Edgar Filing: BOSTON PRIVATE FINANCIAL HOLDINGS INC

2013 Q1 10-Q BPFH

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013


o	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: 0-17089

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)




Commonwealth of Massachusetts	04-2976299
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Ten Post Office Square Boston, Massachusetts	02109
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (888) 666-1363

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 3, 2013:



Common Stock-Par Value $1.00	79,063,544
(class)	(outstanding)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS



PART I—FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Executive Summary	42
	Critical Accounting Policies	43
	Financial Condition	43
	Condensed Consolidated Balance Sheets and Discussion	43
	Loan Portfolio and Credit Quality	46
	Liquidity	51
	Capital Resources	53
	Results of Operations	54
	Recent Accounting Pronouncements	59
Item 3	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4	Controls and Procedures	60
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	61
Item 1A	Risk Factors	61
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3	Defaults upon Senior Securities	61
Item 4	Mine Safety Disclosure	61
Item 5	Other Information	61
Item 6	Exhibits	62
	Signature Page	63
	Certifications

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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)



	March 31, 2013			December 31, 2012
	(In thousands, except share and per share data)
Assets:
Cash and cash equivalents	$	54,136		$	308,744
Investment securities available for sale (amortized cost of $728,989 and $690,556 at March 31, 2013 and December 31, 2012, respectively)	736,610			699,300
Loans held for sale	289,180			308,390
Total loans	4,783,467			4,814,136
Less: Allowance for loan losses	82,286			84,057
Net loans	4,701,181			4,730,079
Other real estate owned (“OREO”)	2,329			3,616
Stock in Federal Home Loan Banks	40,436			41,981
Premises and equipment, net	29,014			27,081
Goodwill	110,180			110,180
Intangible assets, net	23,813			24,874
Fees receivable	10,452			8,836
Accrued interest receivable	14,774			14,723
Deferred income taxes, net	60,634			62,245
Other assets	123,682			124,956
Total assets	$	6,196,421		$	6,465,005
Liabilities:
Deposits	$	4,517,351		$	4,885,059
Deposits held for sale	188,252			194,084
Securities sold under agreements to repurchase	122,187			116,319
Federal funds purchased	50,000			—
Federal Home Loan Bank borrowings	461,411			408,121
Junior subordinated debentures	133,835			143,647
Other liabilities	88,869			95,386
Total liabilities	5,561,905			5,842,616
Redeemable Noncontrolling Interests	17,438			19,287
Shareholders’ Equity:
Preferred stock, $1.00 par value; authorized: 2,000,000 shares;
Series B, issued and outstanding (contingently convertible): 401 shares at March 31, 2013 and December 31, 2012; liquidation value: $100,000 per share	58,089			58,089
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 79,053,668 shares at March 31, 2013 and 78,743,518 shares at December 31, 2012	79,054			78,744
Additional paid-in capital	641,918			640,891
Accumulated deficit	(163,543		)	(176,746		)
Accumulated other comprehensive income	1,560			2,124
Total shareholders’ equity	617,078			603,102
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	6,196,421		$	6,465,005

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



	Three months ended March 31,
	2013		2012
	(In thousands, except share and per share data)
Interest and dividend income:
Loans	$	49,350	$	51,946
Taxable investment securities	514		1,256
Non-taxable investment securities	839		848
Mortgage-backed securities	1,402		1,603
Federal funds sold and other	176		149
Total interest and dividend income	52,281		55,802
Interest expense:
Deposits	3,786		4,903
Federal Home Loan Bank borrowings	2,831		3,945
Junior subordinated debentures	1,154		1,752
Repurchase agreements and other short-term borrowings	234		434
Total interest expense	8,005		11,034
Net interest income	44,276		44,768
Provision/ (credit) for loan losses	—		4,000
Net interest income after provision for loan losses	44,276		40,768
Fees and other income:
Investment management and trust fees	16,868		15,238
Wealth advisory fees	10,068		9,236
Other banking fee income	1,798		1,367
Gain on sale of loans, net	1,187		421
Gain on repurchase of debt	574		879
Gain on sale of investments, net	10		13
Gain/ (loss) on OREO, net	34		(41		)
Other	57		341
Total fees and other income	30,596		27,454
Operating expense:
Salaries and employee benefits	37,449		36,912
Occupancy and equipment	7,503		7,265
Professional services	2,661		2,939
Marketing and business development	1,457		1,329
Contract services and data processing	1,568		1,188
Amortization of intangibles	1,118		1,090
FDIC insurance	1,040		849
Restructuring expense	—		135
Other	3,768		3,920
Total operating expense	56,564		55,627
Income before income taxes	18,308		12,595
Income tax expense	5,897		3,851
Net income from continuing operations	12,411		8,744
Net income from discontinued operations	1,722		1,554
Net income before attribution to noncontrolling interests	14,133		10,298



	Three months ended March 31,
	2013			2012
	(In thousands, except share and per share data)
Less: Net income attributable to noncontrolling interests	930			793
Net income attributable to the Company	$	13,203		$	9,505
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders	$	(1,365	)	$	(1,110	)
Net income attributable to common shareholders for earnings/ (loss) per share calculation	$	11,838		$	8,395
Basic earnings/ (loss) per share attributable to common shareholders:
From continuing operations:	$	0.13		$	0.09
From discontinued operations:	$	0.02		$	0.02
Total attributable to common shareholders:	$	0.15		$	0.11
Weighted average basic common shares outstanding	76,818,610			75,632,980
Diluted earnings/ (loss) per share attributable to common shareholders:
From continuing operations:	$	0.13		$	0.09
From discontinued operations:	$	0.02		$	0.02
Total attributable to common shareholders:	$	0.15		$	0.11
Weighted average diluted common shares outstanding	77,825,430			76,432,851

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	Three months ended March 31,
	2013			2012
	(In thousands)
Net income attributable to the Company	$	13,203		$	9,505
Other comprehensive income/ (loss), net of tax:
Unrealized gain/ (loss) on securities available for sale	(609		)	9
Reclassification adjustment for net realized gain/ (loss) included in net income	6			7
Net unrealized gain/ (loss) on securities available for sale	(615		)	2
Unrealized gain/ (loss) on cash flow hedges	(63		)	(162		)
Reclassification adjustment for net realized gain/ (loss) included in net income	(270		)	(243		)
Net unrealized gain/ (loss) on cash flow hedges	207			81
Net unrealized gain/ (loss) on other	(156		)	(141		)
Other comprehensive income/ (loss), net of tax	(564		)	(58		)
Total comprehensive income/ (loss) attributable to the Company, net	$	12,639		$	9,447

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)



	Common Stock		Preferred Stock		Additional Paid-in Capital			Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income/ (Loss)			Total
	(In thousands, except share data)
Balance, December 31, 2011	$	78,023	$	58,089	$	656,436		$	(230,017	)	$	3,594		$	566,125
Net income attributable to the Company	—		—		—			9,505			—			9,505
Other comprehensive income/ (loss), net	—		—		—			—			(58		)	(58		)
Dividends paid to common shareholders: $0.01 per share	—		—		(776		)	—			—			(776		)
Dividends paid to preferred shareholder	—		—		(73		)	—			—			(73		)
Repurchase of Carlyle warrants and Director’s warrants	—		—		(15,000		)	—			—			(15,000		)
Net proceeds from issuance of:
98,500 shares of common stock	99		—		458			—			—			557
6,609 shares of incentive stock grants, net of cancellations and forfeitures	7		—		(7		)	—			—			—
Amortization of stock compensation and employee stock purchase plan	—		—		1,927			—			—			1,927
Stock options exercised	23		—		161			—			—			184
Tax deficiency from certain stock compensation awards	—		—		(952		)	—			—			(952		)
Other equity adjustments	—		—		102			—			—			102
Balance, March 31, 2012	$	78,152	$	58,089	$	642,276		$	(220,512	)	$	3,536		$	561,541

Balance, December 31, 2012	$	78,744	$	58,089	$	640,891		$	(176,746	)	$	2,124		$	603,102
Net income attributable to the Company	—		—		—			13,203			—			13,203
Other comprehensive income/ (loss), net	—		—		—			—			(564		)	(564		)
Dividends paid to common shareholders: $0.05 per share	—		—		(4,003		)	—			—			(4,003		)
Dividends paid to preferred shareholder	—		—		(363		)	—			—			(363		)
Net proceeds from issuance of:
71,891 shares of common stock	72		—		479			—			—			551
81,418 shares of incentive stock grants, net of cancellations and forfeitures	81		—		(81		)	—			—			—
Amortization of stock compensation and employee stock purchase plan	—		—		2,278			—			—			2,278
Stock options exercised	157		—		1,045			—			—			1,202
Tax deficiency from certain stock compensation awards	—		—		(672		)	—			—			(672		)
Other equity adjustments	—		—		2,344			—			—			2,344
Balance, March 31, 2013	$	79,054	$	58,089	$	641,918		$	(163,543	)	$	1,560		$	617,078

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Three months ended March 31,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net income attributable to the Company	$	13,203		$	9,505
Adjustments to arrive at net income from continuing operations
Net income attributable to noncontrolling interests	930			793
(Income) before tax from discontinued operations, not including gain on disposal	(3,036		)	(2,752		)
Tax expense from discontinued operations	1,314			1,198
Net income from continuing operations	12,411			8,744
Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities:
Depreciation and amortization	5,203			4,960
Net income attributable to noncontrolling interests	(930		)	(793		)
Equity issued as compensation	2,278			1,927
Provision/ (credit) for loan losses	—			4,000
Loans originated for sale	(73,290		)	(34,218		)
Proceeds from sale of loans held for sale	93,335			42,981
Gain on the repurchase of debt	(574		)	(879		)
Deferred income tax expense/ (benefit)	1,346			674
Net decrease/ (increase) in other operating activities	(5,935		)	(8,416		)
Net cash provided by/ (used in) operating activities of continuing operations	33,844			18,980
Net cash provided by/ (used in) operating activities of discontinued operations	1,722			1,090
Net cash provided by/ (used in) operating activities	35,566			20,070
Cash flows from investing activities:
Investment securities available for sale:
Purchases	(106,697		)	(102,353		)
Sales	1,451			4,359
Maturities, redemptions, and principal payments	64,829			115,079
(Investments)/ distributions in trusts, net	(118		)	(591		)
(Purchase)/ redemption of Federal Home Loan Banks stock	1,545			1,075
Net (increase)/ decrease in portfolio loans	18,112			(201,143		)
Proceeds from recoveries of loans previously charged-off	1,122			729
Proceeds from sale of OREO	844			1,176
Proceeds from sale of portfolio loans	9,449			—
Capital expenditures	(3,453		)	(1,864		)
Cash used in other investing activities	(224		)	—
Net cash provided by/ (used in) investing activities of continuing operations	(13,140		)	(183,533		)
Net cash provided by/ (used in) investing activities of discontinued operations	—			(21		)
Net cash provided by/ (used in) investing activities	(13,140		)	(183,554		)



	Three months ended March 31,
	2013			2012
	(In thousands)
Cash flows from financing activities:
Net increase/ (decrease) in deposits, including deposits held for sale	(373,540		)	72,040
Net (decrease)/ increase in securities sold under agreements to repurchase	5,868			(22,240		)
Net (decrease)/ increase in federal funds purchased	50,000			—
Net (decrease)/ increase in short-term Federal Home Loan Bank borrowings	60,000			70,000
Advances of long-term Federal Home Loan Bank borrowings	20,000			15,000
Repayments of long-term Federal Home Loan Bank borrowings	(26,710		)	(24,276		)
Repurchase of debt	(8,932		)	(2,420		)
Dividends paid to common shareholders	(4,003		)	(776		)
Dividends paid to preferred shareholder	(363		)	(73		)
Repurchase of warrants	—			(15,000		)
Tax deficiency from certain stock compensation awards	(672		)	(952		)
Proceeds from stock option exercises	1,202			184
Proceeds from issuance of common stock, net	551			557
Distributions paid to noncontrolling interests	(729		)	(445		)
Other equity adjustments	294			(333		)
Net cash provided by/ (used in) financing activities of continuing operations	(277,034		)	91,266
Net cash provided by/ (used in) financing activities of discontinued operations	—			—
Net cash provided by/ (used in) financing activities	(277,034		)	91,266
Net increase/ (decrease) in cash and cash equivalents	(254,608		)	(72,218		)
Cash and cash equivalents at beginning of year	308,744			203,354
Cash and cash equivalents at end of period	$	54,136		$	131,136
Supplementary schedule of non-cash investing and financing activities:
Cash paid for interest	$	7,873		$	11,165
Cash paid for income taxes, net of (refunds received)	2,809			996
Net unrealized gain/ (loss) on securities available for sale	(615		)	2
Net unrealized gain/ (loss) on cash flow hedges	207			81
Net unrealized gain/ (loss) on other	(156		)	(141		)
Non-cash transactions:
Loans transferred into/ (out of) other real estate owned from/ (to) held for sale or portfolio	(477		)	—
Loans transferred into/ (out of) held for sale from/ (to) portfolio	9,097			—

See accompanying notes to consolidated financial statements.

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 with three reportable segments: Private Banking, Investment Management, and Wealth Advisory.

Boston Private Bank & Trust Company (the “Bank” or “Boston Private Bank”) is a trust company chartered by The Commonwealth of Massachusetts, insured by the Federal Deposit Insurance Corporation (the “FDIC”), and a wholly-owned subsidiary of the Company. Boston Private Bank operates primarily in four geographic markets: New England, San Francisco Bay, Southern California, and the Pacific Northwest. The Bank currently conducts business under the name of Boston Private Bank & Trust Company in all markets. In December 2012, the Bank entered into a definitive agreement to sell its three offices in the Pacific Northwest market.

The Investment Management segment has two consolidated affiliates, consisting of Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”) and Anchor Capital Advisors, LLC (“Anchor”) (together, the “Investment Managers”), both of which are registered investment advisers. Effective January 1, 2013, Anchor/Russell Capital Advisors LLC (“Anchor Russell”) merged into Anchor, with Anchor as the surviving entity. Anchor Capital Holdings, LLC, the former holding company of Anchor and Anchor Russell, which was dissolved upon the merger of Anchor and Anchor Russell, has been reinstated but will remain a pass through entity with no operations. It will continue to be disregarded for tax purposes.

The Wealth Advisory segment has two consolidated affiliate partners, KLS Professional Advisors Group, LLC (“KLS”) and Bingham, Osborn & Scarborough, LLC (“BOS”) (together, the “Wealth Advisors”). In the second quarter of 2012, the Company sold its affiliate Davidson Trust Company (“DTC”). Accordingly, prior period and current financial information related to DTC is included with discontinued operations.

The Company conducts substantially all of its business through its three reportable segments. All significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and include all necessary adjustments of a normal recurring nature which, in the opinion of management, are required for a fair presentation of the results of operations and financial condition of the Company. The interim results of consolidated operations are not necessarily indicative of the results for the entire year.

The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation.

