accrue interest based on factors such as the restructuring terms, if any, the historical payment performance, the value of collateral, and the financial condition of the borrower. Impaired commercial loans and impaired construction loans are typically, in accordance with ASC 310, individually evaluated for impairment. Large groups of smaller-balance homogeneous loans may be collectively evaluated for impairment. Such groups of loans may include, but are not limited to, residential loans, home equity loans, and consumer loans. However, if the terms of any of such loans are modified in a troubled debt restructuring, then such loans would be individually evaluated for impairment in the allowance for loan and lease losses.
Loans that are individually evaluated for impairment require an analysis to determine the amount of impairment, if any. For collateral dependent loans, impairment would be indicated as a result of the carrying value of the loan exceeding the estimated collateral value, less costs to sell, or, for loans not considered to be collateral dependent, the net present value of the projected cash flow, discounted at the loan’s contractual effective interest rate. Generally, when a collateral dependent loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank will continue to obtain updated appraisals, as deemed necessary, especially during periods of declining property values. Normally, shortfalls in the analysis of collateral dependent loans would result in the impairment amount being charged-off to the allowance for loan losses. Shortfalls on cash flow dependent loans may be carried as specific allocations to the general reserve unless a known loss is determined to have occurred, in which case such known loss is charged-off. Based on the impairment analysis, the provision could be higher or lower than the amount of provision associated with a loan prior to its classification as impaired. See Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 for detail on the Company’s treatment of impaired loans in the allowance for loan losses.
Impaired loans individually evaluated for impairment in the allowance for loan losses totaled $29.3$24.0 million as of March 31, 2017, an2018, a increase of $3.3$1.4 million, or 13%6%, compared to $26.0$22.6 million as of December 31, 2016.2017. As of March 31, 2017, $10.02018, $6.4 million of the individually evaluated impaired loans had $1.0$0.3 million in specific reserve allocations. The remaining $19.3$17.6 million of individually evaluated impaired loans did not have specific reserve allocations due to the adequacy of collateral, prior charge-offs taken, interest collected and applied to principal, or a combination of these items. As of December 31, 2016, $11.42017, $8.1 million of individually evaluated impaired loans had $1.1$0.7 million in specific reserve allocations, and the remaining $14.6$14.5 million of individually evaluated impaired loans did not have specific reserve allocations.
The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal forgiveness. As of March 31, 20172018 and December 31, 2016,2017, TDRs totaled $17.2$13.2 million and $18.1$13.6 million, respectively. As of March 31, 2017, $12.12018, $10.9 million of the $17.2$13.2 million in TDRs were on accrual status. As of December 31, 2016, $12.42017, $11.1 million of the $18.1$13.6 million in TDRs were on accrual status.


Potential Problem Loans. Loans that evidence weakness or potential weakness related to repayment history, the borrower’s financial condition, or other factors are reviewed by the Bank’s management to determine if the loan should be adversely classified. Delinquent loans may or may not be adversely classified depending upon management’s judgment with respect to each individual loan. The Bank classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans consist of accruing substandard loans where known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in classification of such loans as nonperforming at some time in the future. Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Triggering events for loan downgrades include updated appraisal information, inability of borrowers to cover debt service payments, loss of tenants or notification by the tenant of non-renewal of lease, inability of borrowers to sell completed construction projects, and the inability of borrowers to sell properties. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, be restructured, or require increased allowance coverage and provision for loan losses.


As of March 31, 2017,2018, the Bank has identified $64.4$45.2 million in potential problem loans, an increasea decrease of $0.7$8.2 million, or 1%15%, compared to $63.7$53.4 million as of December 31, 2016. This increase was primarily due to the downgrade of two commercial and industrial loans made to a single borrower in the New England region.2017. Numerous factors impact the level of potential problem loans including economic conditions and real estate values. These factors affect the borrower’s liquidity and, in some cases, the borrower’s ability to comply with loan covenants such as debt service coverage. When there is a loss of a major tenant in a commercial real estate building, the appraised value of the building generally declines. Loans may be downgraded when this occurs as a result of the additional risk to the borrower in obtaining a new tenant in a timely manner and negotiating a lease with similar or better terms than the previous tenant. In many cases, these loans are still current and paying as agreed, although future performance may be impacted.
The following table presents a rollforward of nonaccrual loans for the three months ended March 31, 20172018 and 2016:2017:
As of and for the three months ended March 31,As of and for the three months ended March 31,
2017 20162018 2017
(In thousands)(In thousands)
Nonaccrual loans, beginning of period$17,315
 $26,571
$14,295
 $17,315
Transfers in to nonaccrual status5,180
 3,322
4,238
 5,180
Transfers out to accrual status(570) (974)(887) (570)
Charge-offs
 (2,746)(374) 
Paid off/ paid down(980) (1,817)(892) (980)
Nonaccrual loans, end of period$20,945
 $24,356
$16,380
 $20,945

