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BPFH Boston Private Financial

Filed: 8 May 20, 1:18pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q  
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             .
Commission File Number: 001-35070
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts04-2976299
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
Ten Post Office Square02109
Boston,Massachusetts
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (617) 912-1900
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange which registered
Common StockBPFHNASDAQ Stock Market LLC
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 filerAccelerated filer 
Non-accelerated filer    Smaller reporting company    
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2020:
Common Stock, Par Value $1.00 Per Share81,800,550
(class)(outstanding)



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

i



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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 March 31, 2020December 31, 2019
 
(In thousands, except share 
and per share data)
Assets:
Cash and cash equivalents$61,714  $292,479  
Investment securities available-for-sale (amortized cost of $961,351 and $966,900 at March 31, 2020 and December 31, 2019, respectively)993,166  978,284  
Investment securities held-to-maturity (fair value of $46,096 and $47,949 at March 31, 2020 and December 31, 2019, respectively)45,395  48,212  
Equity securities at fair value23,080  18,810  
Stock in Federal Home Loan Bank and Federal Reserve Bank45,273  39,078  
Loans held for sale7,671  7,386  
Total loans7,043,338  6,976,704  
Less: Allowance for loan losses68,211  71,982  
Net loans6,975,127  6,904,722  
Premises and equipment, net43,544  44,527  
Goodwill57,607  57,607  
Intangible assets, net9,637  10,352  
Fees receivable4,249  4,095  
Accrued interest receivable24,054  24,175  
Deferred income taxes, net5,630  11,383  
Right-of-use assets98,896  102,075  
Other assets351,283  287,316  
Total assets$8,746,326  $8,830,501  
Liabilities:
Deposits$6,835,572  $7,241,476  
Securities sold under agreements to repurchase45,319  53,398  
Federal funds purchased145,000  —  
Federal Home Loan Bank borrowings491,254  350,829  
Junior subordinated debentures106,363  106,363  
Lease liabilities113,574  117,214  
Other liabilities180,452  140,820  
Total liabilities7,917,534  8,010,100  
Redeemable Noncontrolling Interests—  1,383  
Shareholders’ Equity:
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 81,800,486 shares at March 31, 2020 and 83,265,674 shares at December 31, 201981,800  83,266  
Additional paid-in capital593,167  600,708  
Retained earnings131,761  127,469  
Accumulated other comprehensive income/(loss)22,064  7,575  
Total shareholders’ equity828,792  819,018  
Total liabilities, redeemable noncontrolling interests and shareholders’ equity$8,746,326  $8,830,501  
See accompanying notes to Consolidated Financial Statements.
1


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

 Three months ended March 31,
 20202019
 (In thousands, except share and per share data)
Interest and dividend income:
Loans$66,358  $69,933  
Taxable investment securities868  1,185  
Non-taxable investment securities1,998  1,901  
Mortgage-backed securities2,787  2,897  
Short-term investments and other1,071  908  
Total interest and dividend income73,082  76,824  
Interest expense:
Deposits12,796  14,058  
Federal Home Loan Bank borrowings2,034  2,780  
Junior subordinated debentures917  1,121  
Repurchase agreements and other short-term borrowings78  527  
Total interest expense15,825  18,486  
Net interest income57,257  58,338  
Provision/(credit) for loan losses16,962  (1,426) 
Net interest income after provision/(credit) for loan losses40,295  59,764  
Fees and other income:
Wealth management and trust fees18,371  19,058  
Investment management fees1,925  2,650  
Other banking fee income2,490  2,499  
Gain on sale of loans, net100  73  
Gain on OREO, net—  91  
Other(1,365) 877  
Total fees and other income21,521  25,248  
Operating expense:
Salaries and employee benefits35,096  35,726  
Occupancy and equipment7,646  8,348  
Information systems6,725  5,860  
Professional services3,601  3,560  
Marketing and business development1,890  1,085  
Amortization of intangibles715  672  
FDIC insurance—  660  
Restructuring—  1,646  
Other5,235  2,996  
Total operating expense60,908  60,553  
Income before income taxes908  24,459  
Income tax expense102  4,917  
Net income before attribution to noncontrolling interests806  19,542  
(Continued)
2


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

 Three months ended March 31,
 20202019
Less: Net income attributable to noncontrolling interests 100  
Net income attributable to the Company$800  $19,442  
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders414  1,557  
Net income attributable to common shareholders for earnings per share calculation$1,214  $20,999  
Basic earnings per share attributable to common shareholders:
Total attributable to common shareholders:$0.01  $0.25  
Weighted average basic common shares outstanding83,005,064  83,285,095  
Diluted earnings per share attributable to common shareholders:
Total attributable to common shareholders:$0.01  $0.25  
Weighted average diluted common shares outstanding83,318,041  84,010,450  
 See accompanying notes to Consolidated Financial Statements.
3


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

 Three months ended March 31,
 20202019
(In thousands)
Net income attributable to the Company$800  $19,442  
Other comprehensive income, net of tax:
Net unrealized gain/(loss) on securities available-for-sale14,489  11,568  
Unrealized gain/(loss) on cash flow hedges—  (27) 
Reclassification adjustment for net realized (gain)/loss included in net income—  (220) 
Net unrealized gain/(loss) on cash flow hedges—  (247) 
Other comprehensive income, net of tax14,489  11,321  
Total comprehensive income attributable to the Company, net$15,289  $30,763  
 See accompanying notes to Consolidated Financial Statements.

4


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

 
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total
 (In thousands, except share data)
Balance at December 31, 2018$83,656  $600,196  $87,821  $(17,719) $753,954  
Net income attributable to the Company—  —  19,442  —  19,442  
Other comprehensive income/(loss), net—  —  —  11,321  11,321  
Dividends paid to common shareholders: $0.12 per share—  —  (10,108) —  (10,108) 
Net proceeds from issuance of:
103,991 shares of common stock104  876  —  —  980  
20,595 shares of incentive stock grants, net of 2,976 shares canceled or forfeited and 13,911 shares withheld for employee taxes 166  —  —  170  
Amortization of stock compensation and employee stock purchase plan—  1,352  —  —  1,352  
Stock options exercised10  40  —  —  50  
Other equity adjustments—  1,658  —  —  1,658  
Balance at March 31, 2019$83,774  $604,288  $97,155  $(6,398) $778,819  
Balance at December 31, 2019$83,266  $600,708  $127,469  $7,575  $819,018  
Impact due to change in accounting principle (1)—  —  13,492  —  13,492  
Net income attributable to the Company—  —  800  —  800  
Other comprehensive income/(loss), net—  —  —  14,489  14,489  
Dividends paid to common shareholders: $0.12 per share—  —  (10,000) —  (10,000) 
Repurchase of 1,565,060 shares of common stock(1,565) (11,242) —  —  (12,807) 
Net proceeds from issuance of:
88,328 shares of common stock88  832  —  —  920  
5,539 shares of incentive stock grants, net of 964 shares withheld for employee taxes 57  —  —  62  
Amortization of stock compensation and employee stock purchase plan—  1,348  —  —  1,348  
Stock options exercised 48  —  —  55  
Other equity adjustments(1) 1,416  —  —  1,415  
Balance at March 31, 2020$81,800  $593,167  $131,761  $22,064  $828,792  
_____________________
(1) Impact due to the adoption of ASU 2016-13, Financial Instruments (Topic 326) (“ASU 2016-13”). See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Recent Accounting Pronouncements.”
See accompanying notes to Consolidated Financial Statements.
5


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

 Three months ended March 31,
 20202019
 (In thousands)
Cash flows from operating activities:
Net income attributable to the Company$800  $19,442  
Adjustments to arrive at net income:
Net income attributable to noncontrolling interests 100  
Net income before attribution to noncontrolling interests806  19,542  
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization6,345  5,933  
Net income attributable to noncontrolling interests(6) (100) 
Stock compensation, net of cancellations1,421  1,677  
Provision/(credit) for loan losses16,962  (1,426) 
Loans originated for sale(15,324) (6,796) 
Proceeds from sale of loans held for sale15,127  9,401  
Deferred income tax expense/(benefit)(5,731) (523) 
Decrease/(increase) in right-of-use assets3,179  3,817  
Increase/(decrease) in operating lease liabilities(3,640) (4,102) 
Net decrease/(increase) in other operating activities(27,617) (19,247) 
Net cash provided by/(used in) operating activities(8,478) 8,176  
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases(8,874) —  
Maturities, calls, redemptions, and principal payments12,472  26,265  
Investment securities held-to-maturity:
Principal payments2,730  2,860  
Equity securities at fair value:
Transfers out(19,713) (15,149) 
Transfers in15,443  21,886  
(Investments)/distributions in trusts, net569  853  
Contingent considerations from divestitures1,277  836  
(Purchase)/redemption of Federal Home Loan Bank and Federal Reserve Bank stock(6,195) 2,210  
Net increase in portfolio loans(67,890) (34,670) 
Proceeds from recoveries of loans previously charged off180  492  
Proceeds from sale of OREO—  492  
Capital expenditures(1,975) (750) 
Net cash provided by/(used in) investing activities(71,976) 5,325  
(Continued)
6


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

 Three months ended March 31,
 20202019
(In thousands)
Cash flows from financing activities:
Net increase/(decrease) in deposits(405,904) (1,325) 
Net increase/(decrease) in securities sold under agreements to repurchase(8,079) 21,401  
Net increase/(decrease) in federal funds purchased145,000  (250,000) 
Net increase/(decrease) in short-term Federal Home Loan Bank borrowings115,000  10,000  
Advances of long-term Federal Home Loan Bank borrowings175,000  190,000  
Repayments of long-term Federal Home Loan Bank borrowings(149,575) (5,074) 
Dividends paid to common shareholders(10,000) (10,108) 
Repurchase of common stock(12,807) —  
Proceeds from stock option exercises55  50  
Proceeds from issuance of common stock920  980  
Tax withholding for share based compensation awards(11) (155) 
Distributions paid to noncontrolling interests(6) (100) 
Other equity adjustments96  (218) 
Net cash provided by/(used in) financing activities(150,311) (44,549) 
Net increase/(decrease) in cash and cash equivalents(230,765) (31,048) 
Cash and cash equivalents at beginning of year292,479  127,259  
Cash and cash equivalents at end of period$61,714  $96,211  
Supplemental disclosure of cash flow items:
Cash paid for interest$15,628  $16,775  
Cash paid for income taxes, (net of refunds received)$872  $1,029  
Change in unrealized gain/(loss) on available-for-sale securities, net of tax$14,489  $11,568  
Change in unrealized gain/(loss) on cash flow hedges, net of tax$—  $(247) 
Non-cash transactions:
Loans charged off$(528) $(564) 
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” or “BPFH”), is a bank holding company (the “Holding Company”) with 2 reportable segments: (i) Private Banking and (ii) Wealth Management and Trust.
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, whose deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”), and a wholly-owned subsidiary of the Company. Boston Private Bank is a member of the Federal Reserve Bank of Boston. Boston Private Bank primarily operates in 3 geographic markets: New England, Northern California, and Southern California. The Private Banking segment is principally engaged in providing private banking services to high net worth individuals, privately-owned businesses and partnerships, and nonprofit organizations. In addition, the Private Banking segment is an active provider of financing for affordable housing, first-time homebuyers, economic development, social services, community revitalization and small businesses.
The Wealth Management and Trust segment is comprised of Boston Private Wealth LLC (“Boston Private Wealth”), a registered investment adviser (“RIA”) and wholly-owned subsidiary of the Bank, and the trust operations of Boston Private Bank. The Wealth Management and Trust segment offers planning-based financial strategies, wealth management, family office, financial planning, tax planning, and trust services to individuals, families, institutions, and nonprofit institutions. On September 1, 2019, KLS Professional Advisors Group, LLC (“KLS”) merged with and into Boston Private Wealth. The results of KLS were previously reported in a third reportable segment, “Affiliate Partners”, as further discussed below. The Wealth Management and Trust segment operates in New England, New York, Southeast Florida, Northern California, and Southern California.
Prior to the third quarter of 2019, the Company had 3 reportable segments: Affiliate Partners, Private Banking, and Wealth Management and Trust. Prior to the third quarter of 2019, the Affiliate Partners segment was comprised of 2 affiliates: KLS and Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”), each of which are RIAs. With the integration of KLS into Boston Private Wealth in the third quarter of 2019, the Company reorganized its segment reporting structure to align with how its financial performance and strategy are reviewed and managed. The results of KLS are included in the results of Boston Private Wealth within the Wealth Management and Trust segment, and the results of DGHM are included within the Holding Company and Eliminations for all periods presented. See Part II. Item 8. “Financial Statements and Supplementary Data - Note 3: Asset Sales and Divestitures” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.
The Company conducts substantially all of its business through its 2 reportable segments. All significant intercompany accounts and transactions have been eliminated in consolidation, and the portion of income allocated to the owners other than the Company is included in “Net income attributable to noncontrolling interests” in the Consolidated Statements of Operations for the periods owned. Redeemable noncontrolling interests in the Consolidated Balance Sheets reflect the maximum redemption value of agreements with the owners of DGHM.
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, 2019, as filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation. With the integration of KLS into Boston Private Wealth and the related change to reportable segments, fee revenue from KLS is reported in Wealth management and trust fees for all periods on the Consolidated Statements of Operations, which was presented as Wealth advisory fees in prior periods.
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, 2019, 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, 2020:
In June 2016, the FASB issued ASU 2016-13. Throughout 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”); ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted
8


Transition Relief (“ASU 2019-05”); ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 942)—Effective Dates (“ASU 2019-10”); and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”). This update and related amendments to Topic 326 are 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 current expected credit losses (“CECL”) model methodology that reflects expected credit losses and requires consideration of a reasonable and supportable forecast to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019. The Company adopted this update on January 1, 2020 utilizing a modified retrospective approach. On adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease in the allowance for loan losses of $20.4 million, and an increase in the reserve for unfunded loan commitments of $1.4 million. The net, after-tax impact of the decrease in the allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million shown in the Consolidated Statements of Changes in Shareholders’ Equity.
2. Earnings Per Share
The treasury stock method of calculating earnings per share (“EPS”) is presented below for the three months ended March 31, 2020 and 2019. The following tables present the computations of basic and diluted EPS:
Three months ended March 31,
20202019
(In thousands, except share and per share data)
Basic earnings per share - Numerator:
Net income before attribution to noncontrolling interests$806  $19,542  
Less: Net income attributable to noncontrolling interests 100  
Net income attributable to the Company800  19,442  
Decrease in noncontrolling interests’ redemption values (1)414  1,557  
Total adjustments to income attributable to common shareholders414  1,557  
Net income attributable to common shareholders, treasury stock method$1,214  $20,999  
Basic earnings per share - Denominator:
Weighted average basic common shares outstanding83,005,064  83,285,095  
Per share data - Basic earnings per share:
Total attributable to common shareholders$0.01  $0.25  
Three months ended March 31,
20202019
(In thousands, except share and per share data)
Diluted earnings per share - Numerator:
Net income attributable to common shareholders, after assumed dilution$1,214  $20,999  
Diluted earnings per share - Denominator:
Weighted average basic common shares outstanding  83,005,064  83,285,095  
Dilutive effect of:  
Time-based and market-based stock options, performance-based and time-based restricted stock, and performance-based and time-based restricted stock units, and other dilutive securities (2) 312,977  725,355  
Dilutive common shares  312,977  725,355  
Weighted average diluted common shares outstanding (2) 83,318,041  84,010,450  
Per share data - Diluted earnings per share:
Total attributable to common shareholders$0.01  $0.25  
Dividends per share declared and paid on common stock$0.12  $0.12  
_____________________
(1)See Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the FASB Accounting Standards Codification 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.
9