The Company’s significant accounting policies are described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

2. Earnings Per Share

The two class method of calculating EPS is presented below for the three months ended March 31, 2013 and 2012. The following tables present the computations of basic and diluted EPS:



	Three months ended March 31,
	2013			2012
(In thousands, except share and per share data)
Basic earnings/ (loss) per share - Numerator:
Net income from continuing operations	$	12,411		$	8,744
Less: Net income attributable to noncontrolling interests	930			793
Net income from continuing operations attributable to the Company	11,481			7,951
Decrease/ (increase) in noncontrolling interests’ redemption values (1)	(15		)	(86		)
Dividends on participating securities	(442		)	(92		)
Total adjustments to income attributable to common shareholders	(457		)	(178		)
Net income from continuing operations attributable to common shareholders, before allocation to participating securities	11,024			7,773
Less: Amount allocated to participating securities	(731		)	(763		)
Net income from continuing operations attributable to common shareholders, after allocation to participating securities	$	10,293		$	7,010
Net income from discontinued operations, before allocation to participating securities	$	1,722		$	1,554
Less: Amount allocated to participating securities	(177		)	(169		)
Net income from discontinued operations, after allocation to participating securities	$	1,545		$	1,385
Net income attributable to common shareholders, before allocation to participating securities	$	12,746		$	9,327
Less: Amount allocated to participating securities	(908		)	(932		)
Net income attributable to common shareholders, after allocation to participating securities	$	11,838		$	8,395

Basic earnings/ (loss) per share - Denominator:
Weighted average basic common shares outstanding	76,818,610			75,632,980
Per share data - Basic earnings/ (loss) per share from:
Continuing operations	$	0.13		$	0.09
Discontinued operations	$	0.02		$	0.02
Total attributable to common shareholders	$	0.15		$	0.11

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	Three months ended March 31,
(In thousands, except share and per share data)	2013		2012
(In thousands, except share and per share data)
Diluted earnings/ (loss) per share - Numerator:
Net income from continuing operations attributable to common shareholders, after allocation to participating securities	$	10,293	$	7,010
Add back: income allocated to dilutive securities	—		—
Net income from continuing operations attributable to common shareholders, after allocation to participating securities, after assumed dilution	10,293		7,010
Net income from discontinued operations, after allocation to participating securities	1,545		1,385
Net income attributable to common shareholders, after allocation to participating securities, after assumed dilution	$	11,838	$	8,395
Diluted earnings/ (loss) per share - Denominator:
Weighted average basic common shares outstanding	76,818,610		75,632,980
Dilutive effect of:
Stock options and performance-based restricted stock (2)	561,128		453,626
Warrants to purchase common stock (2)	445,692		346,245
Dilutive common shares	1,006,820		799,871
Weighted average diluted common shares outstanding (2)	77,825,430		76,432,851
Per share data - Diluted earnings/ (loss) per share from:
Continuing operations	$	0.13	$	0.09
Discontinued operations	$	0.02	$	0.02
Total attributable to common shareholders	$	0.15	$	0.11
Dividends per share declared on common stock	$	0.05	$	0.01

_____________________

(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, 2012 for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), an increase in redemption value from period to period reduces income attributable to common shareholders. Decreases in redemption value from period to period increase income attributable to common shareholders, but only to the extent that the cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.


(2)	The diluted EPS computations for the three months ended March 31, 2013 and 2012 do not assume the conversion, exercise, or contingent issuance of the following shares for these periods because the result would have been anti-dilutive for the periods indicated. As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:



	Three months ended March 31,
	2013	2012
Shares excluded due to anti-dilution (treasury method):	(In thousands)
Potential common shares from:
Convertible trust preferred securities (a)	21	1,399
Total shares excluded due to anti-dilution	21	1,399

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	Three months ended March 31,
	2013	2012
Shares excluded due to exercise price exceeding the average market price of common shares during the period (total outstanding):	(In thousands)
Potential common shares from:
Stock options, performance-based restricted stock, or other dilutive securities (b)	1,627	2,495
Total shares excluded due to exercise price exceeding the average market price of common shares during the period	1,627	2,495

(a)

If the effect of the conversion of the trust preferred securities would have been dilutive, interest expense, net of tax, related to the convertible trust preferred securities of $0.3 million for the three months ended March 31, 2012 would have been added back to net income attributable to common shareholders for diluted EPS computations for the period presented. None would be added back for the three months ended March 31, 2013.


(b)	Options to purchase shares of common stock, non-participating (performance-based) restricted stock, and other dilutive securities that were outstanding at period ends were not included in the computation of diluted EPS or in the above anti-dilution table because their exercise or conversion prices were greater than the average market price of the common shares during the respective periods.

3. Reportable segments

Management Reporting

The Company has three reportable segments (Private Banking, Investment Management, and Wealth Advisory) and the Parent Company (Boston Private Financial Holdings, Inc.) (the “Holding Company”). The financial performance of the Company is managed and evaluated by these three areas. The segments are managed separately as a result of the concentrations in each function.

Measurement of Segment Profit and Assets

The accounting policies of the segments are the same as those described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Revenues, expenses, and assets are recorded by each segment, and separate financial statements are reviewed by their management and the Company’s segment chief executive officers.

Reconciliation of Reportable Segment Items

The following tables present a reconciliation of the revenues, profits, assets, and other significant items of reportable segments as of and for the three months ended March 31, 2013 and 2012. Interest expense on junior subordinated debentures is reported at the Holding Company.



	Three months ended March 31,
	Net interest income						Non-interest income				Total revenues
	2013			2012			2013		2012		2013			2012
	(In thousands)
Total Bank	$	45,369		$	46,441		$	9,725	$	7,654	$	55,094		$	54,095
Total Investment Managers	6			7			10,096		9,484		10,102			9,491
Total Wealth Advisors (1)	20			7			10,066		9,237		10,086			9,244
Total Segments	45,395			46,455			29,887		26,375		75,282			72,830
Holding Company and Eliminations	(1,119		)	(1,687		)	709		1,079		(410		)	(608		)
Total Company	$	44,276		$	44,768		$	30,596	$	27,454	$	74,872		$	72,222

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	Three months ended March 31,
	Non-interest expense (2)				Income tax expense						Net income from continuing operations
	2013		2012		2013			2012			2013			2012
	(In thousands)
Total Bank	$	34,613	$	35,634	$	6,681		$	4,649		$	13,800		$	9,812
Total Investment Managers	7,745		7,644		773			618			1,584			1,229
Total Wealth Advisors (1)	7,576		6,727		877			924			1,633			1,593
Total Segments	49,934		50,005		8,331			6,191			17,017			12,634
Holding Company and Eliminations	6,630		5,622		(2,434		)	(2,340		)	(4,606		)	(3,890		)
Total Company	$	56,564	$	55,627	$	5,897		$	3,851		$	12,411		$	8,744



	Three months ended March 31,
	Net income attributable to noncontrolling interests				Net income attributable to the Company (3)						Amortization of intangibles
	2013		2012		2013			2012			2013		2012
	(In thousands)
Total Bank	$	—	$	—	$	13,800		$	9,812		$	69	$	26
Total Investment Managers	466		395		1,118			834			800		800
Total Wealth Advisors (1)	464		398		1,169			1,195			249		264
Total Segments	930		793		16,087			11,841			1,118		1,090
Holding Company and Eliminations	—		—		(2,884		)	(2,336		)	—		—
Total Company	$	930	$	793	$	13,203		$	9,505		$	1,118	$	1,090



	As of March 31,										Three months ended March 31,
	Assets				AUM (4)						Depreciation
	2013		2012		2013			2012			2013		2012
	(In thousands)				(In millions)						(In thousands)
Total Bank	$	6,010,107	$	5,939,691	$	4,167		$	3,696		$	1,329	$	1,458
Total Investment Managers	102,205		105,640		9,314			8,047			52		62
Total Wealth Advisors (1)	66,466		66,880		8,487			7,579			88		88
Total Segments	6,178,778		6,112,211		21,968			19,322			1,469		1,608
Holding Company and Eliminations	17,643		36,351		(21		)	(20		)	52		45
Total Company	$	6,196,421	$	6,148,562	$	21,947		$	19,302		$	1,521	$	1,653

___________________


(1)	In the second quarter of 2012, the Company sold its Wealth Advisory affiliate, DTC. Accordingly, prior period results for DTC have been reclassified into discontinued operations and are included with Holding Company and Eliminations in the tables above.


(2)	Non-interest expense for the three months ended March 31, 2013 includes no restructuring expense. Non-interest expense for the three months ended March 31, 2012 includes $0.1 million of restructuring expense. Restructuring expenses were incurred in the Private Banking segment as well as at the Holding Company.


(3)	Net income from discontinued operations for the three months ended March 31, 2013, and 2012 of $1.7 million, and $1.6 million, respectively, are included in Holding Company and Eliminations in the calculation of net income attributable to the Company.


(4)	“AUM” represents Assets Under Management and Advisory at the affiliates. AUM at DTC have been removed since DTC operations are classified with discontinued operations.

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:



	Amortized Cost		Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
	(In thousands)
As of March 31, 2013
Available for sale securities at fair value:
U.S. government and agencies	$	2,455	$	—	$	(41	)	$	2,414
Government-sponsored entities	199,381		872		—			200,253
Municipal bonds	204,955		2,930		(231		)	207,654
Mortgage-backed securities (1)	310,495		5,016		(1,095		)	314,416
Other	11,703		177		(7		)	11,873
Total	$	728,989	$	8,995	$	(1,374	)	$	736,610

As of December 31, 2012
Available for sale securities at fair value:
U.S. government and agencies	$	2,781	$	—	$	(28	)	$	2,753
Government-sponsored entities	154,058		962		(18		)	155,002
Municipal bonds	207,952		3,172		(140		)	210,984
Mortgage-backed securities (1)	313,239		5,597		(909		)	317,927
Other	12,526		120		(12		)	12,634
Total	$	690,556	$	9,851	$	(1,107	)	$	699,300

___________________


(1)	All mortgage-backed securities are guaranteed by U.S. government agencies or Government-sponsored entities.

The following table presents the maturities of investment securities available for sale, based on contractual maturity, as of March 31, 2013. Certain securities are callable before their final maturity. Additionally, certain securities (such as mortgage-backed securities) are shown within the table below based on their final (contractual) maturity, but, due to prepayments and amortization, are expected to have shorter lives.



	Available for Sale Securities
	Amortized cost		Fair value
	(In thousands)
Within one year	$	59,431	$	59,895
After one, but within five years	279,380		281,892
After five, but within ten years	81,641		82,714
Greater than ten years	308,537		312,109
Total	$	728,989	$	736,610

The following table presents the proceeds from sales, gross realized gains and gross realized losses for securities available for sale that were sold during the following periods:



	Three months ended March 31,
	2013		2012
	(In thousands)
Proceeds from sales	$	1,451	$	4,359
Realized gains	10		16
Realized losses	—		(3		)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The following tables presents information regarding securities as of March 31, 2013 and December 31, 2012 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 March 31, 2013	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses			# of securities
Available for sale securities	(In thousands)
U.S. government and agencies	$	1,216	$	(33	)	$	1,198	$	(8	)	$	2,414	$	(41	)	2
Government-sponsored entities	—		—			—		—			—		—			—
Municipal bonds	26,436		(231		)	—		—			26,436		(231		)	19
Mortgage-backed securities	131,081		(1,072		)	2,371		(23		)	133,452		(1,095		)	20
Other	56		(2		)	36		(5		)	92		(7		)	9
Total	$	158,789	$	(1,338	)	$	3,605	$	(36	)	$	162,394	$	(1,374	)	50



As of December 31, 2012	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses			# of securities
Available for sale securities	(In thousands)
U.S. government and agencies	$	1,472	$	(26	)	$	1,281	$	(2	)	$	2,753	$	(28	)	2
Government-sponsored entities	19,982		(18		)	—		—			19,982		(18		)	2
Municipal bonds	20,102		(140		)	—		—			20,102		(140		)	13
Mortgage-backed securities	101,280		(891		)	2,701		(18		)	103,981		(909		)	17
Other	112		(11		)	12		(1		)	124		(12		)	12
Total	$	142,948	$	(1,086	)	$	3,994	$	(21	)	$	146,942	$	(1,107	)	46

The U.S. government and agencies securities and mortgage-backed securities in the table above as of March 31, 2013 had a Standard and Poor’s credit rating of AA+. The municipal bonds in the table above had Moody’s credit ratings of at least Aa3 or Standard and Poor’s credit ratings of A+. The other securities consisted of equity securities.

As of March 31, 2013, the amount of investment securities in an unrealized loss position greater than 12 months as well as in total was not significant and was primarily due to movements in interest rates. The Company has no intent to sell any securities in an unrealized loss position as of March 31, 2013 and it is not more likely than not that the Company would be forced to sell any of these securities prior to the full recovery of all unrealized loss amounts.

Cost method investments, which are included in other assets, can be temporarily impaired when the fair values decline below the amortized costs of the individual investments. There were no cost method investments with unrealized losses as of March 31, 2013. There were $0.1 million of cost method investments with unrealized losses at December 31, 2012. The Company invests primarily in low income housing partnerships which generate tax credits. The Company also holds partnership interests in venture capital funds formed to provide financing to small businesses and to promote community development. The Company had $22.5 million and $24.9 million in cost method investments included in other assets as of March 31, 2013 and December 31, 2012, 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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall:



	As of March 31, 2013		Fair value measurements at reporting date using:
			Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Assets:
Available for sale securities:
U.S. government and agencies	$	2,414	$	—	$	2,414	$	—
Government-sponsored entities	200,253		—		200,253		—
Municipal bonds	207,654		—		207,654		—
Mortgage-backed securities	314,416		—		314,416		—
Other	11,873		11,873		—		—
Total available for sale securities	736,610		11,873		724,737		—
Derivatives - interest rate customer swaps	2,664		—		2,664		—
Derivatives - customer foreign exchange forwards	216		—		216		—
Other investments	6,010		5,324		686		—
Liabilities:
Derivatives - interest rate customer swaps	$	2,746	$	—	$	2,746	$	—
Derivatives - customer foreign exchange forwards	216		—		216		—
Derivatives - junior subordinated debenture interest rate swap	4,750		—		4,750		—

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



			Fair value measurements at reporting date using:
	As of December 31, 2012		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	$	2,753	$	—	$	2,753	$	—
Government-sponsored entities	155,002		—		155,002		—
Municipal bonds	210,984		—		210,984		—
Mortgage-backed securities	317,927		—		317,927		—
Other	12,634		12,634		—		—
Total available for sale securities	699,300		12,634		686,666		—
Derivatives - interest rate customer swaps	2,915		—		2,915		—
Derivatives - customer foreign exchange forwards	120		—		120		—
Other investments	5,892		5,206		686		—
Liabilities:
Derivatives - interest rate customer swaps	$	3,047	$	—	$	3,047	$	—
Derivatives - customer foreign exchange forwards	120		—		120		—
Derivatives - junior subordinated debenture interest rate swap	5,189		—		5,189		—

As of March 31, 2013 and December 31, 2012, available for sale securities consisted primarily of U.S. government and agencies securities, government-sponsored entities securities, municipal bonds, mortgage-backed securities, and other available for sale securities. The equities (which are categorized as other available for sale securities) are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. The government-sponsored entities securities, municipal bonds, mortgage-backed securities, and certain investments in Small Business Administration (“SBA”) loans (which are categorized as U.S. government and agencies securities) generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets. Therefore, they have been categorized as a Level 2 measurement. No investments held at March 31, 2013 or December 31, 2012 were categorized as Level 3.

The Company uses interest rate customer swaps and a junior subordinated debenture interest rate swap to manage its interest rate risk, and customer foreign exchange forward contracts to manage its foreign exchange risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, they have been categorized as a Level 2 measurement as of March 31, 2013 and December 31, 2012. 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 the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy as of March 31, 2013 and December 31, 2012.