The following table presents a summary of credit quality by geography, based on the location of the regional offices:
March 31,
2017
 December 31, 2016March 31,
2018
 December 31, 2017
(In thousands)(In thousands)
Nonaccrual loans:      
New England$14,407
 $10,081
$8,056
 $6,061
San Francisco Bay Area2,312
 2,989
1,442
 1,473
Southern California4,226
 4,245
6,882
 6,761
Total nonaccrual loans$20,945
 $17,315
$16,380
 $14,295
Loans 30-89 days past due and accruing:      
New England$9,843
 $10,311
$10,571
 $19,725
San Francisco Bay Area10,111
 591
2,251
 1,911
Southern California8,771
 4,235
7,554
 3,412
Total loans 30-89 days past due$28,725
 $15,137
$20,376
 $25,048
Accruing substandard loans:      
New England$12,157
 $10,972
$8,767
 $10,911
San Francisco Bay Area15,824
 15,890
14,970
 11,615
Southern California36,398
 36,809
21,436
 30,826
Total accruing substandard loans$64,379
 $63,671
$45,173
 $53,352



The following table presents a summary of credit quality by loan type. The loan type assigned to the credit quality data is based on the purpose of the loan.
March 31, 2017 December 31, 2016March 31, 2018 December 31, 2017
(In thousands)(In thousands)
Nonaccrual loans:      
Commercial and industrial$572
 $572
$1,669
 $748
Commercial tax exempt4,337
 
Commercial tax-exempt
 
Commercial real estate3,856
 4,583
1,839
 1,985
Construction and land147
 179
109
 110
Residential10,962
 10,908
9,932
 8,470
Home equity1,070
 1,072
2,816
 2,840
Consumer and other1
 1
15
 142
Total nonaccrual loans$20,945
 $17,315
$16,380
 $14,295
Loans 30-89 days past due and accruing:      
Commercial and industrial$2,338
 $1,619
$4,594
 $11,752
Commercial tax exempt
 
Commercial tax-exempt
 
Commercial real estate17,769
 3,096
2,507
 4,043
Construction and land109
 
64
 
Residential6,078
 4,182
12,489
 8,874
Home equity780
 245
664
 355
Consumer and other1,651
 5,995
58
 24
Total loans 30-89 days past due$28,725
 $15,137
$20,376
 $25,048
Accruing substandard loans:      
Commercial and industrial$10,418
 $9,277
$5,426
 $10,951
Commercial tax exempt
 
Commercial tax-exempt
 
Commercial real estate49,425
 49,696
31,384
 34,455
Construction and land3,147
 3,297
7,023
 6,596
Residential1,387
 1,399
1,337
 1,349
Home equity
 

 
Consumer and other2
 2
3
 1
Total accruing substandard loans$64,379
 $63,671
$45,173
 $53,352

Liquidity
Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long and short-term commitments. Liquidity risk is the risk of potential loss if the Company were unable to meet its funding requirements at a reasonable cost. The Company manages its liquidity based on demand, commitments, specific events and uncertainties to meet current and future financial obligations of a short-term nature. The Company’s objective in managing liquidity is to respond to the needs of depositors and borrowers as well as earnings enhancement opportunities in a changing marketplace.


