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BPFH Boston Private Financial

Filed: 5 Nov 20, 4:17pm

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 September 30, 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 filerSmaller 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 October 30, 2020:
Common Stock, Par Value $1.00 Per Share82,254,594
(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)
 September 30, 2020December 31, 2019
 
(In thousands, except share 
and per share data)
Assets:
Cash and cash equivalents$546,263 $292,479 
Investment securities available-for-sale (amortized cost of $967,730 and $966,900 at September 30, 2020 and December 31, 2019, respectively)1,011,327 978,284 
Investment securities held-to-maturity (fair value of $39,348 and $47,949 at September 30, 2020 and December 31, 2019, respectively)38,600 48,212 
Equity securities at fair value32,818 18,810 
Stock in Federal Home Loan Bank and Federal Reserve Bank36,618 39,078 
Loans held for sale15,074 7,386 
Total loans7,222,569 6,976,704 
Less: Allowance for loan losses84,551 71,982 
Net loans7,138,018 6,904,722 
Premises and equipment, net42,907 44,527 
Goodwill57,607 57,607 
Intangible assets, net8,898 10,352 
Fees receivable3,259 4,095 
Accrued interest receivable25,935 24,175 
Deferred income taxes, net8,250 11,383 
Right-of-use assets94,879 102,075 
Other assets370,852 287,316 
Total assets$9,431,305 $8,830,501 
Liabilities:
Deposits$7,827,719 $7,241,476 
Securities sold under agreements to repurchase42,544 53,398 
Federal Home Loan Bank borrowings296,236 350,829 
Junior subordinated debentures106,363 106,363 
Lease liabilities108,932 117,214 
Other liabilities203,342 140,820 
Total liabilities8,585,136 8,010,100 
Redeemable Noncontrolling Interests0 1,383 
Shareholders’ Equity:
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 82,254,594 shares at September 30, 2020 and 83,265,674 shares at December 31, 201982,255 83,266 
Additional paid-in capital597,113 600,708 
Retained earnings136,394 127,469 
Accumulated other comprehensive income30,407 7,575 
Total shareholders’ equity846,169 819,018 
Total liabilities, redeemable noncontrolling interests and shareholders’ equity$9,431,305 $8,830,501 
See accompanying notes to Unaudited Consolidated Financial Statements.
1


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

 Three months ended September 30,Nine months ended September 30,
 2020201920202019
 (In thousands, except share and per share data)
Interest and dividend income:
Loans$59,618 $71,036 $188,783 $212,912 
Taxable investment securities853 938 2,580 3,244 
Non-taxable investment securities1,974 1,924 5,977 5,726 
Mortgage-backed securities2,354 2,622 7,707 8,225 
Short-term investments and other654 1,084 2,307 3,049 
Total interest and dividend income65,453 77,604 207,354 233,156 
Interest expense:
Deposits6,434 15,487 26,565 44,060 
Federal Home Loan Bank borrowings664 4,337 4,453 12,144 
Junior subordinated debentures508 1,022 2,189 3,223 
Repurchase agreements and other short-term borrowings23 605 128 1,778 
Total interest expense7,629 21,451 33,335 61,205 
Net interest income57,824 56,153 174,019 171,951 
Provision/(credit) for loan losses(4,569)167 34,997 104 
Net interest income after provision/(credit) for loan losses62,393 55,986 139,022 171,847 
Fees and other income:
Wealth management and trust fees18,240 19,067 53,872 57,037 
Investment management fees1,393 2,496 5,088 7,601 
Other banking fee income1,320 2,658 6,205 8,024 
Gain on sale of loans, net1,006 934 1,310 1,065 
Gain on OREO, net0 0 91 
Other1,086 (29)753 936 
Total fees and other income23,045 25,126 67,228 74,754 
Operating expense:
Salaries and employee benefits34,671 31,684 103,704 100,116 
Occupancy and equipment8,150 8,260 23,356 24,460 
Information systems7,096 5,169 20,934 16,166 
Professional services4,025 4,435 11,072 11,308 
Marketing and business development935 1,403 5,138 4,422 
Amortization of intangibles714 671 2,131 2,015 
FDIC insurance960 59 1,727 1,304 
Restructuring0 0 1,646 
Other4,386 3,856 15,236 10,312 
Total operating expense60,937 55,537 183,298 171,749 
Income before income taxes24,501 25,575 22,952 74,852 
Income tax expense1,821 5,517 2,764 15,803 
Net income before attribution to noncontrolling interests22,680 20,058 20,188 59,049 
(Continued)
2


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

 Three months ended September 30,Nine months ended September 30,
 2020201920202019
Less: Net income attributable to noncontrolling interests0 96 6 265 
Net income attributable to the Company$22,680 $19,962 $20,182 $58,784 
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders0 304 414 1,045 
Net income attributable to common shareholders$22,680 $20,266 $20,596 $59,829 
Basic earnings per share attributable to common shareholders:
Total attributable to common shareholders:$0.28 $0.24 $0.25 $0.72 
Weighted average basic common shares outstanding82,221,705 83,631,403 82,382,050 83,495,361 
Diluted earnings per share attributable to common shareholders:
Total attributable to common shareholders:$0.28 $0.24 $0.25 $0.71 
Weighted average diluted common shares outstanding82,362,338 83,956,708 82,746,866 84,003,281 
 See accompanying notes to Unaudited Consolidated Financial Statements.
3


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

 Three months ended September 30,Nine months ended September 30,
 2020201920202019
(In thousands)
Net income attributable to the Company$22,680 $19,962 $20,182 $58,784 
Other comprehensive income/(loss), net of tax:
Net unrealized gain on securities available-for-sale368 5,236 23,055 27,469 
Unrealized gain/(loss) on cash flow hedges202 (100)(31)
Reclassification adjustment for net realized (gain)/loss included in net income(200)(4)(93)(360)
Net unrealized gain/(loss) on cash flow hedges2 (2)(193)(391)
Net unrealized gain/(loss) on other0 (30)
Other comprehensive income, net of tax370 5,234 22,832 27,078 
Total comprehensive income attributable to the Company, net of tax$23,050 $25,196 $43,014 $85,862 
 See accompanying notes to Unaudited Consolidated Financial Statements.

4


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

Nine months ended September 30, 2020 and 2019

 
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— — 58,784 — 58,784 
Other comprehensive income/(loss), net— — — 27,078 27,078 
Dividends paid to common shareholders: $0.36 per share— — (30,395)— (30,395)
Repurchase of 678,165 shares of common stock(678)(6,515)— — (7,193)
Net proceeds from issuance of:
265,937 shares of common stock266 2,008 — — 2,274 
42,004 shares of incentive stock grants, net of 9,377 shares canceled or forfeited and 115,173 shares withheld for employee taxes(83)(522)— — (605)
Amortization of stock compensation and employee stock purchase plan— 3,359 — — 3,359 
Stock options exercised81 464 — — 545 
Other equity adjustments— 887 — — 887 
Balance at September 30, 2019$83,242 $599,877 $116,210 $9,359 $808,688 
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— — 20,182 — 20,182 
Other comprehensive income/(loss), net— — — 22,832 22,832 
Dividends paid to common shareholders: $0.30 per share— — (24,748)— (24,748)
Repurchase of 1,565,060 shares of common stock(1,565)(11,242)— — (12,807)
Net proceeds from issuance of:
278,961 shares of common stock279 1,777 — — 2,056 
309,416 shares of incentive stock grants, net of 41,366 shares withheld for employee taxes268 3,747 — — 4,015 
Amortization of stock compensation and employee stock purchase plan— 607 — — 607 
Stock options exercised48 — — 55 
Other equity adjustments1,468 (1)— 1,467 
Balance at September 30, 2020$82,255 $597,113 $136,394 $30,407 $846,169 
_____________________
(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 Unaudited Consolidated Financial Statements.
5


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

Three months ended September 30, 2020 and 2019

Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total
 (In thousands, except share data)
Balance at June 30, 2019$83,774 $603,869 $106,443 $4,125 $798,211 
Net income attributable to the Company— — 19,962 — 19,962 
Other comprehensive income/(loss), net— — — 5,234 5,234 
Dividends paid to common shareholders: $0.12 per share— — (10,195)— (10,195)
Repurchase of 678,165 shares of common stock(678)(6,515)— — (7,193)
Net proceeds from issuance of:
122,790 shares of common stock123 1,018 — — 1,141 
4,493 shares of incentive stock grants65 — — 70 
Amortization of stock compensation and employee stock purchase plan— 1,019 — — 1,019 
Stock options exercised18 92 — — 110 
Other equity adjustments— 329 — — 329 
Balance at September 30, 2019$83,242 $599,877 $116,210 $9,359 $808,688 
Balance at June 30, 2020$82,058 $594,463 $118,647 $30,037 $825,205 
Net income attributable to the Company— — 22,680 — 22,680 
Other comprehensive income/(loss), net— — — 370 370 
Dividends paid to common shareholders: $0.06 per share— — (4,932)— (4,932)
Net proceeds from issuance of:
167,906 shares of common stock168 828 — — 996 
38,412 shares of incentive stock grants, net of 10,207 shares withheld for employee taxes28 311 — — 339 
Amortization of stock compensation and employee stock purchase plan— 1,486 — — 1,486 
Other equity adjustments25 (1)— 25 
Balance at September 30, 2020$82,255 $597,113 $136,394 $30,407 $846,169 
See accompanying notes to Unaudited Consolidated Financial Statements.
6


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

 Nine months ended September 30,
 20202019
 (In thousands)
Cash flows from operating activities:
Net income attributable to the Company$20,182 $58,784 
Adjustments to arrive at net income:
Net income attributable to noncontrolling interests6 265 
Net income before attribution to noncontrolling interests20,188 59,049 
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization17,202 17,726 
Net income attributable to noncontrolling interests(6)(265)
Stock compensation, net of cancellations4,886 4,022 
Provision/(credit) for loan losses34,997 104 
Loans originated for sale(89,510)(32,796)
Proceeds from sale of loans held for sale82,582 29,176 
Deferred income tax expense/(benefit)(11,476)432 
Decrease/(increase) in right-of-use assets7,196 1,416 
Increase/(decrease) in operating lease liabilities(8,282)(1,465)
Net decrease/(increase) in other operating activities(28,948)(36,916)
Net cash provided by/(used in) operating activities28,829 40,483 
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases(71,634)(24,977)
Maturities, calls, redemptions, and principal payments64,457 115,857 
Investment securities held-to-maturity:
Principal payments9,316 18,880 
Equity securities at fair value:
Transfers out(36,463)(44,537)
Transfers in22,455 36,985 
(Investments)/distributions in trusts, net(625)357 
Contingent considerations from divestitures3,648 3,254 
(Purchase)/redemption of Federal Home Loan Bank and Federal Reserve Bank stock2,460 1,507 
Net increase in portfolio loans(319,627)(268,238)
Proceeds from recoveries of loans previously charged-off276 887 
Proceeds from sale of OREO0 492 
Proceeds from sale of portfolio loans71,992 92,304 
Capital expenditures(6,531)(5,795)
Net cash provided by/(used in) investing activities(260,276)(73,024)
(Continued)
7