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
(2)The diluted EPS computations for the three months ended March 31, 2020 and 2019 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,
20202019
Shares excluded due to exercise price exceeding the average market price of common shares during the period (total outstanding):(In thousands)
Potential common shares from:
Options, restricted stock, or other dilutive securities1,254  796  
Total shares excluded due to exercise price exceeding the average market price of common shares during the period1,254  796  

3. Reportable Segments
Management Reporting
The Company has 2 reportable segments: (i) Private Banking and (ii) Wealth Management and Trust, as well as the Parent Company (Boston Private Financial Holdings, Inc., the “Holding Company”) within Holding Company and Eliminations. The financial performance of the Company is managed and evaluated according to these 2 segments. Each segment is managed by a segment leader (“Segment Leader”) who has full authority and responsibility for the performance and the allocation of resources within their segment. The Company’s Chief Executive Officer (“CEO”) is the Company’s Chief Operating Decision Maker (“CODM”).
The Segment Leader for Private Banking is the CEO of Boston Private Bank, who is also the Company’s CEO. The Bank’s banking operations are reported in the Private Banking segment. The Segment Leader for Wealth Management and Trust is the President of Private Banking, Wealth and Trust. The Segment Leader of Wealth Management and Trust reports to the CEO of the Company. The Segment Leaders have authority with respect to the allocation of capital within their respective segments, management oversight responsibility, performance assessments, and overall authority and accountability within their respective segment. The Company’s CODM communicates with the President of Private Banking, Wealth and Trust regarding profit and loss responsibility, strategic planning, priority setting and other matters. The Company’s Chief Financial Officer reviews all financial detail with the CODM on a monthly basis.
Description of Reportable Segments
Private Banking
The Private Banking segment operates primarily in 3 geographic markets: New England, Northern California and Southern California. The Bank conducts business under the name of Boston Private Bank & Trust Company in all markets. The Bank is chartered by the Commonwealth of Massachusetts and is insured by the FDIC. The Bank is principally engaged in providing private banking services to high net worth individuals, privately-owned businesses and partnerships, and nonprofit organizations. In addition, the Bank is an active provider of financing for affordable housing, first-time homebuyers, economic development, social services, community revitalization and small businesses.
Wealth Management and Trust
The Wealth Management and Trust segment is comprised of the trust operations of the Bank and the operations of Boston Private Wealth. On September 1, 2019, KLS merged into Boston Private Wealth. As a result, the results of KLS are included in the results of Boston Private Wealth within the Wealth Management and Trust segment for all periods presented. The Wealth Management and Trust segment offers planning-based financial strategies, wealth management, family office, financial planning, tax planning, and trust services to individuals, families, institutions, and nonprofit institutions. The Wealth Management and Trust segment operates in New England, New York, Southeast Florida, Northern California and Southern California.
Changes to Segment Reporting
With the integration of KLS into Boston Private Wealth in the third quarter of 2019, the Company reorganized the segment reporting structure to align with how the Company's financial performance and strategy is reviewed and managed. The results of KLS are included in the results of Boston Private Wealth within the Wealth Management and Trust segment, and the results of DGHM are included in Holding Company and Eliminations for all periods presented.
10

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 I. Item 1. "Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies."

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, 2020 and 2019.
Three months ended March 31,
20202019
Private Banking (1)(In thousands)
Net interest income$58,090  $59,337  
Fees and other income1,108  3,258  
Total revenue59,198  62,595  
Provision/(credit) for loan losses16,962  (1,426) 
Operating expense (2)42,588  41,317  
Income/(loss) before income taxes(352) 22,704  
Income tax expense/(benefit)(931) 4,430  
Net income before attribution to noncontrolling interests579  18,274  
Net income attributable to the Company$579  $18,274  
Assets$8,692,069  $8,481,160  
Amortization of intangibles$77  $—  
Depreciation$2,626  $2,670  
Three months ended March 31,
20202019
Wealth Management and Trust (1)(In thousands)
Net interest income$72  $106  
Fees and other income18,485  19,126  
Total revenue18,557  19,232  
Operating expense (2)15,449  15,567  
Income before income taxes3,108  3,665  
Income tax expense1,074  1,194  
Net income before attribution to noncontrolling interests2,034  2,471  
Net income attributable to the Company$2,034  $2,471  
Assets$143,998  $147,771  
Amortization of intangibles$638  $672  
Depreciation$294  $367  
Three months ended March 31,
20202019
Holding Company and Eliminations (1)(In thousands)
Net interest income (3)$(905) $(1,105) 
Fees and other income1,928  2,864  
Total revenue1,023  1,759  
Operating expense2,871  3,669  
Income/(loss) before income taxes(1,848) (1,910) 
Income tax expense/(benefit)(41) (707) 
Net income/(loss) before attribution to noncontrolling interests(1,807) $(1,203) 
Noncontrolling interests 100  
Net income/(loss) attributable to the Company$(1,813) $(1,303) 
Assets (including eliminations)$(89,741) $(56,788) 
Depreciation$39  $47  
11

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Three months ended March 31,
20202019
Total Company (1)(In thousands)
Net interest income$57,257  $58,338  
Fees and other income21,521  25,248  
Total revenue78,778  83,586  
Provision/(credit) for loan losses16,962  (1,426) 
Operating expense60,908  60,553  
Income before income taxes908  24,459  
Income tax expense102  4,917  
Net income before attribution to noncontrolling interests806  19,542  
Noncontrolling interests 100  
Net income attributable to the Company$800  $19,442  
Assets$8,746,326  $8,572,143  
Amortization of intangibles$715  $672  
Depreciation$2,959  $3,084  
_____________________
(1)Due to rounding, the sum of individual segment results may not add up to the Total Company results.
(2)Operating expense related to the Private Banking and Wealth Management and Trust segments includes restructuring expense for the three months ended March 31, 2019 of $1.3 million and $0.4 million, respectively.
(3)Interest expense on junior subordinated debentures is included in Holding Company and Eliminations.
12

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
4. Investments
The following table presents a summary of investment securities at March 31, 2020 and December 31, 2019:
 Amortized
Cost
UnrealizedFair
Value
GainsLosses
(In thousands)
At March 31, 2020
Available-for-sale securities at fair value:
U.S. government and agencies$19,957  $1,130  $—  $21,087  
Government-sponsored entities154,844  5,598  —  160,442  
Municipal bonds319,844  12,784  (128) 332,500  
Mortgage-backed securities (1)466,706  12,670  (239) 479,137  
Total$961,351  $32,182  $(367) $993,166  
Held-to-maturity securities at amortized cost:
Mortgage-backed securities (1)$45,395  $731  $(30) $46,096  
Total$45,395  $731  $(30) $46,096  
Equity securities at fair value:
Money market mutual funds (2)$23,080  $—  $—  $23,080  
Total$23,080  $—  $—  $23,080  
At December 31, 2019
Available-for-sale securities at fair value:
U.S. government and agencies$19,955  $42  $(57) $19,940  
Government-sponsored entities154,963  1,292  —  156,255  
Municipal bonds312,977  12,551  (73) 325,455  
Mortgage-backed securities (1)479,005  1,117  (3,488) 476,634  
Total$966,900  $15,002  $(3,618) $978,284  
Held-to-maturity securities at amortized cost:
Mortgage-backed securities (1)48,212  53  (316) 47,949  
Total$48,212  $53  $(316) $47,949  
Equity securities at fair value:
Money market mutual funds (2)$18,810  $—  $—  $18,810  
Total$18,810  $—  $—  $18,810  
_____________________
(1)All mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities.
(2)Money market mutual funds maintain a constant net asset value of $1.00 and therefore have no unrealized gain or loss.
The Company adopted ASU 2016-13 as of January 1, 2020. Under ASU 2016-13, the Company is required to assess the investment portfolio for credit impairment. The Company considers the held-to-maturity portfolio to meet the "zero loss" expectation requirements. All held-to-maturity securities owned by the Company are AAA rated mortgage-backed securities that are backed by the guarantees of U.S. government, U.S. government agencies or government sponsored entities. The Company has experienced zero losses for these securities. In addition, as of March 31, 2020, 0 held-to-maturity securities were past due. Therefore, 0 credit allowance was recorded on the held-to-maturity investment portfolio. The Company evaluated the available-for-sale investment securities on a security by security basis and identified 0 security with impairment. Therefore, 0 credit allowance was booked on the available-for-sale investment portfolio. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Recent Accounting Pronouncements” for additional information on ASU 2016-13.
The following table presents the maturities of available-for-sale investment securities, based on contractual maturity, as of March 31, 2020. 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.
13

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
 Available-for-sale Securities
Amortized
Cost
Fair
Value
(In thousands)
Within one year$33,686  $33,916  
After one, but within five years312,665  322,256  
After five, but within ten years230,955  239,899  
Greater than ten years384,045  397,095  
Total$961,351  $993,166  
The following table presents the maturities of held-to-maturity investment securities, based on contractual maturity, as of March 31, 2020.
 Held-to-maturity Securities
Amortized
Cost
Fair
Value
(In thousands)
After five, but within ten years$37,086  $37,569  
Greater than ten years8,309  8,527  
Total$45,395  $46,096  
The following table presents the maturities of equity securities, based on contractual maturity, as of March 31, 2020.
 Equity Securities
Amortized
Cost
Fair
Value
(In thousands)
Within one year$23,080  $23,080  
Total$23,080  $23,080  
During the three months ended March 31, 2020 and 2019, there were 0 sales of available-for-sale, held-to- maturity, or equity securities.
The following tables present information regarding securities at March 31, 2020 and December 31, 2019 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 months12 months or longerTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
# of
Securities
(In thousands, except number of securities)
March 31, 2020
Available-for-sale securities
Municipal bonds$14,009  $(128) $—  $—  $14,009  $(128)  
Mortgage-backed securities (1)3,568  (25) 18,972  (214) 22,540  (239) 36
Total$17,577  $(153) $18,972  $(214) $36,549  $(367) 39  
Held-to-maturity securities
Mortgage-backed securities (1)$—  $—  $4,442  $(30) $4,442  $(30)  
Total$—  $—  $4,442  $(30) $4,442  $(30)  
14

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Less than 12 months12 months or longerTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
# of
Securities
(In thousands, except number of securities)
December 31, 2019
Available-for-sale securities
U.S. government and agencies$9,899  $(57) $—  $—  $9,899  $(57)  
Government-sponsored entities1,725  —  —  —  1,725  —   
Municipal bonds9,149  (73) —  —  9,149  (73)  
Mortgage-backed securities (1)140,723  (1,016) 187,043  (2,472) 327,766  (3,488) 85  
Total$161,496  $(1,146) $187,043  $(2,472) $348,539  $(3,618) 91  
Held-to-maturity securities
Mortgage-backed securities (1)$10,328  $(11) $30,451  $(305) $40,779  $(316) 14  
Total$10,328  $(11) $30,451  $(305) $40,779  $(316) 14  
_____________________
(1)All mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities.
As of March 31, 2020, the mortgage-backed securities in the first table above had current Standard and Poor’s credit rating of at least AAA. As of March 31, 2020, the municipal bonds in the first table above had a current Standard and Poor’s credit rating of at least AAA. As of March 31, 2020, the Company determined that the unrealized losses on investments, since their purchase, is primarily attributed to changes in interest rates and not as a result of the deterioration of credit quality. As of March 31, 2020, 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.
Other investments
The Company invests in low-income housing tax credits, which are included in other assets, to encourage private capital investment in the construction and rehabilitation of low-income housing. The Company makes these investments as an indirect subsidy that allows investors, such as the Company, in a flow-through limited liability entity, such as limited partnerships or limited liability companies that manage or invest in qualified affordable housing projects, to receive the benefits of the tax credits allocated to the entity that owns the qualified affordable housing project. The Company also holds partnership interests in venture capital funds formed to provide financing to small businesses and to promote community development.
Other 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 0 other investments with unrealized losses as of March 31, 2020 or December 31, 2019. The Company’s other 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 $66.1 million and $65.5 million in other investments included in other assets as of March 31, 2020 and December 31, 2019, 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.
15

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, 2020 and December 31, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall:
 As of March 31, 2020Fair value measurements at reporting date using:
Quoted prices in
active markets
for identical
assets (Level 1)
Significant 
other
observable
inputs (Level 2)
Significant
unobservable
inputs (Level 3)
(In thousands)
Assets:
Available-for-sale securities:
U.S. government and agencies$21,087  $—  $21,087  $—  
Government-sponsored entities160,442  —  160,442  —  
Municipal bonds332,500  —  332,500  —  
Mortgage-backed securities479,137  —  479,137  —  
Total available-for-sale securities993,166  —  993,166  —  
Equity securities23,080  23,080  —  —  
Derivatives - interest rate customer swaps93,391  —  93,391  —  
Derivatives - risk participation agreement46  —  46  —  
Trading securities held in the “rabbi trust” (1)5,550  5,550  —  —  
Liabilities:
Derivatives - interest rate customer swaps$94,437  $—  $94,437  $—  
Derivatives - risk participation agreement480  —  480  —  
Deferred compensation “rabbi trust” (1)5,550  5,550  —  —  
  Fair value measurements at reporting date using:
As of December 31, 2019Quoted 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$19,940  $—  $19,940  $—  
Government-sponsored entities156,255  —  156,255  —  
Municipal bonds325,455  —  325,455  —  
Mortgage-backed securities476,634  —  476,634  —  
Total available-for-sale securities978,284  —  978,284  —  
Equity securities18,810  18,810  —  —  
Derivatives - interest rate customer swaps36,089  —  36,089  —  
Derivatives - risk participation agreements10  —  10  —  
Trading securities held in the “rabbi trust” (1)6,119  6,119  —  —  
Liabilities:
Derivatives - interest rate customer swaps$36,580  $—  $36,580  $—  
Derivatives - risk participation agreements242  —  242  —  
Deferred compensation “rabbi trust” (1)6,112  6,112  —  —  
_____________________
(1) The Company has adopted a special trust for the Deferred Compensation Plan called a “rabbi trust”. The rabbi trust is an arrangement that is used to accumulate assets that may be used to fund the Company’s obligation to pay benefits under the Deferred Compensation Plan. To prevent immediate taxation to the executives who participate in the Deferred Compensation Plan, the amounts placed in the rabbi trust must remain subject to the claims of the Company’s creditors. The investments chosen by the participants in the Deferred Compensation Plan are mirrored by the rabbi trust as a way to minimize the earnings volatility of the Deferred Compensation Plan.
As of March 31, 2020 and December 31, 2019, available-for-sale securities consisted of U.S. government and agencies securities, government-sponsored entities securities, municipal bonds, and mortgage-backed securities. Available-for-sale Level 2 securities generally have quoted prices but are traded less frequently than exchange-traded securities and can be
16