 March 31,
2018
 December 31, 2017 $
Change
 %
Change
 (In thousands)
Cash and cash equivalents$77,085
 $120,541
 $(43,456) (36)%
Investment securities available-for-sale1,118,497
 1,170,328
 (51,831) (4)%
LESS: Securities pledged against current borrowings and derivatives(93,576) (38,779) (54,797) 141 %
Subtotal$1,102,006
 $1,252,090
 $(150,084) (12)%
As a percent of assets13% 15% n/a
 n/a
        
Access to additional FHLB borrowings1,181,554
 1,228,008
 (46,454) (4)%
Subtotal$2,283,560
 $2,480,098
 $(196,538) (8)%
As a percent of assets27% 30% n/a
 n/a
As a percent of deposits35% 38% n/a
 n/a

At March 31, 2017,2018, the Company’s cash and cash equivalents amounted to $165.2$77.1 million. The Holding Company’s cash and cash equivalents amounted to $61.6$71.6 million at March 31, 2017.2018. Management believes that the Holding Company and its affiliates, including the Bank, have adequate liquidity to meet their commitments for the foreseeable future.


Management is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. At both March 31, 2017 and December 31, 2016,2018 consolidated cash and cash equivalents and investment securities available-for-sale, securities, less securities pledged against current borrowings and derivatives, amounted to $1.1 billion, or 13% of total assets, compared to $1.3 billion, or 16%15% of total assets.assets at December 31, 2017. Future loan growth may depend upon the Company’s ability to continue to grow its core deposit levels. In addition, the Company has access to available borrowings through the FHLB totaling $0.8$1.2 billion as ofat March 31, 2017 compared to $0.9 billion at2018, which decreased from December 31, 2016.2017. Combined, this liquidity totals $2.1$2.3 billion, or 26%27% of assets and 34%35% of total deposits, as of March 31, 2017,2018, compared to $2.2$2.5 billion, or 28%30% of assets and 37%38% of total deposits, at December 31, 2016.2017.
The Bank has various internal policies and guidelines regarding liquidity, both on- and off-balance sheet, loans to assets ratio, and limits on the use of wholesale funds. These policies and/or guidelines require certain minimum or maximum balances or ratios be maintained at all times. In light of the provisions in the Bank’s internal liquidity policies and guidelines, the Bank will carefully manage the amount and timing of future loan growth along with its relevant liquidity policies and balance sheet guidelines. 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. If, as a result of general economic conditions, market interest rates, competitive pressures, or otherwise, the amount of deposits at the Bank decreases relative to its overall banking operations, the Bank may be limited in its ability to grow its loan portfolio or may have to rely more heavily on higher cost borrowings as a source of funds in the future.
Holding Company Liquidity. The Company and some of the Company’s majority-owned affiliates hold put and call options that would require the Company to purchase (and the noncontrolling interest owners of the majority-owned affiliates to sell) the remaining noncontrolling interests in these companies at either a contractually predetermined fair value, a multiple of EBITDA, or fair value, as determined by the respective agreements. At March 31, 2017,2018, the estimated maximum redemption value for these affiliates related to outstanding put options was $17.2$16.3 million, all of which could be redeemed within the next 12 months, under certain circumstances, and is classified on the consolidated balance sheets as redeemable noncontrolling interests. The redeemable noncontrolling interest related to Anchor at March 31, 2018 of $6.5 million was eliminated upon the completion of the sale of Anchor in April 2018. These put and call options are discussed in detail in Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.