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

 Nine months ended September 30,
 20202019
(In thousands)
Cash flows from financing activities:
Net increase/(decrease) in deposits586,243 (122,928)
Net increase/(decrease) in securities sold under agreements to repurchase(10,854)11,932 
Net increase/(decrease) in federal funds purchased0 (20,000)
Net increase/(decrease) in short-term Federal Home Loan Bank borrowings(75,000)110,000 
Advances of long-term Federal Home Loan Bank borrowings525,000 340,000 
Repayments of long-term Federal Home Loan Bank borrowings(504,593)(299,240)
Dividends paid to common shareholders(24,748)(30,395)
Repurchase of common stock(12,807)(7,193)
Proceeds from stock option exercises55 545 
Proceeds from issuance of common stock2,056 2,274 
Tax withholding for share based compensation awards(264)(1,268)
Distributions paid to noncontrolling interests(6)(265)
Other equity adjustments149 (170)
Net cash provided by/(used in) financing activities485,231 (16,708)
Net increase/(decrease) in cash and cash equivalents253,784 (49,249)
Cash and cash equivalents at beginning of year292,479 127,259 
Cash and cash equivalents at end of period$546,263 $78,010 
Supplemental disclosure of cash flow items:
Cash paid for interest$33,104 $60,489 
Cash paid for income taxes, (net of refunds received)$5,948 $18,122 
Change in unrealized gain/(loss) on available-for-sale securities, net of tax$23,055 $27,469 
Change in unrealized gain/(loss) on cash flow hedges, net of tax$(193)$(391)
Change in unrealized gain/(loss) on other, net of tax$(30)$
Non-cash transactions:
Loans charged-off$(2,319)$(944)
See accompanying notes to Unaudited Consolidated Financial Statements.

8

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 and 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, as well as 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. Prior to the merger, the results of KLS were reported in a third reportable segment, “Affiliate Partners”, as 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. 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 September 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”, if any, in the Consolidated Statements of Operations for the periods owned. Redeemable noncontrolling interests, if any, 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. In 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
9


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 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 as 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 and nine months ended September 30, 2020 and 2019. The following tables present the computations of basic and diluted EPS:
Three months ended September 30,Nine months ended September 30,
2020201920202019
(In thousands, except share and per share data)
Basic earnings per share - Numerator:
Net income before attribution to noncontrolling interests$22,680 $20,058 $20,188 $59,049 
Less: Net income attributable to noncontrolling interests0 96 6 265 
Net income attributable to the Company22,680 19,962 20,182 58,784 
Decrease in noncontrolling interests’ redemption values (1)0 304 414 1,045 
Net income attributable to common shareholders, treasury stock method$22,680 $20,266 $20,596 $59,829 
Basic earnings per share - Denominator:
Weighted average basic common shares outstanding82,221,705 83,631,403 82,382,050 83,495,361 
Per share data - Basic earnings per share:
Total attributable to common shareholders$0.28 $0.24 $0.25 $0.72 
Three months ended September 30,Nine months ended September 30,
2020201920202019
(In thousands, except share and per share data)
Diluted earnings per share - Numerator:
Net income attributable to common shareholders, after assumed dilution$22,680 $20,266 $20,596 $59,829 
Diluted earnings per share - Denominator:
Weighted average basic common shares outstanding82,221,705 83,631,403 82,382,050 83,495,361 
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)140,633 325,305 364,816 507,920 
Weighted average diluted common shares outstanding (2)82,362,338 83,956,708 82,746,866 84,003,281 
Per share data - Diluted earnings per share:
Total attributable to common shareholders$0.28 $0.24 $0.25 $0.71 
Dividends per share declared and paid on common stock$0.06 $0.12 $0.30 $0.36 
_____________________
(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. A decrease in redemption value from period to period increases 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.
(2)The diluted EPS computations for the three and nine months ended September 30, 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. This includes shares excluded from the computation of diluted EPS because the
10

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
effect would have been anti-dilutive and out-of-the money options, where the exercise prices were greater than the average market price of common shares for the period, because their inclusion would have been anti-dilutive As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:
Three months ended September 30,Nine months ended September 30,
2020201920202019
Anti-dilutive shares excluded from computation of average dilutive EPS(In thousands)
Potential common shares from: options, restricted stock, or other dilutive securities2,655 808 1,901 760 
Total anti-dilutive shares excluded from computation of average dilutive EPS2,655 808 1,901 760 
3.    Reportable Segments
Management reporting
The Company has 2 reportable segments: (i) Private Banking and (ii) Wealth Management and Trust, as well as 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 three 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.
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."

11

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Reconciliation of reportable segment items
The following tables present a reconciliation of the revenues, expenses, assets, and other significant items of the reportable segments as of and for the three and nine months ended September 30, 2020 and 2019.
Three months ended September 30,Nine months ended September 30,
2020201920202019
Private Banking (1)(In thousands)
Net interest income$58,325 $57,058 $176,105 $174,814 
Fees and other income2,487 3,403 7,192 9,465 
Total revenue60,812 60,461 183,297 184,279 
Provision/(credit) for loan losses(4,569)167 34,997 104 
Operating expense (2)43,128 38,134 128,630 117,256 
Income before income taxes22,253 22,160 19,670 66,919 
Income tax expense2,946 4,212 760 13,520 
Net income before attribution to noncontrolling interests19,307 17,948 18,910 53,399 
Net income attributable to the Company$19,307 $17,948 $18,910 $53,399 
Assets$9,366,642 $8,617,207 $9,366,642 $8,617,207 
Amortization of intangibles$76 $$217 $
Depreciation$2,684 $2,229 $7,921 $7,271 
Three months ended September 30,Nine months ended September 30,
2020201920202019
Wealth Management and Trust (1)(In thousands)
Net interest income$1 $99 $80 $309 
Fees and other income18,272 19,106 54,049 57,188 
Total revenue18,273 19,205 54,129 57,497 
Operating expense (2)15,540 13,888 45,640 43,864 
Income before income taxes2,733 5,317 8,489 13,633 
Income tax expense808 1,751 2,780 4,465 
Net income before attribution to noncontrolling interests1,925 3,566 5,709 9,168 
Net income attributable to the Company$1,925 $3,566 $5,709 $9,168 
Assets$149,105 $143,326 $149,105 $143,326 
Amortization of intangibles$638 $671 $1,914 $2,015 
Depreciation$282 $290 $862 $991 
Three months ended September 30,Nine months ended September 30,
2020201920202019
Holding Company and Eliminations (1)(In thousands)
Net interest income (3)$(502)$(1,004)$(2,166)$(3,172)
Fees and other income2,286 2,617 5,987 8,101 
Total revenue1,784 1,613 3,821 4,929 
Operating expense2,269 3,515 9,028 10,629 
Income/(loss) before income taxes(485)(1,902)(5,207)(5,700)
Income tax expense/(benefit)(1,933)(446)(776)(2,182)
Net income/(loss) before attribution to noncontrolling interests1,448 (1,456)(4,431)$(3,518)
Noncontrolling interests96 6 265 
Net income/(loss) attributable to the Company$1,448 $(1,552)$(4,437)$(3,783)
Assets (including eliminations)$(84,442)$(69,589)$(84,442)$(69,589)
Depreciation$36 $51 $113 $147 
12

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Three months ended September 30,Nine months ended September 30,
2020201920202019
Total Company (1)(In thousands)
Net interest income$57,824 $56,153 $174,019 $171,951 
Fees and other income23,045 25,126 67,228 74,754 
Total revenue80,869 81,279 241,247 246,705 
Provision/(credit) for loan losses(4,569)167 34,997 104 
Operating expense60,937 55,537 183,298 171,749 
Income before income taxes24,501 25,575 22,952 74,852 
Income tax expense1,821 5,517 2,764 15,803 
Net income before attribution to noncontrolling interests22,680 20,058 20,188 59,049 
Noncontrolling interests0 96 6 265 
Net income attributable to the Company$22,680 $19,962 $20,182 $58,784 
Assets$9,431,305 $8,690,944 $9,431,305 $8,690,944 
Amortization of intangibles$714 $671 $2,131 $2,015 
Depreciation$3,002 $2,570 $8,896 $8,409 
_____________________
(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 of $1.3 million and $0.4 million, respectively, for the nine months ended September 30, 2019. There were no other restructuring expenses in other periods presented.
(3)Interest expense on junior subordinated debentures is included in Holding Company and Eliminations.
13

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 September 30, 2020 and December 31, 2019:
 Amortized
Cost
UnrealizedFair
Value
GainsLosses
(In thousands)
At September 30, 2020
Available-for-sale securities at fair value:
U.S. government and agencies$19,960 $1,130 $0 $21,090 
Government-sponsored entities153,105 5,432 0 158,537 
Municipal bonds319,749 20,026 (119)339,656 
Mortgage-backed securities (1)474,916 17,344 (216)492,044 
Total$967,730 $43,932 $(335)$1,011,327 
Held-to-maturity securities at amortized cost:
Mortgage-backed securities (1)$38,600 $748 $0 $39,348 
Total$38,600 $748 $0 $39,348 
Equity securities at fair value:
Money market mutual funds (2)$32,818 $ $ $32,818 
Total$32,818 $ $ $32,818 
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 the U.S. government, U.S. government agencies or government-sponsored entities. The Company has experienced 0 losses for these securities. In addition, as of September 30, 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 September 30, 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.
14

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$52,777 $53,205 
After one, but within five years305,620 318,668 
After five, but within ten years222,230 235,564 
Greater than ten years387,103 403,890 
Total$967,730 $1,011,327 
The following table presents the maturities of Held-to-maturity investment securities, based on contractual maturity, as of September 30, 2020.
 Held-to-maturity Securities
Amortized
Cost
Fair
Value
(In thousands)
After five, but within ten years$31,527 $32,123 
Greater than ten years7,073 7,225 
Total$38,600 $39,348 
The following table presents the maturities of Equity securities, based on contractual maturity, as of September 30, 2020.
 Equity Securities
Amortized
Cost
Fair
Value
(In thousands)
Within one year$32,818 $32,818 
Total$32,818 $32,818 
During the three and nine months ended September 30, 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 September 30, 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. As of September 30, 2020, there were no Held-to-maturity securities having temporary impairment.
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)
September 30, 2020
Available-for-sale securities
Municipal bonds$10,740 $(119)$0 $0 $10,740 $(119)4 
Mortgage-backed securities (1)25,864 (103)6,376 (113)32,240 (216)29 
Total$36,604 $(222)$6,376 $(113)$42,980 $(335)33 
15