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
priced using market data from similar assets and include government-sponsored entities securities, municipal bonds, mortgage-backed securities, “off-the-run” U.S. Treasury securities, and certain investments in SBA loans (which are categorized as U.S. government and agencies securities). “Off-the-run” U.S. Treasury securities are Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity. When Treasuries move to the secondary over-the-counter market, they become less frequently traded, therefore, they are considered “off-the-run.” NaN investments held as of March 31, 2020 or December 31, 2019 were categorized as Level 3.
As of March 31, 2020 and December 31, 2019, equity securities consisted of Level 1 money market mutual funds that are valued with prices quoted in active markets.
In managing its interest rate and credit risk, the Company may utilize derivative instruments including interest rate customer swaps, interest rate swaps, and risk participation agreements. As a service to its customers, the Company may utilize derivative instruments including customer foreign exchange forward contracts to manage its foreign exchange risk, if any. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities, and therefore, they have been categorized as a Level 2 measurement as of March 31, 2020 and December 31, 2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 8: Derivatives and Hedging Activities” for further details.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position.
The Company has determined that the majority of inputs used to value its derivatives are within Level 2. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy as of March 31, 2020 and December 31, 2019.
Trading securities held in the rabbi trust consist of publicly traded mutual fund investments that are valued at prices quoted in active markets. Therefore, they have been categorized as Level 1 as of March 31, 2020 and December 31, 2019.
The Company accounts for its investments held in the rabbi trust in accordance with ASC 320, Investments - Debt and Equity Securities. The investments held in the rabbi trust are classified as trading securities. The assets of the rabbi trust are carried at their fair value within other assets on the Consolidated Balance Sheets. Changes in the fair value of the securities are recorded as an increase or decrease in other income each quarter. The deferred compensation liability reflects the market value of the securities selected by the participants and is included within other liabilities on the Consolidated Balance Sheets. Changes in the fair value of the liability are recorded as an increase or decrease in salaries and employee benefits expense each quarter.
There were no transfers for assets or liabilities recorded at fair value on a recurring basis as of March 31, 2020 and December 31, 2019. There were 0 Level 3 assets valued on a recurring basis at March 31, 2020 or December 31, 2019. There were no changes in the valuation techniques used for measuring the fair value.
The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis during the periods ended March 31, 2020 and 2019, respectively, aggregated by the level in the fair value hierarchy within which those measurements fall.
 As of March 31, 2020Fair 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, 2020
(In thousands)
Assets:
Impaired loans (1)$97  $—  $—  $97  $21  
_____________________
(1)Collateral-dependent impaired loans held as of March 31, 2020 that had write-downs or recoveries in fair value or whose specific reserve changed during the three months ended March 31, 2020.
17

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
 As of March 31, 2019Fair 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, 2019
(In thousands)
Assets:
Impaired loans (1)$957  $—  $—  $957  $372  
_____________________
(1)Collateral-dependent impaired loans held as of March 31, 2019 that had write-downs or recoveries in fair value or whose specific reserve changed during the three months ended March 31, 2019.
The following tables present 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, 2020
Fair ValueValuation
Technique
Unobservable
Input
Range of
Inputs
Utilized
Weighted
Average of
Inputs
Utilized
(In thousands)
Impaired Loans$97  Appraisals of CollateralDiscount for costs to sell10% - 10%10%
Appraisal adjustments—%—%
 As of March 31, 2019
Fair ValueValuation
Technique
Unobservable
Input
Range of
Inputs
Utilized
Weighted
Average of
Inputs
Utilized
(In thousands)
Impaired Loans$957  Appraisals of CollateralDiscount for costs to sell—% - 6%1%
Appraisal adjustments—%—%
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 may 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.
18

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the carrying values and fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis:
 As of March 31, 2020
Book ValueFair ValueQuoted 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$61,714  $61,714  $61,714  $—  $—  
Investment securities held-to-maturity45,395  46,096  —  46,096  —  
Loans held for sale7,671  7,724  —  7,724  —  
Loans, net6,975,127  6,752,894  —  —  6,752,894  
Other financial assets73,576  73,576  —  73,576  —  
FINANCIAL LIABILITIES:
Deposits6,835,572  6,838,860  —  6,838,860  —  
Securities sold under agreements to repurchase45,319  45,319  —  45,319  —  
Federal funds purchased145,000  145,000  —  145,000  —  
Federal Home Loan Bank borrowings491,254  493,532  —  493,532  —  
Junior subordinated debentures106,363  96,363  —  —  96,363  
Other financial liabilities2,154  2,154  —  2,154  —  
 As of December 31, 2019
Book ValueFair ValueQuoted 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$292,479  $292,479  $292,479  $—  $—  
Investment securities held-to-maturity48,212  47,949  —  47,949  —  
Loans held for sale7,386  7,475  —  7,475  —  
Loans, net6,904,722  6,883,360  —  —  6,883,360  
Other financial assets67,348  67,348  —  67,348  —  
FINANCIAL LIABILITIES:
Deposits7,241,476  7,241,739  —  7,241,739  —  
Securities sold under agreements to repurchase53,398  53,398  —  53,398  —  
Federal Home Loan Bank borrowings350,829  351,233  —  351,233  —  
Junior subordinated debentures106,363  96,363  —  —  96,363  
Other financial liabilities1,957  1,957  —  1,957  —  
The estimated fair values have been determined by using available quoted market information or other appropriate valuation methodologies. The aggregate fair value amounts presented above do not represent the underlying value of the financial assets and liabilities of the Company taken as a whole as they do not reflect any premium or discount the Company might recognize if the assets were sold or the liabilities sold, settled, or redeemed. An excess of fair value over book value on financial assets represents a premium, or gain, the Company might recognize if the assets were sold, while an excess of book value over fair value on financial liabilities represents a premium, or gain, the Company might recognize if the liabilities were 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.
19

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Cash and cash equivalents
The carrying value reported in the balance sheet for cash and cash equivalents approximates fair value due to the short-term nature of their maturities and these assets are classified as Level 1 measurements.
Investment securities held-to-maturity
Investment securities held-to-maturity consist of mortgage-backed securities as of March 31, 2020 and December 31, 2019. The mortgage-backed securities are fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities is based on quoted market prices obtained from external pricing services. The principal market for our securities portfolio is the secondary institutional market, with an exit price that is predominantly reflective of bid level pricing in that market. Accordingly, held-to-maturity mortgage-backed securities are classified as Level 2.
There were no transfers of the Company's financial instruments that are not measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.
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. The Company estimates the fair value of loans using the exit price notion under ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which includes identifying an exit price using current market information for origination rates and making certain adjustments to incorporate credit risk, transaction costs and other adjustments utilizing publicly available rates and indexes. Loans, net 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 these assets are classified as Level 2 measurements.
Deposits
The fair values reported for transaction accounts (demand, NOW, savings, and money market) equal their respective book values reported on the balance sheet and these liabilities are classified as Level 2 measurements. 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 these liabilities are classified as Level 2 measurements.
Securities sold under agreements to repurchase
The fair values of securities sold under agreements to repurchase are estimated based on contractual cash flows discounted at the Bank’s incremental borrowing rate for FHLB borrowings with similar maturities and these liabilities have been classified as Level 2 measurements.
Federal funds purchased
The carrying amounts of federal funds purchased, if any, approximate fair value due to their short-term nature and therefore these funds have been classified as Level 2 measurements.
Federal Home Loan Bank borrowings
The fair values reported for FHLB borrowings are 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 measurements.
Junior subordinated debentures
The fair values of the junior subordinated debentures issued by Boston Private Capital Trust I and Boston Private Capital Trust II are 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.
20

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Other financial liabilities
Other financial liabilities consists of accrued interest payable for which the carrying amount approximates fair value and is classified as Level 2 measurements.
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, Northern California, and Southern California. The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, commercial tax-exempt loans, construction and land loans, and home equity and other consumer loans. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank’s single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank’s lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including, in particular, the performance of the construction sector. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changing conditions in the New England, Northern California, and Southern California economies and real estate markets.
The following table presents a summary of the loan portfolio based on the portfolio segment as of the dates indicated:
 March 31, 2020December 31, 2019
 (In thousands)
Commercial and industrial$670,744  $694,034  
Commercial tax-exempt445,319  447,927  
Commercial real estate2,626,299  2,551,274  
Construction and land238,293  225,983  
Residential2,841,926  2,839,155  
Home equity89,350  83,657  
Consumer and other131,407  134,674  
Total$7,043,338  $6,976,704  
The following table presents nonaccrual loans receivable by class of receivable as of the dates indicated:
March 31, 2020December 31, 2019
(In thousands)
Commercial and industrial$1,371  $582  
Commercial tax-exempt—  —  
Commercial real estate5,392  —  
Residential16,074  13,993  
Home equity1,476  1,525  
Consumer and other  
Total$24,314  $16,103  
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 0 loans 90 days or more past due, but still accruing, as of both March 31, 2020 and December 31, 2019. 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.
21

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables show the payment status of loans receivable by class of receivable as of the dates indicated:
March 31, 2020
Accruing Past DueNonaccrual Loans
30-59 Days Past Due60-89 Days Past DueTotal Accruing Past DueCurrent30-89 Days Past Due90 Days or
Greater
Past Due
Total Non-Accrual LoansCurrent Accruing LoansTotal
Loans
Receivable
(In thousands)
Commercial and industrial$1,401  $92  $1,493  $381  $—  $990  $1,371  $667,880  $670,744  
Commercial tax-exempt  —  —  —  —  —  —  —  445,319  445,319  
Commercial real estate  —  —  —  5,392  —  —  5,392  2,620,907  2,626,299  
Construction and land  —  —  —  —  —  —  —  238,293  238,293  
Residential  12,967  —  12,967  9,024  2,056  4,994  16,074  2,812,885  2,841,926  
Home equity  —  319  319  180  —  1,296  1,476  87,555  89,350  
Consumer and other  73  —  73   —  —   131,333  131,407  
Total  $14,441  $411  $14,852  $14,978  $2,056  $7,280  $24,314  $7,004,172  $7,043,338  
December 31, 2019
Accruing Past DueNonaccrual Loans
30-59 Days Past Due60-89 Days Past DueTotal Accruing Past DueCurrent30-89 Days Past Due90 Days or Greater Past DueTotal Non-Accrual LoansCurrent Accruing LoansTotal Loans Receivable
(In thousands)
Commercial and industrial  $828  $—  $828  $—  $241  $341  $582  $692,624  $694,034  
Commercial tax-exempt  —  —  —  —  —  —  —  447,927  447,927  
Commercial real estate1,420  —  1,420  —  —  —  —  2,549,854  2,551,274  
Construction and land—  —  —  —  —  —  —  225,983  225,983  
Residential19,133  1,038  20,171  9,593  759  3,641  13,993  2,804,991  2,839,155  
Home equity369  —  369  220  148  1,157  1,525  81,763  83,657  
Consumer and other1,008  2,149  3,157   —    131,514  134,674  
Total$22,758  $3,187  $25,945  $9,814  $1,148  $5,141  $16,103  $6,934,656  $6,976,704  
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. There could be an increase in these situations as the economic conditions brought on by the COVID-19 pandemic could lead to a decline in collateral values.
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 COVID-19 pandemic has limited the Bank’s ability to obtain updated appraisals. In lieu of appraisals, the Bank may use other valuation techniques in the short-term.
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.
22

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Credit Quality Indicators
The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management’s judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in general economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers’ ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company’s financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company’s analysis of credit risk. Generally, only commercial loans, including commercial real estate, other commercial and industrial loans, commercial tax-exempt loans, and construction and land loans, are given a numerical grade.
A summary of the rating system used by the Bank is included here from Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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 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.
These above credit quality indicators are assigned upon origination with commercial loans reassessed on an annual basis while noncommercial loans are reassessed when the loan becomes past due greater than 90 days or when ad-hoc information becomes available to the loan officer. Further the commercial loan portfolio is subject for selection of an independent review, also on an annual basis. In addition, those loans not considered to be "Pass" rated, are subject to a Loan Committee review on a quarterly basis. Lastly, on an ad-hoc basis as new information becomes available to the loan officer on the credit quality of the borrower, the credit quality indicators are reassessed.
23

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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, 2020
By Loan Grade or Nonaccrual Status
PassSpecial
Mention
Accruing
Classified (1)
Nonaccrual
Loans
Total
(In thousands)
Commercial and industrial$609,537  $9,428  $50,408  $1,371  $670,744  
Commercial tax-exempt434,259  2,516  8,544  —  445,319  
Commercial real estate2,517,306  79,909  23,692  5,392  2,626,299  
Construction and land237,823  470  —  —  238,293  
Residential2,821,611  —  4,241  16,074  2,841,926  
Home equity86,811  —  1,063  1,476  89,350  
Consumer and other131,106  300  —   131,407  
Total$6,838,453  $92,623  $87,948  $24,314  $7,043,338  
December 31, 2019
By Loan Grade or Nonaccrual Status
PassSpecial
Mention
Accruing
Classified (1)
Nonaccrual
Loans
Total
(In thousands)
Commercial and industrial$656,364  $12,101  $24,987  $582  $694,034  
Commercial tax-exempt436,721  7,154  4,052  —  447,927  
Commercial real estate2,495,702  32,014  23,558  —  2,551,274  
Construction and land225,526  457  —  —  225,983  
Residential2,820,909  —  4,253  13,993  2,839,155  
Home equity81,060  —  1,072  1,525  83,657  
Consumer and other134,371  300  —   134,674  
Total$6,850,653  $52,026  $57,922  $16,103  $6,976,704  
______________________
(1) Accruing Classified may include both Substandard and Doubtful classifications.
The following table presents the loan portfolio’s credit risk profile by loan origination year and class of receivable as of the dates indicated:
24