The Holding Company’s primary sources of funds are dividends from its affiliates and access to the capital and debt markets. The Holding Company recognized $1.6$1.7 million in net income from discontinued operations during the three months ended March 31, 20172018 as the final payment related to a revenue sharing agreement with Westfield Capital Management Company, LLC (“Westfield”). This revenue sharing agreement is in effect through December 2017, and the terms are discussed in detail in Part II. Item 8. “Financial Statements and Supplementary Data - Note 3: Acquisitions, Asset Sales, and Divestitures” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Other than the revenue sharing agreement with Westfield, divestitures are not ongoing sources of funds for the Holding Company. After the December 2017 payments under the revenue sharing agreement are received in 2018, theThe Company will not receive additional net income from Westfield. Westfield now that the final payment has been received. Although not a primary source of funds, the Holding Company has generated liquidity from the sale of affiliates in the past and also generated additional funds at the time of the Anchor sale closing in April 2018. Pursuant to the Anchor sale agreement, the Holding Company will be entitled to future revenue sharing payments that have a net present value of approximately $15 million in addition to the $32 million of cash received at the time of the sale closing in April 2018. The Company will also have a tax liability of $11 million to $12 million attributable to the transaction, which is primarily the result of a book to tax basis difference associated with nondeductible goodwill.
Dividends from the Bank are limited by various regulatory requirements relating to capital adequacy and retained earnings. See Part II. Item 5. “Market for Registrant’s Common Equity, Related Stockholders Matters, and Issuers Purchases of Equity Securities” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 for further details.
The Bank pays dividends to the Holding Company, subject to the approval of the Bank’s board of directors, depending on its profitability and asset growth. If regulatory agencies were to require banks to increase their capital ratios, or impose other restrictions, it may limit the ability of the Bank to pay dividends to the Holding Company and/or limit the amount that the Bank could grow.
Although the Bank’s capital currently exceeds regulatory requirements for capital, the Holding Company could downstream additional capital to increase the rate that the Bank could grow. Depending upon the amount of capital downstreamed by the Holding Company, the approval of the Holding Company’s board of directors may be required prior to the payment, if any.
The Company is required to pay interest quarterly on its junior subordinated debentures. The estimated cash outlay for the remaining nine months of 20172018 for the interest payments is approximately $2.2 million based on the debt outstanding at March 31, 20172018 and estimated LIBOR.
The Company presently plans to pay cash dividends on its common stock on a quarterly basis dependent upon a number of factors such as profitability, Holding Company liquidity, and the Company’s capital levels. However, the ultimate declaration of dividends by the board of directors of the Company will depend on consideration of, among other things, recent financial trends and internal forecasts, regulatory limitations, alternative uses of capital deployment, general economic conditions, and regulatory changes to capital requirements. Based on the current quarterly dividend rate of $0.11$0.12 per share, as announced by the Company on January 18, 2017,17, 2018, and estimated shares outstanding, the Company estimates that the amount to be paid out for dividends to common shareholders in the remaining nine months of 20172018 will be approximately $27.8$30.5 million. The estimated dividend payments in 20172018 could increase or decrease if the Company’s board of directors votes to increase or decrease, respectively, the current dividend rate, and/or the number of shares outstanding changes significantly.


Based on the shares of stock outstanding of 6.95% Non-Cumulative Perpetual Preferred Stock, Series D (“the Series D”), and the dividend rate, the Company expects towould pay $2.6 million in cash dividends on preferred stock for the remaining nine months of 2017.2018, if the same amount of shares remains outstanding for the remaining nine months of 2018. Although the dividend rate of interest is set in the terms of the preferred stock, the quarterly preferred stock dividend payments are subject to approval by the Company’s board of directors. The Series D is callable by the Company beginning in June 2018. Should the Company call the Series D, the amount of cash outlay for dividend payments will be reduced.
In the first quarter of 2016,2018, the Company’s board of directors approved, and the Company received regulatory non-objection for, a share repurchase program of up to $20$20.0 million of the Company’s outstanding common shares. Under the program, shares may be repurchased from time to time in the open market for a two-year period. As of March 31, 2017, there2018, the full $20.0 million remains $10.7 million available to be repurchased.for repurchase. The amount and timing of additional repurchases if any, will be based on the Company’s continuous evaluation of the program.
Bank Liquidity. The Bank has established various borrowing arrangements to provide additional sources of liquidity and funding. Management believes that the Bank currently has adequate liquidity available to respond to current demands. The Bank is a member of the FHLB of Boston, and as such, has access to short- and long-term borrowings from that institution. The FHLB can change the advance amounts that banks can utilize based on a bank’s current financial condition as obtained from publicly available data such as FDIC Call Reports. Decreases in the amount of FHLB borrowings available to the Bank would lower its liquidity and possibly limit the Bank’s ability to grow in the short-term. Management believes that the Bank has adequate liquidity to meet its commitments for the foreseeable future.