Other investments, which are not considered available for sale investments, consist of deferred compensation trusts for the benefit of certain current or former employees, which consist of publicly traded mutual fund investments that are valued

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

at prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement as of March 31, 2013 and December 31, 2012. The remaining other investments categorized as Level 2 consist of the Company’s cost-method investments as of March 31, 2013 and December 31, 2012.

There were no Level 3 assets at March 31, 2013 or December 31, 2012.

The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis during the periods ended March 31, 2013 and 2012, respectively, aggregated by the level in the fair value hierarchy within which those measurements fall.



	As of March 31, 2013		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	As of March 31, 2013		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended March 31, 2013
	(In thousands)
Assets:
Impaired loans (1)	$	4,494	$	—	$	—	$	4,494	$	(1,239	)
	$	4,494	$	—	$	—	$	4,494	$	(1,239	)

___________________


(1)	Collateral-dependent impaired loans held at March 31, 2013 that had write-downs in fair value or whose specific reserve changed during the first three months of 2013.



	As of March 31, 2012		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	As of March 31, 2012		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended March 31, 2012
	(In thousands)
Assets:
Impaired loans (1)	$	4,894	$	—	$	—	$	4,894	$	(979	)
OREO (2)	198		—		—		198		(41		)
	$	5,092	$	—	$	—	$	5,092	$	(1,020	)

________________


(1)	Collateral-dependent impaired loans held at March 31, 2012 that had write-downs in fair value or whose specific reserve changed during the first three months of 2012.


(2)	One OREO property held at March 31, 2012 had a write-down during the first three months of 2012.

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value.



	March 31, 2013
	Fair Value		Valuation technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	4,494	Appraisals of Collateral	Discount for costs to sell	0% - 12%	7%
Impaired Loans	$	4,494	Appraisals of Collateral	Appraisal adjustments	0% - 25%	17%

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	December 31, 2012
	Fair Value		Valuation technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	16,797	Appraisals of Collateral	Discount for costs to sell	6% - 13%	8%
Impaired Loans	$	16,797	Appraisals of Collateral	Appraisal adjustments	0% - 59%	23%
OREO	$	379	Appraisals of Collateral	Discount for costs to sell	8%	8%
OREO	$	379	Appraisals of Collateral	Appraisal adjustments	8%	8%

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

The OREO in the tables above includes those properties that had an adjustment to fair value during the the three months ended March 31, 2013 and 2012. The Company uses appraisals as a basis for determining fair value, 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.

The following tables present the carrying values and fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis (other than certain loans, as noted below):



	March 31, 2013
	Book Value		Fair Value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
FINANCIAL ASSETS:
Cash and cash equivalents	$	54,136	$	54,136	$	54,136	$	—	$	—
Loans, net	4,701,181		4,716,548		—		—		4,716,548
Loans held for sale	289,180		289,180		—		289,180		—
Other financial assets	118,004		118,004		—		118,004		—
FINANCIAL LIABILITIES:
Deposits	4,517,351		4,523,775		—		4,523,775		—
Deposits held for sale	188,252		177,107		—		177,107		—
Securities sold under agreements to repurchase	122,187		123,463		—		123,463		—
Federal Funds purchased	50,000		50,000		—		50,000		—
Federal Home Loan Bank borrowings	461,411		480,402		—		480,402		—
Junior subordinated debentures	133,835		108,573		—		3,875		104,698
Other financial liabilities	9,998		9,998		—		9,998		—

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	December 31, 2012
	Book Value		Fair Value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
FINANCIAL ASSETS:
Cash and cash equivalents	$	308,744	$	308,744	$	308,744	$	—	$	—
Loans, net	4,730,079		4,766,574		—		—		4,766,574
Loans held for sale	308,390		308,908		—		308,908		—
Other financial assets	118,087		118,087		—		118,087		—
FINANCIAL LIABILITIES:
Deposits	4,885,059		4,891,465		—		4,891,465		—
Deposits held for sale	194,084		182,592		—		182,592		—
Securities sold under agreements to repurchase	116,319		117,885		—		117,885		—
Federal Funds purchased	—		—		—		—		—
Federal Home Loan Bank borrowings	408,121		428,037		—		428,037		—
Junior subordinated debentures	143,647		117,502		—		12,804		104,698
Other financial liabilities	10,058		10,058		—		10,058		—

The estimated fair values have been determined by using available quoted market information or other appropriate valuation methodologies. The aggregate fair value amounts presented do not represent the underlying value of the Company taken as a whole.

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 therefore cannot be determined with precision. Changes made to any of the underlying assumptions could significantly affect the estimates.

Cash and cash equivalents

The carrying value reported in the balance sheets for cash and cash equivalents approximates fair value due to the short-term nature of their maturities and are classified as Level 1.

Loans, net

Fair value estimates are based on loans with similar financial characteristics. Fair values of commercial and residential mortgage loans are estimated by discounting contractual cash flows adjusted for prepayment estimates and using discount rates approximately equal to current market rates on loans with similar credit and interest rate characteristics and maturities. The fair value estimates for home equity and other loans are based on outstanding loan terms and pricing in the local markets. The method of estimating the fair value of the loans disclosed in the table above does not incorporate the exit price concept in the presentation of the fair value of these financial instruments. Net loans are included in the Level 3 fair value category based upon the inputs and valuation techniques used.

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. In December 2012, the Bank entered into an agreement to sell its three offices in the Pacific Northwest market. The loans related to this transaction were transferred from the loan portfolio to loans held for sale. The fair value indicated for these loans held for sale was based on the agreed upon offer in the pending transaction. Accordingly, loans held for sale are included in the Level 2 fair value category.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

Other financial assets

Other financial assets consist of accrued interest and fees receivable, stock in Federal Home Loan Banks (“FHLBs”), and the cash surrender value of bank-owned life insurance, for which the carrying amount approximates fair value, and are classified as Level 2.

Deposits

The fair values reported for transaction accounts (demand, NOW, savings, and money market) equal their respective book values reported on the balance sheets and are classified as Level 2. The fair values disclosed are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on certificates of deposit with similar remaining maturities and are classified as Level 2.

Deposits held for sale

Deposits held for sale are recorded at the lower of cost or fair value. All of the deposits held for sale at March 31, 2013 and December 31, 2012 relate to the Pacific Northwest transaction. Fair value estimates are based on actual agreed upon price and premium per the agreement. Accordingly, deposits held for sale are included in the Level 2 fair value category.

Securities sold under agreements to repurchase

The fair value 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 have been classified as Level 2.

Federal funds purchased

The carrying amount of federal funds purchased approximates fair value due to their short-term nature and have been classified as Level 2.

Federal Home Loan Bank borrowings

The fair value reported for FHLB borrowings is estimated based on the discounted value of contractual cash flows. The discount rate used is based on the Bank’s estimated current incremental borrowing rate for FHLB borrowings of similar maturities and have been classified as Level 2.

Junior subordinated debentures

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I was based on the current market price of the securities at March 31, 2013 and December 31, 2012 and have been classified as Level 2. The fair value of the junior subordinated debentures issued by Boston Private Capital Trust II and the junior subordinated debentures acquired in the acquisitions of First Private Bank & Trust, Gibraltar Private Bank and Trust Company (Gibraltar Private Bank and Trust Company was subsequently sold in 2009), and Charter Private Bank was estimated using Level 3 inputs such as the interest rates on these securities and current rates for similar debt, a consideration for illiquidity of trading in the debt, and pending regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt.

During the year ended December 31, 2012, the classification of the inputs used in the valuation technique for the junior subordinated debentures, other than those issued by Boston Private Capital Trust I, were changed from Level 2 to Level 3. This change was the result of a new valuation model used primarily due to the pending changes affecting the regulatory capital treatment of junior subordinated debentures and the impact in the capital markets on new issuances of these types of securities. The Board of Governors of the Federal Reserve System (the “Federal Reserve”) proposed rules in 2012 that will begin to implement the standards set forth by the Basel Committee on Banking Supervision in December 2010 and known as Basel III which apply to capital and liquidity. Such rules would eliminate the current favorable treatment that junior subordinated debentures receive in the calculation of regulatory capital which, when combined with the current low interest rate environment and the illiquidity of this type of instrument to the holder, significantly reduces observable market data for similar debt.

Other financial liabilities

Other financial liabilities consist of accrued interest payable and deferred compensation for which the carrying amount approximates fair value and are classified as Level 2.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

Financial instruments with off-balance sheet risk

The Bank’s commitments to originate loans and for unused lines and outstanding letters of credit are primarily at market interest rates and therefore, the carrying amount approximates fair value.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

6. Loan Portfolio and Credit Quality

The Bank’s lending activities are conducted principally in New England, San Francisco Bay, Southern California, and the Pacific Northwest. In December 2012, the Bank entered into an agreement to sell its three offices in the Pacific Northwest market, and therefore the loans that will be included in the Pacific Northwest transaction are classified as held for sale and are not included in the data below.

The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, construction and land loans, and home equity and other consumer loans. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank’s single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank’s lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including, in particular, the performance of the construction sector. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changing conditions in the New England, San Francisco Bay, and Southern California economies and real estate markets.

Total loans include deferred loan fees/ (costs), net, of ($3.6) million and ($4.2) million as of March 31, 2013 and December 31, 2012, respectively. Deferred loan fees/ (costs) include unamortized premiums or discounts related to mortgage loans purchased by the Bank.

The following table presents a summary of the loan portfolio based on the portfolio segment as of the dates indicated:



	March 31, 2013		December 31, 2012
	(In thousands)
Commercial and industrial	$	788,512	$	806,326
Commercial real estate	1,688,441		1,691,350
Construction and land	148,917		137,570
Residential	1,898,413		1,906,089
Home equity	118,182		123,551
Consumer and other	141,002		149,250
Total Loans	$	4,783,467	$	4,814,136

The following table presents nonaccrual loans receivable by class of receivable as of the dates indicated:



	March 31, 2013		December 31, 2012
	(In thousands)
Commercial and industrial	$	10,071	$	4,337
Commercial real estate	46,295		41,696
Construction and land	4,552		2,213
Residential	11,759		11,744
Home equity	340		660
Consumer and other	9		95
Total	$	73,026	$	60,745

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 less than $0.1 million of loans 90 days or more past due, but still accruing, as of March 31, 2013 and $3.6 million as of December 31, 2012. 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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months under the restructured loan terms, along with meeting other criteria.

The following tables show the payment status of loans receivable by class as of the dates indicated:



	March 31, 2013
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due (1)		60-89 Days Past Due		90+ Days Past Due		Total Accruing Past Due		Current Payment Status		30-89 Days Past Due		90+ Days Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	825	$	2,625	$	—	$	3,450	$	1,210	$	28	$	8,833	$	10,071	$	774,991	$	788,512
Commercial real estate	1,478		241		—		1,719		26,489		5,968		13,838		46,295		1,640,427		1,688,441
Construction and land	36		276		50		362		715		38		3,799		4,552		144,003		148,917
Residential	11,243		282		—		11,525		2,236		3,039		6,484		11,759		1,875,129		1,898,413
Home equity	31		175		—		206		300		—		40		340		117,636		118,182
Consumer and other	37		55		—		92		5		1		3		9		140,901		141,002
Total	$	13,650	$	3,654	$	50	$	17,354	$	30,955	$	9,074	$	32,997	$	73,026	$	4,693,087	$	4,783,467

___________________


(1)	Does not include one commercial and industrial 30-59 day delinquent loan totaling $0.1 million in loans held for sale as of March 31, 2013.



	December 31, 2012
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due (1)		60-89 Days Past Due		90+ Days Past Due		Total Accruing Past Due		Current Payment Status		30-89 Days Past Due		90+ Days Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	10,684	$	210	$	257	$	11,151	$	3,073	$	—	$	1,264	$	4,337	$	790,838	$	806,326
Commercial real estate	3,331		4,572		3,249		11,152		29,125		8,913		3,658		41,696		1,638,502		1,691,350
Construction and land	42		3,216		50		3,308		723		137		1,353		2,213		132,049		137,570
Residential	20,194		3,218		—		23,412		5,101		1,980		4,663		11,744		1,870,933		1,906,089
Home equity	119		39		—		158		300		—		360		660		122,733		123,551
Consumer and other	569		182		—		751		93		—		2		95		148,404		149,250
Total	$	34,939	$	11,437	$	3,556	$	49,932	$	38,415	$	11,030	$	11,300	$	60,745	$	4,703,459	$	4,814,136

___________________


(1)	Does not include one commercial and industrial 30-59 day delinquent loan totaling $0.3 million in loans held for sale as of December 31, 2012.

Nonaccruing and delinquent loans are affected by factors, including economic and business conditions, such as interest rates and unemployment levels, and real estate collateral values, among others. In periods of prolonged economic declines, borrowers may become more severely impacted 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 not be renewed.

Generally when a collateral dependent commercial loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. In limited circumstances, an updated appraisal is obtained on residential and home equity loans that are classified as impaired. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time,

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

the Bank continues to obtain newer appraisals, approximately every 12 to 18 months or sooner, if deemed necessary, especially during periods of declining values.

The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more.

Credit Quality Indicators

The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management’s judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in general economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers’ ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company’s financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company’s analysis of credit risk.

A summary of the rating system used by the Bank, repeated 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, 2012 follows:

Acceptable or Pass - All loans graded as acceptable or pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan losses. Only commercial loans, including commercial real estate, commercial and industrial loans, and construction and land loans are given a numerical grade. For residential, home equity and consumer loans, the Bank classifies loans as acceptable or pass unless there is known information such as delinquency or client requests for modifications which would then generally result in a risk rating such as substandard 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 are classified as impaired.

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 by class of financing receivable as of the dates indicated:



	March 31, 2013
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention (1)		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	763,443	$	5,890	$	9,108	$	10,071	$	788,512
Commercial real estate	1,541,944		52,024		48,178		46,295		1,688,441
Construction and land	122,964		17,265		4,136		4,552		148,917
Residential	1,874,391		—		12,263		11,759		1,898,413
Home equity	116,169		—		1,673		340		118,182
Consumer and other	140,993		—		—		9		141,002
Total	$	4,559,904	$	75,179	$	75,358	$	73,026	$	4,783,467

___________________


(1)	Does not include three commercial and industrial special mention loans totaling $0.8 million and three commercial real estate special mention loans totaling $3.0 million in loans held for sale as of March 31, 2013.