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
March 31, 2020
Loan Origination Year By Loan Grade or Nonaccrual Status
202020192018201720162015 & PriorTotal
(In thousands)
Commercial and industrial
Pass$26,987  $149,993  $147,350  $51,752  $39,825  $193,630  $609,537  
Special Mention—  488  1,765  3,836  232  3,107  9,428  
Accruing Classified (1)50  25,225  3,602  14,969  2,520  4,042  50,408  
Nonaccrual—  171  —  210  735  255  1,371  
Total$27,037  $175,877  $152,717  $70,767  $43,312  $201,034  $670,744  
Commercial tax-exempt
Pass$—  $13,741  $41,012  $24,823  $108,057  $246,626  $434,259  
Special Mention—  —  —  —  —  2,516  2,516  
Accruing Classified (1)—  —  —  4,021  —  4,523  8,544  
Total$—  $13,741  $41,012  $28,844  $108,057  $253,665  $445,319  
Commercial real estate
Pass$71,236  $491,954  $310,679  $349,161  $432,649  $861,627  $2,517,306  
Special Mention—  22,855  13,322  15,324  19,325  9,083  79,909  
Accruing Classified (1)—  1,424  —  1,184  8,919  12,165  23,692  
Nonaccrual—  5,392  —  —  —  —  5,392  
Total$71,236  $521,625  $324,001  $365,669  $460,893  $882,875  $2,626,299  
Construction and land
Pass$3,731  $52,620  $84,692  $53,428  $16,820  $26,532  $237,823  
Special Mention—  —  470  —  —  —  470  
Total$3,731  $52,620  $85,162  $53,428  $16,820  $26,532  $238,293  
Residential
Pass$131,395  $612,100  $480,529  $504,672  $471,195  $621,720  $2,821,611  
Accruing Classified (1)—  —  —  —  —  4,241  4,241  
Nonaccrual—  263  1,089  2,532  —  12,190  16,074  
Total$131,395  $612,363  $481,618  $507,204  $471,195  $638,151  $2,841,926  
Home equity
Pass$1,325  $13,322  $15,847  $7,781  $6,833  $41,703  $86,811  
Accruing Classified (1)—  —  —  —  —  1,063  1,063  
Nonaccrual—  —  —  —  139  1,337  1,476  
Total$1,325  $13,322  $15,847  $7,781  $6,972  $44,103  $89,350  
Consumer and other
Pass$6,326  $15,684  $23,993  $31,032  $5,227  $48,844  $131,106  
Special Mention—  —  —  300  —  —  300  
Nonaccrual—  —  —  —  —    
Total$6,326  $15,684  $23,993  $31,332  $5,227  $48,845  $131,407  
Total
Pass$241,000  $1,349,414  $1,104,102  $1,022,649  $1,080,606  $2,040,682  $6,838,453  
Special Mention—  23,343  15,557  19,460  19,557  14,706  92,623  
Accruing Classified (1)50  26,649  3,602  20,174  11,439  26,034  87,948  
Nonaccrual—  5,826  1,089  2,742  874  13,783  24,314  
Total$241,050  $1,405,232  $1,124,350  $1,065,025  $1,112,476  $2,095,205  $7,043,338  
______________________
(1) Accruing Classified may include both Substandard and Doubtful classifications.
25

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, 2020
Recorded Investment (1)Unpaid Principal BalanceRelated AllowanceYTD Average Recorded InvestmentYTD Interest Income Recognized while Impaired
(In thousands)
With no related allowance recorded:
Commercial and industrial$555  $632  n/a  $667  $ 
Commercial tax-exempt—  —  n/a  —  —  
Commercial real estate6,119  6,151  n/a  2,403   
Construction and land—  —  n/a  —  —  
Residential16,352  16,612  n/a  15,587  117  
Home equity1,548  2,109  n/a  1,550   
Consumer and other—  —  n/a  —  —  
Subtotal$24,574  $25,504  n/a  $20,207  $135  
With an allowance recorded:
Commercial and industrial$273  $280  $175  $281  $—  
Commercial tax-exempt—  —  —  —  —  
Commercial real estate—  —  —  —  —  
Construction and land—  —  —  —  —  
Residential532  532  64  535   
Home equity270  270  20  271   
Consumer and other—  —  —  —  —  
Subtotal$1,075  $1,082  $259  $1,087  $ 
Total:
Commercial and industrial$828  $912  $175  $948  $ 
Commercial tax-exempt—  —  —  —  —  
Commercial real estate6,119  6,151  —  2,403   
Construction and land—  —  —  —  —  
Residential16,884  17,144  64  16,122  121  
Home equity1,818  2,379  20  1,821   
Consumer and other—  —  —  —  —  
Total$25,649  $26,586  $259  $21,294  $141  
_____________________
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, if applicable, which was applied to principal.
26

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
As of and for the three months ended March 31, 2019
Recorded Investment (1)Unpaid Principal BalanceRelated AllowanceYTD Average Recorded InvestmentYTD Interest Income Recognized while Impaired
(In thousands)
With no related allowance recorded:
Commercial and industrial$862  $1,730  n/a  $1,021  $15  
Commercial tax-exempt—  —  n/a  —  —  
Commercial real estate  —  —  n/a  136  256  
Construction and land—  —  n/a  —  —  
Residential12,306  12,566  n/a  11,056  137  
Home equity2,147  2,709  n/a  1,709  —  
Consumer and other—  —  n/a  —  —  
Subtotal$15,315  $17,005  n/a  $13,922  $408  
With an allowance recorded:
Commercial and industrial$1,302  $1,353  $231  $1,542  $16  
Commercial tax-exempt—  —  —  —  —  
Commercial real estate—  —  —  —  —  
Construction and land—  —  —  —  —  
Residential597  597  68  732   
Home equity—  —  —  1,290  —  
Consumer and other—  —  —  —  —  
Subtotal$1,899  $1,950  $299  $3,564  $23  
Total:
Commercial and industrial$2,164  $3,083  $231  $2,563  $31  
Commercial tax-exempt—  —  —  —  —  
Commercial real estate—  —  —  136  256  
Construction and land—  —  —  —  —  
Residential12,903  13,163  68  11,788  144  
Home equity2,147  2,709  —  2,999  —  
Consumer and other—  —  —  —  —  
Total$17,214  $18,955  $299  $17,486  $431  
_____________________
(1)Recorded investment represents the client loan balance net of historical charge offs and historical nonaccrual interest paid, if applicable, 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, 2019
Recorded Investment (1)Unpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentInterest Income Recognized while Impaired
(In thousands)
With no related allowance recorded:
Commercial and industrial$470  $553  n/a  $1,062  $268  
Commercial tax-exempt—  —  n/a  —  —  
Commercial real estate733  733  n/a  155  262  
Construction and land—  —  n/a  —  —  
Residential15,362  15,622  n/a  13,700  636  
Home equity1,557  2,119  n/a  2,095  35  
Consumer and other—  —  n/a  —  —  
Subtotal$18,122  $19,027  n/a  $17,012  $1,201  
With an allowance recorded:
Commercial and industrial$254  $254  $146  $736  $33  
Commercial tax-exempt—  —  —  —  —  
Commercial real estate—  —  —  —  —  
Construction and land—  —  —  —  —  
Residential538  538  67  1,130  23  
Home equity273  273  22  545   
Consumer and other—  —  —  —  —  
Subtotal$1,065  $1,065  $235  $2,411  $60  
Total:
Commercial and industrial$724  $807  $146  $1,798  $301  
Commercial tax-exempt—  —  —  —  —  
Commercial real estate733  733  —  155  262  
Construction and land—  —  —  —  —  
Residential15,900  16,160  67  14,830  659  
Home equity1,830  2,392  22  2,640  39  
Consumer and other—  —  —  —  —  
Total$19,187  $20,092  $235  $19,423  $1,261  
_____________________
(1)Recorded investment represents the client loan balance net of historical charge offs and historical nonaccrual interest paid, if applicable, 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.
On March 22, 2020, regulators issued an interagency statement encouraging financial institutions to work with borrowers affected by the COVID-19 pandemic. The interagency statement also provided additional information regarding loan modifications. The regulators indicated they will not criticize institutions for working with borrowers in a safe and sound manner and have indicated that related modifications will not automatically result in a TDR. The regulators also provided supervisory views that loans modified under this program would not be considered past due or nonaccrual.
The regulators view prudent loan modification programs offered to financial institution customers affected by the COVID-19 pandemic as positive and proactive actions that can manage adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. The statement indicated that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not TDRs.
As of March 31, 2020, 10 loans with a current outstanding principal balance of approximately $5.0 million were processed under this mortgage deferment program. As of the date of this filing, the Bank has approved approximately 170 additional deferments for mortgage loans with a current outstanding principal balance of approximately $90.0 million.
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 either 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
28

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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.
As of March 31, 2020, the Bank has pledged $2.3 billion of loans in a blanket lien agreement with the FHLB. The Bank also has $386.2 million of loans pledged as collateral at the FRB for access to their discount window. As of December 31, 2019, the Bank had pledged $2.5 billion of loans to the FHLB and $395.3 million of loans at the FRB.
The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. These loans are outside of the guidelines to not be considered a TDR by recent regulatory guidance. 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, 2020 and December 31, 2019, TDRs totaled $14.9 million and $12.6 million, respectively. As of March 31, 2020, $7.1 million of the $14.9 million in TDRs were on accrual status. As of December 31, 2019, $7.1 million of the $12.6 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 reserve on the particular loan. Prior to the adoption of ASU 2016-13 on January 1, 2020, a general or allocated reserve would have been applied. 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:
As of and for the three months ended March 31, 2020
Restructured Year to DateTDRs that defaulted in the Year to Date that were restructured
in prior twelve months
# of
Loans
Pre-
modification
recorded
investment
Post-
modification
recorded
investment
# of
Loans
Post-
modification
recorded
investment
(In thousands, except number of loans)
Commercial and industrial (1) $50  $50  —  $—  
Commercial tax exempt—  —  —  —  —  
Commercial real estate—  —  —  —  —  
Construction and land—  —  —  —  —  
Residential (2) 2,373  2,373  —  —  
Home equity—  —  —  —  —  
Consumer and other—  —  —  —  —  
Total $2,423  $2,423  —  $—  
_____________________
(1)Represents the following type of concession: extension of maturity, reduction in interest rate.
(2)Represents the following type of concession: payment deferral.
29

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
As of and for the three months ended March 31, 2019
Restructured Current QuarterTDRs that defaulted in the Current Quarter that were restructured in prior twelve months
# of LoansPre- modification recorded investmentPost- modification recorded investment# of LoansPost- modification recorded investment
(In thousands, except number of loans)
Commercial and industrial (1) $179  $179  —  $—  
Commercial tax exempt—  —  —  —  —  
Commercial real estate—  —  —  —  —  
Construction and land—  —  —  —  —  
Residential (2) 3,000  3,000  —  —  
Home equity—  —  —  —  —  
Consumer and other—  —  —  —  —  
Total $3,179  $3,179  —  $—  
_____________________
(1)Represents the following type of concession: extension of term.
(2)Represents the following type of concession: temporary reduction of interest rate.
In the first quarter of 2020, in response to the COVID-19 pandemic, the Bank initiated a mortgage deferment program under which principal and interest payments on qualifying loans are generally deferred for three months and the loan term is extended three months. Loans that are deferred under the program are not considered TDRs or past due based on current regulatory guidance. As of March 31, 2020, 10 loans totaling approximately $5.0 million were approved under the program. As this program was started late in the first quarter of 2020, the Bank has been experiencing increased volume in the second quarter of 2020 due to the COVID-19 pandemic. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 16: Subsequent Events” for additional information on the mortgage deferment program.
Loan participations serviced for others and loans serviced for others are not included in the Company’s total loans.
The following table presents a summary of the loan participations serviced for others and loans serviced for others based on class of receivable as of the dates indicated:
 March 31, 2020December 31, 2019
 (In thousands)
Commercial and industrial$14,706  $14,533  
Commercial tax-exempt17,959  18,101  
Commercial real estate117,782  121,929  
Construction and land79,517  75,451  
Total loan participations serviced for others$229,964  $230,014  
Residential$145,299  $204,696  
Total loans serviced for others$145,299  $204,696  
Total loans include deferred loan origination (fees)/costs, net, of $7.7 million and $8.1 million as of March 31, 2020 and December 31, 2019, respectively.
7. Allowance for Loan Losses
The allowance for loan losses is established based upon the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. Subsequent recoveries, if any, are credited to the allowance when collected.
Under the CECL methodology, which the Company adopted on January 1, 2020, the Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The quantitative model utilizes a factor-based approach to estimate expected credit losses using probability of default and loss given default, which are derived from a selected peer group's historical default and loss experience. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of estimated prepayments and curtailments. Reasonable and supportable economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the Company's historical long-run average. Management has
30

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
determined a reasonable and supportable period of two years and a straight line reversion period of twelve months to be appropriate for purposes of estimating expected credit losses. The Company's qualitative assessment is based on factors outlined in regulatory guidance and include the following:
• Volume and trend of past-due, non-accrual, and adversely-graded loans
• Trends in volume and terms of loans
• Concentration Risk
• Experience and depth of management
• Risk surrounding lending policy and underwriting standards
• Risk surrounding loan review
• Banking industry conditions, other external factors, and inherent model risk
Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company will use either a discounted cash flow ("DCF") approach or a fair value of collateral approach. The latter approach will be used for loans deemed to be collateral dependent or when foreclosure is probable.
Accrued interest receivable amounts are excluded from balances of loans held at amortized cost and are included within Accrued interest receivable on the consolidated balance sheet. Management has elected not to measure an allowance for credit losses on these amounts as the Company employs a timely write-off policy as generally any loan over 89 days past-due is put on non-accrual status and any associated accrued interest is reversed.
For periods disclosed prior to the adoption of ASU 2016-13 as of January 1, 2020, the Allowance for loan losses was determined under the incurred loss model. Refer to "Note 1: Basis of Presentation and Summary of Significant Account Policies" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the methodology.
The allowance for loan losses, which is reported as a reduction of outstanding loan balances, totaled $68.2 million and $72.0 million as of March 31, 2020 and December 31, 2019, respectively.
Beginning in the first quarter of 2020, the Company made a change to the loan portfolio segmentation as it relates to the allowance for loan losses in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given the different underlying risk characteristics. For the period ended March 31, 2019, the provision/ (credit) for loan losses and related allowance balance in the allowance for loan losses for tax-exempt commercial and industrial loans is included with commercial and industrial loans. The following tables present a summary of the changes in the allowance for loan losses for the periods indicated:
31

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
As of and for the three months ended March 31,
20202019
(In thousands)
Allowance for loan losses, beginning of period:
Commercial and industrial$10,048  $15,912  
Commercial tax-exempt6,016  n/a  
Commercial real estate40,765  41,934  
Construction and land5,119  6,022  
Residential8,857  10,026  
Home equity778  1,284  
Consumer and other399  134  
Total allowance for loan losses, beginning of period$71,982  $75,312  
Impact of adopting ASU 2016-13:
Commercial and industrial$(565) n/a  
Commercial tax-exempt(4,409) n/a  
Commercial real estate(14,455) n/a  
Construction and land(2,158) n/a  
Residential685  n/a  
Home equity(535) n/a  
Consumer and other1,052  n/a  
Total impact of adopting ASU 2016-13$(20,385) n/a  
Provision/(credit) for loan losses:
Commercial and industrial$1,245  $(413) 
Commercial tax-exempt320  n/a  
Commercial real estate10,270  (310) 
Construction and land2,748  (669) 
Residential2,237  (69) 
Home equity(72) 74  
Consumer and other214  (39) 
Total provision/(credit) for loan losses$16,962  $(1,426) 
Loans charged off:
Commercial and industrial$(518) $—  
Commercial tax-exempt—  —  
Commercial real estate—  —  
Construction and land—  —  
Residential—  —  
Home equity—  (562) 
Consumer and other(10) (2) 
Total charge offs$(528) $(564) 
Recoveries on loans previously charged off:
Commercial and industrial$45  $188  
Commercial tax-exempt—  —  
Commercial real estate—  189  
Construction and land—  —  
Residential—  100  
Home equity132  —  
Consumer and other 15  
Total recoveries$180  $492  
Allowance for loan losses, end of period:
Commercial and industrial$10,255  $15,687  
Commercial tax-exempt1,927  n/a  
Commercial real estate36,580  41,813  
Construction and land5,709  5,353  
Residential11,779  10,057  
Home equity303  796  
Consumer and other1,658  108  
Total allowance for loan losses, end of period$68,211  $73,814  
The balance of the allowance for loan losses of $68.2 million as of March 31, 2020 represents a decrease of $3.8 million from December 31, 2019. Upon the adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease
32