In addition to the above liquidity, the Bank has access to the Federal ReserveFRB discount window facility, which can provide short-term liquidity as “lender of last resort,” brokered deposits, and federal funds lines. The use of non-core funding sources, including brokered deposits and borrowings, by the Bank may be limited by regulatory agencies. Generally, the regulatory agencies prefer that banks rely on core-funding sources for liquidity.
From time to time, the Bank purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. At March 31, 2017,2018, the Bank had unused federal fund lines of credit totaling $565.0$465.0 million, compared to $435.0 million at December 31, 2017, with correspondent institutions to provide it with immediate access to overnight borrowings, compared to $485.0 million at December 31, 2016.borrowings. At March 31, 2017,2018, the Bank had no outstanding borrowings under the federal fund lines with these correspondent institutions and had $80.0$30.0 million of outstanding borrowings under the federal fund lines at December 31, 2016.2017. Certain liquidity sources, such as federal funds lines, may be withdrawn by the correspondent bank at any time especially in the event of financial deterioration of the institution.
The Bank has also negotiated brokered deposit agreements with several institutions that have nationwide distribution capabilities. The Bank also participates in deposit placement services that can be used to provide customers to expanded deposit insurance coverage. At March 31, 2017,2018, the Bank had $643.7$536.9 million of brokered deposits (net of premiums paid) outstanding under these agreements, compared to $738.3$780.2 million at December 31, 2016.2017.
If the Bank is no longer able to utilize the FHLB for borrowing, collateral currently used for FHLB borrowings could be transferred to other facilities such as the Federal Reserve’sFRB’s discount window. In addition, the Bank could increase its usage of brokered deposits. Other borrowing arrangements may have higher rates than the FHLB would typically charge.

Capital Resources
Total shareholders’ equity at March 31, 20172018 was $781.9$789.5 million, compared to $768.5$785.9 million at December 31, 2016,2017, an increase of $13.4 million, or 2%.$3.6 million. The increase in shareholders’ equity was primarily the result of net income, partially offset by dividends paid and the change in accumulated other comprehensive income/ (loss), amortization.
The Company currently has one class of warrants to purchase common stock compensation, andoutstanding. These warrants were initially issued to the conversionU.S. Department of stockthe Treasury (the “TARP warrants”). As of March 31, 2018, 1,692,755 warrants partially offset bywere outstanding, before adjusting for dividends paid.
As a bank holding company, the Company is subject to various regulatory capital requirements administered by federal agencies. 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 effectpaid on the Company’s financial statements. For example, under capital adequacy guidelinescommon stock in excess of $0.01 per share. The TARP warrants expire in November 2018.
The Company and the regulatory framework for prompt corrective action, the Bank which is a wholly-owned subsidiary of the Company, must meet specific capital guidelines that involve quantitative measures of the Bank’s assets and certain off-balance sheet items as calculated under regulatory guidelines. The Bank’s capital 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 administeredrules issued by the Board of Governors of the Federal Reserve with respect to certain non-banking activities, including adjustments in connection with off-balance sheet items.
Effective January 1, 2015,System (the “Federal Reserve”). Under these rules, the Company and the Bank adopted the BASEL III regulatoryare each required to maintain a minimum common equity Tier 1 capital framework. Under BASEL III,to risk-weighted assets ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8% and a minimum Tier 1 leverage ratio of 4%. Additionally, subject to a transition schedule, these rules require the Company and the Bank were required to implement a new risk-weighted capital measure, common equity tier 1 (“CETI”), as well as a phased in capital conservation buffer. In addition, capital requirements for all banking organizations