	December 31, 2012
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention (1)		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	779,236	$	13,691	$	9,062	$	4,337	$	806,326
Commercial real estate	1,531,701		54,000		63,953		41,696		1,691,350
Construction and land	110,940		17,048		7,369		2,213		137,570
Residential	1,886,273		—		8,072		11,744		1,906,089
Home equity	121,218		—		1,673		660		123,551
Consumer and other	149,155		—		—		95		149,250
Total	$	4,578,523	$	84,739	$	90,129	$	60,745	$	4,814,136

___________________


(1)	Does not include five commercial and industrial special mention loans totaling $0.9 million and three commercial real estate special mention loans totaling $3.0 million in loans held for sale as of December 31, 2012.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The following tables present, by class of receivable, the balance of impaired loans with and without a related allowance, the associated allowance for those impaired loans with a related allowance, and the total unpaid principal on impaired loans:



	As of and for the three months ended March 31, 2013
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	7,859	$	9,043	n/a		$	7,251	$	81
Commercial real estate	39,348		58,523		n/a		39,835		101
Construction and land	934		1,547		n/a		2,633		91
Residential	6,696		8,164		n/a		3,427		29
Home equity	40		40		n/a		280		1
Consumer and other	—		—		n/a		—		—
Subtotal	54,877		77,317		n/a		53,426		303
With an allowance recorded:
Commercial and industrial	3,245		3,310		$	369	1,676		4
Commercial real estate	24,475		25,957		2,446		20,702		112
Construction and land	3,965		4,046		417		1,637		—
Residential	10,584		10,843		1,496		13,633		112
Home equity	—		—		—		—		—
Consumer and other	—		—		—		—		—
Subtotal	42,269		44,156		4,728		37,648		228
Total:
Commercial and industrial	11,104		12,353		369		8,927		85
Commercial real estate	63,823		84,480		2,446		60,537		213
Construction and land	4,899		5,593		417		4,270		91
Residential	17,280		19,007		1,496		17,060		141
Home equity	40		40		—		280		1
Consumer and other	—		—		—		—		—
Total	$	97,146	$	121,473	$	4,728	$	91,074	$	531

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	As of and for the three months ended March 31, 2012
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	6,538	$	9,264	n/a		$	5,855	$	—
Commercial real estate	29,964		44,809		n/a		33,543		104
Construction and land	6,087		10,360		n/a		6,294		97
Residential	9,572		10,542		n/a		10,232		81
Home equity	360		360		n/a		342		1
Consumer and other	—		—		n/a		—		—
Subtotal	52,521		75,335		n/a		56,266		283
With an allowance recorded:
Commercial and industrial	1,081		1,109		$	113	1,101		—
Commercial real estate	28,121		29,624		3,245		24,586		173
Construction and land	1,194		1,224		313		1,234		—
Residential	13,757		13,757		868		8,295		63
Home equity	131		131		131		131		2
Consumer and other	—		—		—		—		—
Subtotal	44,284		45,845		4,670		35,347		238
Total:
Commercial and industrial	7,619		10,373		113		6,956		—
Commercial real estate	58,085		74,433		3,245		58,129		277
Construction and land	7,281		11,584		313		7,528		97
Residential	23,329		24,299		868		18,527		144
Home equity	491		491		131		473		3
Consumer and other	—		—		—		—		—
Total	$	96,805	$	121,180	$	4,670	$	91,613	$	521

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	As of and for the year ended December 31, 2012
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	3,274	$	4,499	n/a		$	4,707	$	—
Commercial real estate	40,133		64,424		n/a		31,736		283
Construction and land	1,310		2,682		n/a		5,532		97
Residential	2,337		2,594		n/a		8,885		312
Home equity	360		360		n/a		355		3
Consumer and other	—		—		n/a		40		—
Subtotal	47,414		74,559		n/a		51,255		695
With an allowance recorded:
Commercial and industrial	1,149		1,191		$	118	1,855		1
Commercial real estate	18,519		19,814		1,667		24,510		727
Construction and land	903		953		189		1,486		—
Residential	13,539		13,798		1,403		11,781		374
Home equity	—		—		—		114		5
Consumer and other	—		—		—		—		—
Subtotal	34,110		35,756		3,377		39,746		1,107
Total:
Commercial and industrial	4,423		5,690		118		6,562		1
Commercial real estate	58,652		84,238		1,667		56,246		1,010
Construction and land	2,213		3,635		189		7,018		97
Residential	15,876		16,392		1,403		20,666		686
Home equity	360		360		—		469		8
Consumer and other	—		—		—		40		—
Total	$	81,524	$	110,315	$	3,377	$	91,001	$	1,802

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.

When management determines that it is probable that the Bank will not collect all principal and interest on a loan in accordance with the original loan terms, the loan is designated as impaired.

Loans that are designated as impaired require an analysis to determine the amount of impairment, if any. Impairment would be indicated as a result of the carrying value of the loan exceeding the estimated collateral value, less costs to sell, for collateral dependent loans or the net present value of the projected cash flow, discounted at the loan’s contractual effective interest rate, for loans not considered to be collateral dependent. Generally, shortfalls 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 reserve allocations unless a known loss is determined to have occurred, in which case such known loss is charged-off.

Loans in the held for sale category are carried at the lower of cost or estimated fair value in the aggregate and are excluded from the allowance for loan losses analysis.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The Bank may, under certain circumstances, restructure loans as a concession to borrowers who have experienced financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Company’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and principal forgiveness. TDRs totaled $61.2 million and $54.5 million at March 31, 2013 and December 31, 2012, respectively. Of the $61.2 million in TDRs at March 31, 2013, $29.9 million were on accrual status. Of the $54.5 million in TDRs at December 31, 2012, $26.7 million were on accrual status.

Since all TDRs 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 loan based on loan type. Therefore, depending upon the result of the impairment analysis, there could be an increase or decrease in the related allowance for loan losses. Many loans initially categorized as TDRs are already on nonaccrual status and considered impaired. Therefore, there is generally not a material change to the allowance for loan losses when a loan is categorized as a TDR.

The following tables present the balance of TDRs that were restructured or defaulted during the periods indicated:



	As of and for the three months ended March 31, 2013
	Restructured Current Quarter					TDRs that defaulted in the current quarter that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
(Dollars In thousands)
Commercial and industrial (1)	2	$	1,219	$	1,219	—	$	—
Commercial real estate (2)	5	9,163		9,163		1	561
Construction and land (3)	1	347		347		—	—
Residential	—	—		—		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	8	$	10,729	$	10,729	1	$	561

___________________


(1)	Represents the following concessions: extension of term (1 loan; post-modification recorded investment of $1.0 million); and temporary rate reduction (1 loan; post-modification recorded investment of $0.2 million).


(2)	Represents the following concessions: extension of term (4 loans; post-modification recorded investment of $9.0 million); and combination of concessions (1 loan; post-modification recorded investment of $0.2 million).


(3)	Represents the following concessions: extension of term.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	As of and for the three months ended March 31, 2012
	Restructured Current Quarter					TDRs that defaulted in the current quarter that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
(Dollars In thousands)
Commercial and industrial	—	$	—	$	—	—	$	—
Commercial real estate (1)	4	5,545		5,545		—	—
Construction and land	—	—		—		—	—
Residential (2)	8	3,702		3,702		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	12	$	9,247	$	9,247	—	$	—

___________________


(1)	Represents the following concessions: extension of term (3 loans; post-modification recorded investment of $2.7 million); and combination of concessions (1 loan; post-modification recorded investment of $2.8 million).


(2)	Represents the following concessions: payment deferral (1 loan; post-modification recorded investment of $1.9 million); temporary rate reduction (6 loans; post-modification recorded investment of $0.5 million); and combination of concessions (1 loan; post-modification recorded investment of $1.3 million).

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 reported as a reduction of outstanding loan balances, and totaled $82.3 million and $84.1 million at March 31, 2013 and December 31, 2012, respectively.

The following tables present a summary of the changes in the allowance for loan losses for the periods indicated:



	As of and for the three months ended March 31,
	2013			2012
	(In thousands)
Allowance for loan losses, beginning of period:
Commercial and industrial	$	11,825		$	12,163
Commercial real estate	52,497			63,625
Construction and land	5,016			6,382
Residential	10,892			9,286
Home equity	1,085			1,535
Consumer and other	540			1,149
Unallocated	2,202			1,974
Total allowance for loan losses, beginning of period	84,057			96,114
Provision/ (credit) for loan losses:
Commercial and industrial	(114		)	1,827
Commercial real estate	(919		)	2,030
Construction and land	(1,036		)	(712		)
Residential	1,827			966
Home equity	398			(53		)
Consumer and other	(74		)	(116		)
Unallocated	(82		)	58
Total provision/ (credit) for loan losses	—			4,000
Loans charged-off:
Commercial and industrial	$	(27	)	$	(2,311	)
Commercial real estate	(1,239		)	(406		)
Construction and land	—			—
Residential	(1,265		)	(198		)
Home equity	(360		)	—
Consumer and other	(2		)	(26		)
Total charge-offs	(2,893		)	(2,941		)
Recoveries on loans previously charged-off:
Commercial and industrial	165			383
Commercial real estate	127			117
Construction and land	807			166
Residential	—			—
Home equity	23			61
Consumer and other	—			2
Total recoveries	1,122			729

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	As of and for the three months ended March 31,
	2013		2012
	(In thousands)
Allowance for loan losses at end of period:
Commercial and industrial	11,849		12,062
Commercial real estate	50,466		65,366
Construction and land	4,787		5,836
Residential	11,454		10,054
Home equity	1,146		1,543
Consumer and other	464		1,009
Unallocated	2,120		2,032
Total allowance for loan losses at end of period	$	82,286	$	97,902

The following tables present the Company’s allowance for loan losses and loan portfolio at March 31, 2013 and December 31, 2012 by portfolio segment, disaggregated by method of impairment analysis. The Company had no loans acquired with deteriorated credit quality at March 31, 2013 or December 31, 2012.



	Commercial and industrial		Commercial real estate		Construction and land		Residential
	(In thousands)
Allowance for loan losses balance at March 31, 2013 attributable to:
Loans collectively evaluated	$	11,480	$	48,020	$	4,370	$	9,958
Loans individually evaluated	369		2,446		417		1,496
Total allowance for loan losses	$	11,849	$	50,466	$	4,787	$	11,454

Recorded investment (loan balance) at March 31, 2013:
Loans collectively evaluated	$	777,408	$	1,624,618	$	144,018	$	1,881,133
Loans individually evaluated	11,104		63,823		4,899		17,280
Total Loans	$	788,512	$	1,688,441	$	148,917	$	1,898,413



	Home equity		Consumer and other		Unallocated		Total
(Continued from above)	(In thousands)
Allowance for loan losses balance at March 31, 2013 attributable to:
Loans collectively evaluated	$	1,146	$	464	$	2,120	$	77,558
Loans individually evaluated	—		—		—		4,728
Total allowance for loan losses	$	1,146	$	464	$	2,120	$	82,286

Recorded investment (loan balance) at March 31, 2013:
Loans collectively evaluated	$	118,142	$	141,002	$	—	$	4,686,321
Loans individually evaluated	40		—		—		97,146
Total Loans	$	118,182	$	141,002	$	—	$	4,783,467

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	Commercial and industrial		Commercial real estate		Construction and land		Residential
	(In thousands)
Allowance for loan losses balance at December 31, 2012 attributable to:
Loans collectively evaluated	$	11,707	$	50,830	$	4,827	$	9,489
Loans individually evaluated	118		1,667		189		1,403
Total allowance for loan losses	$	11,825	$	52,497	$	5,016	$	10,892

Recorded investment (loan balance) at December 31, 2012:
Loans collectively evaluated	$	801,903	$	1,632,698	$	135,357	$	1,890,213
Loans individually evaluated	4,423		58,652		2,213		15,876
Total Loans	$	806,326	$	1,691,350	$	137,570	$	1,906,089



	Home equity		Consumer and other		Unallocated		Total
(Continued from above)	(In thousands)
Allowance for loan losses balance at December 31, 2012 attributable to:
Loans collectively evaluated	$	1,085	$	540	$	2,202	$	80,680
Loans individually evaluated	—		—		—		3,377
Total allowance for loan losses	$	1,085	$	540	$	2,202	$	84,057

Recorded investment (loan balance) at December 31, 2012:
Loans collectively evaluated	$	123,191	$	149,250	$	—	$	4,732,612
Loans individually evaluated	360		—		—		81,524
Total Loans	$	123,551	$	149,250	$	—	$	4,814,136

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 fixed and variable rate loan assets and fixed and variable rate borrowings.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2013 and December 31, 2012.



	March 31, 2013							December 31, 2012
	Asset derivatives			Liability derivatives				Asset derivatives			Liability derivatives
	Balance sheet location	Fair value (1)		Balance sheet location	Fair value (1)			Balance sheet location	Fair value (1)		Balance sheet location	Fair value (1)
	(In thousands)
Derivatives designated as hedging instruments:
Interest rate products	Other assets	$	—	Other liabilities	$	(4,750	)	Other assets	$	—	Other liabilities	$	(5,189	)
Derivatives not designated as hedging instruments:
Interest rate products	Other assets	2,664		Other liabilities	(2,746		)	Other assets	2,915		Other liabilities	(3,047		)
Foreign exchange contracts	Other assets	216		Other liabilities	(216		)	Other assets	120		Other liabilities	(120		)
Total		$	2,880		$	(7,712	)		$	3,035		$	(8,356	)

___________________


(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 in the consolidated statements of operations for the three months ended March 31, 2013 and 2012.



Derivatives in cash flow hedging relationships	Amount of gain or (loss) recognized in OCI on derivative (effective portion)						Location of gain or (loss) reclassified from accumulated OCI into income (effective portion)	Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)
	three months ended March 31,							three months ended March 31,
	2013			2012				2013			2012
(In thousands)
Interest rate products	$	(22	)	$	(277	)	Interest income	$	(461	)	$	(416	)
Total	$	(22	)	$	(277	)		$	(461	)	$	(416	)

The following table presents the components of the Company’s accumulated other comprehensive income/ (loss) related to the derivatives for the three months ended March 31, 2013 and 2012.



	Three months ended March 31,
	2013			2012
	(In thousands)
Accumulated other comprehensive income on cash flow hedges, balance at beginning of period	$	(2,969	)	$	(3,106	)
Net change in unrealized gain/ (loss) on cash flow hedges	207			81
Accumulated other comprehensive income on cash flow hedges, balance at end of period	$	(2,762	)	$	(3,025	)

Cash Flow Hedges of Interest Rate Risk

The Company’s objective in using derivatives is to add stability to interest income and expense and to manage the risk related to exposure to changes in interest rates. To accomplish this objective, the Holding Company entered into an interest rate swap in the second quarter of 2010 with a notional amount of $75 million related to the Holding Company’s cash outflows associated with the subordinated debt related to trust preferred securities to protect against an increase in the London Interbank Offered Rate (“LIBOR”). The interest rate swap had an effective date of December 30, 2010 and a term of five years. As of December 30, 2010, the subordinated debt switched from a fixed rate of 6.25% to a variable rate of three-month LIBOR plus

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

1.68%. The interest rate swap effectively fixed the Holding Company’s interest rate payments on the $75 million of debt at 4.45%.

The Company uses the “Hypothetical Derivative Method” described in ASC 815, Derivatives and Hedging (“ASC 815”), for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge ineffectiveness. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (“OCI”) (outside of earnings) and subsequently reclassified to earnings in interest and dividend income when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge is recorded as a gain or loss in the consolidated statement of operations as part of fees and other income. The Holding Company had no hedge ineffectiveness recognized in earnings during the three months ended March 31, 2013 and 2012. The Holding Company also monitors the risk of counterparty default on an ongoing basis.

A portion of the balance reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are made or received on the Holding Company’s interest rate swap. During the next twelve months, the Holding Company estimates that $1.8 million will be reclassified as an increase in interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from two different services the Bank provides to qualified commercial clients. The Bank offers certain derivative products directly to such clients. The Bank economically hedges derivative transactions executed with commercial clients by entering into mirror-image, offsetting derivatives with third parties. Derivative transactions executed as part of these programs are not designated in ASC 815-qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. Because the derivatives have mirror-image contractual terms, the changes in fair value substantially offset through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in the consolidated statement of operations in other income. The derivative asset and liability values above include an adjustment related to the consideration of credit risk required under ASC 820, of less than ($0.1) million and $0.1 million in earnings for the three months ended March 31, 2013 and 2012. As of March 31, 2013 and December 31, 2012, the Bank had eight and 11 interest rate swaps with an aggregate notional amount of $52.1 million and $55.7 million, respectively, related to this program. As of March 31, 2013 and December 31, 2012, the Bank also had 14 and six, respectively, foreign currency exchange contracts with notional amounts of $10.7 million and $3.7 million, respectively, related to this program.