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
in the allowance for loan losses of $20.4 million. The adoption amount was driven primarily by the portfolio composition, the short-term nature of many commercial loans, estimated prepayments and curtailments, a change to the loan portfolio segmentation in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given the different underlying risk characteristics, and the reasonable and supportable economic forecasts at the time of adoption. During the first quarter of 2020, the Company recognized a provision for loan losses of $17.0 million. The increase in the allowance for loan losses of $17.0 million in the first quarter of 2020 was primarily driven by the changes in economic forecasts late in the first quarter of 2020 to reflect deteriorating economic conditions related to the COVID-19 pandemic.
The balance of reserve for unfunded loan commitments of $4.3 million as of March 31, 2020 represents an increase of $3.2 million from December 31, 2019. Upon the adoption of ASU 2016-13 on January 1, 2020, the Company recognized an increase in the reserve of $1.4 million in the unfunded loan commitments expense. The net, after-tax impact of the $20.4 million decrease in the allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million. During the first quarter of 2020, the Company recognized a $1.8 million expense for the increase in the reserve for unfunded loan commitments, which is recognized as Other expense within Noninterest expense, driven by the change in economic forecasts.
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 or when the Bank takes possession of other assets.
The following tables present the Company’s allowance for loan losses and loan portfolio as of March 31, 2020 and December 31, 2019 by portfolio segment, disaggregated by method of impairment analysis. The Company had 0 loans acquired with deteriorated credit quality as of March 31, 2020 or December 31, 2019.
March 31, 2020
Individually Evaluated
for Impairment
Collectively Evaluated
for Impairment
Total
Recorded investment
(loan balance)
Allowance for loan lossesRecorded investment
(loan balance)
Allowance for loan lossesRecorded investment
(loan balance)
Allowance for loan losses
(In thousands)
Commercial and industrial$828  $175  $669,916  $10,080  $670,744  $10,255  
Commercial tax-exempt—  —  445,319  1,927  445,319  1,927  
Commercial real estate6,119  —  2,620,180  36,580  2,626,299  36,580  
Construction and land—  —  238,293  5,709  238,293  5,709  
Residential16,884  64  2,825,042  11,715  2,841,926  11,779  
Home equity1,818  20  87,532  283  89,350  303  
Consumer and other—  —  131,407  1,658  131,407  1,658  
Total$25,649  $259  $7,017,689  $67,952  $7,043,338  $68,211  

December 31, 2019
Individually Evaluated
for Impairment
Collectively Evaluated
for Impairment
Total
Recorded investment
(loan balance)
Allowance for loan lossesRecorded investment
(loan balance)
Allowance for loan lossesRecorded investment
(loan balance)
Allowance for loan losses
(In thousands)
Commercial and industrial$724  $146  $1,141,237  $15,918  $1,141,961  $16,064  
Commercial real estate733  —  2,550,541  40,765  2,551,274  40,765  
Construction and land—  —  225,983  5,119  225,983  5,119  
Residential15,900  67  2,823,255  8,790  2,839,155  8,857  
Home equity1,830  22  81,827  756  83,657  778  
Consumer and other—  —  134,674  399  134,674  399  
Total$19,187  $235  $6,957,517  $71,747  $6,976,704  $71,982  
33

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
8. Derivatives and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and, to a lesser extent, the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are generally determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain loans, deposits, and borrowings. As a service to its customers, the Company may utilize derivative instruments including customer foreign exchange forward contracts to manage its foreign exchange risk, if any.
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, 2020 and December 31, 2019:
 March 31, 2020December 31, 2019
 Asset derivativesLiability derivativesAsset derivativesLiability derivatives
 Balance
sheet
location
Fair 
value (1)
Balance
sheet
location
Fair 
value (1)
Balance
sheet
location
Fair 
value (1)
Balance
sheet
location
Fair 
value (1)
 (In thousands)
Derivatives not designated as hedging instruments:
Interest rate customer swapsOther assets93,391  Other liabilities94,437  Other assets36,089  Other liabilities36,580  
Risk participation agreementsOther assets46  Other liabilities480  Other assets10  Other liabilities242  
Total$93,437  $94,917  $36,099  $36,822  
_____________________
(1)For additional details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 5: Fair Value Measurements.”
The following table presents the effect of the Company’s derivative financial instruments on accumulated other comprehensive income for the three months ended March 31, 2020 and 2019:
Derivatives in cash
flow hedging
relationships
Amount of gain or (loss) recognized in OCI on derivativesLocation of gain
or (loss) reclassified
from accumulated
OCI into income
Amount of gain or (loss) reclassified from accumulated OCI into income
Three months ended March 31,Three months ended March 31,
2020201920202019
(In thousands)(In thousands)
Interest rate swaps$—  $(38) Interest expense  $—  $(311) 
Total$—  $(38) $—  $(311) 
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, 2020 and 2019:
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,
20202019
(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  $—  $(311) 
The effects of cash flow hedging:
Gain or (loss) on cash flow hedging relationships in ASC 815
Interest contracts - amount of gain or (loss) reclassified from accumulated other comprehensive income into incomeInterest expense  $—  $(311) 
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
34

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Bank could also be declared in default on its derivative obligations. The Bank was in compliance with these provisions as of March 31, 2020 and December 31, 2019.
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, 2020 and December 31, 2019.
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, 2020 and December 31, 2019.
As of March 31, 2020 and December 31, 2019, the termination amounts related to collateral determinations of derivatives in a liability position were $94.7 million and $35.7 million, respectively. The Company has minimum collateral posting thresholds with its derivative counterparties. As of March 31, 2020 and December 31, 2019, the Company had pledged securities with a market value of $96.8 million and $40.0 million, respectively, against its obligations under these agreements. The collateral posted is typically greater than the current liability position; however, due to timing of liability position changes at period end, the funding of a collateral shortfall may take place shortly following period end.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. The Company has utilized interest rate derivatives in the past, but as of March 31, 2020, there were no active cash flow hedges.
Per ASU 2017-12, for derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. For active cash flow hedges, a portion of the balance reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made or received on the Company’s interest rate swaps.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from different services the Bank provides to qualified commercial clients. The Bank offers certain derivative products directly to such clients. The Bank economically hedges derivative transactions executed with commercial clients by entering into mirror-image, offsetting derivatives with third parties. Derivative transactions executed as part of these programs are not designated in ASC 815-qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. Because the derivatives have mirror-image contractual terms, the changes in fair value substantially offset through earnings. The net effect on earnings is primarily driven by changes in the credit valuation adjustment (“CVA”). The CVA represents the dollar amount of fair value adjustment related to nonperformance risk of both the Bank and its counterparties. Fees earned in connection with the execution of derivatives related to this program are recognized in the Consolidated Statements of Operations in other income. The Bank has interest rate swaps and caps related to this program with an aggregate notional amount of $1.7 billion as of March 31, 2020 and $1.6 billion as of December 31, 2019. As of March 31, 2020 and December 31, 2019, there were 0 foreign currency exchange contracts related to this program.
In addition, as a participant lender, the Bank has guaranteed performance on the pro-rated portion of swaps executed by other financial institutions. As the participant lender, the Bank is providing a partial guarantee, but is not a direct party to the related swap transactions. The Bank has no obligations under the risk participation agreements unless the borrower defaults on their swap transaction with the lead bank and the swap is in a liability position to the borrower. In that instance, the Bank has agreed to pay the lead bank a portion of the swap’s termination value at the time of the default. The derivative transactions entered into as part of these agreements are not designated, as per ASC 815, as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. As of March 31, 2020 and December 31, 2019, there were 7 of these risk participation transactions with an aggregate notional amount of $58.4 million and $58.8 million, respectively.
The Bank has also participated out to other financial institutions a pro-rated portion of 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. As of March 31, 2020, there were 5 of these risk participation transactions with an aggregate notional amount of $30.4 million. As of December 31, 2019, there were 4 of these risk participation transactions with an aggregate notional amount of $20.5 million.
35

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents the effect of the Bank’s derivative financial instruments not designated as hedging instruments in the Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019.
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 derivativesThree months ended March 31,
20202019
 (In thousands)
Interest rate swapsOther income/ (expense)$(555) $(191) 
Risk participation agreementsOther income/ (expense)(202) 104  
Total$(757) $(87) 
9. Income Taxes
The following table presents the components of income tax expense and effective tax rates for the periods indicated:
Three months ended March 31,
20202019
(In thousands)
Income before income taxes$908  $24,459  
Income tax expense102  4,917  
Net income before attribution to noncontrolling interests$806  $19,542  
Effective tax rate11.2 %20.1 %
The effective tax rate for the three months ended March 31, 2020 of 11.2%, with related tax expense of $0.1 million, was calculated based on a forecasted 2020 annual effective tax rate. The effective tax rate for the three months ended March 31, 2019 of 20.1%, with related tax expense of $4.9 million, was calculated based on a forecasted 2019 annual effective tax rate.
The effective tax rates for the three months ended March 31, 2020 and March 31, 2019 of 11.2% and 20.1%, respectively, were calculated based on forecasted annual effective tax rates. The effective tax rate for both periods was less than the statutory rate of 21% due primarily to earnings from tax-exempt investments and income tax credits, which were partially offset by state and local income taxes and the accounting for investments in affordable housing projects. The effective tax rate for the three months ended March 31, 2020 is less than the effective tax rate for the same period in 2019 due primarily to the lower level of income in 2020 as compared to 2019.
10. Noncontrolling Interests
Noncontrolling interests consist of equity owned by management of the Company’s majority-owned affiliate, DGHM. Net income attributable to noncontrolling interests in the Consolidated Statements of Operations represents the net income allocated to the noncontrolling interest owners of DGHM. Net income allocated to the noncontrolling interest owners was $6 thousand and $100 thousand for the three-month periods ended March 31, 2020 and 2019, 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 of DGHM, the Company had redeemable noncontrolling interests held in mezzanine equity in the accompanying Consolidated Balance Sheets of 0 and $1.4 million as of March 31, 2020 and December 31, 2019, respectively. The aggregate amount of such redeemable noncontrolling equity interests are recorded at the estimated maximum redemption values. The Company had 0 noncontrolling interests included in permanent shareholder’s equity at March 31, 2020 and December 31, 2019.
The DGHM operating agreement provides the Company and/or the noncontrolling interest holders with contingent call and put options and mandatory repurchase obligations used for the orderly transfer of noncontrolling equity interests between the noncontrolling interest holders and the Company at contractually predetermined values. This agreement is 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, 2019.
The interests in DGHM take the form of limited liability company units. There are various events that could trigger a put, call or mandatory repurchase, such as a change in control, death, disability, retirement, resignation or termination. The terms of these rights and obligations are governed by the operating agreement of DGHM.
36

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents a rollforward of the Company’s redeemable noncontrolling interests for the periods indicated:
Three months ended
March 31, 2020March 31, 2019
(In thousands)
Redeemable noncontrolling interests at beginning of period$1,383  $2,526  
Net income attributable to noncontrolling interests 100  
Distributions(6) (100) 
Purchases/(sales) of ownership interests(64) 12  
Amortization of equity compensation 17  
Adjustments to fair value(1,327) (1,893) 
Redeemable noncontrolling interests at end of period$—  $662  
11. Accumulated Other Comprehensive Income
The following table presents a summary of the amounts reclassified from Accumulated other comprehensive income/ (loss) for the three months ended March 31, 2020 and 2019:
Description of component of Accumulated other comprehensive income/(loss)Three months ended March 31,Affected line item in
Statement of Operations
20202019
(In thousands)
Net realized gain/(loss) on cash flow hedges:
Hedges related to deposits:
Pre-tax gain/(loss)$—  $(311) Interest (expense)
Tax (expense)/ benefit—  (91) Income tax (expense)/benefit
Net$—  $(220) Net income/(loss) attributable to the Company
Total reclassifications for the period, net of tax$—  $(220) 
The following table presents the after-tax changes in the components of the Company’s Accumulated other comprehensive income/(loss) for the three months ended March 31, 2020 and 2019:
Components of Accumulated other comprehensive income/(loss)
Unrealized
gain/(loss)
on securities
available-for-sale
Unrealized
gain/(loss)
on cash flow
hedges
Unrealized
gain/(loss)
on other
Accumulated
other
comprehensive
income/(loss)
(In thousands)
Balance at December 31, 2018$(17,556) $391  $(554) $(17,719) 
Other comprehensive income/(loss) before reclassifications11,568  (27) —  11,541  
Reclassified from other comprehensive income/(loss)—  (220) —  (220) 
Other comprehensive income/(loss), net11,568  (247) —  11,321  
Balance at March 31, 2019$(5,988) $144  $(554) $(6,398) 
Balance at December 31, 2019$8,435  $—  $(860) $7,575  
Other comprehensive income/(loss) before reclassifications14,489  —  —  14,489  
Other comprehensive income/(loss), net14,489  —  —  14,489  
Balance at March 31, 2020$22,924  $—  $(860) $22,064  
12. Restructuring
There were 0 restructuring charges in the first quarter of 2020. In the first quarter of 2019, the Company incurred restructuring charges of $1.6 million. The charges were in connection with a previously announced reduction to the Company’s workforce, which included executive transition changes as well as other employee benefit and technology related initiatives. The restructuring is intended to improve the Company’s operating efficiency and enhance earnings.
37

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents a summary of the restructuring activity for the three months ended March 31, 2020 and 2019:
Severance ChargesOther Associated CostsTotal
(In thousands)
Accrued charges at December 31, 2019$526  $789  $1,315  
Costs paid(434) —  (434) 
Accrued charges at March 31, 2020$92  $789  $881  
Accrued charges at December 31, 2018$3,896  $789  $4,685  
Cost incurred1,646  —  1,646  
Costs paid(1,986) —  (1,986) 
Accrued charges at March 31, 2019$3,556  $789  $4,345  
13. Revenue Recognition
In accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes 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. ASC 606 does not apply to revenue associated with financial instruments such as loans and securities. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest income considered in-scope of ASC 606 is discussed below.
Wealth Management and Trust Fees
Wealth management and trust fees are earned for providing wealth management, retirement plan advisory, family office, financial planning, trust services, and other financial advisory services to clients. The Company’s performance obligation under these contracts is satisfied over time as the 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 AUM and the applicable fee rate, depending on the terms of the contracts. Fees are also recognized monthly based either on a fixed fee amount or are based on the quarter-end (in arrears) market value of the AUM and the applicable fee rate (“asset based fees”), depending on the terms of the contracts. No performance based incentives are earned on wealth management contracts. Receivables are recorded on the Consolidated Balance Sheets in the Fees receivable line item. Deferred revenues of $6.4 million and $6.7 million as of March 31, 2020 and 2019, respectively, are recorded on the Consolidated Balance Sheets within the Other liabilities 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 or, in certain circumstances, quarterly 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 Sheets in the Fees receivable line item.
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 AUM and the applicable fee rate, depending on the terms of the contracts. 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 Sheets in the Fees receivable line item.
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.
38