were increased. In order to avoid limitations on distributions, including dividend payments and certain discretionary bonus payments to executive officers,establish a capital conservation buffer must be heldof common equity Tier 1 capital in an amount above the minimum risk-based capital requirements. The new rules are phased-in through 2019. The Bankrequirements for “adequately capitalized” institutions equal to 2.5% of total risk-weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and Company wereto engage in compliance with all of the requirements of the capital conservation buffershare repurchases.
A Federal Reserve-supervised institution, such as of March 31, 2017.
To be categorized as “well capitalized,” the Company and the Bank, must maintain specified minimumis considered “well capitalized” if it (i) has a total capital ratios. In addition, the Companyto risk-weighted assets ratio of 10.0% or greater; (ii) a Tier 1 capital to risk-weighted assets ratio of 8.0% or greater; (iii) a common equity Tier 1 capital ratio to risk-weighted assets of 6.5% or greater, (iv) a Tier 1 leverage ratio of 5.0% or greater; and the Bank cannot be(iv) is not subject to any written agreement, order, or capital directive, or prompt corrective action directive to be considered “well capitalized.” Both the Companymeet and themaintain a specific capital level for any capital measure. The Bank maintained capital at levels that would beis currently considered “well capitalized” as of March 31, 2017 under the applicable regulations.
As of March 31, 2017, quantitative measures established by regulation to ensure capital adequacy required us to maintain minimum ratios of CETI, Tier 1, and total capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).all regulatory definitions.
The following table presents the Company’s and the Bank’s amounts of regulatory capital and related ratios as of March 31, 20172018 and December 31, 2016.2017. Also presented are the minimum requirements established by the Federal Reserve and the FDIC as of those dates for the Company and the Bank, respectively, to meet applicable capital requirements and the requirements of the FDIC as of those dates for the Bank to be considered “well capitalized” under the FDIC’s prompt corrective action provisions.
all regulatory definitions. The Federal Reserve the FDIC, and the Massachusetts Division of Banks may impose higher capital ratios than those listed below based upon the results of regulatory exams. The Bank was categorized as “well capitalized” under the FDIC’s prompt corrective action provisions as of March 31, 2017 and December 31, 2016.
 Actual For capital adequacy purposes (at least) To be well capitalized under prompt corrective action provisions (at least) Basel III minimum capital ratio with capital conservation buffer (1)
 Amount Ratio Amount Ratio Amount Ratio Ratio
 (In thousands)  
As of March 31, 2017             
Common equity tier 1 risk-based capital             
Company$578,941
 9.97% $261,308
 4.5% n/a
 n/a 7.0%
Boston Private Bank667,983
 11.55
 260,195
 4.5
 $375,837
 6.5% 7.0
Tier 1 risk-based capital             
Company728,614
 12.55
 348,411
 6.0
 n/a
 n/a 8.5
Boston Private Bank667,983
 11.55
 346,927
 6.0
 462,569
 8.0
 8.5
Total risk-based capital             
Company801,548
 13.80
 464,548
 8.0
 n/a
 n/a 10.5
Boston Private Bank740,347
 12.80
 462,569
 8.0
 578,211
 10.0
 10.5
Tier 1 leverage capital             
Company728,614
 9.23
 315,916
 4.0
 n/a
 n/a 4.0
Boston Private Bank667,983
 8.51
 314,000
 4.0
 392,500
 5.0
 4.0
              

Actual For capital adequacy purposes (at least) To be well capitalized under prompt corrective action provisions (at least) Basel III minimum capital ratio with capital conservation buffer (1)Actual For capital adequacy purposes (at least) To be well capitalized under prompt corrective action provisions (at least) Minimum capital ratio with capital conservation buffer (1)
Amount Ratio Amount Ratio Amount Ratio RatioAmount Ratio Amount Ratio Amount Ratio Ratio
(In thousands)  (In thousands)  
As of December 31, 2016             
As of March 31, 2018             
Common equity tier 1 risk-based capital                          
Company$571,663
 10.00% $257,222
 4.5% n/a
 n/a 7.0%$621,084
 10.39% $268,869
 4.5% n/a
 n/a 7.0%
Boston Private Bank661,991
 11.64
 256,030
 4.5
 $369,822
 6.5% 7.0706,635
 11.87
 267,936
 4.5
 $387,019
 6.5% 7.0
Tier 1 risk-based capital                          
Company722,674
 12.64
 342,962
 6.0
 n/a
 n/a 8.5771,240
 12.91
 358,492
 6.0
 n/a
 n/a 8.5
Boston Private Bank661,991
 11.64
 341,374
 6.0
 455,165
 8.0
 8.5706,635
 11.87
 357,249
 6.0
 476,331
 8.0
 8.5
Total risk-based capital                          
Company794,584
 13.90
 457,283
 8.0
 n/a
 n/a 10.5845,914
 14.16
 477,989
 8.0
 n/a
 n/a 10.5
Boston Private Bank733,214
 12.89
 455,165
 8.0
 568,956
 10.0
 10.5780,957
 13.12
 476,331
 8.0
 595,414
 10.0
 10.5
Tier 1 leverage capital                          
Company722,674
 9.42
 306,848
 4.0
 n/a
 n/a 4.0771,240
 9.41
 327,943
 4.0
 n/a
 n/a 4.0
Boston Private Bank661,991
 8.70
 304,510
 4.0
 380,637
 5.0
 4.0706,635
 8.68
 325,819
 4.0
 407,273
 5.0
 4.0
             