The following table presents the effect of the Company’s derivative financial instruments, not designated as hedging instruments, in the consolidated statement of operations for the three months ended March 31, 2013 and 2012.



Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss), Net, Recognized in Income on Derivative Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments		2013			2012
		(In thousands)
Interest rate products	Other income/ expense	$	(4	)	$	81
Foreign exchange contracts	Other income/ expense	2			—
Total		$	(2	)	$	81

The Holding Company and the Bank have agreements with their derivative counterparties that contain provisions where, if the Holding Company or Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Holding Company or the Bank could also be declared in default on its derivative obligations. The Holding Company and the Bank were in compliance with these provisions as of March 31, 2013 and December 31, 2012.

The Holding Company and the Bank also have agreements with certain of their derivative counterparties that contain provisions where, if the Holding Company or Bank fails to maintain its status as a well- or adequately-capitalized institution, then the counterparty could terminate the derivative positions and the Holding Company or the Bank would be required to settle its obligations under the agreements. The Holding Company and the Bank were in compliance with these provisions as of March 31, 2013 and December 31, 2012.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

Certain of the Holding Company and the Bank’s agreements with their derivative counterparties contain provisions where if specified events or conditions occur that materially change the Holding Company’s or the Bank’s creditworthiness in an adverse manner, the Holding Company or the Bank may be required to fully collateralize their obligations under the derivative instruments. The Holding Company and the Bank were in compliance with these provisions as of March 31, 2013 and December 31, 2012.

As of March 31, 2013 and December 31, 2012, the termination amounts related to collateral determinations of derivatives in a liability position was $7.6 million and $8.4 million, respectively. The Company has minimum collateral posting thresholds with its derivative counterparty and has posted collateral of $10.4 million as of March 31, 2013 and December 31, 2012, against its obligation under this agreement.

9. Income Taxes

The following table presents the components of income tax expense for continuing operations, discontinued operations, noncontrolling interests and the Company:



	Three months ended March 31,
	2013			2012
	(In thousands)
Income from continuing operations:
Income before income taxes	$	18,308		$	12,595
Income tax expense	5,897			3,851
Net income from continuing operations	$	12,411		$	8,744
Effective tax rate, continuing operations	32.2		%	30.6		%

Income from discontinued operations:
Income before income taxes	$	3,036		$	2,752
Income tax expense	1,314			1,198
Net income from discontinued operations	$	1,722		$	1,554
Effective tax rate, discontinued operations	43.3		%	43.5		%

Income attributable to noncontrolling interests:
Income before income taxes	$	930		$	793
Income tax expense	—			—
Net income attributable to noncontrolling interests	$	930		$	793
Effective tax rate, noncontrolling interests	—		%	—		%

Income attributable to the Company
Income before income taxes	$	20,414		$	14,554
Income tax expense	7,211			5,049
Net income attributable to the Company	$	13,203		$	9,505
Effective tax rate attributable to the Company	35.3		%	34.7		%

The effective tax rate for continuing operations for the three months ended March 31, 2013 of 32.2%, with related tax expense of $5.9 million, was calculated based on a projected 2013 annual effective tax rate. The effective tax rate was less than the statutory rate of 35% due primarily to earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests. These items were partially offset by state and local income taxes.

The effective tax rate for continuing operations for the three months ended March 31, 2012 of 30.6%, with related tax expense of $3.9 million, was calculated based on a projected 2012 annual effective tax rate. The effective tax rate was less than the statutory rate of 35% due primarily to earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests. These items were partially offset by state and local income taxes.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The effective tax rate for continuing operations for the three months ended March 31, 2013 is greater than the effective tax rate for the same period in 2012 due primarily to earnings from tax-exempt investments, income tax credits, and income attributable to noncontrolling interests having a smaller impact on the effective tax rate, due primarily to the higher level of income before taxes in 2013 compared to 2012.

Contingent consideration related to the 2009 divestiture of certain affiliates, primarily related to the revenue sharing agreement with Westfield Capital Management Company, LLC, is also reflected under “discontinued operations” in the table above. The profits and losses attributable to owners other than the Company are reflected under “noncontrolling interests” in the table above.

10. Noncontrolling Interests

At the Company, noncontrolling interests typically consist of equity owned by management of the Company’s respective majority-owned affiliates. Net income attributable to noncontrolling interests in the consolidated statements of operations represents the net income allocated to the noncontrolling interest owners of the affiliates. Net income allocated to the noncontrolling interest owners was $0.9 million and $0.8 million for the three months ended March 31, 2013 and 2012, 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 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 total shareholders’ equity. The Company had no noncontrolling interests included in shareholder’s equity at March 31, 2013 and December 31, 2012. However, due to the redemption features of the noncontrolling interests, the Company had redeemable noncontrolling interests held in mezzanine equity in the accompanying consolidated balance sheets of of $17.4 million and $19.3 million at March 31, 2013 and December 31, 2012, respectively. The aggregate amount of such redeemable noncontrolling equity interests are recorded at the estimated maximum redemption values.

Each affiliate operating agreement provides the Company and/or the noncontrolling interests with contingent call or put redemption features used for the orderly transfer of noncontrolling equity interests between the affiliate noncontrolling interest owners and the Company at either a contractually predetermined fair value, multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), or fair value. The Company may liquidate these noncontrolling interests in cash, shares of the Company’s common stock, or other forms of consideration dependent on the operating agreement. These agreements are discussed in Part II. Item 8. “Financial Statements and Supplementary Data – Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Generally, these put and call redemption features refer to shareholder rights of both the Company and the noncontrolling interest owners of the Company’s majority-owned affiliate companies. The affiliate company noncontrolling interests generally take the form of limited liability company (LLC) units, profits interests, or common stock (collectively, the “noncontrolling equity interests”). In most circumstances, the put and call redemption features generally relate to the Company’s right and, in some cases, obligation to purchase and the noncontrolling equity interests’ right to sell their equity interests. There are various events that could cause the puts or calls to be exercised, such as a change in control, death, disability, retirement, resignation or termination. The puts and calls are generally to be exercised at the then fair value or a contractually agreed upon approximation thereof. The terms of these rights vary and are governed by the respective individual operating and legal documents.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The following table presents the contractually determined maximum redemption values to repurchase the noncontrolling interests at the periods indicated:



	March 31, 2013		December 31, 2012
	(In thousands)
Anchor	$	11,122	$	11,105
BOS	3,900		5,782
DGHM	2,416		2,400
Total	$	17,438	$	19,287

The following table presents an analysis of the Company’s redeemable noncontrolling interests for the periods indicated:



	Three months ended March 31,
	2013			2012
	(In thousands)
Redeemable noncontrolling interests at beginning of year	$	19,287		$	21,691
Net income attributable to noncontrolling interests	930			793
Distributions	(729		)	(445		)
Adjustments to fair value	(2,050		)	(435		)
Redeemable noncontrolling interests at end of period	$	17,438		$	21,604

11. Restructuring

On May 27, 2011, the Company completed the merger of its four private banks, operating in the New England, San Francisco Bay, Southern California and Pacific Northwest markets, under a single Massachusetts charter. During this period of restructuring, the Company sought to reduce expenses by simplifying the portfolio businesses, streamlining the Holding Company structure, while incurring certain merger-related expenses such as severance charges, costs to terminate contracts, legal, audit and consulting costs, and other costs. The Company had substantially completed the merger-related restructuring as planned in the first half of 2012.

During the second half of 2012, the Company implemented a senior executive restructuring of the Holding Company leadership and Bank management. The purpose of this restructuring was to create a more streamlined organization and to refine the Company’s cost base. To implement the new structure the Company incurred an additional severance charge of $4.8 million. The Company expects no additional severance charges associated with this initiative.

Restructuring expenses incurred since the plans of restructuring were first implemented in 2011 totaled $14.0 million with the Private Banking segment incurring $9.5 million, and the remaining $4.5 million incurred by the Holding Company.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The following table presents a summary of the restructuring activity for the three months ended March 31, 2013 and 2012.



	Severance Charges			Contract Termination Fees		Professional Expenses			Other Associated Costs			Total
	(In thousands)
Accrued charges at December 31, 2011	$	2,658		$	211	$	230		$	—		$	3,099
Costs incurred	(1		)	—		128			8			135
Costs paid	(459		)	—		(254		)	(8		)	(721		)
Accrued charges at March 31, 2012	$	2,198		$	211	$	104		$	—		$	2,513

Accrued charges at December 31, 2012	$	3,517		$	98	$	8		$	—		$	3,623
Costs incurred	—			—		—			—			—
Costs paid	(736		)	—		(8		)	—			(744		)
Accrued charges at March 31, 2013	$	2,781		$	98	$	—		$	—		$	2,879

12. Recent Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments to this update require entities to present information about reclassifications out of accumulated other comprehensive income in a single note or on the face of the financial statements. The new guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with early adoption permitted. The Company did not early adopt. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

In July 2012, the FASB issued updated guidance, ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The amendments in this update regarding the impairment testing applicable to indefinite-lived intangible assets, is similar to the impairment guidance issued in ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment, applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess. The updated guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted provided the Company has not yet performed its 2012 impairment test or issued its financial statements. The Company did not early adopt. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

In December 2011, the FASB issued new guidance, ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities and in January 2013, the FASB issued, ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2013-01 limits the scope of disclosures to derivatives, repurchase agreements and securities lending arrangements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013 and requires a retrospective application for all comparative periods which are presented. The adoption of these ASUs did not have a material effect on the Company’s consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

13. Subsequent Events

The Company evaluated subsequent events through the date the accompanying unaudited interim consolidated financial statements were issued. Pursuant to the requirements of ASC 855, Subsequent Events, there were no events or transactions during the subsequent event reporting period that required disclosure in the unaudited consolidated interim financial statements, other than the two transactions discussed below.

On April 24, 2013, the Company closed the public offering of 2,000,000 depositary shares (the “Depositary Shares”) pursuant to an Underwriting Agreement dated April 17, 2013, previously disclosed by the Company. Each Depositary Share represents a 1/40th interest in a share of the Company’s 6.95% Non-Cumulative Perpetual Preferred Stock, Series D, par value $1.00 per share and liquidation preference of $1,000 per share (the “Series D Preferred Stock”).

Upon the issuance of the Series D Preferred Stock on April 24, 2013, the ability of the Company to declare and pay dividends on, or purchase, redeem or otherwise acquire, shares of its preferred stock or any securities of the Company that rank junior to the Series D Preferred Stock was subject to certain restrictions in the event that the Company does not declare and pay (or set aside) dividends on the Series D Preferred Stock for the last preceding dividend period.

Also on April 24, 2013, the Company repurchased all 400.81221 shares of the Company’s Series B Non-Cumulative Perpetual Contingent Convertible Preferred Stock, par value $1.00 per share, held by BP Holdco, L.P. pursuant to a Stock Repurchase Agreement, dated as of April 16, 2013, previously disclosed by the Company.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of and for the three months ended March 31, 2013

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding our strategy, effectiveness of our investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth in assets, deposits and results of operations, receipt of regulatory approval for pending acquisitions, success of acquisitions, future operations, market position, financial position, and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond the Company’s control.

Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned “Risk Factors”; adverse conditions in the capital and debt markets and the impact of such conditions on the Company’s private banking, investment management and wealth advisory activities; changes in interest rates; competitive pressures from other financial institutions; the effects of continued weakness in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay our loans; changes in the value of the securities and other assets; changes in loan default and charge-off rates; the adequacy of loan loss reserves; reductions in deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; the risk that the Company’s deferred tax assets may not be realized; risks related to the identification and implementation of acquisitions; and changes in assumptions used in making such forward-looking statements, as well as the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K and updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

Executive Summary

The Company offers a wide range of wealth management services to high net worth individuals, families, businesses and select institutions through its three reportable segments: Private Banking, Investment Management, and Wealth Advisory. This Executive Summary provides an overview of the most significant aspects of our operating segments and the Company’s operations in the first quarter of 2013. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following.



	Three months ended March 31,							% Change
	2013		2012		Change			% Change
	(In thousands, except per share data)
Total revenues	$	74,872	$	72,222	$	2,650		4	%
Provision/ (credit) for loan losses	—		4,000		(4,000		)	nm
Total operating expenses	56,564		55,627		937			2	%
Net income from continuing operations	12,411		8,744		3,667			42	%
Net income attributable to noncontrolling interests	930		793		137			17	%
Net income attributable to the Company	13,203		9,505		3,698			39	%
Diluted earnings per share:
From continuing operations	$	0.13	$	0.09	$	0.04		44	%
From discontinued operations	$	0.02	$	0.02	$	—		—	%
Attributable to common shareholders	$	0.15	$	0.11	$	0.04		36	%

________________

nm = not meaningful

Net income attributable to the Company was $13.2 million for the three months ended March 31, 2013, compared to $9.5 million in the same period of 2012. The Company recognized diluted earnings per share of $0.15 for the three months ended March 31, 2013, compared to diluted earnings per share of $0.11 for the same period of 2012.

Key items that affected the Company’s results in the first quarter of 2013 compared to the same period of 2012 include:

▪

The Company recorded no provision for loan losses for the three months ended March 31, 2013, compared to a provision for loan losses of $4.0 million in the same period of 2012. The lack of provision in the three months ended March 31, 2013 was driven by a reduction in classified loans and continued improvement in credit quality, the decrease in the loan portfolio, and the change in the mix of the loan portfolio.

▪

The low interest rate environment continues to affect net interest income. Net interest margin (“NIM”) decreased 14 basis points to 3.13% for the three months ended March 31, 2013 compared to the same period in 2012. Net interest income for the three months ended March 31, 2013 was $44.3 million, a decrease of $0.5 million, or 1%, compared to the same period in 2012. This decrease was due to lower average yields on loans and investments, partially offset by lower average rates paid on the Company’s deposits and borrowings, and the increase in the average volume of the loan portfolio.


▪	Fee and other income increased $3.1 million, or 11%, for the three months ended March 31, 2013 compared to the same period in 2012. Investment management and trust fees and wealth advisory fees increased as a result of increased AUM due to market appreciation and positive net flows.


▪	AUM increased 14% to $21.9 billion at March 31, 2013 compared to the same period in 2012. First quarter 2013 AUM net inflows were $181 million, up from $84 million in the same period in 2012.

The Company’s Private Banking segment reported net income attributable to the Company of $13.8 million in the first quarter of 2013, compared to net income attributable to the Company of $9.8 million in the same period of 2012. The $4.0 million, or 41%, increase was a result of recording no provision for loan losses in the first quarter of 2013, increased noninterest income, and reduced noninterest expense, offset by decreased net interest income and increased income tax expense for the three months ended March 31, 2013. AUM increased $0.5 billion, or 13%, to $4.2 billion at March 31, 2013 from $3.7 billion at March 31, 2012, due to both net inflows and investment performance.