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The Bank also charges fees for treasury activities such as swap fees and 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 relating to foreign exchange fees as they are governed by client disclosure statements and the Bank’s internal policies and procedures.
The following table presents the fee income considered in-scope of ASC 606 by contracts with customers:
 Three months ended March 31,
 20202019
 (In thousands)
Fees and other income:
Wealth management and trust fees$18,371  $19,058  
Investment management fees1,925  2,650  
Other income752  684  
Revenue from contracts with customers21,048  22,392  
Non-interest income within the scope of other GAAP topics473  2,856  
Total non-interest income$21,521  $25,248  
14. Lease Accounting
On adoption of ASU 2016-02 on January 1, 2019, the Company recognized $124.1 million of lease liabilities and $108.5 million of right-of-use ("ROU") assets on the face of the balance sheet. ROU assets obtained in exchange for lease liabilities are net of tenant improvement allowances and deferred rent. There was no impact to the Company’s Consolidated Statements of Cash Flows upon adoption, since the net impact of all adjustments recorded upon transition represents non-cash activity. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Recent Accounting Pronouncements” for additional information on the Company's adoption of this standard.
The Company, as lessee, has 42 real estate leases for office and ATM locations classified as operating leases. The Company determines if an arrangement is a lease or contains a lease at inception. The terms of the real estate leases generally have annual increases in payments based off of a fixed or variable rate, such as the Consumer Price Index rate, that is outlined within the respective contracts. Generally, the initial terms of the leases for our leased properties range from five to fifteen years. Most of the leases also include options to renew for periods of five to ten years at contractually agreed upon rates or at market rates at the time of the extension. On a quarterly basis, the Company evaluates whether the renewal of each lease is reasonably certain. If the lease doesn’t provide the implicit interest rate, the Bank uses its incremental borrowing rate at the commencement date of the lease in determining the present value of lease payments. No other significant judgments or assumptions were made in applying the requirements of ASU 2016-02.
The following table presents information about the Company's leases as of the dates indicated.
Three months ended March 31,
20202019
(In thousands)
Lease cost
Operating lease cost$4,601  $4,685  
Short-term lease cost48  32  
Variable lease cost(9)  
Less: Sublease income(28) (18) 
Total operating lease cost$4,612  $4,701  
Three months ended March 31, 2020
(In thousands, except years and percentages)
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases$5,100  
ROU assets obtained in exchange for new operating lease liabilities$443  
Weighted-average remaining lease term for operating leases7.9 years
Weighted-average discount rate for operating leases3.2 %
39

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The Company is obligated for minimum payments under non-cancelable operating leases. In accordance with the terms of these leases, the Company is currently committed to minimum annual payments as follows as of March 31, 2020:
March 31, 2020
(In thousands)
Remainder of 2020$14,962  
202119,974  
202219,934  
202318,984  
202412,961  
Thereafter44,194  
Total future minimum lease payments131,009  
Less: Amounts representing interest(17,435) 
Present value of net future minimum lease payments$113,574  
15. Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update and the related amendments to Topic 842 require lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”); ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”); and ASU No. 2019-01, Leases (Topic 842), Codification Improvements (“ASU 2019-01”). The standard establishes an ROU model that requires a lessee to recognize a ROU asset and lease liability on the Consolidated Balance Sheets for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Consolidated Statements of Operations. The Company adopted these provisions on January 1, 2019. The most significant effects relate to the recognition of new ROU assets and lease liabilities on the balance sheet for real estate operating leases and providing significant disclosures about leasing activities. Additionally, the Company elected the package of practical expedients, as prescribed by ASU 2016-02. On adoption, the Company recognized $124.1 million of lease liabilities and $108.5 million of ROU assets. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 14: Lease Accounting” for further details.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) (“ASU 2016-13”). Throughout 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”); ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”); ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 942)—Effective Dates (“ASU 2019-10”); and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”). This update and related amendments to Topic 326 are 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 CECL model methodology that reflects expected credit losses and requires consideration of a reasonable and supportable economic forecast to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019. The Company adopted this update on January 1, 2020 utilizing a modified retrospective approach. On adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease in the allowance for loan losses of $20.4 million, and an increase in the reserve for unfunded loan commitments of $1.4 million. The net, after-tax impact of the decrease in the allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million shown in the Consolidated Statements of Changes in Shareholders’ Equity. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 4: Investments, Note 6 - Loan Portfolio and Credit Quality, and Note 7 - Allowance for Loan Losses” for further details.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in ASU 2018-14 remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. This update is effective on a retrospective basis for interim and annual reporting periods beginning January 1, 2021. The Company is assessing the potential impact for this update and how it applies to the Company’s disclosures surrounding its two non-qualified supplemental executive retirement plans and a long-term incentive plan.
40

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
16. Subsequent Events
Impact of the COVID-19 pandemic
The COVID-19 pandemic has caused substantial disruptions to the global economy and to the customers and communities that we serve. In response to the pandemic, the Company has implemented business continuity contingency plans, including company-wide remote working arrangements. We are also focused on supporting our clients who may be experiencing a financial hardship due to the COVID-19 pandemic, including by participating in the Small Business Administration’s (the “SBA”) Paycheck Protection Program (the “PPP”) and offering loan deferrals, forbearance, and second mortgages as appropriate, including through our mortgage deferment program.
As of March 31, 2020, the COVID-19 pandemic did not have a significant impact on the Company’s financial condition, results of operations, or capital position other than the provision for loan loss expense described in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses.” Below is a summary of the impact to the Company subsequent to March 31, 2020 until the filing date of this Form 10-Q.
Participation in the PPP
The CARES Act appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. The CARES Act provided funding to the SBA for use for the PPP. Under the terms of the PPP, certain businesses can apply for loans through qualified financial institutions, such as the Bank, based on eligibility criteria. The PPP provides loans to eligible businesses with an initial term of two years at an interest rate of 1.0%. Payments can be deferred for a period of six months. Loans issued under the PPP will be forgiven if the borrower uses at least 75% of the proceeds on payroll, rent, utilities and other qualified benefits for a period of eight weeks, following the loan funding date, and are 100% guaranteed by the SBA. The SBA has issued an interim final rule in which it has provided that a lender may rely on certifications made by a borrower to determine the borrower’s eligibility for a PPP loan and use of loan proceeds, subject to a good faith review, and to determine the qualifying loan amount and eligibility for loan forgiveness.
Loans issued by participating financial institutions are 100% guaranteed by the SBA. Banks will receive a processing fee from the SBA from 1.0% to 5.0% based on the size of the loan. Loans up to $350 thousand will have a 5.0% fee, loans between $350 thousand and $2.0 million will have a 3.0% fee, and loans greater than $2.0 million will have a 1.0% fee.
In conjunction with the PPP, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility (the “PPPLF”) will extend credit to depository institutions with a term of up to two years at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility.
The Bank is participating in the PPP and PPPLF programs. As of March 31, 2020, an immaterial amount of loans were processed under the PPP program, though the Company expects increased volume in the second quarter of 2020. As of the date of this filing, the Bank has approved approximately 1,100 PPP loans totaling approximately $425.0 million and does not anticipate to approve any additional loans under the current conditions.
Mortgage Deferment Program 
In the first quarter of 2020, in response to the COVID-19 pandemic, the Bank initiated a mortgage deferment program under which principal and interest payments on qualifying mortgage loans are generally deferred for three months and the loan term is extended three months. Loans that meet the requirements for deferral under the program are not considered TDRs or past due based on current regulatory guidance. As of March 31, 2020, 10 loans totaling approximately $5.0 million were processed under this program, though the Company expects increased volume in the second quarter of 2020. As of the date of this filing, the Bank has initially approved approximately 170 deferments for loans totaling approximately $90.0 million.
Massachusetts COVID-19 Emergency Legislation
On April 20, 2020, legislation enacted in Massachusetts in response to the COVID-19 emergency declared by Governor Baker was signed into law by the Governor. The legislation establishes a temporary moratorium on foreclosures on one- to four-family, owner occupied residential real estate in Massachusetts. The legislation also requires a creditor to grant to a borrower of a mortgage loan secured by one- to four-family, owner occupied residential real estate in Massachusetts a forbearance of up to 180 days, if requested by the borrower, who must affirm that the borrower has experienced a financial impact from the COVID-19 pandemic. A borrower is entitled to request a forbearance while the legislation is in effect even if the borrower is already in default. In connection with a forbearance, a creditor may not charge fees, penalties or interest beyond the amounts scheduled and calculated as if the borrower made all contractual payments on time and in full under the terms of the relevant loan agreement. The legislation specifies that a payment subject to forbearance shall be added to the end of the term of the loan unless otherwise agreed by the parties. The legislation also prohibits a creditor from furnishing negative information to a consumer reporting agency related to mortgage payments subject to forbearance. Because the legislation was enacted on an emergency basis, it went into effect immediately upon being signed into law. The legislation provides that the temporary moratorium on foreclosures expires 120 days after the effective date of the legislation, which is August 18, 2020, or 45 days after the COVID-19 emergency declaration has been lifted, whichever is sooner, but the Governor may extend the moratorium in increments of up 90 days as long as the moratorium ends not later than 45 days after the COVID-19 emergency declaration
41

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
has been lifted. A borrower may request a forbearance under the legislation at any time while the foreclosure moratorium is in effect. Forbearances, if any, granted under the Massachusetts legislation to borrowers who are currently in default may not qualify for the reporting exclusion as a TDR or delinquency status as was provided under the national guidance from regulators.
Commercial Real Estate Second Loan Program
In the first quarter of 2020, in response to the COVID-19 pandemic, the Bank also initiated a program to offer qualifying Commercial real estate borrowers a second mortgage to cover up to one year of principal and interest payments. In order to qualify for the loan, the total exposure for each borrower could not exceed a 75% loan-to-value ratio and the loans were current at the time of application, amongst other conditions. As of March 31, 2020, approximately 70% of our total Commercial real estate portfolio balance qualified for the plan. As of the date of this filing, borrowers for approximately 260 existing loans totaling $1.4 billion have requested and been approved for these second mortgages, representing approximately 50% of the Commercial real estate loan balance. Approximately $90.0 million in new loans are expected to be funded under this program. The entire Commercial real estate portfolio will continue to be monitored regardless of their participation in the plan.
42


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of and for the three months ended March 31, 2020
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; evaluations of interest rate trends and future liquidity; expectations as to changes in assets, deposits and results of operations; the impact of the COVID-19 pandemic; future operations, market position and 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”; the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in general business and economic conditions on a national basis and in the local markets in which the Company operates; changes in customer behavior due to changing business and economic conditions or legislative or regulatory initiatives; continued turbulence in the capital and debt markets; changes in interest rates; increases in loan defaults and charge-off rates; decreases in the value of securities and other assets; changes in loan loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments; competitive pressures from other financial institutions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; changes in regulation; reputational risk relating to the Company’s participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; risks that goodwill and intangibles recorded in the Company’s financial statements will become impaired; the risk that the Company’s deferred tax asset may not be realized; risks related to the identification and implementation of acquisitions, dispositions and restructurings; changes in assumptions used in making such forward-looking statements; and 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
43


Executive Summary
The Company offers a wide range of private banking, wealth management, and trust services to high net worth individuals, families, businesses and select institutions through its two reportable segments: (i) Private Banking and (ii) Wealth Management and Trust. This Executive Summary provides an overview of the most significant aspects of the Company's operating segments and operations in the first quarter of 2020. 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,
20202019$ Change% Change
(In thousands, except per share data)
Total revenue$78,778  $83,586  $(4,808) (6)%
Provision/(credit) for loan losses16,962  (1,426) 18,388  nm  
Total operating expense60,908  60,553  355  %
Net income before attribution to noncontrolling interests806  19,542  (18,736) (96)%
Net income attributable to noncontrolling interests 100  (94) (94)%
Net income attributable to the Company800  19,442  (18,642) (96)%
Diluted earnings per share attributable to common shareholders$0.01  $0.25  $(0.24) (96)%
ASSETS UNDER MANAGEMENT AND ADVISORY (“AUM”):
Wealth Management and Trust$13,497,000  $14,564,000  (1,067,000) (7)%
Other1,016,000  1,558,000  (542,000) (35)%
Total AUM$14,513,000  $16,122,000  $(1,609,000) (10)%
_____________________
nm = not meaningful
Net income attributable to the Company was $0.8 million for the three months ended March 31, 2020 and $19.4 million for the same period of 2019. The Company recognized diluted earnings per share attributable to common shareholders of $0.01 and $0.25 for the three months ended March 31, 2020 and 2019, respectively.
Key items that affected the Company’s results in the first quarter of 2020 compared to the same period of 2019 include:
Provision expense for loan losses increased $18.4 million to $17.0 million for the three months ended March 31, 2020, compared to the same period of 2019. During the first quarter of 2020, the Company recognized a total provision for loan losses and unfunded loan commitments expense of $18.8 million, which includes a provision for loan loss expense of $17.0 million and $1.8 million for unfunded loan commitments, which is recognized as Other expense within Noninterest expense. The provision for loan losses in the first quarter of 2020 was primarily driven by changes in economic forecasts late in the first quarter of 2020 to reflect deteriorating economic conditions related to the COVID-19 pandemic.
Upon adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease in the allowance for loan losses of $20.4 million, and an increase in the reserve for unfunded loan commitments of $1.4 million. The net, after-tax impact of the decrease in the allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million.
Total revenue decreased $4.8 million, or 6%, to $78.8 million for the three months ended March 31, 2020, compared to the same period of 2019 as described below.
Total fees and other income decreased $3.7 million, or 15%, to $21.5 million for the three months ended March 31, 2020, compared to the same period of 2019. The decrease was primarily driven by lower Other income, Investment management fees, and Wealth management and trust fees. Total fees and other income represents 27% of Total revenue for the three months ended March 31, 2020, compared to 30% of Total revenue for the same period of 2019.
Net interest income decreased $1.1 million, or 2%, to $57.3 million for the three months ended March 31, 2020, compared to the same period of 2019. Net interest margin (“NIM”) was 2.76% for the three months ended March 31, 2020, a decrease of 14 basis points compared to the same period in 2019. The decreases in net interest income and NIM were primarily driven by the impact of recent rate cuts as lower interest on interest-earning assets was partially offset by lower funding costs.
Total operating expenses increased $0.4 million, or 1%, to $60.9 million for the three months ended March 31, 2020, compared to the same period of 2019. The increase was primarily driven by an increase in Other expense, Information systems, and Marketing and business development, partially offset by a restructuring charge of $1.6 million in the first
44