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 September 30, 2020, the Mortgage-backed securities in the first table above had current Standard and Poor’s credit rating of at least AAA. One municipal security in the first table above had a current Standard and Poor's credit rating of at least AA+; the remaining had a rating of AAA. As of September 30, 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 September 30, 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 September 30, 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 small business investment companies formed to provide financing to small businesses and to promote community development. The Company had $79.9 million and $65.5 million in other investments included in Other assets as of September 30, 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.
16

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 September 30, 2020 and December 31, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall:
 As of September 30, 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$21,090 $0 $21,090 $0 
Government-sponsored entities158,537 0 158,537 0 
Municipal bonds339,656 0 339,656 0 
Mortgage-backed securities492,044 0 492,044 0 
Total available-for-sale securities1,011,327 0 1,011,327 0 
Equity securities32,818 32,818 0 0 
Derivatives - interest rate customer swaps91,399 0 91,399 0 
Derivatives - risk participation agreement64 0 64 0 
Trading securities held in the “rabbi trust” (1)6,744 6,744 0 0 
Liabilities:
Derivatives - interest rate customer swaps$92,758 $0 $92,758 $0 
Derivatives - interest rate swaps272 0 272 0 
Derivatives - risk participation agreement444 0 444 0 
Deferred compensation “rabbi trust” (1)6,744 6,744 0 0 
  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 September 30, 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-
17

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
sale Level 2 securities generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets and include Government-sponsored entities securities, Municipal bonds, Mortgage-backed securities, “off-the-run” U.S. Treasury securities, and certain investments in the Small Business Administration's (the "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 September 30, 2020 or December 31, 2019 were categorized as Level 3.
As of September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2020 and December 31, 2019. There were 0 Level 3 assets valued on a recurring basis at September 30, 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 measured at fair value on a non-recurring basis during the periods ended September 30, 2020 and September 30, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.
 As of September 30, 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 September 30, 2020Nine months ended September 30, 2020
(In thousands)
Assets:
Impaired loans (1)$102 $0 $0 $102 $30 $(1,168)
_____________________
(1)Collateral-dependent impaired loans held as of September 30, 2020 that had write-downs or recoveries in fair value or whose specific reserve changed during the nine months ended September 30, 2020.
18

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
 As of September 30, 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 September 30, 2019Nine months ended September 30, 2019
(In thousands)
Assets:
Impaired loans (1)$729 $$$729 $(388)$204 
_____________________
(1)Collateral-dependent impaired loans held as of September 30, 2019 that had write-downs or recoveries in fair value or whose specific reserve changed during the nine months ended September 30, 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 September 30, 2020
Fair ValueValuation
Technique
Unobservable
Input
Range of
Inputs
Utilized
Weighted
Average of
Inputs
Utilized
(In thousands)
Impaired Loans$102 Appraisals of CollateralDiscount for costs to sell10% - 10%10%
Appraisal adjustments0%0%
 As of September 30, 2019
Fair ValueValuation
Technique
Unobservable
Input
Range of
Inputs
Utilized
Weighted
Average of
Inputs
Utilized
(In thousands)
Impaired Loans$729 Appraisals of CollateralDiscount for costs to sell0% - 6%6%
Appraisal adjustments0%0%
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.
19

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 September 30, 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$546,263 $546,263 $546,263 $0 $0 
Investment securities held-to-maturity38,600 39,348 0 39,348 0 
Loans held for sale15,074 15,404 0 15,404 0 
Loans, net7,138,018 6,985,399 0 0 6,985,399 
Other financial assets65,812 65,812 0 65,812 0 
FINANCIAL LIABILITIES:
Deposits7,827,719 7,829,292 0 7,829,292 0 
Securities sold under agreements to repurchase42,544 42,544 0 42,544 0 
Federal Home Loan Bank borrowings296,236 297,641 0 297,641 0 
Junior subordinated debentures106,363 69,863 0 0 69,863 
Other financial liabilities2,189 2,189 0 2,189 0 
 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.
20

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Cash and cash equivalents
The carrying value reported in the Consolidated Balance Sheets 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 September 30, 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 September 30, 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 Consolidated Balance Sheets, 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, if any
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, and regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt.
21

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Other financial liabilities
Other financial liabilities consist 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, if any
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 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.
Beginning in the first quarter of 2020, the Company made a change to the loan portfolio segmentation in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given their different underlying risk characteristics. Beginning in the second quarter of 2020, the Company also added a segment for loans originated under the SBA's Paycheck Protection Program (the "PPP"). For the period ended December 31, 2019, there were no PPP loans as the SBA initiated the program in the second quarter of 2020 in response to the COVID-19 pandemic.
The following table presents a summary of the loan portfolio based on the portfolio segment as of the dates indicated:
 September 30, 2020December 31, 2019
 (In thousands)
Commercial and industrial$583,145 $694,034 
Paycheck Protection Program371,496 
Commercial tax-exempt472,342 447,927 
Commercial real estate2,659,890 2,551,274 
Construction and land211,697 225,983 
Residential2,729,164 2,839,155 
Home equity81,797 83,657 
Consumer and other113,038 134,674 
Total$7,222,569 $6,976,704 
The following table presents nonaccrual loans receivable by class of receivable as of the dates indicated:
September 30, 2020December 31, 2019
(In thousands)
Commercial and industrial$15,418 $582 
Commercial tax-exempt3,929 
Commercial real estate5,261 
Residential16,216 13,993 
Home equity438 1,525 
Consumer and other1 
Total$41,263 $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 no loans 90 days or more past due, but still accruing, as of both September 30, 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.
22

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:
September 30, 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$1,881 $175 $2,056 $12,203 $226 $2,989 $15,418 $565,671 $583,145 
Paycheck Protection Program0 0 0 0 0 0 0 371,496 371,496 
Commercial tax-exempt0 0 0 3,929 0 0 3,929 468,413 472,342 
Commercial real estate688 1,535 2,223 5,212 0 49 5,261 2,652,406 2,659,890 
Construction and land0 0 0 0 0 0 0 211,697 211,697 
Residential0 320 320 5,191 3,847 7,178 16,216 2,712,628 2,729,164 
Home equity1,036 0 1,036 0 0 438 438 80,323 81,797 
Consumer and other0 0 0 1 0 0 1 113,037 113,038 
Total$3,605 $2,030 $5,635 $26,536 $4,073 $10,654 $41,263 $7,175,671 $7,222,569 
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-exempt447,927 447,927 
Commercial real estate1,420 1,420 2,549,854 2,551,274 
Construction and land225,983 225,983 
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 Bank did not use any alternative valuation techniques in the third quarter of 2020.
The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more. Loans with modified terms under the CARES Act are not considered past due if they are complying with the modified terms.
23

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 employment levels, general business and 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.
24

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:
September 30, 2020
By Loan Grade or Nonaccrual Status
PassSpecial
Mention
Accruing
Classified (1)
Nonaccrual
Loans
Total
(In thousands)
Commercial and industrial$531,922 $9,054 $26,751 $15,418 $583,145 
Paycheck Protection Program371,496 0 0 0 371,496 
Commercial tax-exempt458,681 5,229 4,503 3,929 472,342 
Commercial real estate2,426,786 182,526 45,317 5,261 2,659,890 
Construction and land209,297 2,400 0 0 211,697 
Residential2,708,733 0 4,215 16,216 2,729,164 
Home equity80,318 0 1,041 438 81,797 
Consumer and other112,737 300 0 1 113,038 
Total$6,899,970 $199,509 $81,827 $41,263 $7,222,569 
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:
25

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
September 30, 2020
Loan Origination Year By Loan Grade or Nonaccrual Status
20202019201820172016PriorRevolvingTotal
(In thousands)
Commercial and industrial
Pass$73,081 $89,413 $79,047 $16,435 $24,449 $54,673 $194,824 $531,922 
Special Mention1,031 937 698 149 2,792 3,447 9,054 
Accruing Classified (1)1,042 6,313 7,172 2,500 771 269 8,684 26,751 
Nonaccrual151 12,053 12 3,202 15,418 
Total$74,123 $96,908 $87,156 $31,686 $25,369 $57,746 $210,157 $583,145 
Paycheck Protection Program
Pass$371,496 $$$$$$$371,496 
Total$371,496 $$$$$$$371,496 
Commercial tax-exempt
Pass$53,184 $18,508 $40,630 $24,417 $119,832 $202,110 $$458,681 
Special Mention5,229 5,229 
Accruing Classified (1)4,503 4,503 
Nonaccrual3,929 3,929 
Total$53,184 $18,508 $40,630 $28,346 $119,832 $211,842 $$472,342 
Commercial real estate
Pass$207,359 $459,709 $261,796 $320,435 $380,271 $709,912 $87,304 $2,426,786 
Special Mention22,824 30,630 26,982 21,149 37,414 43,527 182,526 
Accruing Classified (1)1,598 31,694 12,025 45,317 
Nonaccrual5,212 49 5,261 
Total$231,781 $527,245 $288,778 $341,584 $417,685 $765,464 $87,353 $2,659,890 
Construction and land
Pass$28,297 $59,020 $48,402 $44,916 $2,232 $26,430 $$209,297 
Special Mention2,400 2,400 
Total$28,297 $59,020 $50,802 $44,916 $2,232 $26,430 $$211,697 
Residential
Pass$446,397 $519,995 $412,968 $421,348 $397,183 $510,842 $$2,708,733 
Accruing Classified (1)4,215 4,215 
Nonaccrual261 272 2,373 13,310 16,216 
Total$446,397 $520,256 $413,240 $423,721 $397,183 $528,367 $$2,729,164 
Home equity
Pass$$$252 $$686 $10,721 $68,659 $80,318 
Accruing Classified (1)1,041 1,041 
Nonaccrual299 139 438 
Total$$$252 $$686 $12,061 $68,798 $81,797 
Consumer and other
Pass$539 $168 $31 $$84 $731 $111,184 $112,737 
Special Mention300 300 
Nonaccrual
Total$539 $168 $31 $$84 $731 $111,485 $113,038 
Total
Pass$1,180,353 $1,146,813 $843,126 $827,551 $924,737 $1,515,419 $461,971 $6,899,970 
Special Mention22,824 31,661 30,319 21,847 37,563 51,548 3,747 199,509 
Accruing Classified (1)2,640 38,007 7,172 2,500 771 22,053 8,684 81,827 
Nonaccrual5,624 272 18,355 13,621 3,391 41,263 
Total$1,205,817 $1,222,105 $880,889 $870,253 $963,071 $1,602,641 $477,793 $7,222,569 
______________________
(1) Accruing Classified may include both Substandard and Doubtful classifications.
26