The Company’s Investment Management segment reported net income attributable to the Company of $1.1 million in the first quarter of 2013, compared to net income attributable to the Company of $0.8 million in the same period of 2012. The $0.3 million, or 34%, increase was primarily due to increases in investment management and trust fees. Most fee-based revenue is determined based on beginning-of-period AUM data, and, as a result, the increase in investment management and trust fees was related to changes in AUM from December 31, 2011 through December 31, 2012. AUM increased $1.3 billion, or 16%, to $9.3 billion at March 31, 2013 from $8.0 billion at March 31, 2012, due to investment performance.

The Company’s Wealth Advisory segment reported net income attributable to the Company of $1.2 million in the first quarter of 2013, compared to net income attributable to the Company of $1.2 million in the same period of 2012. The $0.8 million increase in wealth advisory fee revenue was offset by increased operating expenses, including a legal settlement expense, increased salaries and employee benefits expense and increased professional services expense. AUM increased $0.9 billion, or 12%, to $8.5 billion at March 31, 2013 from $7.6 billion at March 31, 2012, due to positive net flows and investment performance.

Critical Accounting Policies

Critical accounting policies reflect significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments are the allowance for loan and lease losses, the valuation of goodwill and intangible assets and analysis for impairment, and tax estimates. These policies are discussed in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no changes to these policies through the filing of this Quarterly Report on Form 10-Q.

Financial Condition

Condensed Consolidated Balance Sheets and Discussion



	March 31, 2013		December 31, 2012		Increase/ (decrease)			% Change
	(In thousands)
Assets:
Total cash and investments	$	831,182	$	1,050,025	$	(218,843	)	(21	)%
Loans held for sale	289,180		308,390		(19,210		)	(6	)%
Total loans	4,783,467		4,814,136		(30,669		)	(1	)%
Less: Allowance for loan losses	82,286		84,057		(1,771		)	(2	)%
Net loans	4,701,181		4,730,079		(28,898		)	(1	)%
Goodwill and intangible assets	133,993		135,054		(1,061		)	(1	)%
Other assets	240,885		241,457		(572		)	—	%
Total assets	$	6,196,421	$	6,465,005	$	(268,584	)	(4	)%
Liabilities and Equity:
Deposits	$	4,517,351	$	4,885,059	$	(367,708	)	(8	)%
Deposits held for sale	188,252		194,084		(5,832		)	(3	)%
Total borrowings	767,433		668,087		99,346			15	%
Other liabilities	88,869		95,386		(6,517		)	(7	)%
Total liabilities	5,561,905		5,842,616		(280,711		)	(5	)%
Redeemable noncontrolling interests	17,438		19,287		(1,849		)	(10	)%
Total shareholders’ equity	617,078		603,102		13,976			2	%
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	6,196,421	$	6,465,005	$	(268,584	)	(4	)%

Total Assets. Total assets decreased $268.6 million, or 4%, to $6.2 billion at March 31, 2013 from $6.5 billion at December 31, 2012. This decrease was due to deposit outflows in the first three months of 2013.

Cash and Investments. Total cash and investments (consisting of cash and cash equivalents, investment securities, and stock in the FHLBs) decreased $0.2 billion, or 21%, to $0.8 billion, or 13% of total assets at March 31, 2013 from $1.1 billion, or 16% of total assets at December 31, 2012. The decrease was due to the $254.6 million, or 82%, decrease in cash and cash equivalents, partially offset by the $37.3 million, or 5%, increase in investment securities. The decrease in cash and cash equivalents is the net result of short-term fluctuations in liquidity due to changes in levels of deposits, borrowings and loans outstanding.

The majority of the investments held by the Company are held by the Bank. The Bank’s investment policy requires management to maintain a portfolio of securities which will provide liquidity necessary to facilitate funding of loans, to cover deposit fluctuations, and to mitigate the Bank’s overall balance sheet exposure to interest rate risk, while at the same time earning a satisfactory return on the funds invested. The securities in which the Bank may invest are subject to regulation and are generally limited to securities that are considered “investment grade.”

Investment maturities, principal payments, and sales of the Company’s available for sale securities provided $0.1 billion of cash proceeds during the three months ended March 31, 2013, which was used to purchase new investments or fund new loans. The timing of sales and reinvestments is based on various factors, including management’s evaluation of interest rate trends, the credit risk of municipal securities and the Company’s liquidity. The Company’s available for sale investment portfolio carried a total of $9.0 million of unrealized gains and $1.4 million of unrealized losses at March 31, 2013, compared to $9.9 million of unrealized gains and $1.1 million of unrealized losses at December 31, 2012.

No impairment losses were recognized through earnings related to available for sale securities during the three months ended March 31, 2013 and 2012. The amount of investment securities in an unrealized loss position greater than 12 months as well as the total amount of unrealized losses was not significant and was primarily due to movements in interest rates since the securities were purchased. At March 31, 2013, the Company had no intent to sell any securities in an unrealized loss position at that date 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 losses.

See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 4: Investments” for further details of the Company’s investment securities.

Loans held for sale. Loans held for sale decreased $19.2 million, or 6%, to $289.2 million at March 31, 2013 from $308.4 million at December 31, 2012. Within loans held for sale on the consolidated balance sheet, $273.6 million of the balance at March 31, 2013 and $276.7 million of the balance at December 31, 2012 relates to the previously announced agreement to sell the Bank’s three Pacific Northwest offices. Excluding the loans held for sale related to the Pacific Northwest transaction, loans held for sale decreased $16.1 million from December 31, 2012 to March 31, 2013. The balance of loans held for sale is usually related to the timing and volume of residential loans originated for sale and the ultimate sale transaction which is typically executed within a short-time following the loan origination.

Goodwill and intangible assets, net. Goodwill and intangible assets decreased $1.1 million, or 1%, to $134.0 million at March 31, 2013 from $135.1 million at December 31, 2012. The decrease is due to amortization of intangible assets. The Company tests goodwill for impairment on an annual basis and between annual dates if events or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value, in accordance with ASC 350, Intangibles-Goodwill and Other. Management concluded at March 31, 2013 that there were no triggering events during the three months then ended. Management will perform its annual goodwill impairment testing in the fourth quarter of 2013.

Other. Other assets, consisting of OREO, premises and equipment, fees receivable, accrued interest receivable, deferred income taxes, net, and other assets, remained relatively flat at $240.9 million at March 31, 2013 compared to $241.5 million at December 31, 2012. Decreases in deferred income taxes, net, OREO, and other assets was offset by increases in fees receivable and premises and equipment.

OREO decreased $1.3 million, or 36%, to $2.3 million at March 31, 2013 from $3.6 million at December 31, 2012. The decrease is due to the sale of one OREO property during the first quarter of 2013.

Deferred income taxes, net decreased $1.6 million, or 3%, to $60.6 million at March 31, 2013 from $62.2 million at December 31, 2012. The decrease is primarily due to current year deferred tax expense, as well as certain stock compensation awards that have expired during the first three months of 2013. At March 31, 2013, no valuation allowance on the net deferred tax asset was required, other than for capital losses, due primarily to the expectation of future taxable income.

Other assets, which consist primarily of Bank-Owned Life Insurance (“BOLI”), prepaid expenses, investment in partnerships, the fair value of interest rate derivatives, and other receivables, decreased $1.3 million, or 1%, to $123.7 million at March 31, 2013 from $125.0 million at December 31, 2012. The decrease is primarily due to changes in the fair value of other investments and the settlement of certain receivables, slightly offset by increases in prepaid rent.

Deposits. Total deposits decreased $367.7 million, or 8%, to $4.5 billion, at March 31, 2013 from $4.9 billion at December 31, 2012. Deposit balances declined during the first quarter of 2013 due to expected outflows from several client accounts with high balances at year end 2012.

The following table presents the composition of the Company’s deposits at March 31, 2013 and December 31, 2012:



	March 31, 2013				December 31, 2012
	Balance		as a % of total		Balance		as a % of total
	(In thousands)
Demand deposits	$	1,061,053	24	%	$	1,349,594	28	%
NOW	464,564		10	%	482,647		10	%
Savings	91,482		2	%	87,054		2	%
Money market	2,220,254		49	%	2,297,847		47	%
Certificates of deposit under $100,000	193,421		4	%	211,032		4	%
Certificates of deposit of $100,000 or greater	486,577		11	%	456,885		9	%
Total deposits (1)	$	4,517,351	100	%	$	4,885,059	100	%

____________


(1)	Does not include deposits held for sale of $188.3 million and $194.1 million at March 31, 2013 and December 31, 2012, respectively.

Borrowings. Total borrowings (consisting of securities sold under agreements to repurchase, federal funds purchased, FHLB borrowings, and junior subordinated debentures) increased $99.3 million, or 15%, to $0.8 billion at March 31, 2013 from $0.7 billion at December 31, 2012. Federal funds purchased increased $50.0 million, or 100%, at March 31, 2013 from none at December 31, 2012. From time to time, the Bank purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. FHLB borrowings increased $53.3 million, or 13%, to $461.4 million at March 31, 2013 from $408.1 million at December 31, 2012. FHLB borrowings are generally used to provide additional funding for loan growth when it is in excess of deposit growth and to manage interest rate risk, but can also be used as an additional source of liquidity for the Bank. Repurchase agreements increased $5.9 million, or 5%, to $122.2 million at March 31, 2013 from $116.3 million at December 31, 2012. Repurchase agreements are generally linked to commercial demand deposit accounts with an overnight sweep feature. These increases were partially offset by the repurchase of $9.8 million of the Company’s junior subordinated debentures during the quarter.

Other. Other liabilities, which consist primarily of accrued interest, accrued bonus, the fair value of interest rate derivatives, and other accrued expenses decreased $6.5 million, or 7%, to $88.9 million at March 31, 2013 from $95.4 million at December 31, 2012. The decrease is primarily due to payments on 2012 accrued compensation and other payables.

Loan Portfolio and Credit Quality

Loans. Total portfolio loans decreased $30.7 million, or 1%, to $4.8 billion, or 77%, of total assets at March 31, 2013, from $4.8 billion, or 74%, of total assets at December 31, 2012. Decreases in commercial and industrial loans of $17.8 million, or 2%, home equity and other consumer loans of $13.6 million or 5%, residential loans of $7.7 million, or 0%, and commercial real estate loans of $2.9 million, or 0%, were partially offset by an increase in construction and land loans of $11.3 million, or 8%.

Geographic concentration. The following table presents the Bank’s outstanding loan balance concentrations at March 31, 2013 based on the location of the lender’s regional offices. Loans from the Holding Company to certain principals of the Company’s affiliate partners and relating to the sale of a previous affiliate partner, and loans at the Company’s non-banking segments are identified as “Other, net.”



	Commercial and Industrial				Commercial Real Estate				Construction and Land				Residential				Home Equity and Other Consumer
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(In thousands)
New England	$	672,895	85	%	$	643,756	38	%	$	99,989	67	%	$	1,163,647	61	%	$	204,563	79	%
San Francisco Bay	61,806		8	%	642,170		38	%	37,923		26	%	436,577		23	%	42,537		16	%
Southern California	53,811		7	%	402,515		24	%	11,005		7	%	298,189		16	%	11,889		5	%
Other, net	—		—	%	—		—	%	—		—	%	—		—	%	195		—	%
Total	$	788,512	100	%	$	1,688,441	100	%	$	148,917	100	%	$	1,898,413	100	%	$	259,184	100	%

The allowance for loan losses is reported as a reduction of outstanding loan balances, and totaled $82.3 million and $84.1 million at March 31, 2013 and December 31, 2012, respectively.

The allowance for loan losses at March 31, 2013 decreased $1.8 million, or 2%, from December 31, 2012 due to net charge-offs. No provision was booked in the first quarter of 2013 due primarily to the decline in adversely-classified loans, continued positive trends in net loan loss experience, a slight reduction in total loans, and the change in the mix of the loan portfolio. The allowance for loan losses as a percentage of total loans decreased 3 basis points to 1.72% at March 31, 2013 from 1.75% at December 31, 2012. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses” for an analysis of the Company’s allowance for loan losses.

An analysis of the risk in the loan portfolio, which includes significant management judgment, is used to determine the estimated appropriate amount of the allowance for loan losses. The Company’s allowance for loan losses is comprised of three primary components (general reserve, allocated reserves on non-impaired special mention and accruing substandard loans, and allocated reserves on impaired loans). In addition, an unallocated component which is not considered to be a significant portion of the overall allowance for loan losses is maintained due to the general imprecision and variable nature of qualitative factors and other estimates used to determine the allowance for loan losses. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses” and the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for further information.

The following table presents a summary of loans charged-off, net of recoveries, by geography for the three months ended March 31, 2013 and 2012, respectively. The geography assigned to the Private Banking data is based on the location of the lender’s regional offices.



	Three months ended March 31,
	2013			2012
	(In thousands)
Net loans (charged-off)/ recovered:
New England	$	(1,236	)	$	(341	)
San Francisco Bay	(1,508		)	(1,980		)
Southern California	973			(72		)
Pacific Northwest	—			181
Total net loans (charged-off)/ recovered	$	(1,771	)	$	(2,212	)

Net charge-offs of $1.8 million were recorded in the first quarter of 2013, compared to $2.2 million of net charge-offs in the same period of 2012. The Company believes that commercial loans, which include construction and land loans, commercial real estate, and commercial and industrial loans, represent the greatest risk of loss due to the size and nature of these loans and the related collateral. Local economic and business conditions in the markets where our Bank offices are located have a significant impact on our commercial loan customers and their ability to service their loans. Of the $1.8 million in net charge-offs recorded in the three months of 2013, $1.3 million were on residential loans, $0.4 million were on home equity loans, and $1.1 million were on commercial real estate loans, offset by net recoveries of $0.8 million on construction and land loans and $0.2 million on commercial and industrial loans.

Nonperforming assets. The Company’s nonperforming assets include nonaccrual loans and OREO. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of deeds in lieu of foreclosure. In addition, the Company may, under certain circumstances, restructure loans in troubled debt restructurings as a concession to a borrower when the borrower is experiencing financial distress. Such restructured loans are generally included in impaired loans. Nonperforming assets increased $11.0 million, or 17%, to $75.4 million, or 1.22% of total assets at March 31, 2013, from $64.4 million, or 1.00% of total assets at December 31, 2012. Nonperforming assets as of March 31, 2013 do not include $0.5 million of OREO in the Pacific Northwest region which is anticipated to be included as part of the sale transaction for that region.

The following table presents a rollforward of nonaccrual loans for the three months ended March 31, 2013 and 2012:



	As of and for the three months ended March 31,
	2013			2012
	(In thousands)
Nonaccrual loans, beginning of period	60,745			68,109
Transfers in to nonaccrual status	23,595			19,611
Transfers out to OREO	—			—
Transfers in from loans held for sale	—			—
Transfers out to accrual status	(4,727		)	(8,767		)
Charge-offs	(2,840		)	(2,877		)
Paid off/ paid down	(3,747		)	(3,410		)
Nonaccrual loans, end of period	$	73,026		$	72,666

The following table presents a summary of the Private Banking credit quality by geography, based on the location of the lender’s regional offices:



	March 31, 2013		December 31, 2012
	(In thousands)
Nonaccrual loans:
New England	$	39,853	$	28,307
San Francisco Bay	25,626		25,105
Southern California	7,547		7,333
Total nonaccrual loans	$	73,026	$	60,745
Loans 30-89 days past due and accruing (1):
New England (2)	$	10,609	$	20,751
San Francisco Bay	5,862		11,771
Southern California	833		13,854
Total loans 30-89 days past due	$	17,304	$	46,376
Accruing substandard loans:
New England	$	17,372	$	27,551
San Francisco Bay	49,306		49,854
Southern California	8,680		12,724
Total accruing substandard loans	$	75,358	$	90,129

_____________________


(1)	Does not include one 30-89 day delinquent loan held for sale totaling $0.1 million as of March 31, 2013 and $0.3 million as of December 31, 2012.