quarter of 2019 as well as a decrease in Occupancy and equipment, FDIC insurance, and Salaries and employee benefits due to accrual adjustments.
For the three months ended March 31, 2020, total loans increased by $66.6 million, or 1%, while total deposits decreased $405.9 million, or 6%, from prior quarter. The Company’s loan-to-deposit ratio was 103% as of March 31, 2020. Deposits are the Company’s primary source of funds to originate loans. When the Company’s loan-to-deposit ratio exceeds 100%, the Company relies on other funding sources such as FHLB borrowings or federal funds to fund loan growth. If the Company is unable to grow deposits in line with loan growth, we will evaluate other options such as slowing loan growth, selling a portion of portfolio loans, or originating mortgage loans as held-for-sale.
The Company’s Private Banking segment reported Net income attributable to the Company of $0.6 million in the first quarter of 2020, compared to $18.3 million for the same period of 2019. Net income attributable to the Company decreased $17.7 million, or 97%, from the same period in 2019 primarily driven by an increase of $18.4 million to the Provision for loan losses, a decrease of $3.4 million in Total revenue primarily due to lower Fees and other income, and an increase of $1.3 million in Operating expense primarily due to higher Other expense related to the reserve for unfunded loan commitments expense.
The Company’s Wealth Management and Trust segment reported Net income attributable to the Company of $2.0 million in the first quarter of 2020, compared to $2.5 million for the same period of 2019. The decrease of $0.4 million, or 18%, was primarily driven by a decrease of $0.7 million in Total revenue due to the impact of lower AUM on accounts that are billed based on AUM levels, partially offset by a decrease of $0.1 million in Total operating expense. The decrease in Total operating expense was primarily due to a $0.4 million restructuring charge in the first quarter of 2019, a decrease in Occupancy and equipment expense, and a decrease in Professional services expense, partially offset by an increase in Information systems expense and Salaries and employee benefits expense. Wealth Management and Trust AUM decreased $1.1 billion, or 7%, to $13.5 billion at March 31, 2020 from $14.6 billion at March 31, 2019. The decrease in AUM was primarily driven by lost business of $1.2 billion and unfavorable market returns of $0.8 billion, partially offset by new business of $1.0 billion for the twelve months ended March 31, 2020.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has caused substantial disruptions to the global economy and to the customers and communities that we serve. In response to the pandemic, we have implemented business continuity contingency plans, including company-wide remote working arrangements. We are also focused on supporting our clients who may be experiencing a financial hardship due to COVID-19, including participating in the SBA's PPP, offering loan deferrals and forbearance as needed, including our mortgage deferment program, and creating the Commercial real estate second loan program. We will continue to evaluate this fluid situation and take additional actions as necessary. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 16: Subsequent events” for further details on the Company's participation in these programs.
As of March 31, 2020, the COVID-19 pandemic did not have a material impact on the Company’s financial condition, results of operations, or capital position other than the provision for loan loss expense discussed below. As described in Part II. Item 1A. "Risk Factors", the COVID-19 pandemic could have a material impact on the Company’s financial condition, results of operations or capital position in the future.
During the first quarter of 2020, the Company recognized a total provision for loan losses expense of $18.8 million for loans and off-balance sheet commitments driven by the changes in economic forecasts late in the first quarter of 2020 to reflect deteriorating economic conditions related to the COVID-19 pandemic. There have been no significant changes to judgments in determining the fair value of assets or liabilities, and there have been no material impairments of financial assets. The Company will continue to monitor the fair value of assets to determine if trigger events exist to warrant further impairment testing.
Company-wide remote working arrangements have not adversely affected our ability to maintain operations, including financial reporting systems and internal controls over financial reporting.
Regulatory Developments
The CARES Act
On March 27, 2020, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the economic effects of the COVID-19 pandemic.
Paycheck Protection Program. The CARES Act appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. As of the date of this filing, the Bank has initially approved approximately 1,100 PPP loans totaling approximately $425.0 million. In conjunction with the PPP, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility (the “PPPLF”)
45


will extend credit to depository institutions with a term of up to two years at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility.
Troubled Debt Restructuring Relief. From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the national emergency declared by the President on March 13, 2020 concerning the COVID–19 outbreak (the “national emergency”), a financial institution may elect to suspend the requirements under accounting principles generally accepted in the U.S. for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a troubled debt restructured (“TDR”), including impairment accounting. The Company elected this accounting policy. This TDR relief is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable. In the first quarter of 2020, the Company initiated a mortgage loan deferment program in line with the preceding guidance. As of March 31, 2020, 10 loans totaling approximately $5.0 million were processed under this program. As of the date of this filing, the Bank has initially approved approximately 170 deferments for loans totaling approximately $90.0 million.
CECL Delay. Banks, savings associations, credit unions, bank holding companies and their affiliates are not required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses (“CECL”), from the date of the law’s enactment until the earlier of the end of the national emergency or December 31, 2020. On March 27, 2020, the Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”), and the Office of the Comptroller of the Currency issued an interim final rule that allows banking organizations that are required to adopt CECL this year to mitigate the estimated cumulative regulatory capital effects for up to two years. The relief afforded by the CARES Act and interim final rule is in addition to the three-year transition period already in place. The Company adopted CECL effective January 1, 2020.
Reduction of the Community Bank Leverage Ratio. The CARES Act reduced the community bank leverage ratio from 9% to 8% until the earlier of the end of the national emergency or December 31, 2020. In response to the CARES Act, federal banking regulators set the community bank leverage ratio at 8% for the remainder of 2020, 8.5% for 2021 and 9% thereafter.
Revival of Bank Debt Guarantee Program. The CARES Act amends the Dodd-Frank Act to provide the FDIC with the authority to guarantee bank-issued debt and noninterest-bearing transaction accounts that exceed the FDIC's $250,000 limit through December 31, 2020. The FDIC has discretion to determine whether and how to exercise this authority.
Forbearance. The CARES Act codifies in part recent guidance from state and federal regulators and government-sponsored enterprises, including the 60-day suspension of foreclosures on federally-backed mortgages and requirements that servicers grant forbearance to borrowers affected by COVID-19.
Moratorium on Negative Credit Reporting. Any furnisher of credit information that agrees to defer payments, forbear on any delinquent credit or account, or provide any other relief to consumers affected by the COVID-19 pandemic must report the credit obligation or account as current if the credit obligation or account was current before the accommodation.
Massachusetts COVID-19 Emergency Legislation
On April 20, 2020, legislation enacted in Massachusetts in response to the COVID-19 emergency declared by Governor Baker was signed into law by the Governor. The legislation establishes a temporary moratorium on foreclosures on one- to four-family, owner occupied residential real estate in Massachusetts. The legislation also requires a creditor to grant to a borrower of a mortgage loan secured by one- to four-family, owner occupied residential real estate in Massachusetts a forbearance of up to 180 days, if requested by the borrower, who must affirm that the borrower has experienced a financial impact from the COVID-19 pandemic. A borrower is entitled to request a forbearance while the legislation is in effect even if the borrower is already in default. In connection with a forbearance, a creditor may not charge fees, penalties or interest beyond the amounts scheduled and calculated as if the borrower made all contractual payments on time and in full under the terms of the relevant loan agreement. The legislation specifies that a payment subject to forbearance shall be added to the end of the term of the loan unless otherwise agreed by the parties. The legislation also prohibits a creditor from furnishing negative information to a consumer reporting agency related to mortgage payments subject to forbearance. Because the legislation was enacted on an emergency basis, it went into effect immediately upon being signed into law. The legislation provides that the temporary moratorium on foreclosures expires 120 days after the effective date of the legislation, which is August 18, 2020, or 45 days after the COVID-19 emergency declaration has been lifted, whichever is sooner, but the Governor may extend the moratorium in increments of up 90 days as long as the moratorium ends not later than 45 days after the COVID-19 emergency declaration has been lifted. A borrower may request a forbearance under the legislation at any time while the foreclosure moratorium is in effect. Forbearances, if any, granted under the Massachusetts legislation to borrowers who are currently in default may not qualify for the reporting exclusion as a TDR or delinquency status as was provided under the national guidance from regulators.
46


Critical Accounting Policies
Critical accounting policies reflect significant judgments and uncertainties, which 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, which involve the most complex or subjective decisions or assessments, are the allowance for loan losses, the valuation of goodwill and intangible assets and the analysis for impairment, and income 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, 2019.
There was one change to these policies through the filing of this Quarterly Report on Form 10-Q. Upon the adoption of ASU 2016-13, Financial Instruments (Topic 326) ("ASU 2016-13") on January 1, 2020, management's policy and processes for the allowance for loan losses has changed. The updates in this standard replace the incurred loss impairment methodology in current GAAP with a CECL model methodology. The CECL model methodology incorporates current conditions, and “reasonable and supportable” forecasts, as well as prepayments to estimate loan losses over the life of loan. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses" for further discussion on the new policy and processes.
Results of operations for the three months ended March 31, 2020 versus March 31, 2019
Net Income. The Company recorded Net income before attribution to noncontrolling interests for the three months ended March 31, 2020 of $0.8 million, compared to $19.5 million for the same respective period in 2019. Net income attributable to the Company for the three months ended March 31, 2020 was $0.8 million, compared to $19.4 million for the same period in 2019.
The Company recognized Diluted EPS attributable to common shareholders for the three months ended March 31, 2020 of $0.01 per share, compared to $0.25 per share for the same period in 2019. Net income attributable to the Company for 2020 and 2019 was positively impacted by decreases in the redemption value of certain redeemable noncontrolling interests, which increases Net 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 table presents selected financial highlights:
Three months ended March 31,
$
Change
%
Change
20202019
(In thousands)
Net interest income$57,257  $58,338  $(1,081) (2)%
Fees and other income21,521  25,248  (3,727) (15)%
Total revenue78,778  83,586  (4,808) (6)%
Provision/(credit) for loan losses16,962  (1,426) 18,388  nm  
Operating expense60,908  60,553  355  %
Income tax expense102  4,917  (4,815) (98)%
Net income before attribution to noncontrolling interests806  19,542  (18,736) (96)%
Less: Net income attributable to noncontrolling interests 100  (94) (94)%
Net income attributable to the Company$800  $19,442  $(18,642) (96)%
_____________________
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. NIM is the amount of net interest income expressed as a percentage of average interest-earning assets. The average rate earned on interest-earning assets is the amount of annualized interest income expressed as a percentage of average interest-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 $87.9 million at March 31, 2020 and could be placed on nonaccrual status if their credit quality declines further.
Net interest income for the three months ended March 31, 2020 was $57.3 million, a decrease of $1.1 million, or 2%, compared to the same period in 2019. The decrease was primarily driven by the impact of recent rate cuts as lower interest on interest-earning assets was partially offset by lower funding costs. NIM was 2.76% for the three months ended March 31, 2020, a decrease of 14 basis points compared to the same period in 2019. The decrease in NIM was also primarily driven by the impact of recent rate cuts as lower interest on interest-earning assets was partially offset by lower funding costs.
47


The following tables present the composition of the Company’s NIM for the three months ended March 31, 2020 and 2019.
Average BalanceInterest Income/ExpenseAverage Yield/Rate (1)
As of and for the three months ended March 31,
AVERAGE BALANCE SHEET:202020192020201920202019
AVERAGE ASSETS(In thousands)
Interest-earning assets:
Cash and investments: (2)
Taxable investment securities$201,174  $244,230  $868  $1,185  1.73 %1.94 %
Non-taxable investment securities315,681  306,868  1,998  1,901  2.53 %2.48 %
Mortgage-backed securities520,629  521,788  2,787  2,897  2.14 %2.22 %
Short-term investments and other147,482  79,603  1,071  908  2.89 %4.58 %
Total cash and investments1,184,966  1,152,489  6,724  6,891  2.27 %2.39 %
Loans: (3)
Commercial and industrial1,148,986  1,070,161  10,724  10,979  3.69 %4.10 %
Commercial real estate2,582,305  2,398,413  27,482  28,151  4.21 %4.69 %
Construction and land233,324  211,351  2,572  2,641  4.36 %5.00 %
Residential2,850,833  2,972,945  23,468  25,545  3.29 %3.44 %
Home equity86,048  90,646  952  1,121  4.45 %5.02 %
Other consumer132,237  133,937  1,160  1,496  3.53 %4.53 %
Total loans7,033,733  6,877,453  66,358  69,933  3.75 %4.07 %
Total earning assets8,218,699  8,029,942  73,082  76,824  3.54 %3.83 %
LESS: Allowance for loan losses51,730  75,537  
Cash and due from banks (non-interest bearing)49,571  46,172  
Other assets562,851  493,148  
TOTAL AVERAGE ASSETS$8,779,391  $8,493,725  
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW$638,926  $674,872  $232  $296  0.15 %0.18 %
Money market3,753,045  3,341,397  9,657  10,072  1.03 %1.22 %
Certificates of deposit668,818  775,817  2,907  3,690  1.75 %1.93 %
Total interest-bearing deposits5,060,789  4,792,086  12,796  14,058  1.02 %1.19 %
Junior subordinated debentures106,363  106,363  917  1,121  3.41 %4.22 %
FHLB borrowings and other455,813  615,985  2,112  3,307  1.83 %2.15 %
Total interest-bearing liabilities5,622,965  5,514,434  15,825  18,486  1.13 %1.36 %
Non-interest bearing demand deposits2,046,102  1,974,526  
Payables and other liabilities270,371  236,426  
Total average liabilities7,939,438  7,725,386  
Redeemable noncontrolling interests1,018  2,056  
Average shareholders’ equity838,935  766,283  
TOTAL AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY$8,779,391  $8,493,725  
Net interest income$57,257  $58,338  
Interest rate spread2.41 %2.47 %
NIM2.76 %2.90 %
__________________
(1) Annualized. 
(2) Investments classified as available-for-sale and held-to-maturity are shown in the average balance sheet at amortized cost.
(3) Includes loans held for sale and nonaccrual loans.
Interest and dividend income. Total interest and dividend income for the three months ended March 31, 2020 was $73.1 million, a decrease of $3.7 million, or 5%, compared to the same period in 2019. The decrease was primarily driven by lower yields on loans and investments, partially offset by a higher volume of loans and investments.
The Bank generally has interest related to nonaccrual loans that is either collected or reversed each quarter. When a loan is placed on nonaccrual, the interest income previously accrued but uncollected, is reversed which will have a negative effect on the related yield. Interest collected on loans while on nonaccrual status is generally applied to the principal balance. If
48