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present, by class of receivable, the balance of impaired loans with and without a related allowance, the associated allowance for those impaired loans with a related allowance, and the total unpaid principal on impaired loans:
As of and for the three and nine months ended September 30, 2020
Recorded Investment (1)Unpaid Principal BalanceRelated AllowanceQTD Average Recorded InvestmentYTD Average Recorded InvestmentQTD Interest Income Recognized while ImpairedYTD Interest Income Recognized while Impaired
(In thousands)
With no related allowance recorded:
Commercial and industrial$15,234 $15,287 n/a$6,420 $2,965 $1 $7 
Paycheck Protection Program0 0 n/a0 0 0 0 
Commercial tax-exempt3,929 3,929 n/a982 393 0 0 
Commercial real estate5,928 6,100 n/a5,958 4,557 8 25 
Construction and land0 0 n/a0 0 0 0 
Residential16,229 16,489 n/a16,208 15,984 86 346 
Home equity (2)390 390 n/a390 1,086 (3)7 
Consumer and other0 0 n/a0 0 0 0 
Subtotal$41,710 $42,195 n/a29,958 $24,985 92 $385 
With an allowance recorded:
Commercial and industrial$185 $199 $83 208 $248 $0 $1 
Paycheck Protection Program0 0 0 0 0 0 0 
Commercial tax-exempt0 0 0 0 0 0 0 
Commercial real estate49 50 49 37 15 0 0 
Construction and land0 0 0 0 0 0 0 
Residential427 427 56 502 521 3 9 
Home equity260 260 17 261 266 2 6 
Consumer and other0 0 0 0 0 0 0 
Subtotal$921 $936 $205 $1,008 $1,050 $5 $16 
Total:
Commercial and industrial$15,419 $15,486 $83 $6,628 $3,213 $1 $8 
Paycheck Protection Program0 0 0 0 0 0 0 
Commercial tax-exempt3,929 3,929 0 982 393 0 0 
Commercial real estate5,977 6,150 49 5,995 4,572 8 25 
Construction and land0 0 0 0 0 0 0 
Residential16,656 16,916 56 16,710 16,505 89 355 
Home equity (2)650 650 17 651 1,352 (1)13 
Consumer and other0 0 0 0 0 0 0 
Total$42,631 $43,131 $205 $30,966 $26,035 $97 $401 
_____________________
(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.
(2)Negative quarterly income is due to reversal of income recognized in prior quarter.
27

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
As of and for the three and nine months ended September 30, 2019
Recorded Investment (1)Unpaid Principal BalanceRelated AllowanceQTD Average Recorded InvestmentYTD Average Recorded InvestmentQTD Interest Income Recognized while ImpairedYTD Interest Income Recognized while Impaired
(In thousands)
With no related allowance recorded:
Commercial and industrial$479 $788 n/a$1,233 $1,256 $192 $217 
Commercial tax-exemptn/a
Commercial real estaten/a55 256 
Construction and landn/a
Residential14,879 15,140 n/a15,026 13,321 236 476 
Home equity2,313 2,995 n/a2,359 2,106 12 13 
Consumer and othern/a
Subtotal$17,671 $18,923 n/a$18,618 $16,738 $440 $962 
With an allowance recorded:
Commercial and industrial$538 $539 $341 $491 $877 $$23 
Commercial tax-exempt
Commercial real estate
Construction and land
Residential2,059 2,059 712 1,419 1,017 18 
Home equity279 279 23 276 626 
Consumer and other
Subtotal$2,876 $2,877 $1,076 $2,186 $2,520 $$43 
Total:
Commercial and industrial$1,017 $1,327 $341 $1,724 $2,133 $195 $240 
Commercial tax-exempt
Commercial real estate55 256 
Construction and land
Residential16,938 17,199 712 16,445 14,338 241 494 
Home equity2,592 3,274 23 2,635 2,732 13 15 
Consumer and other
Total$20,547 $21,800 $1,076 $20,804 $19,258 $449 $1,005 
_____________________
(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.

28

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-exemptn/a
Commercial real estate733 733 n/a155 262 
Construction and landn/a
Residential15,362 15,622 n/a13,700 636 
Home equity1,557 2,119 n/a2,095 35 
Consumer and othern/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.
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 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.
29

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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 September 30, 2020, the Bank has pledged $2.3 billion of loans in a blanket lien agreement with the FHLB. The Bank also has $360.5 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 September 30, 2020 and December 31, 2019, TDRs totaled $14.5 million and $12.6 million, respectively. As of September 30, 2020, $7.8 million of the $14.5 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 September 30, 2020
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 industrial0 $0 $0 1 $49 
Home equity0 0 0 1 251 
Total0 $0 $0 2 $300 
As of and for the nine months ended September 30, 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)1 $50 $50 1 $49 
Residential (2)1 2,373 2,373 1 1,562 
Home equity0 0 0 1 251 
Total2 $2,423 $2,423 3 $1,862 
_____________________
(1)Represents the following type of concession: extension of maturity and reduction in interest rate.
(2)Represents the following type of concession: payment deferral.                    
30

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
As of and for the nine months ended September 30, 2019
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$179 $179 $
Residential3,222 3,227 
Home equity274 283 
Total$3,675 $3,689 $
As of and for the nine months ended September 30, 2019
Extension of termTemporary rate reductionPayment deferralCombination of concessionsTotal concessions
# of
Loans
Post-
modifi-
cation
recorded
invest-
ment
# of
Loans
Post-
modifi-
cation
recorded
invest-
ment
# of
Loans
Post-
modifi-
cation
recorded
invest-
ment
# of
Loans
Post-
modifi-
cation
recorded
invest-
ment
# of
Loans
Post-
modifi-
cation
recorded
invest-
ment
(In thousands, except number of loans)
Commercial and industrial$179 $$$$179 
Residential3,227 3,227 
Home equity283 283 
$179 $3,510 $$$3,689 
There were no loans that were restructured or defaulted during the three months ended September 30, 2019.
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 initially three months and the loan term is extended three months; if requested, the loan may be deferred for a subsequent three months. Loans that are deferred under the program are not considered TDRs or past due based on current regulatory guidance. In total, approximately 350 Residential and Home equity loans totaling approximately $220.0 million have been processed under the program. As of September 30, 2020, approximately 140 loans totaling approximately $100.0 million remain in deferral under the program.
Additionally, in response to the COVID-19 pandemic, the Bank initiated a program where it offered qualified Commercial and industrial borrowers principal payment deferrals for six months, with the deferred principal added to the last payment. In total, approximately 90 Commercial and industrial loans totaling approximately $125.0 million have been processed under the program. As of September 30, 2020, approximately 30 loans totaling approximately $50.0 million remain in deferral under the 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:
 September 30, 2020December 31, 2019
 (In thousands)
Commercial and industrial$42,759 $14,533 
Commercial tax-exempt17,724 18,101 
Commercial real estate130,164 121,929 
Construction and land83,059 75,451 
Total loan participations serviced for others$273,706 $230,014 
Residential$185,638 $204,696 
Total loans serviced for others$185,638 $204,696 
Total loans include deferred loan origination (fees)/costs, net, of $(1.1) million and $8.1 million as of September 30, 2020 and December 31, 2019, respectively. The change in the balance of loan origination (fees)/costs, net, from December 31, 2019 to September 30, 2020 was primarily driven by the addition of $10.9 million of PPP loan origination fees in the second quarter of 2020.
31

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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 per segment for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address risks not incorporated 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 on the remaining portfolio segment balance over the life of the portfolio. Reasonable and supportable economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the historical long-run average of the macroeconomic variables. Management has 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. Management also applies a weight to the various forecasts chosen to determine the reasonable and supportable economic forecasts. The Company's qualitative assessment is based on factors outlined in regulatory guidance and include the following:
• Volume and trend of past-due, nonaccrual, 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 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 Sheets. 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 $84.6 million and $72.0 million as of September 30, 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 their different underlying risk characteristics. For the periods ended September 30, 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. Beginning in the second quarter of 2020, the Company made a change to the loan portfolio segmentation as it relates to the Allowance for loan losses, adding the segment Paycheck Protection Program. For the periods ended September 30, 2019, there were no loans in this segment as the SBA initiated the program in the second quarter of 2020 in response to the COVID-19 pandemic.
32

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents a summary of the changes in the Allowance for loan losses for the periods indicated:
As of and for the three months ended September 30,As of and for the nine months ended September 30,
2020201920202019
(In thousands)
Allowance for loan losses, beginning of period:
Commercial and industrial$9,559 $16,082 $10,048 $15,912 
Paycheck Protection Program190 n/a0 n/a
Commercial tax-exempt2,486 n/a6,016 n/a
Commercial real estate47,675 43,741 40,765 41,934 
Construction and land9,524 4,780 5,119 6,022 
Residential17,765 9,555 8,857 10,026 
Home equity439 805 778 1,284 
Consumer and other1,686 104 399 134 
Total allowance for loan losses, beginning of period$89,324 $75,067 $71,982 $75,312 
Impact of adopting ASU 2016-13:
Commercial and industrialn/an/a$(565)n/a
Paycheck Protection Programn/an/a0 n/a
Commercial tax-exemptn/an/a(4,409)n/a
Commercial real estaten/an/a(14,455)n/a
Construction and landn/an/a(2,158)n/a
Residentialn/an/a685 n/a
Home equityn/an/a(535)n/a
Consumer and othern/an/a1,052 n/a
Total impact of adopting ASU 2016-13n/an/a$(20,385)n/a
Allowance for loan losses, beginning of period, net$89,324 $75,067 $51,597 $75,312 
Provision/(credit) for loan losses:
Commercial and industrial$(10)$361 $876 $498 
Paycheck Protection Program0 n/a190 n/a
Commercial tax-exempt398 n/a1,277 n/a
Commercial real estate(374)(762)20,991 826 
Construction and land(1,166)5,397 (1,236)
Residential(3,026)617 5,197 46 
Home equity11 (57)1,232 26 
Consumer and other(402)(163)(56)
Total provision/(credit) for loan losses$(4,569)$167 $34,997 $104 
33