As of December 31, 2017             
Common equity tier 1 risk-based capital             
Company$607,800
 10.32% $265,153
 4.5% n/a
 n/a 7.0%
Boston Private Bank694,201
 11.83
 264,028
 4.5
 $381,373
 6.5% 7.0
Tier 1 risk-based capital             
Company758,089
 12.87
 353,537
 6.0
 n/a
 n/a 8.5
Boston Private Bank694,201
 11.83
 352,037
 6.0
 469,382
 8.0
 8.5
Total risk-based capital             
Company832,182
 14.12
 471,383
 8.0
 n/a
 n/a 10.5
Boston Private Bank767,576
 13.08
 469,382
 8.0
 586,728
 10.0
 10.5
Tier 1 leverage capital             
Company758,089
 9.34
 324,725
 4.0
 n/a
 n/a 4.0
Boston Private Bank694,201
 8.63
 321,920
 4.0
 402,400
 5.0
 4.0
_____________________
n/a    not applicable
(1)Required capital ratios under the Basel III capital rules with the fully phased-in capital conservation buffer added to the minimum risk-based capital ratios. The fully phased-in ratios are effective for 2019, with lower requirements during the transition years 2016 through 2018.
Bank regulatory authorities restrict the Bank from lending or advancing funds to, or investing in the securities of, the Company. Further, these authorities restrict the amounts available for the payment of dividends by the Bank to the Company.
The Company has sponsored the creation of two statutory trusts for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Company. In accordance with ASC 810-10-55, Consolidation - Overall - Implementation Guidance and Illustrations - Variable Interest Entities, these statutory trusts created by the Company are not consolidated into the Company’s financial statements; however, the Company reflects the amounts of junior subordinated debentures payable to the preferred stockholders of statutory trusts as debt in its financial statements. As of both March 31, 20172018 and December 31, 2016,2017, all $100.0 million of the net balance of these trust preferred securities qualified as Tier 1 capital.

Recent Accounting Pronouncements
n May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 replaces existing revenue recognition standards and expands the disclosure requirementsSee Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 14: Recent Accounting Pronouncements” for revenue agreements with customers. Under the new standard, a company will recognize revenue when it transfers promised goods or servicesdescription of upcoming changes to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to revenue associated with financial instruments such as loans and securities. Therefore, the Company’s net interest income will not be impacted by this new standard. ASU 2014-09 is effectiveaccounting principles generally accepted in the first quarter of 2018. AlthoughUnited States that may impact the Company does not anticipate any material impact of ASU 2014-09, the Company is still assessing the full impact of implementation on its consolidated financial statements and does expect additional financial statement disclosures and associated internal controls to be implemented along with the adoption of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU update amends current lease accounting and requires all leases, other than short-term leases, to be reported on the balance sheet through the recognition of a right-of-use asset and a corresponding liability for future lease obligations. The amended guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and will require transition utilizing a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparativeCompany.


period presented in the financial statements. The Company expects that this ASU will gross up the assets and liabilities on the balance sheet related to the lease assets and liabilities.
In March 2016, the FASB issued ASU 2016-09. This update is intended to simplify several aspects of the accounting for employee share-based plans such as income tax consequences, classification of awards as either liabilities or equity on the balance sheet, and classification on the statement of cash flows. The Company adopted this ASU on January 1, 2017. The adoption of this ASU will result in fluctuations in the Company’s earnings due to changes in the Company’s stock price between issuance date and settlement date of employee share-based transactions. In addition, the Company anticipates that certain stock options will expire unexercised, due to being out of the money, and the previous tax benefits will be reversed.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) (“ASU 2016-13”). This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018. The Company does not plan on adopting early. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company does not expect that this ASU will have a significant impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04. This update is the result of the first phase of a two phase project by the FASB to reduce the cost and complexity of the goodwill impairment test. The objective of Phase 1 of the project, which resulted in ASU 2017-04, is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. Under the provisions of this update, an entity still has the option to perform the qualitative assessment, or Step 0 test, for a reporting unit to determine if the quantitative impairment test is necessary. This ASU will be effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company elected to early adopt this ASU as of January 1, 2017. The adoption of this ASU could increase or decrease the amount of a goodwill impairment charge should any of the Company’s reporting units with goodwill fail a Step 1 test in the future, as compared to the amount of a goodwill impairment charge under the existing standards depending on the fair value of the reporting unit’s assets.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Interest Rate Sensitivity and Market Risk as described in Part II. Item 7A. “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Sensitivity and Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Item 4.     Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Exchange Act, the Company has evaluated, with the participation of management, including the Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives,