a nonaccruing loan pays off, previously collected interest income that was applied to principal may be recorded as interest income if the principal balance was paid in full. Based on the net amount collected 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 (including commercial loans and commercial tax-exempt loans) for the three months ended March 31, 2020 was $10.7 million, a decrease of $0.3 million, or 2%, compared to the same period in 2019, as a result of a 41 basis point decrease in the average yield, partially offset by a 7% increase in the average balance. The decrease in the average yield was the result of lower yields on recent loan originations and decreases to the interest rate benchmarks to which the variable rate loans are tied. The increase in the average balance was related primarily to growth in all regions in which the Bank operates.
Interest income on commercial real estate loans for the three months ended March 31, 2020 was $27.5 million, a decrease of $0.7 million, or 2%, compared to the same period in 2019, as a result of a 48 basis point decrease in the average yield, partially offset by an 8% increase in the average balance. The decrease in the average yield was the result of lower yields on recent loan originations and decreases to the interest rate benchmarks to which the variable rate loans are tied. The increase in the average balance was primarily driven by organic growth in the Southern California and Northern California regions.
Interest income on construction and land loans for the three months ended March 31, 2020 was $2.6 million, a decrease of $0.1 million, or 3%, compared to the same period in 2019, as a result of a 64 basis point decrease in the average yield partially offset by a 10% increase in the average balance. The overall yields on construction and land loans fluctuate due to the short-term nature of the loans and the related impact of draws and payoffs. Due to the relatively low balances in construction and land loans, a large draw- or pay-down can result in a significant change in the overall yield depending on the interest rate of the particular loans that caused the balance changes. The decrease in the average yield was primarily driven by decreases to the interest rate benchmarks to which the variable rate loans are tied. The increase in the average balance was driven primarily by increased utilization of existing loans in the Southern California and New England regions.
Interest income on residential mortgage loans for the three months ended March 31, 2020 was $23.5 million, a decrease of $2.1 million, or 8%, from the same period in 2019, as a result of a 15 basis point decrease in the average yield and 4% decrease in the average balance. The decrease in the average yield was the result of lower yields on recent loan originations and decreases to the interest rate benchmarks to which the variable rate loans are tied. The decrease in the average balance was primary driven by the sale of $190.7 million of residential loans in the third and fourth quarters of 2019.
Interest income on home equity loans for the three months ended March 31, 2020 was $1.0 million, a decrease of 15% compared to the same period in 2019, as a result of a 57 basis point decrease in the average yield and a 5% decrease in the average balance. The decrease in the average yield was the result of the timing of changes to benchmark interest rates, while the decrease in the average balance was primarily driven by reduced demand.
Interest income on other consumer loans for the three months ended March 31, 2020 was $1.2 million, a decrease of $0.3 million, or 22%, compared to the same period in 2019, as a result of a 100 basis point decrease in the average yield, and a 1% decrease in the average balance. The decrease in the average yield was the result of the timing of changes in interest rate benchmarks to which loans are tied, while the decrease in the average balance was primarily driven by strategic decisions to run off non-core balances.
Investment income for the three months ended March 31, 2020 was $6.7 million, a decrease of $0.2 million, or 2%, from the same period in 2019, as a result of a 12 basis point decrease in the average yield, partially offset by a 3% increase in the average balance. The decrease in the average yield is primarily due to recent purchases made at lower interest rates. The increase in the average balance was primarily due to short-term fluctuations in liquidity from deposits.
Interest expense. Total interest expense for the three months ended March 31, 2020 was $15.8 million, a decrease of $2.7 million, or 14%, compared to the same period in 2019. The decrease was primarily driven by the impact of lower rates on interest-bearing deposits and borrowings, and a decrease in the average volume of borrowings, partially offset by an increase in the volume of interest-bearing deposits.
Interest expense on interest-bearing deposits for the three months ended March 31, 2020 was $12.8 million, a decrease of $1.3 million, or 9%, compared to the same period in 2019, as a result of a 17 basis point decrease in the average rate, partially offset by a 6% increase in the average balance. The decrease in the average rate paid on deposits was driven primarily by wholesale reductions in rates paid for deposit accounts given the recent decreases in interest rates. The increase in the average balance for interest-bearing deposits was primarily driven by an increase in money market balances in the New England region.
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Interest paid on non-deposit interest-bearing liabilities for the three months ended March 31, 2020 was $3.0 million, a decrease of $1.4 million, or 32%, compared to the same period in 2019, as a result of a 32 basis point decrease in the average rate paid on FHLB borrowings and other borrowings, a 26% decrease in the average balance of FHLB borrowings and other borrowings, and an 81 basis point decrease in the average rate on junior subordinated debentures. The decreases in the average rates paid were primarily driven by the decreases in benchmark interest rates to which the instruments are tied. The decrease in the average balance for non-deposit interest-bearing liabilities was primarily driven by an increase in deposits, reducing the need for higher-cost borrowings.
Provision/(credit) for loan losses. The Company recorded a Provision for loan losses of $17.0 million for the three months ended March 31, 2020, compared to a credit to the Provision for loan losses of $1.4 million for the same period in 2019. The provision for loan losses in the first quarter of 2020 was primarily driven by changes in economic forecasts late in the first quarter of 2020 to reflect deteriorating economic conditions due to the COVID-19 pandemic. Under the CECL methodology, the provision for loan loss required may be significantly affected by reasonable and supportable economic forecasts. Under the CECL methodology, the provision for loan loss required may be significantly affected by reasonable and supportable economic forecasts.
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 estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The quantitative model utilizes a factor-based approach to estimate expected credit losses using probability of default and loss given default, which are derived from a selected peer group's historical default and loss experience. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of prepayments and curtailments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the Company's historical long-run average. Qualitative factors are estimated by management and include trends in problem loans, strength of management, concentration risk and underwriting standards. For further details, see “Loan Portfolio and Credit Quality” below. For periods disclosed prior to the adoption of ASU 2016-13 as of January 1, 2020, the Allowance for loan losses was determined under the incurred loss model. Refer to "Note 1: Basis of Presentation and Summary of Significant Account Policies" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the methodology.
Fees and other income
Three months ended March 31,$
Change
%
Change
20202019
(In thousands)
Wealth management and trust fees$18,371  $19,058  $(687) (4)%
Investment management fees1,925  2,650  (725) (27)%
Other banking fee income2,490  2,499  (9) — %
Gain on sale of loans, net100  73  27  37 %
Total core fees and income22,886  24,280  (1,394) (6)%
Total other income(1,365) 968  (2,333) nm  
Total fees and other income$21,521  $25,248  $(3,727) (15)%
_____________________
nm = not meaningful
Total fees and other income for the three months ended March 31, 2020 decreased $3.7 million, or 15%, compared to the same period in 2019 driven by lower Total other income, lower Wealth management and trust fees, and lower Investment management fees. The decrease in Wealth management and trust fees and Investment management fees was driven by the impact of lower AUM.
Wealth management and trust fees for the three months ended March 31, 2020 decreased $0.7 million, or 4%, compared to the same period in 2019, while Investment management fees decreased $0.7 million, or 27%, compared to the same period in 2019. The decreases were primarily driven by the impact of lower AUM.
Total AUM managed or advised by the Company was $14.5 billion at March 31, 2020, a decrease of $1.6 billion, or 10%, compared to March 31, 2019. The decrease was primarily driven by the impact of negative market returns of $1.1 billion and net outflows of $0.5 billion for the twelve months ended March 31, 2020.
Total other income for the three months ended March 31, 2020 decreased $2.3 million compared to the same period in 2019 driven by the impact of unfavorable mark-to-market adjustments of $0.8 million for derivatives and $0.8 million for deferred compensation securities in the first quarter of 2020.
50


Operating Expense
Three months ended March 31,$
Change
%
Change
20202019
(In thousands)
Salaries and employee benefits$35,096  $35,726  $(630) (2)%
Occupancy and equipment7,646  8,348  (702) (8)%
Information systems6,725  5,860  865  15 %
Professional services3,601  3,560  41  %
Marketing and business development1,890  1,085  805  74 %
Amortization of intangibles715  672  43  %
FDIC insurance—  660  (660) (100)%
Restructuring—  1,646  (1,646) (100)%
Other5,235  2,996  2,239  75 %
Total operating expense$60,908  $60,553  $355  %
Total operating expense for the three months ended March 31, 2020 increased $0.4 million, or 1%, to $60.9 million compared to the same period in 2019. The increase was primarily due to an increase in Other expense, Information systems expense, and Marketing and business development expense, partially offset by a decrease in Restructuring expense, Occupancy and equipment expense, FDIC insurance expense, and Salaries and employee benefits expense.
Other expense increased $2.2 million, or 75%, for the three months ended March 31, 2020, compared to the same period in 2019. The increase was primarily driven by the reserve for unfunded loan commitments expense of $1.8 million in the first quarter of 2020, and an increase in non-service pension costs.
Information systems expense increased $0.9 million, or 15%, for the three months ended March 31, 2020, compared to the same period in 2019. The increase was primarily driven by new information technology initiatives placed into service during the fourth quarter of 2019.
Marketing and business development expense increased $0.8 million, or 74%, for the three months ended March 31, 2020, compared to the same period in 2019. The increase was primarily driven by new advertising campaigns and timing of spend.
Restructuring expense decreased for the three months ended March 31, 2020, compared to the same period of 2019. In the first quarter of 2019, there was a restructuring expense of $1.6 million related to executive departures.
Occupancy and equipment expense decreased $0.7 million, or 8%, for the three months ended March 31, 2020, compared to the same period in 2019. The decrease was primarily driven by a decrease in depreciation expense on leasehold improvements and a decrease in rent expense due to lease expirations.
FDIC insurance decreased for the three months ended March 31, 2020, compared to the same period in 2019. The decrease was driven by an FDIC insurance assessment credit received in the first quarter of 2020. In January 2019, the Bank received notification from the FDIC that it was eligible for small bank assessment credits of $2.0 million because the FDIC's Deposit Insurance Fund reserve ratio exceeded the target level. The full $2.0 million of credits have been utilized as of March 31, 2020.
Salaries and employee benefits expense decreased $0.6 million, or 2%, for the three months ended March 31, 2020, compared to the same period in 2019. The decrease was primarily driven by an unfavorable adjustment on deferred compensation securities held in the rabbi trust, the effect of accrual adjustments, and lower medical insurance premiums, partially offset by higher salary expense in the first quarter of 2020.
Income Tax Expense. Income tax expense for the three months ended March 31, 2020 was $0.1 million, compared to $4.9 million for the same period in 2019. The effective tax rate for the three months ended March 31, 2020 was 11.2%, compared to an effective tax rate of 20.1% for the same period of 2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 9: Income Taxes” for further detail.
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Financial Condition
Condensed Consolidated Balance Sheets and Discussion
 March 31,
2020
December 31, 2019Increase/
(decrease)
%
Change
 (In thousands)
Assets:
Total cash and investments$1,168,628  $1,376,863  $(208,235) (15)%
Loans held for sale7,671  7,386  285  %
Total loans7,043,338  6,976,704  66,634  %
Less: Allowance for loan losses68,211  71,982  (3,771) (5)%
Net loans6,975,127  6,904,722  70,405  %
Goodwill and intangible assets, net67,244  67,959  (715) (1)%
Right-of-use assets98,896  102,075  (3,179) (3)%
Total other assets428,760  371,496  57,264  15 %
Total assets$8,746,326  $8,830,501  $(84,175) (1)%
Liabilities and Equity:
Deposits$6,835,572  $7,241,476  $(405,904) (6)%
Total borrowings787,936  510,590  277,346  54 %
Lease liabilities113,574  117,214  (3,640) (3)%
Total other liabilities180,452  140,820  39,632  28 %
Total liabilities7,917,534  8,010,100  (92,566) (1)%
Redeemable noncontrolling interests (“RNCI”)—  1,383  (1,383) (100)%
Total shareholders’ equity828,792  819,018  9,774  %
Total liabilities, RNCI and shareholders’ equity$8,746,326  $8,830,501  $(84,175) (1)%
Total assets. Total assets decreased $84.2 million, or 1%, to $8.7 billion at March 31, 2020 from $8.8 billion at December 31, 2019, primarily driven by a decrease in Total cash and investments, partially offset by an increase in Total loans and Total other assets.
Total cash and investments. Total cash and investments (consisting of Cash and cash equivalents, Investment securities available-for-sale, Investment securities held-to-maturity, Equity securities at fair value, and Stock in the Federal Home Loan Bank and Federal Reserve Bank) decreased $208.2 million, or 15%, from December 31, 2019. The decrease was primarily driven by a decrease of $230.8 million in Cash and cash equivalents, partially offset by an increase of $19.2 million in Investment securities available-for-sale and Equity securities at fair value. The Company utilized cash and proceeds from maturing investment securities to partially fund loan growth as deposits declined over the same period. Total cash and investments represent 13% of total assets at March 31, 2020 and 16% of total assets at December 31, 2019.
The majority of the investments held by the Company are held by the Bank. The Bank’s asset-liability management 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, redemptions, principal payments, and sales of securities, if any, net of purchases (includes Investment securities available-for-sale, Investment securities held-to-maturity and Equity securities at fair value), provided $2.1 million of cash proceeds during the three months ended March 31, 2020, compared to $35.9 million in the same period in 2019. The timing of sales and reinvestments is based on various factors, including management’s evaluation of interest rate trends, credit risk, and the Company’s liquidity. The Company’s available-for-sale investment portfolio carried a total of $32.2 million of unrealized gains and $0.4 million of unrealized losses at March 31, 2020, compared to $15.0 million of unrealized gains and $3.6 million of unrealized losses at December 31, 2019.
No impairment losses were recognized through earnings related to investment securities during the three months ended March 31, 2020 and 2019. The Company does not consider these investments to be credit impaired as the decline in fair value on investments is primarily attributed to changes in interest rates and not due to credit quality or other risk factors.
Additionally, at March 31, 2020 and December 31, 2019, the Company held $45.4 million and $48.2 million, respectively, of Investment securities held-to-maturity at amortized cost. All of the held-to-maturity securities held at March 31, 2020 were mortgage-backed securities guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities.
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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 at March 31, 2020 increased $0.3 million, or 4%, to $7.7 million from the balance at December 31, 2019. 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 at March 31, 2020 decreased $0.7 million, or 1%, to $67.2 million from the balance at December 31, 2019, due to Amortization of intangible assets. There was no change to Goodwill during the three months ended March 31, 2020.
Goodwill and indefinite-lived intangible assets 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. Indefinite-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 2019. The estimated fair value of Boston Private Wealth exceeded its carrying value. Management will perform the annual goodwill and indefinite-lived intangible asset impairment testing for this year in the fourth quarter of 2020. Management determined that there was not a trigger event in the first quarter of 2020 from the economic conditions related to the COVID-19 pandemic, and will continually monitor for triggering events that would warrant testing prior to the fourth quarter of 2020.
Right-of-use assets. Total right-of-use ("ROU") assets at March 31, 2020 decreased $3.2 million, or 3%, to $98.9 million compared to the balance at December 31, 2019. Upon adoption of the new lease accounting standard, ASU 2016-02, the Company recognized $108.5 million of ROU assets on the face of the Consolidated Balance Sheets as of January 1, 2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 14: Lease Accounting” for further details.
Total other assets. Total other assets, as presented in the table above, consists of the following line items from the Consolidated Balance Sheets: Premises and equipment, net; Fees receivable; Accrued interest receivable; Deferred income taxes, net; and Other assets. Total other assets at March 31, 2020 increased $57.3 million, or 15%, to $428.8 million from the balance at December 31, 2019. These changes resulted from the following factors:
Other assets, which consist primarily of bank-owned life insurance, investment in partnerships, prepaid expenses, interest rate derivatives, and other receivables increased $64.0 million, or 22%, to $351.3 million at March 31, 2020 from $287.3 million at December 31, 2019. The increase was primarily driven by an increase in the market value of derivative assets, which was offset by an increase in the market value of derivative liabilities in Other liabilities.
Deferred income taxes, net, decreased $5.8 million, or 51%, to $5.6 million at March 31, 2020 from $11.4 million at December 31, 2019. The decrease was primarily due to the current year tax effect of other comprehensive income as the tax effect of the adoption of ASU 2016-13 of $5.5 million was offset by the tax effect of the provision expense in the first quarter of 2020.
Deposits. Deposits at March 31, 2020 decreased $405.9 million, or 6%, compared to the balance at December 31, 2019. Average total deposits for the three months ended March 31, 2020 increased 5% from the same period in 2019 as shown in the average balance sheet. For further details, see “Results of Operations” above.
Deposits are the principal source of the Bank’s funds for use in lending, investments, and liquidity. 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.
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, 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.
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