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
As of and for the three months ended September 30,As of and for the nine months ended September 30,
2020201920202019
(In thousands)
Loans charged -off:
Commercial and industrial$(172)$(180)$(1,079)$(375)
Paycheck Protection Program0 n/a0 n/a
Commercial tax-exempt0 n/a0 n/a
Commercial real estate0 0 
Construction and land0 0 
Residential0 0 
Home equity0 (1,157)(562)
Consumer and other(73)(5)(83)(7)
Total charge-offs$(245)$(185)$(2,319)$(944)
Recoveries on loans previously charged-off:
Commercial and industrial$36 $275 $133 $503 
Paycheck Protection Program0 n/a0 n/a
Commercial tax-exempt0 n/a0 n/a
Commercial real estate0 27 0 246 
Construction and land0 0 
Residential0 0 100 
Home equity0 132 
Consumer and other5 11 32 
Total recoveries$41 $310 $276 $887 
Allowance for loan losses, end of period:
Commercial and industrial$9,413 $16,538 $9,413 $16,538 
Paycheck Protection Program190 n/a190 n/a
Commercial tax-exempt2,884 n/a2,884 n/a
Commercial real estate47,301 43,006 47,301 43,006 
Construction and land8,358 4,786 8,358 4,786 
Residential14,739 10,172 14,739 10,172 
Home equity450 754 450 754 
Consumer and other1,216 103 1,216 103 
Total allowance for loan losses, end of period$84,551 $75,359 $84,551 $75,359 
The balance of the Allowance for loan losses of $84.6 million as of September 30, 2020 represents an increase of $12.6 million from December 31, 2019. During the three and nine months ended September 30, 2020, the Company recognized a Provision credit of $4.6 million and a Provision expense of $35.0 million, respectively. The decrease in the Allowance for loan losses for the three months ended September 30, 2020 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter, as well as the net impact of the change in the composition and volume of the loan portfolio. These improvements were partially offset by the net impact in the changes of the qualitative factors, and a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts, including consideration for the significant uncertainty related to the duration and severity of economic impacts from the COVID-19 pandemic. The increase in Allowance for loan losses for the nine months ended September 30, 2020 was primarily driven by the change in allowance methodology from the incurred loss model to the current expected credit loss model, as well as the current reasonable and supportable economic forecast deterioration as a result of the COVID-19 pandemic, and the net change in qualitative factors to account for risks and assumptions related to our loan portfolio not incorporated in the forecasts.
The balance of reserve for unfunded loan commitments of $8.9 million as of September 30, 2020 represents an increase of $7.8 million from December 31, 2019. The change was driven by an increase in the reserve ratios as a result of the current reasonable and supportable economic forecasts due to the COVID-19 pandemic as well as an increase in the balance of loan commitments. Changes in the balance of reserve for unfunded loan commitments are recognized as Other expense within Total operating expense.
Upon the adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease 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 reasonable and supportable economic forecasts at the time of adoption.
34

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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. The net, after-tax impact of the $20.4 million decrease in the Allowance for loan losses and the $1.4 million increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million.
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 September 30, 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 September 30, 2020 or December 31, 2019.
September 30, 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$15,419 $83 $567,726 $9,330 $583,145 $9,413 
Paycheck Protection Program0 0 371,496 190 371,496 190 
Commercial tax-exempt3,929 0 468,413 2,884 472,342 2,884 
Commercial real estate5,977 49 2,653,913 47,252 2,659,890 47,301 
Construction and land0 0 211,697 8,358 211,697 8,358 
Residential16,656 56 2,712,508 14,683 2,729,164 14,739 
Home equity650 17 81,147 433 81,797 450 
Consumer and other0 0 113,038 1,216 113,038 1,216 
Total$42,631 $205 $7,179,938 $84,346 $7,222,569 $84,551 
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 land0 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 other134,674 399 134,674 399 
Total$19,187 $235 $6,957,517 $71,747 $6,976,704 $71,982 
35

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 September 30, 2020 and December 31, 2019:
 September 30, 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 designated as hedging instruments:
Interest rate swapsOther assets$0 Other liabilities$272 Other assets$Other liabilities$
Derivatives not designated as hedging instruments:
Interest rate customer swapsOther assets91,399 Other liabilities92,758 Other assets36,089 Other liabilities36,580 
Risk participation agreementsOther assets64 Other liabilities444 Other assets10 Other liabilities242 
Total$91,463 $93,474 $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 and nine months ended September 30, 2020 and 2019:
Derivatives in cash
flow hedging
relationships
Amount of gain or (loss) recognized in OCI on derivatives
Location of gain
or (loss) reclassified
from accumulated
OCI into income
Amount of gain or (loss) reclassified from accumulated OCI into income
Three months ended September 30,Three months ended September 30,
2020201920202019
(In thousands)(In thousands)
Interest rate swaps$285 $Interest income/(expense)$284 $
Total$285 $$284 $
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
Nine months ended September 30,Nine months ended September 30,
2020201920202019
(In thousands)(In thousands)
Interest rate swaps$(141)$(46)Interest income/(expense)$132 $508 
Total$(141)$(46)$132 $508 
36

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents the effect of the Company’s derivative financial instruments in the Consolidated Statements of Operations for the three and nine months ended September 30, 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
Amount of gain or
(loss) recognized in
income on cash flow
hedging relationships
Three months ended September 30,Nine months ended September 30,
2020201920202019
(In thousands)
Total amounts of income and (expense) line items presented in the Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recordedInterest income/(expense)$284 $$132 $508 
The effects of cash flow hedging:
Gain or (loss) on cash flow hedging relationships in ASC 815
Interest contracts - amount of gain or (loss) reclassified from Accumulated other comprehensive income into incomeInterest income/(expense)$284 $$132 $508 
The Bank has agreements with its derivative counterparties that contain provisions where, if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The Bank was in compliance with these provisions as of September 30, 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 September 30, 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 September 30, 2020 and December 31, 2019.
As of September 30, 2020 and December 31, 2019, the termination amounts related to collateral determinations of derivatives in a liability position were $94.1 million and $35.7 million, respectively. The Bank has minimum collateral posting thresholds with its derivative counterparties. As of September 30, 2020 and December 31, 2019, the Bank had pledged securities with a market value of $90.5 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.
To accomplish this objective and strategy, the Bank has entered into one interest rate swap during 2020 with an effective date of April 14, 2020. The interest rate swap is designated as a cash flow hedge and involves the receipt of variable rate amounts from a counterparty in exchange for the Bank making fixed payments.
The one interest rate swap entered into during 2020 has a notional amount of $100 million and a term of eighteen months from its respective effective date. The interest rate swap will effectively fix the Bank's interest payments on $100 million of rolling three month FHLB advances at a rate of 0.48%.
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 Bank’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
37

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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 September 30, 2020 and $1.6 billion as of December 31, 2019. As of September 30, 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 September 30, 2020 and December 31, 2019, there were 7 of these risk participation transactions with an aggregate notional amount of $57.7 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 September 30, 2020, there were 5 of these risk participation transactions with an aggregate notional amount of $30.3 million. As of December 31, 2019, there were 4 of these risk participation transactions with an aggregate notional amount of $20.5 million.
The following table presents the effect of the Bank’s derivative financial instruments not designated as hedging instruments in the Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019.
Amount of gain or (loss), net,
recognized in income on derivatives
Derivatives not designated as
hedging instruments
Location of gain or (loss) recognized in income on derivativesThree months ended September 30,Nine months ended September 30,
2020201920202019
 (In thousands)
Interest rate swapsOther income/(expense)$(568)$(289)$(869)$(544)
Risk participation agreementsOther income/(expense)78 (11)(148)(120)
Total$(490)$(300)$(1,017)$(664)
9.    Income Taxes
The following table presents the components of Income tax expense and effective tax rates for the periods indicated:
Nine months ended September 30,
20202019
(In thousands)
Income before income taxes$22,952 $74,852 
Income tax expense2,764 15,803 
Net income before attribution to noncontrolling interests$20,188 $59,049 
Effective tax rate12.0 %21.1 %
The effective tax rate for the nine months ended September 30, 2020 of 12.0%, with related tax expense of $2.8 million, was calculated based on a forecasted 2020 annual effective tax rate. The effective tax rate was less than the statutory rate of 21% due primarily to earnings from tax-exempt investments and income tax credits. These savings were partially offset by state and local income taxes, the accounting for investments in affordable housing projects, and tax expense from employee shared-based payments.
The effective tax rate for the nine months ended September 30, 2019 of 21.1%, with related tax expense of $15.8 million, was calculated based on a forecasted 2019 annual effective tax rate. The effective tax rate was more than the statutory rate of 21% due primarily to state and local income taxes and the accounting for investments in affordable housing projects. These expenses were partially offset by earnings from tax-exempt investments and income tax credits.
38

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The effective tax rate for the nine months ended September 30, 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. Earnings from tax-exempt investments have a larger proportionate impact on 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, if any, represents the net income allocated to the noncontrolling interest owners of DGHM. Net income allocated to the noncontrolling interest owners was 0 and $96 thousand for the three-month periods ended September 30, 2020 and 2019, respectively, and $6 thousand and $265 thousand for the nine-month periods ended September 30, 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 September 30, 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 September 30, 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.
The following table presents a rollforward of the Company’s redeemable noncontrolling interests for the periods indicated:
Three months endedNine months ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
(In thousands)
Redeemable noncontrolling interests at beginning of period$0 $1,786 $1,383 $2,526 
Net income attributable to noncontrolling interests0 96 6 265 
Distributions0 (96)(6)(265)
Purchases/(sales) of ownership interests0 (64)12 
Amortization of equity compensation8 10 24 36 
Adjustments to fair value(8)(315)(1,343)(1,093)
Redeemable noncontrolling interests at end of period$0 $1,481 $0 $1,481 
11.    Accumulated Other Comprehensive Income
The following table presents a summary of the amounts reclassified from the Company's Accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 2020 and 2019:
Description of component of Accumulated other comprehensive income/(loss)Three months ended September 30,Nine months ended September 30,Affected line item in
Statement of Operations
2020201920202019
(In thousands)
Net realized gain/(loss) on cash flow hedges:
Hedges related to deposits:
Pre-tax gain/(loss)$284 $$132 $508 Interest income/(expense)
Tax (expense)/ benefit(84)(2)(39)(148)Income tax (expense)/benefit
Total reclassifications for the period, net of tax$200 $$93 $360 Net income/(loss) attributable to the Company
39

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the after-tax changes in the components of the Company’s Accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 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 reclassifications27,469 (31)27,438 
Reclassified from other comprehensive income/(loss)(360)(360)
Other comprehensive income/(loss), net27,469 (391)27,078 
Balance at September 30, 2019$9,913 $$(554)$9,359 
Balance at December 31, 2019$8,435 $0 $(860)$7,575 
Other comprehensive income/(loss) before reclassifications23,055 (100)(30)22,925 
Reclassified from other comprehensive income/(loss)0 (93)0 (93)
Other comprehensive income/(loss), net23,055 (193)(30)22,832 
Balance at September 30, 2020$31,490 $(193)$(890)$30,407 
Components of Accumulated other comprehensive income/(loss)
Unrealized
gain/(loss)
on securities
available-for-sale
Unrealized
gain/(loss)
on cash flow
hedges
Unrealized
gain/(loss)
on other
Accumulated
other
comprehensive
income/(loss)
(In thousands)
Balance at June 30, 2019$4,677 $$(554)$4,125 
Other comprehensive income/(loss) before reclassifications5,236 5,238 
Reclassified from other comprehensive income/(loss)(4)(4)
Other comprehensive income/(loss), net5,236 (2)5,234 
Balance at September 30, 2019$9,913 $$(554)$9,359 
Balance at June 30, 2020$31,122 $(195)$(890)$30,037 
Other comprehensive income/(loss) before reclassifications368 202 0 570 
Reclassified from other comprehensive income/(loss)0 (200)0 (200)
Other comprehensive income/(loss), net368 2 0 370 
Balance at September 30, 2020$31,490 $(193)$(890)$30,407 
12.    Restructuring
There were 0 restructuring charges for the three and nine months ended September 30, 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 was intended to improve the Company’s operating efficiency and enhance earnings.
40