and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.
Based on such evaluation, except for the exclusion noted in the preceding paragraph, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of March 31, 20172018 in ensuring that material information required to be disclosed by the Company, including its consolidated subsidiaries, was made known to the certifying officers by others within the Company and its consolidated subsidiaries in the reports that it files or submits under the Exchange Act and is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. On a quarterly basis, the Company evaluates the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.
(b) Change in internal controls over financial reporting.
There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2017,2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.



PART II. Other Information

Item 1.     Legal Proceedings
The Company is involved in various legal proceedings. In the opinion of management, final disposition of these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company.

Item 1A.     Risk Factors
Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully consider the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 20162017 as filed with the SEC. There have been no material changes to these risk factors since the filing of that report.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities of the Company in the first quarter of 2017.2018.
The
 Issuer Purchases of Equity Securities
Period(a) Total number of shares purchased (b) Average price paid per share (c) Total number of shares purchased as part of publicly announced plans (d) Maximum approximate dollar value of shares that may yet be purchased under the plans
January 1 - 31, 2018
 N/A 
 $10,661,737
February 1 - 28, 2018
 N/A 
 
March 1 - 31, 2018
 N/A 
 20,000,000
Total
 N/A 
 $20,000,000
        
On March 28, 2018, the Company received a notice of non-objection from the Federal Reserve Bank of Boston for a share repurchase program of up to $20 million of the Company’s outstanding common shares. Under the program, shares may be repurchased from time to time in the open market in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations, for a two-year period. The program does not obligate the Company to purchase any shares. The repurchases will be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The share repurchase program may be suspended or discontinued at any time without prior notice. The Company’s boardBoard of directorsDirectors approved the program, subject to regulatory non-objection, on January 27, 2016. There were no repurchases of equity securities of the Company in the first quarter of 2017. February 26, 2018.
The Company has authorization toCompany’s previous share repurchase $10,661,737 of shares basedprogram expired on the remaining amount in the current repurchase program.
February 28, 2018.



Item 3.     Defaults Upon Senior Securities
None.

Item 4.     Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
None.

Item 6.     Exhibits
(a) Exhibits
Exhibit No. Description Incorporated by Reference 
Filed or
Furnished
with this
10-Q
Form 
SEC Filing
Date
 
Exhibit
Number
 
10.1Form of Performance Restricted Stock Unit Award Agreement for the Chief Executive Officer under the Boston Private Financial Holdings, Inc. Amended and Restated 2009 Stock Option and Incentive PlanFiled
10.2Form of Restricted Stock Unit Award Agreement for the Chief Executive Officer under the Boston Private Financial Holdings, Inc. Amended and Restated 2009 Stock Option and Incentive PlanFiled
10.3Form of Performance Restricted Stock Unit Award Agreement for Employees under the Boston Private Financial Holdings, Inc. Amended and Restated 2009 Stock Option and Incentive PlanFiled
10.4Form of Restricted Stock Unit Award Agreement for Employees under the Boston Private Financial Holdings, Inc. Amended and Restated 2009 Stock Option and Incentive PlanFiled
10.5Form of Restricted Stock Unit Award Agreement for Employees under the Boston Private Financial Holdings, Inc. 2010 Inducement Stock Plan, as AmendedFiled
31.1        Filed
31.2        Filed
32.1        Furnished
32.2        Furnished
101.INS XBRL Instance Document       Filed
101.SCH XBRL Taxonomy Extension Schema Document       Filed
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document       Filed
101.DEF XBRL Taxonomy Extension Definition Linkbase Document       Filed
101.LAB XBRL Taxonomy Extension Label Linkbase Document       Filed
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document       Filed




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  
 
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
  
 
/s/ CLAYTON G. DEUTSCH
May 4, 20172, 2018Clayton G. Deutsch
 Chief Executive Officer
  
 
/s/    DSAVIDTEVEN J. KM. GAYEAVEN
May 4, 20172, 2018David J. KayeSteven M. Gaven
 
Executive Vice President, Chief Financial
and Administrative Officer


6369