(2)	In addition to loans 30-89 days past due and accruing, the Company had one loan totaling less than $0.1 million that was 90 days or greater past due but still on accrual status as of March 31, 2013, and three loans totaling $3.6 million as of December 31, 2012, respectively. These loans originated in the New England region.

Of the $73.0 million of loans on nonaccrual status at March 31, 2013, $31.0 million, or 42%, had a current payment status; $9.0 million, or 13%, were 30-89 days past due, and $33.0 million, or 45%, were 90 days or more past due. Of the $60.7 million of nonaccrual loans at December 31, 2012, $38.4 million, or 63%, had a current payment status, $11.0 million, or 18%, were 30-89 days past due, and $11.3 million, or 19%, were 90 days or more past due. In these situations, despite the loan’s current payment status, if the Bank has reason to believe it may not collect all principal and interest on the loan in accordance with the related contractual terms, the Bank will generally discontinue the accrual of interest income and will generally apply any payments received to principal. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 6: Loan Portfolio and Credit Quality” for additional detail on the payment status of nonaccrual loans.

The following table presents a summary of the Private Banking credit quality by loan type. The loan type assigned to the Private Banking credit quality data is based on the purpose of the loan.



	March 31, 2013		December 31, 2012
	(In thousands)
Nonaccrual loans:
Commercial and industrial	$	10,071	$	4,337
Commercial real estate	46,295		41,696
Construction and land	4,552		2,213
Residential	11,759		11,744
Home equity and other consumer	349		755
Total nonaccrual loans	$	73,026	$	60,745
Loans 30-89 days past due and accruing (1):
Commercial and industrial (2)	$	3,450	$	10,894
Commercial real estate	1,719		7,903
Construction and land	312		3,258
Residential	11,525		23,412
Home equity and other consumer	298		909
Total loans 30-89 days past due	$	17,304	$	46,376
Accruing substandard loans:
Commercial and industrial	$	9,108	$	9,062
Commercial real estate	48,178		63,953
Construction and land	4,136		7,369
Residential	12,263		8,072
Home equity and other consumer	1,673		1,673
Total accruing substandard loans	$	75,358	$	90,129

_____________________

(1)

In addition to loans 30-89 days past due and accruing, the Company had one construction and land loan totaling less than $0.1 million that was 90 days or greater past due but still on accrual status at March 31, 2013. As of December 31, 2012, the Company had one commercial and industrial loan totaling $0.3 million, one commercial real estate loan totaling $3.2 million, and one construction and land loan totaling less than $0.1 million that were more than 90 days past due but still on accrual status.


(2)	Does not include one loan held for sale, 30-89 days past due and accruing, totaling $0.1 million as of March 31, 2013 and $0.3 million as of December 31, 2012.

Nonaccrual and delinquent loans are affected by many factors including economic and business conditions, such as interest rates and unemployment levels, and real estate collateral values, among others. In periods of prolonged economic declines, borrowers may become more severely impacted 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 as 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.

Delinquencies. At March 31, 2013, accruing loans with an aggregate balance of $17.3 million, or 0.36% of total loans, were 30-89 days past due, a decrease of $29.1 million, or 63%, compared to $46.4 million, or 0.96%, of total loans, at December 31, 2012. Loan delinquencies are generally the result of deteriorating economic conditions of the region and the resulting liquidity impact upon the client. The payment performance of delinquent clients can vary from month to month. Further deterioration in the credit condition of these delinquent loans could lead to the loans going to nonaccrual status and/or being downgraded. Downgrades would generally result in additional provision for loan losses. If the loan is put on nonaccrual status, the loan would generally be considered impaired and an impairment analysis would be performed to determine the

amount of impairment, if any. Based on the impairment analysis, the provision could be higher or lower than the amount of provision associated with a loan prior to its classification as impaired. Past due loans may be included with accruing substandard loans.

The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest in accordance with the contractual terms of the loan agreement is in doubt. 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. Impaired loans totaled $97.1 million as of March 31, 2013, an increase of $15.6 million, or 19%, compared to $81.5 million as of December 31, 2012. As of March 31, 2013, $42.2 million of the impaired loans had $4.7 million in specific reserve allocations. The remaining $54.9 million of impaired loans did not have specific reserve allocations due to the adequacy of collateral, prior charge-offs taken, or interest collected and applied to principal. As of December 31, 2012, $34.1 million of impaired loans had $3.4 million in specific reserve allocations, and the remaining $47.4 million of impaired loans did not have specific reserve allocations.

Loans that are designated as impaired require an analysis to determine the amount of impairment, if any. Impairment would be indicated as a result of the carrying value of the loan exceeding the estimated collateral value, less costs to sell, for collateral dependent loans or the net present value of the projected cash flow, discounted at the loan’s contractual effective interest rate, for loans not considered to be collateral dependent. Generally, shortfalls on collateral dependent loans would result in the impairment amount being charged-off to the allowance for loan losses, and shortfalls on cash flow dependent loans may be carried as specific reserve allocations unless a known loss is determined to have occurred, in which case such known loss is charged-off.

In certain instances, although very infrequent, loans that have become 90 days 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 less than $0.1 million of loans past due 90 days or more and still accruing interest at March 31, 2013 and $3.6 million at December 31, 2012.

The Bank’s general 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 months). For troubled debt restructured loans (“TDRs”), a return to accrual status requires timely payments (for a period of six months) in accordance with restructured terms, along with meeting other criteria.

The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. These loans are classified as TDRs and are included in impaired loans. These TDRs typically result from the Company’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/ or principal forgiveness. TDRs totaled $61.2 million and $54.5 million at March 31, 2013 and December 31, 2012, respectively. Of the $61.2 million in TDRs at March 31, 2013, $29.9 million were on accrual status. Of the $54.5 million in TDRs at December 31, 2012, $26.7 million were on accrual status.

The Bank continues to evaluate the underlying collateral of each nonaccrual loan and pursue the collection of interest and principal. Where appropriate, the Bank obtains updated appraisals on collateral. Please refer to Part I. Item 1. “Financial Statements and Supplementary Data—Note 6: Loans Receivable” for further information on nonaccruing loans.

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

The Company has identified approximately $75.4 million in potential problem loans as of March 31, 2013, a decrease of $14.7 million, or 16%, compared to $90.1 million as of December 31, 2012. This decrease was primarily due to a decline in the amount of commercial real estate loans of $15.8 million, or 25%, to $48.2 million as of March 31, 2013 compared to $64.0 million as of December 31, 2012. Numerous factors impact the level of potential problem loans including economic conditions and real estate values. These factors affect our borrowers’ liquidity and, in some cases, our borrowers’ ability to comply with loan covenants such as debt service coverage. When there is a loss of a major tenant in a commercial real estate building, the appraised value of the building generally declines. Loans may be downgraded when this occurs as a result of the additional risk to the borrower in obtaining a new tenant in a timely manner and negotiating a lease with similar or better terms than the previous tenant. In many cases, these loans are still current and paying as agreed, although future performance may be impacted.

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 continues to obtain newer appraisals, approximately every 12 to 18 months or sooner, if deemed necessary, especially during periods of declining values.

The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more.

Liquidity

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

At March 31, 2013, the Company’s cash and cash equivalents amounted to $54.1 million. The Holding Company’s cash and cash equivalents amounted to $50.2 million at March 31, 2013. In April 2013, the Holding Company issued $50.0 million in Non-Cumulative Perpetual Preferred Stock, Series D (“Series D Preferred stock”) and repurchased its Series B Preferred stock for approximately $69.8 million in cash. Management believes that the Company and the Holding Company have adequate liquidity to meet their commitments for the foreseeable future.

Management is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. At March 31, 2013, consolidated cash and cash equivalents and securities available for sale, less securities pledged against current borrowings, amounted to $0.7 billion, or 11% of total assets, compared to $0.9 billion, or 14% of total assets at December 31, 2012.

The Company’s consolidated cash and cash equivalents and securities available for sale, less securities pledged decreased $0.2 billion, or 25%, in the first three months of 2013. This decrease is primarily due to fact that the decrease in deposits was greater than the decrease in loans. Future loan growth may depend upon the Company’s ability to grow its core deposit levels. In addition, the Company has access to available borrowings through the FHLB totaling $725.8 million as of March 31, 2013 compared to $794.4 million at December 31, 2012. Combined, this liquidity totals $1.4 billion, or 22% of assets and 31% of total deposits as of March 31, 2013 compared to $1.7 billion, or 26% of assets and 34% of total deposits as of December 31, 2012.

The Bank has various internal policies and guidelines regarding liquidity, both on and off balance sheet, loans to assets ratio, and limits on the use of wholesale funds. These policies and or guidelines require certain minimum or maximum balances or ratios be maintained at all times. In light of the provisions in the Bank’s internal liquidity policies and guidelines, the Bank carefully manages the amount and timing of future loan growth along with its relevant liquidity policies and balance sheet guidelines.

Holding Company Liquidity. The Company and some of the Company’s majority-owned affiliates hold put and call options that would require the Company to purchase (and the majority-owned affiliates to sell) the remaining noncontrolling interests in these companies at the then fair value generally as determined by the respective agreements. At March 31, 2013, the estimated maximum redemption value for these affiliates related to outstanding put options was $17.4 million, all of which could be redeemed within the next 12 months, under certain circumstances, and is classified on the consolidated balance sheets as redeemable noncontrolling interests. These put and call options are discussed in detail in Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

The Holding Company’s primary sources of funds are dividends from its affiliates, access to the capital and debt markets, and private equity investments. The Holding Company recognized $1.7 million in net income from discontinued operations during the three months ended March 31, 2013. The majority of this amount related to a revenue sharing agreement with Westfield Capital Management Company, LLC (“Westfield”). Other than the revenue sharing agreement with Westfield, divestitures are not ongoing sources of funds for the Holding Company. Dividends from the Bank are limited by various regulatory requirements relating to capital adequacy and retained earnings. See Part II. Item 5. “Market for Registrant’s Common Equity, Related Stockholders Matters, and Issuers Purchases of Equity Securities” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for further details.

The Bank has paid dividends to the Holding Company depending on its profitability and asset growth. If regulatory agencies were to require banks to increase their capital ratios, or impose other restrictions, it may limit the ability of the Bank to pay dividends to the Holding Company and/or limit the amount that the Bank could grow.

Although the Bank is currently above current regulatory requirements for capital, the Holding Company could downstream additional capital to increase the rate that the Bank could grow. Depending upon the amount of capital downstreamed by the Holding Company, the approval of the Holding Company’s board of directors may be required prior to the payment, if any.

The Company is required to pay interest quarterly on its junior subordinated debentures. Since 2010, the Company has been a party to an interest rate swap to hedge a portion of the cash flow associated with a junior subordinated debenture which converted from a fixed rate to a floating rate on December 30, 2010. The estimated cash outlay for the remaining nine months of 2013 for the interest payments, including the effect of the cash flow hedge, is approximately $3.6 million based on the debt outstanding as of the date of this filing and estimated LIBOR.

The Company is required to pay cash dividends quarterly on its Series D Preferred stock at 6.95% per annum, issued in April 2013. The estimated cash outlay for the remaining nine months of 2013 for the Series D Preferred stock dividend payments is approximately $2.2 million.

The Company presently plans to pay cash dividends on its common stock on a quarterly basis dependent upon a number of factors such as profitability, Holding Company liquidity, and the Company’s capital levels. However, the ultimate declaration of dividends by the board of directors of the Company will depend on consideration of, among other things, recent financial trends and internal forecasts, regulatory limitations, alternative uses of capital deployment, general economic conditions, and pending regulatory changes to capital requirements. In January 2013, the Company increased its quarterly dividend from $0.01 per share to $0.05 per share. Based on the current dividend rate and estimated shares outstanding, the Company estimates the amount to be paid out in the remaining nine months of 2013 for dividends to common shareholders will be approximately $12.0 million. In April 2013, the Company’s repurchased all of its Series B Preferred stock and therefore will not pay additional dividends on these shares.

Bank Liquidity. The Bank has established various borrowing arrangements to provide additional sources of liquidity and funding. Management believes that the Bank currently has adequate liquidity available to respond to current demands. The Bank is a member of the FHLB of Boston, and as such, has access to short- and long-term borrowings from that institution. The FHLB can change the advance amounts that banks can utilize based on a bank’s current financial condition as obtained from publicly available data such as FDIC Call Reports. Decreases in the amount of FHLB borrowings available to the Bank would lower its liquidity and possibly limit the Bank’s ability to grow. Management believes that the Bank has adequate liquidity to meet its commitments for the foreseeable future.

In addition to the above liquidity, the Bank has access to the Federal Reserve discount window facility, which can provide short-term liquidity as “lender of last resort,” brokered certificates of deposit, and federal funds lines. The use of non-core funding sources, including brokered deposits and borrowings, by the Bank may be limited by regulatory agencies. Generally, the regulatory agencies prefer that banks rely on core-funding sources for liquidity.

From time to time, the Bank purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. The Bank had unused federal fund lines of credit totaling $186.0 million with correspondent institutions to provide immediate access to overnight borrowings. At March 31, 2013, the Bank had outstanding borrowings of $50.0 million under these federal fund lines. At December 31, 2012, Bank had unused federal fund lines of credit totaling $236.0 million with correspondent institutions to provide immediate access to overnight borrowings.

If the Bank was no longer able to utilize the FHLB for borrowing, collateral currently used for FHLB borrowings could be transferred to other facilities such as the Federal Reserve’s discount window. In addition, the Bank could increase its usage of brokered certificates of deposit. Other borrowing arrangements may have higher rates than the FHLB would typically charge.

Capital Resources

Total shareholders’ equity at March 31, 2013 was $617.1 million, compared to $603.1 million at December 31, 2012, an increase of $14.0 million, or 2%. The increase in shareholders’ equity was primarily the result of net income and stock compensation, partially offset by dividends paid.

As a bank holding company, the Company is subject to various regulatory capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. For example, under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank, which is a wholly-owned subsidiary of the Company, must meet specific capital guidelines that involve quantitative measures of the Bank’s assets and certain off-balance sheet items as calculated under regulatory guidelines. The Bank’s capital and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Similarly, the Company is also subject to capital requirements administered by the Federal Reserve with respect to certain non-banking activities, including adjustments in connection with off-balance sheet items.

To be categorized as “well capitalized,” the Company and the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the regulatory capital and capital ratios table, below. In addition, the Company and the Bank cannot be subject to any written agreement, order or capital directive or prompt corrective action to be considered “well capitalized.” Both the Company and the Bank maintain capital at levels that would be considered “well capitalized” as of March 31, 2013 under the applicable regulations.

The following table presents the Company’s and the Bank’s amount of regulatory capital and related ratios as of March 31, 2013 and December 31, 2012. Also presented are the capital guidelines established by the Federal Reserve, which pertain to the Company, and by the FDIC, which pertains to the Bank. To be categorized as “adequately capitalized” or “well capitalized,” the Company and the Bank must be in compliance with these ratios as long as the Company and/or the Bank are not subject to any written agreement, order, capital directive, or prompt corrective action directive. The Federal Reserve, the FDIC, and the Massachusetts Commissioner of Banks may impose higher capital ratios than those listed below based on the results of regulatory exams.