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 and nine months ended September 30, 2020 and 2019:
Severance ChargesOther Associated CostsTotal
(In thousands)
Accrued charges at December 31, 2019$526 $789 $1,315 
Costs paid(434)0 (434)
Accrued charges at March 31, 202092 789 881 
Costs paid(92)0 (92)
Accrued charges at June 30, 2020$0 $789 $789 
Costs paid0 0 0 
Accrued charges at September 30, 2020$0 $789 $789 
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, 20193,556 789 4,345 
Costs paid(1,364)(1,364)
Accrued charges at June 30, 2019$2,192 $789 $2,981 
Costs paid(1,156)(1,156)
Accrued charges at September 30, 2019$1,036 $789 $1,825 
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, depending on the terms of the contracts. No performance based incentives are earned under wealth management contracts. Receivables are recorded on the Consolidated Balance Sheets in the Fees receivable line item. Deferred revenues of $6.0 million and $6.5 million as of September 30, 2020 and December 31, 2019, respectively, are recorded on the Consolidated Balance Sheets within Other liabilities.
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 within Fees receivable.
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 within Fees receivable.
Other banking fee income
41

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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, and other miscellaneous charges related to the accounts. These fees are not governed by individual contracts with clients. They are charges to clients based on disclosures presented to clients upon opening these accounts along with updated disclosures when changes are made to the fee structures. The transaction-based fees are recognized in revenue when charged to the client based on specific activity on the client’s account. Monthly service/maintenance charges are recognized in the month they are earned and are charged directly to the client’s account.
The Bank also charges fees for treasury activities such as 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 September 30,Nine months ended September 30,
 2020201920202019
 (In thousands)
Fees and other income:
Wealth management and trust fees$18,240 $19,067 $53,872 $57,037 
Investment management fees1,393 2,496 5,088 7,601 
Other income812 700 2,166 2,029 
Revenue from contracts with customers20,445 22,263 61,126 66,667 
Other non-interest income not within the scope of ASC 6062,600 2,863 6,102 8,087 
Total non-interest income$23,045 $25,126 $67,228 $74,754 
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 Consolidated Balance Sheets. 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 36 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 Company recognized $2.0 million of lease liabilities and ROU assets on the Consolidated Balance Sheets related to equipment leases on September 30, 2020. The Company, as lessee, has 21 equipment leases classified as operating leases. The terms of the equipment leases are fixed payments outlined within the respective contracts and generally range from three to five years. 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.
42

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Three months ended September 30,Nine months ended September 30,
2020201920202019
(In thousands)
Lease cost
Operating lease cost$4,562 $4,866 $13,656$14,392 
Short-term lease cost58 12 16441 
Variable lease cost5 143 (4)147 
Less: Sublease income0 (27)(28)(73)
Total operating lease cost$4,625 $4,994 $13,788$14,507 
Nine months ended September 30, 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$15,107 
ROU assets obtained in exchange for new operating lease liabilities (1)$4,056 
Weighted-average remaining lease term for operating leases7.6 years
Weighted-average discount rate for operating leases3.2 %
______________________
(1) Operating lease liabilities were impacted by the addition of real estate and equipment leases, partially offset by real estate lease modifications for the nine months ended September 30, 2020.
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 September 30, 2020:
September 30, 2020
(In thousands)
Remainder of 2020$5,136 
202120,662 
202220,575 
202319,275 
202413,113 
Thereafter46,003 
Total future minimum lease payments124,764 
Less: Amounts representing interest(15,832)
Present value of net future minimum lease payments$108,932 
15.    Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02Leases (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 an 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 method 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”). In 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
43

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
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 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, 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 as 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.
44


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of and for the three and nine months ended September 30, 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 employment levels, general business and economic conditions on a national basis and in the local markets in which the Company operates; changes in customer behavior; the possibility that future credit losses are higher than currently expected due to changes in economic assumptions, customer behavior or adverse economic developments; 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.
45


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 third 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 September 30,
20202019$ Change% Change
(In thousands, except per share data and percentages)
Total revenue$80,869 $81,279 $(410)(1)%
Provision/(credit) for loan losses(4,569)167 (4,736)nm
Total operating expense60,937 55,537 5,400 10 %
Net income before attribution to noncontrolling interests22,680 20,058 2,622 13 %
Net income attributable to noncontrolling interests 96 (96)(100)%
Net income attributable to the Company22,680 19,962 2,718 14 %
Diluted earnings per share attributable to common shareholders$0.28 $0.24 $0.04 17 %
ASSETS UNDER MANAGEMENT AND ADVISORY (“AUM”):
Wealth Management and Trust$15,581,000 $14,695,000 $886,000 %
Other (1)672,000 1,533,000 (861,000)(56)%
Total AUM$16,253,000 $16,228,000 $25,000 — %
_____________________
nm = not meaningful
(1) Includes results from Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”)
Net income attributable to the Company was $22.7 million and $20.0 million for the three months ended September 30, 2020 and September 30, 2019, respectively. The Company recognized Diluted earnings per share attributable to common shareholders of $0.28 and $0.24 for the three months ended September 30, 2020 and September 30, 2019, respectively. Key items that affected the Company’s results in the third quarter of 2020 compared to the same period of 2019 include:
Provision for loan losses decreased $4.7 million to a credit of $4.6 million for the three months ended September 30, 2020, compared to the same period of 2019. During the third quarter of 2020, the Company recognized a total provision credit of $2.8 million, which included a provision credit of $4.6 million, and separately, a reserve of $1.8 million for unfunded loan commitments, recognized as Other expense within Noninterest expense.
The decrease in the Allowance for loan losses for the three months ended September 30, 2020 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter, as well as the net impact of the change in the composition and volume of the loan portfolio. These improvements were partially offset by the net impact in the changes of the qualitative factors, and a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts, including consideration for the significant uncertainty related to the duration and severity of economic impacts from the COVID-19 pandemic.
Total revenue decreased $0.4 million to $80.9 million for the three months ended September 30, 2020, compared to the same period of 2019 as described below.
Total fees and other income decreased $2.1 million, or 8%, to $23.0 million for the three months ended September 30, 2020, compared to the same period of 2019. The decrease was primarily driven by lower Other banking fee income as a result of lower bank-owned life insurance revenue and lower swap fee income, as well as lower Investment management fees due to the impact of recent outflows of AUM at DGHM. Total fees and other income represents 28% of Total revenue for the three months ended September 30, 2020, compared to 31% of Total revenue for the same period of 2019.
Net interest income increased $1.7 million, or 3%, to $57.8 million for the three months ended September 30, 2020, compared to the same period of 2019. The increase in Net interest income was primarily driven by the addition of PPP-related income and lower funding costs, partially offset by lower interest on interest-earning assets. Net interest margin (“NIM”) was 2.61% for the three months ended September 30, 2020, a decrease of 11 basis points compared to the same period in 2019. Although Net interest income increased, the decrease in NIM was driven by excess cash balances held at lower yields in the third quarter of 2020 and lower-yielding PPP loans.
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Total operating expense increased $5.4 million, or 10%, to $60.9 million for the three months ended September 30, 2020, compared to the same period of 2019. The increase was primarily driven by increases in Salaries and employee benefits expense, Information systems expense as a result of new IT initiatives being placed in service, and the reserve for unfunded loan commitments within Other expense, partially offset by a decrease in Marketing and business development expense.
For the three months ended September 30, 2020, total loans decreased $110.4 million, or 2%, while total deposits increased $400.3 million, or 5%, from the second quarter of 2020. The decrease in loans was primarily driven by the sale of $72.0 million of residential mortgage loans in the third quarter of 2020, while the increase in deposits was primarily driven by clients maintaining additional cash liquidity. The Company’s loan-to-deposit ratio decreased from 99% as of June 30, 2020 to 92% as of September 30, 2020, driven by strong deposit inflows. 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, it may evaluate other options such as slowing loan growth, selling a portion of portfolio loans, or originating mortgage loans as held-for-sale. Additionally if the Company has excess deposits, the Company may seek to to earn a better yield by investing excess cash in loan growth, purchasing investment securities or other cash management strategies.
The Company’s Private Banking segment reported Net income attributable to the Company of $19.3 million in the third quarter of 2020, compared to $17.9 million for the same period of 2019. Net income attributable to the Company increased $1.4 million from the same period in 2019, primarily driven by a decrease of $4.7 million to the Provision for loan losses and a decrease in Income tax expense of $1.3 million. These items were partially offset by an increase of $5.0 million in Total operating expense primarily due to increases in Information systems expense as a result of new IT initiatives being placed in service, Salaries and employee benefits expense, and Other expense related to the reserve for unfunded loan commitments.
The Company’s Wealth Management and Trust segment reported Net income attributable to the Company of $1.9 million in the third quarter of 2020, compared to $3.6 million for the same period of 2019. The decrease of $1.6 million, or 46%, was primarily driven by an increase of $1.7 million in Total operating expense and a decrease of $0.9 million in Total revenue due to the impact of lower AUM on fee revenues as of fee billing dates and lower effective fee rates. The increase in Total operating expense was primarily driven by an increase in Salaries and employee benefits expense related to the hiring of additional advisors as part of the Company's strategic initiative to grow the Wealth Management and Trust business, as well as an increase in Information systems expense, partially offset by a decrease in Other expense. Wealth Management and Trust AUM increased $0.9 billion, or 6%, to $15.6 billion at September 30, 2020 from $14.7 billion at September 30, 2019. The increase in AUM was primarily driven by favorable market returns of $0.8 billion and total net flows of $0.1 billion for the twelve months ended September 30, 2020.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has caused, and continues to cause, substantial disruptions to the global economy and to the customers and communities that we serve. In response to the pandemic, the Company 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 and forbearance as needed, including our mortgage deferment program and Commercial and industrial loan 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.     
Participation in the PPP
The CARES Act initially 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 up to five years at an interest rate of 1.0%. Loans issued under the PPP will be forgiven if the borrower uses at least 60% of the proceeds on payroll costs and other eligible costs such as utilities or rent for a period of up to 24 weeks, following the loan funding date. This was changed from 75% and 8 weeks by the Paycheck Protection Program Flexibility Act signed into law on June 5, 2020. 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.
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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 five years at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility. As of September 30, 2020, the Bank has not participated in the PPPLF.
As of September 30, 2020, the Bank processed 1,045 loans totaling $380.3 million under the PPP program, primarily in the second quarter of 2020. The Bank has received $10.9 million in processing fees from the SBA, which is netted against the principal balance on the Consolidated Balance Sheets and will be accreted through net interest income on a straight-line basis over the life of the loan. If a loan is forgiven or otherwise paid off, the remainder of the processing fee will be accreted through net interest income. As of September 30, 2020, the balance of PPP loans was $371.5 million, and $2.2 million was accreted through net interest income.
Mortgage deferment program    
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 initially three months and the loan term is extended three months; if requested, the loan may be deferred for a subsequent three months. Loans that are deferred under the program are not considered TDRs or past due based on current regulatory guidance. In total, approximately 350 residential and home equity loans totaling approximately $220.0 million have been processed under the program. As of September 30, 2020, deferrals for approximately 200 loans totaling approximately $120.0 million have expired with the loans returning to payment, while approximately 140 loans totaling approximately $100.0 million remain in deferral under the program. Approximately 10 loans totaling less than $1.0 million are delinquent on payment terms as of September 30, 2020 after the deferral expired, primarily First Time Home Buyer loans.
Commercial and industrial loan deferment program    
In response to the COVID-19 pandemic, the Bank initiated a program offering qualified Commercial and industrial borrowers principal payment deferral for six months, with the deferred principal added to the last payment. In total, approximately 90 Commercial and industrial loans totaling approximately $125.0 million have been processed under the program. As of September 30, 2020, deferrals for approximately 60 loans totaling approximately $75.0 million have expired with the loans returning to payment, while approximately 30 loans totaling approximately $50.0 million remain in deferral under the program. Of the loans that came off deferral, no loans are delinquent on payment terms as of September 30, 2020.
Commercial real estate second loan program
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 after receiving the second mortgage for each borrower could not exceed a 75% loan-to-value ratio, and the loans were required to be current at the time of application, amongst other conditions. In total, borrowers with approximately 240 existing loans totaling $1.3 billion requested and were approved for these second mortgages, representing approximately 50% of the Commercial real estate loan balance. As of September 30, 2020, the borrowers associated with the $1.3 billion of existing loans received approximately $80.0 million in additional funding under this program. The Company does not anticipate a material increase in the $80.0 million balance of new loans in the future, and the principal balance will amortize down over the life of the loan, generally five years. In addition to, and outside of the Commercial real estate second loan program, the Bank offered qualified Commercial real estate borrowers principal payment deferral for up to twelve months, with the deferred principal added to the balance due at maturity. In total, approximately 10 Commercial real estate borrowers with loans totaling approximately $55.0 million accepted this accommodation. As of September 30, 2020, deferrals for approximately 5 borrowers with loans totaling approximately $15.0 million have expired with the loans returning to payment, while approximately 5 borrowers with loans totaling approximately $40.0 million remain in deferral. Of the loans that came off deferral, no loans are delinquent on payment terms as of September 30, 2020. The entire Commercial real estate portfolio will continue to be monitored for credit deterioration regardless of their participation in the plan.
Credit quality and Allowance for loan loss
The Company continues to monitor and evaluate the impact of the COVID-19 pandemic on the credit quality of our assets. Total criticized and classified loans as of September 30, 2020 was $322.6 million, an increase of $16.5 million, or 5%, linked quarter, primarily driven by the downgrade of $71.0 million of loans, partially offset by $54.0 million of payoffs, paydowns and upgrades. Of the $71.0 million in downgrades in the third quarter of 2020, $62.0 million were Commercial real estate loans across 16 relationships, primarily with hospitality and retail clients. During the third quarter of 2020, the Company recognized a total net provision credit of $2.8 million primarily driven by the latest reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter. Within the Commercial real estate portfolio, the impact of the improving current reasonable and supportable economic forecasts was partially offset by additional reserves needed to account for the increase in criticized and classified loans in the Commercial real estate portfolio.
Other accounting matters
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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.
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.
Subsequent to the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, there was one change to the critical accounting policies. 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 have changed. The updates in this standard replace the incurred loss impairment methodology with a CECL model methodology. The CECL model methodology incorporates current conditions, reasonable and supportable economic forecasts, and prepayments to estimate loan losses over the life of the 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. There have been no other changes to the Company's policies through the filing of this Quarterly Report on Form 10-Q.
Results of operations for the three and nine months ended September 30, 2020 versus September 30, 2019
Net income. The Company recorded Net income attributable to the Company for the three and nine months ended September 30, 2020 of $22.7 million and $20.2 million, respectively, compared to Net income attributable to the Company of $20.0 million and $58.8 million for the same respective periods in 2019.

The Company recognized Diluted earnings per share attributable to common shareholders for the three and nine months ended September 30, 2020 of $0.28 per share and $0.25 per share, respectively, compared to Diluted earnings per share attributable to common shareholders of $0.24 per share and $0.71 per share for the same respective periods in 2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 2: Earnings Per Share” for further detail on adjustments made to arrive at income available to common shareholders.
The following table presents selected financial highlights:
Three months ended September 30,$
Change
% ChangeNine months ended September 30,$
Change
%
Change
2020201920202019
(In thousands, except percentages)
Net interest income$57,824 $56,153 1,671 %$174,019 $171,951 $2,068 %
Fees and other income23,045 25,126 (2,081)(8)%67,228 74,754 (7,526)(10)%
Total revenue80,869 81,279 (410)(1)%241,247 246,705 (5,458)(2)%
Provision/(credit) for loan losses(4,569)167 (4,736)nm34,997 104 34,893 nm
Operating expense60,937 55,537 5,400 10 %183,298 171,749 11,549 %
Income tax expense1,821 5,517 (3,696)(67)%2,764 15,803 (13,039)(83)%
Net income before attribution to noncontrolling interests22,680 20,058 2,622 13 %20,188 59,049 (38,861)(66)%
Less: Net income attributable to noncontrolling interests 96 (96)(100)%6 265 (259)(98)%
Net income attributable to the Company$22,680 $19,962 $2,718 14 %$20,182 $58,784 $(38,602)(66)%
_____________________
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
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the same assets are earning less income. Loans graded as substandard but still accruing interest income totaled $81.8 million at September 30, 2020 and could be placed on nonaccrual status if their credit quality declines further.
Net interest income for the three months ended September 30, 2020 was $57.8 million, an increase of $1.7 million, or 3%, compared to the same period in 2019. The increase was primarily driven by lower funding costs and the addition of PPP-related income in 2020, partially offset by lower interest on interest-earning assets. NIM was 2.61% for the three months ended September 30, 2020, a decrease of 11 basis points compared to the same period in 2019. Although Net interest income increased, the decrease in NIM was primarily driven by the addition of lower-yielding PPP loans in 2020 and the impact of excess cash balances earning a lower yield.
Net interest income for the nine months ended September 30, 2020 was $174.0 million, an increase of $2.1 million, or 1%, compared to the same period in 2019. The increase was primarily driven by lower funding costs and the addition of PPP-related income in 2020, partially offset by lower interest on interest-earning assets. NIM was 2.71% for the nine months ended September 30, 2020, a decrease of 9 basis points compared to the same period in 2019. Although Net interest income increased, the decrease in NIM was driven by the addition of lower-yielding PPP loans in 2020.
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The following tables present the composition of the Company’s NIM for the three and nine months ended September 30, 2020 and 2019.
Average BalanceInterest Income/ExpenseAverage Yield/Rate (1)
As of and for the three months ended September 30,
AVERAGE BALANCE SHEET:202020192020201920202019
AVERAGE ASSETS(In thousands)
Interest-earning assets:
Cash and investments: (2)
Taxable investment securities$201,515 $198,655 $853 $938 1.69 %1.95 %
Non-taxable investment securities313,130 305,108 1,974 1,924 2.52 %2.52 %
Mortgage-backed securities515,813 492,514 2,354 2,622 1.83 %2.13 %
Short-term investments and other432,117 101,958 654 1,084 0.59 %4.06 %
Total cash and investments1,462,575 1,098,235 5,835 6,568 1.59 %2.39 %
Loans: (3)
Commercial and industrial1,032,816 1,101,672 8,314 11,523 3.15 %4.09 %
Paycheck Protection Program373,047 — 2,390 — 2.51 %— %
Commercial real estate2,652,770 2,518,048 23,546 29,118 3.47 %4.52 %
Construction and land218,211 195,843 2,109 2,410 3.78 %4.82 %
Residential2,809,871 3,016,265 22,089 25,567 3.14 %3.39 %
Home equity84,226 89,068 623 1,121 2.94 %4.99 %
Other consumer111,657 127,987 547 1,297 1.95 %4.02 %
Total loans7,282,598 7,048,883 59,618 71,036 3.23 %3.98 %
Total earning assets8,745,173 8,147,118 65,453 77,604 2.96 %3.76 %
LESS: Allowance for loan losses89,370 75,199 
Cash and due from banks (non-interest bearing)34,761 49,065 
Other assets655,999 544,368 
TOTAL AVERAGE ASSETS$9,346,563 $8,665,352 
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW$722,742 $615,730 $197 $275 0.11 %0.18 %
Money market4,070,026 3,378,006 4,790 11,523 0.47 %1.35 %
Certificates of deposit585,729 711,299 1,447 3,689 0.98 %2.06 %
Total interest-bearing deposits5,378,497 4,705,035 6,434 15,487 0.48 %1.31 %
Junior subordinated debentures106,363 106,363 508 1,022 1.87 %3.76 %
FHLB borrowings and other388,412 833,535 687 4,942 0.69 %2.32 %
Total interest-bearing liabilities5,873,272 5,644,933 7,629 21,451 0.52 %1.50 %
Non-interest bearing demand deposits2,321,223 1,953,214 
Payables and other liabilities309,462 258,371 
Total average liabilities8,503,957 7,856,518 
Redeemable noncontrolling interests 944 
Average shareholders’ equity842,606 807,890 
TOTAL AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY$9,346,563 $8,665,352 
Net interest income$57,824 $56,153 
Interest rate spread2.44 %2.26 %
NIM2.61 %2.72 %
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Average BalanceInterest Income/ExpenseAverage Yield/Rate (1)
As of and for the nine months ended September 30,
AVERAGE BALANCE SHEET:202020192020201920202019
AVERAGE ASSETS(In thousands)
Interest-earning assets:
Cash and investments: (2)
Taxable investment securities$200,346 $223,072 $2,580 $3,244 1.72 %1.94 %
Non-taxable investment securities315,101 305,422 5,977 5,726 2.53 %2.50 %
Mortgage-backed securities514,043 507,338 7,707 8,225 2.00 %2.16 %
Short-term investments and other256,143 104,225 2,307 3,049 1.19 %3.78 %
Total cash and investments1,285,633 1,140,057 18,571 20,244 1.92 %2.36 %
Loans: (3)
Commercial and industrial1,074,159 1,088,027 28,746 33,673 3.51 %4.08 %
Paycheck Protection Program218,175 — 3,963 — 2.41 %— %
Commercial real estate2,631,461 2,474,804 75,630 87,222 3.78 %4.65 %
Construction and land228,243 203,211 6,932 7,610 3.99 %4.94 %
Residential2,841,023 2,999,480 68,636 76,847 3.22 %3.42 %
Home equity86,186 90,361 2,225 3,388 3.44 %5.01 %
Other consumer122,706 128,879 2,651 4,172 2.88 %4.33 %
Total loans7,201,953 6,984,762 188,783 212,912 3.46 %4.04 %
Total earning assets8,487,586 8,124,819 207,354 233,156 3.23 %3.80 %
LESS: Allowance for loan losses69,929 74,863 
Cash and due from banks (non-interest bearing)41,461 46,906 
Other assets620,313 516,642 
TOTAL AVERAGE ASSETS$9,079,431 $8,613,504 
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW$680,962 $658,154 $616 $847 0.12 %0.17 %
Money market3,835,219 3,317,117 19,295 32,072 0.67 %1.29 %
Certificates of deposit641,800 746,453 6,654 11,141 1.38 %2.00 %
Total interest-bearing deposits5,157,981 4,721,724 26,565 44,060 0.69 %1.25 %
Junior subordinated debentures106,363 106,363 2,189 3,223 2.74 %4.05 %
FHLB borrowings and other484,674 801,519 4,581 13,922 1.24 %2.29 %
Total interest-bearing liabilities5,749,018 5,629,606 33,335 61,205 0.77 %1.45 %
Non-interest bearing demand deposits2,194,237 1,949,948 
Payables and other liabilities295,327 243,370 
Total average liabilities8,238,582 7,822,924 
Redeemable noncontrolling interests400 1,642 
Average shareholders’ equity840,449 788,938 
TOTAL AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY$9,079,431 $8,613,504 
Net interest income$174,019 $171,951 
Interest rate spread2.46 %2.35 %
NIM2.71 %2.80 %
__________________
(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 September 30, 2020 was $65.5 million, a decrease of $12.2 million, or 16%, compared to the same period in 2019. Total interest and dividend income for the nine months ended September 30, 2020 was $207.4 million, a decrease of $25.8 million, or 11%, compared to the same period in 2019. The decreases were primarily driven by lower yields on loans and investments, partially offset by higher volumes 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
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effect on the related yield. Interest collected on loans while on nonaccrual status is generally applied to the principal balance. If 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 September 30, 2020 was $8.3 million, a decrease of $3.2 million, or 28%, compared to the same period in 2019, as a result of a 94 basis point decrease in the average yield and a 6% decrease in the average balance. For the nine months ended September 30, 2020, Commercial and industrial interest income was $28.7 million, a decrease of $4.9 million, or 15%, compared to the same period in 2019, as a result of a 57 basis point decrease in the average yield and a 1% decrease in the average balance. The decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied and lower yields on recent loan originations. The decreases in the average balance for the three and nine month periods were related primarily to lower revolving line of credit usage.
Interest income on PPP loans for the three and nine months ended September 30, 2020 was $2.4 million and $4.0 million, respectively. The Company began earning interest income on PPP loans in the second quarter of 2020. Nearly all of the PPP loans originated remain outstanding as of September 30, 2020. Interest income on PPP loans includes interest earned on the loans and the accretion of origination fees over the life of the loans. If a loan is forgiven or otherwise paid off, the remainder of the processing fee will be accreted through net interest income.
Interest income on Commercial real estate loans for the three months ended September 30, 2020 was $23.5 million, a decrease of $5.6 million, or 19%, compared to the same period in 2019, as a result of a 105 basis point decrease in the average yield, partially offset by a 5% increase in the average balance. For the nine months ended September 30, 2020, Commercial real estate interest income was $75.6 million, a decrease of $11.6 million, or 13%, compared to the same period in 2019, as a result of a 87 basis point decrease in the average yield, partially offset by a 6% increase in the average balance. The decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied and lower yields on recent loan originations. The increases in the average balance for the three and nine month periods were related primarily to the addition of approximately $80.0 million of loans under the commercial real estate second loan program as part of relief measures provided to clients as a result of the COVID-19 pandemic.
Interest income on Construction and land loans for the three months ended September 30, 2020 was $2.1 million, a decrease of $0.3 million, or 12%, compared to the same period in 2019, as a result of a 104 basis point decrease in the average yield, partially offset by an 11% increase in the average balance. For the nine months ended September 30, 2020, Construction and land interest income was $6.9 million, a decrease of $0.7 million, or 9%, compared to the same period in 2019, as a result of a 95 basis point decrease in the average yield, partially offset by a 12% 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 drawdown or paydown 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 decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied. The increases in the average balance for the three and nine month periods were related primarily to line drawdowns, primarily in Southern California.
Interest income on Residential mortgage loans for the three months ended September 30, 2020 was $22.1 million, a decrease of $3.5 million, or 14%, from the same period in 2019, as a result of a 25 basis point decrease in the average yield and a 7% decrease in the average balance. For the nine months ended September 30, 2020, Residential mortgage interest income was $68.6 million, a decrease of $8.2 million, or 11%, compared to the same period in 2019, as a result of a 20 basis point decrease in the average yield and a 5% decrease in the average balance. The decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied and lower yields on recent loan originations. The decrease in the average balance for the three month period was primarily driven by the sale of approximately $72.0 million of residential loans in the third quarter of 2020. The decrease in the average balance for the nine month period was primarily driven by the sale of approximately $190.7 million of Residential loans in the third and fourth quarters of 2019, and the sale of approximately $72.0 million of Residential loans in the third quarter of 2020.
Interest income on Home equity loans for the three months ended September 30, 2020 was $0.6 million, a decrease of $0.5 million, or 44%, compared to the same period in 2019, as a result of a 205 basis point decrease in the average yield and a 5% decrease in the average balance. For the nine months ended September 30, 2020, Home equity interest income was $2.2 million, a decrease of $1.2 million, or 34%, compared to the same period in 2019, as a result of a 157 basis point decrease in the average yield and a 5% decrease in the average balance. The decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied. The decreases in
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the average balance for the three and nine month periods were primarily driven by reduced demand as a result of economic uncertainty related to the COVID-19 pandemic.
Interest income on Other consumer loans for the three months ended September 30, 2020 was $0.5 million, a decrease of $0.8 million, or 58%, compared to the same period in 2019, as a result of a 207 basis point decrease in the average yield and a 13% decrease in the average balance. For the nine months ended September 30, 2020, Other consumer interest income was $2.7 million, a decrease of $1.5 million, or 36%, compared to the same period in 2019, as a result of a 145 basis point decrease in the average yield and a 5% decrease in the average balance. The decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied. The decreases in the average balances for the three and nine month periods were primarily driven by strategic decisions to slow new consumer loan growth.
Investment income for the three months ended September 30, 2020 was $5.8 million, a decrease of $0.7 million, or 11%, compared to the same period in 2019, as a result of an 80 basis point decrease in the average yield, partially offset by a 33% increase in the average balance. For the nine months ended September 30, 2020, investment income was $18.6 million, a decrease of $1.7 million, or 8%, compared to the same period in 2019, as a result of a 44 basis point decrease in the average yield, partially offset by a 13% increase in the average balance. The decreases in the average yield for the three and nine month periods were primarily due to the lower interest rate environment. The increases in the average balance for the three and nine month periods were primarily due to investing the additional cash from higher deposit balances.
Interest expense. Total interest expense for the three months ended September 30, 2020 was $7.6 million, a decrease of $13.8 million, or 64%, compared to the same period in 2019. For the nine months ended September 30, 2020, total interest expense was $33.3 million, a decrease of $27.9 million, or 46%, compared to the same period in 2019. The decreases in interest expense for the three and nine months periods were primarily driven by the impact of lower rates on interest-bearing deposits and borrowings and decreases in the average volume of borrowings due to higher deposits, partially offset by increases in the volume of interest-bearing deposits.
Interest expense on interest-bearing deposits for the three months ended September 30, 2020 was $6.4 million, a decrease of $9.1 million, or 58%, compared to the same period in 2019, as a result of an 83 basis point decrease in the average rate, partially offset by a 14% increase in the average balance. For the nine months ended September 30, 2020, interest expense on interest-bearing deposits was $26.6 million, a decrease of $17.5 million, or 40%, compared to the same period in 2019, as a result of a 56 basis point decrease in the average rate, partially offset by a 9% increase in the average balance. The decreases in the average rate paid on deposits for the three and nine month periods were driven primarily by wholesale reductions in rates paid for deposit accounts given decreases in interest rates. The increases in the average balance for interest-bearing deposits was primarily driven by increases in deposit products in all regions in which the Bank operates as clients hold additional cash deposit balances given the economic uncertainty surrounding the COVID-19 pandemic.
Interest expense paid on non-deposit interest-bearing liabilities for the three months ended September 30, 2020 was $1.2 million, a decrease of $4.8 million, or 80%, compared to the same period in 2019, as a result of a 163 basis point decrease in the average rate paid on FHLB borrowings and other borrowings, a 53% decrease in the average balance of FHLB borrowings and other borrowings, and a 189 basis point decrease in the average rate on junior subordinated debentures. For the nine months ended September 30, 2020, interest paid on non-deposit interest-bearing liabilities was $6.8 million, a decrease of $10.4 million, or 61%, compared to the same period in 2019, as a result of a 105 basis point decrease in the average rate paid on FHLB borrowings and other borrowings, a 40% decrease in the average balance of FHLB borrowings and other borrowings, and a 131 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 decreases in the average balance for non-deposit interest-bearing liabilities were primarily driven by increases in deposits reducing the need for higher-cost borrowings.
Provision/(credit) for loan losses. The Company recorded a provision credit of $4.6 million for the three months ended September 30, 2020, compared to a provision for loan losses of $0.2 million for the same period in 2019. The decrease in the Allowance for loan losses for the three months ended September 30, 2020 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter, as well as the net impact of the change in the composition and volume of the loan portfolio. These improvements were partially offset by the net impact in the changes of the qualitative factors, and a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts, including consideration for the significant uncertainty related to the duration and severity of economic impacts from the COVID-19 pandemic.
For the nine months ended September 30, 2020, the Company recorded a provision for loan losses of $35.0 million, compared to a provision for loan losses of $0.1 million for the same period in 2019. The increase in Allowance for loan losses for the nine months ended September 30, 2020 was primarily driven by the change in allowance methodology from the incurred loss model to the current expected credit loss model, as well as the current reasonable and supportable economic forecast deterioration as a result of the COVID-19 pandemic, and the net change in qualitative factors to account for risks and
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assumptions related to our loan portfolio not incorporated in the forecasts. Under the CECL methodology, the provision for loan losses 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 A