	Actual				For capital adequacy purposes (at least)				To be well capitalized under prompt corrective action provisions (at least)
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(In thousands)
As of March 31, 2013
Total risk-based capital
Company	$	684,755	14.91	%	$	367,366	8.00	%	$	459,207	10.00	%
Boston Private Bank	606,023		13.29		364,841		8.00		456,052		10.00
Tier I risk-based capital
Company	626,948		13.65		183,683		4.00		275,524		6.00
Boston Private Bank	548,683		12.03		182,421		4.00		273,631		6.00
Tier I leverage capital
Company	626,948		10.14		247,370		4.00		309,212		5.00
Boston Private Bank	548,683		8.98		244,324		4.00		305,405		5.00

As of December 31, 2012
Total risk-based capital
Company	$	676,206	14.61	%	$	370,223	8.00	%	$	462,779	10.00	%
Boston Private Bank	594,422		12.94		367,522		8.00		459,402		10.00
Tier I risk-based capital
Company	617,965		13.35		185,112		4.00		277,667		6.00
Boston Private Bank	536,649		11.68		183,761		4.00		275,641		6.00
Tier I leverage capital
Company	617,965		9.94		248,692		4.00		310,865		5.00
Boston Private Bank	536,649		8.73		245,755		4.00		307,194		5.00

Bank regulatory authorities restrict the Bank from lending or advancing funds to, or investing in the securities of, the Company. Further, these authorities restrict the amounts available for the payment of dividends by the Bank to the Company.

As of March 31, 2013, the Company has sponsored the creation of, or assumed sponsorship of, five statutory trusts for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Company. In accordance with ASC 810-10-55, Consolidation - Overall - Implementation Guidance and Illustrations - Variable Interest Entities, these statutory trusts created by, or assumed by, the Company are not consolidated into the Company’s financial statements; however, the Company reflects the amounts of junior subordinated debentures payable to the preferred stockholders of statutory trusts as debt in its financial statements. As of March 31, 2013, all $126.7 million of the net balance of these trust preferred securities qualified as Tier I capital. As of December 31, 2012, all $136.5 million of the net balance of these trust preferred securities qualified as Tier I capital.

Results of operations for the three months ended March 31, 2013 versus March 31, 2012

Net Income. The Company recorded net income from continuing operations for the three months ended March 31, 2013 of $12.4 million, compared to $8.7 million for the same period in 2012. Net income attributable to the Company, which includes income from both continuing and discontinued operations, for the three months ended March 31, 2013 was $13.2 million, compared to $9.5 million, for the same period in 2012.

The Company recognized diluted earnings per share from continuing operations for the three months ended March 31, 2013 of $0.13 per share, compared to $0.09 per share, for the same period in 2012. Diluted earnings per share attributable to common shareholders, which includes both continuing and discontinued operations, for the three months ended March 31, 2013 was $0.15 per share, compared to $0.11 per share, for the same period in 2012. Net income from continuing operations in both 2013 and 2012 was offset by charges that reduce income available to common shareholders. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 2: Earnings Per Share” for further detail on these charges to income available to common shareholders.

The following discussions are based on the Company’s continuing operations, unless otherwise stated.

The following table presents selected financial highlights:



	Three months ended March 31,				% Change
	2013		2012		% Change
	(In Thousands)
Net interest income	$	44,276	$	44,768	(1	)%
Fees and other income	30,596		27,454		11	%
Total revenue	74,872		72,222		4	%
Provision/ (credit) for loan losses	—		4,000		nm
Operating expense	56,564		55,627		2	%
Income tax expense	5,897		3,851		53	%
Net income from continuing operations	12,411		8,744		42	%
Net income from discontinued operations	1,722		1,554		11	%
Less: Net income attributable to noncontrolling interests	930		793		17	%
Net income attributable to the Company	$	13,203	$	9,505	39	%

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, on a fully taxable-equivalent (“FTE”) basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities. When credit quality declines and loans are placed on nonaccrual status, NIM can decrease because the same assets are earning less income. Loans that are graded substandard but are still accruing interest income of $75.4 million at March 31, 2013 could be placed on nonaccrual status if their credit quality declines further.

Net interest income for the three months ended March 31, 2013 was $44.3 million, a decrease of $0.5 million, or 1%, compared to the same period in 2012. The decrease for the three months is due to lower average yields on loans and investments, partially offset by an increase in volume of the loan portfolio, and lower average rates paid on the Company’s deposits and borrowings. The NIM was 3.13% and 3.27% for the three months ended March 31, 2013 and 2012, respectively.

The following table presents the composition of the Company’s NIM on a FTE basis for the three months ended March 31, 2013 and 2012; however, the discussion following these tables reflects non-FTE data.



	Average Balance				Interest Income/Expense				Average Yield/Rate
(In Thousands)	As of and for the three months ended March 31,
AVERAGE BALANCE SHEET:	2013		2012		2013		2012		2013		2012
AVERAGE ASSETS
Interest-Earning Assets:
Cash and Investments (1):
Taxable investment securities	$	198,833	$	376,206	$	514	$	1,256	1.03	%	1.34	%
Non-taxable investment securities (2)	205,255		194,410		1,291		1,323		2.52	%	2.72	%
Mortgage-backed securities	317,686		251,989		1,402		1,603		1.76	%	2.54	%
Federal funds sold and other	168,004		130,771		176		149		0.43	%	0.46	%
Total Cash and Investments	889,778		953,376		3,383		4,331		1.52	%	1.82	%
Loans: (3)
Commercial and Construction (2)	2,805,685		2,591,377		31,990		32,693		4.62	%	5.07	%
Residential	2,003,845		1,857,838		16,928		17,826		3.38	%	3.84	%
Home Equity and Other Consumer	268,156		320,160		1,987		2,760		3.01	%	3.45	%
Total Loans	5,077,686		4,769,375		50,905		53,279		4.05	%	4.48	%
Total Earning Assets	5,967,464		5,722,751		54,288		57,610		3.67	%	4.04	%
Less: Allowance for Loan Losses	84,330		97,471
Cash and due from Banks (non-interest bearing)	41,897		112,844
Other Assets (4)	391,909		427,083
TOTAL AVERAGE ASSETS	$	6,316,940	$	6,165,207
AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY
Interest-Bearing Liabilities:
Deposits (5):
Savings and NOW	$	576,814	$	533,075	$	132	$	331	0.09	%	0.25	%
Money Market	2,387,363		1,983,558		2,086		2,136		0.35	%	0.43	%
Certificates of Deposits	678,788		898,458		1,568		2,436		0.94	%	1.09	%
Total Deposits	3,642,965		3,415,091		3,786		4,903		0.42	%	0.58	%
Junior Subordinated Debentures	137,016		180,817		1,154		1,752		3.37	%	3.83	%
FHLB Borrowings and Other	537,468		709,611		3,065		4,379		2.28	%	2.44	%
Total Interest-Bearing Liabilities	4,317,449		4,305,519		8,005		11,034		0.75	%	1.02	%
Noninterest Bearing Demand Deposits	1,264,803		1,167,623
Payables and Other Liabilities (4)	107,645		106,536
Total Average Liabilities	5,689,897		5,579,678
Redeemable Noncontrolling Interests	17,184		21,701
Average Shareholders’ Equity	609,859		563,828
TOTAL AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY	$	6,316,940	$	6,165,207
Net Interest Income - on a FTE Basis					$	46,283	$	46,576
FTE Adjustment (2)					2,007		1,808
Net Interest Income (GAAP Basis)					$	44,276	$	44,768
Interest Rate Spread									2.92	%	3.02	%
Net Interest Margin									3.13	%	3.27	%

________________________


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


(2)	Interest income on non-taxable investments and loans is presented on a FTE basis using statutory rates. The discussion following these tables reflects non-FTE data.


(3)	Includes loans held for sale and nonaccrual loans.


(4)	Includes assets and liabilities of discontinued operations, if any.


(5)	Includes deposits held for sale.

Interest and Dividend Income. Interest and dividend income for the three months ended March 31, 2013 was $52.3 million, a decrease of $3.5 million, or 6%, compared to the same period in 2012. The decrease was primarily due to lower yields on loans and investments, partially offset by increased average loan volume, and a shift in the mix of interest-bearing assets from cash and investments into the loan portfolio.

The Bank generally has interest income that is either recovered or reversed related to nonaccruing loans each quarter. Based on the net amount recovered 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 loans (including construction loans), on a non-FTE basis, for the three months ended March 31, 2013 was $30.4 million, a decrease of $0.9 million, or 3%, compared to the same period in 2012 as a result of a 45 basis point decrease in the average yield, partially offset by an 8% increase in the average balance. The increase in the average balance is related to the organic growth of the commercial loan portfolio at the Bank, as discussed above in Part I. Item 2. “Management’s Discussion and Analysis - Loan Portfolio and Credit Quality.” The decrease in the average yield is the result of market conditions leading to lower rates due to competition for higher quality loans.

Interest income on residential mortgage loans for the three months ended March 31, 2013 was $16.9 million, a decrease of $0.9 million, or 5%, compared to the same period in 2012 as a result of a 46 basis point decrease in the average yield, partially offset by an 8% increase in the average balance. The decrease in the average yield was primarily due to adjustable rate mortgage (“ARM”) loans repricing to lower rates, clients refinancing into lower rates and new loan originations at historically low rates. The decline in U.S. Treasury yields, the index to which the ARMs are typically linked, has decreased the yields on these mortgage loans. The increase in the average balances was due to the organic growth of the residential loan portfolio at the Bank.

Interest income on home equity and other consumer loans for the three months ended March 31, 2013 was $2.0 million, a decrease of $0.8 million, or 28%, compared to the same period in 2012, as a result of a 44 basis point decrease in the average yield and a 16% decrease in the average balance. The decrease in average yield is primarily due to lower market rates on consumer loans. The decrease in average balance reflects lower client demand.

Investment income, on a non-FTE basis, for the three months ended March 31, 2013 was $2.9 million, a decrease of $0.9 million, or 24%, compared to the same period in 2012, as a result of a 30 basis point decrease in the average yield and a 7% decrease in the average balance. The decrease in the average balance is primarily due to timing and volume of deposit balances as compared to the level of loans outstanding. Investment decisions are made based on anticipated liquidity, loan demand, and asset-liability management considerations.

Interest expense. Interest expense on deposits and borrowings for the three months ended March 31, 2013 was $8.0 million, a decrease of $3.0 million, or 27%, compared to the same period in 2012.

Interest expense on deposits for the three months ended March 31, 2013 was $3.8 million, a decrease of $1.1 million, or 23%, compared to the same period in 2012, as a result of a 16 basis point decrease in the average rate paid, partially offset by a 7% increase in the average balance. The decrease in the average rates paid was primarily due to the Bank’s ability to lower interest rates on all account types due to the low interest rate environment.

Interest paid on borrowings for the three months ended March 31, 2013 was $4.2 million, a decrease of $1.9 million, or 31%, compared to the same period in 2012, as a result of a 25 basis point decrease in the average rate paid and a 24% decrease in the average balance. The decrease in the average rate paid is primarily due to the higher-rate FHLB borrowings maturing and being replaced at lower rates, and the repurchase of a portion of the Company’s junior subordinated debt in 2012 and the first quarter of 2013.

Provision/ (credit) for loan losses. The provision/ (credit) for loan losses for the three months ended March 31, 2013 was zero, a decrease of $4.0 million compared to the same period in 2012. No provision was booked in the first quarter of 2013 due primarily to the decline in adversely-classified loans, a decrease in the loan portfolio, and the change in the mix of the loan portfolio.

The provision/ (credit) for loan losses is determined as a result of the required level of the allowance for loan losses, estimated by management, which reflects the inherent risk of loss in the loan portfolio as of the balance sheet dates. The factors used by management to determine the level of the allowance for loan losses include the trends in problem loans, economic and

business conditions, strength of management, real estate collateral values, and underwriting standards. For further details, see Part I. Item 2. “Management’s Discussion and Analysis - Loan Portfolio and Credit Quality” above.

Fees and other income. Fees and other income for the three months ended March 31, 2013 was $30.6 million, an increase of $3.1 million, or 11%, compared to the same period in 2012. The increase is primarily due to higher investment management and trust fees, wealth advisory fees, and higher gains on sales of loans, partially offset by lower gains recognized from the repurchase of debt and lower other income.

Investment management and trust fees for the three months ended March 31, 2013 was $16.9 million, an increase of $1.6 million, or 11%, compared to the same period in 2012. AUM at the Bank and Investment Managers increased $1.7 billion, or 15%, in the past twelve months to $13.5 billion at March 31, 2013. $1.4 billion of the increase is due to market appreciation, and the remaining $0.3 billion increase is due to positive net flows. Investment management and trust fees from the Bank and Investment Managers are typically calculated based on a percentage of AUM, and approximately 45% of the first quarter 2013 investment management and trust fee revenues were earned based upon beginning-of-period (December 31, 2012) AUM for the quarter. Changes in revenue generally lag behind changes in AUM, and accordingly, we expect higher levels of investment management and trust revenue in the second quarter of 2013.

Wealth advisory fee income for the three months ended March 31, 2013 was $10.1 million, an increase of $0.8 million, or 9%, compared to the same period in 2012. AUM as of March 31, 2013 managed by the Wealth Advisors was $8.5 billion, an increase of $0.9 billion, or 12%, compared to March 31, 2012.

Gain on sale of loans, net, for the three months ended March 31, 2013 was $1.2 million, an increase of $0.8 million, or over 100%, compared to the same period in 2012. In the first quarter of 2013, the Company transferred $9.1 million in loans from its loan portfolio to loans held for sale. These loans were subsequently sold for a gain of $0.2 million. The remaining increase related to the sale of loans originated for sale.

Gain on repurchase of debt for the three months ended March 31, 2013 was $0.6 million. During the first three months of 2013, the Company repurchased $9.8 million of its junior subordinated debt. The Company used available cash on hand to repurchase the securities.

Other Income for the three months ended March 31, 2013 was $0.1 million, a decrease of $0.3 million, or 83%, compared to the same period in 2012. The decrease is primarily due to lower gains on the Company’s rabbi trust investments, lower partnership earnings, and lower earnings from the Company’s other cost method investments.

Operating Expense. Operating expense for the three months ended March 31, 2013 was $56.6 million, an increase of $0.9 million, or 2%, compared to the same period in 2012. The increase for the three months ended March 31, 2013 is primarily due to increases in salaries and benefits, occupancy and equipment, contract services, and FDIC insurance expenses, partially offset by decreased professional fees and other expenses.

Salaries and employee benefits expense, the largest component of operating expense, for the three months ended March 31, 2013 was $37.4 million, an increase of $0.5 million, or 1%, compared to the same period in 2012. The increase is primarily due to higher commission-based compensation and post-employment benefits, partially offset by efficiencies resulting from the Bank merger and management restructuring.

Occupancy and equipment expense for the three months ended March 31, 2013 was $7.5 million, an increase of $0.2 million, or 3%, compared to the same period in 2012. The increase is primarily related to new offices opened by the Bank in the past year, as well as increased technology expense.

Contract services and data processing expense for the three months ended March 31, 2013 was $1.6 million, an increase of $0.4 million, or 32%, compared to the same period in 2012. The increase is primarily related to higher custody fees and system expenses, which are based on AUM levels.

FDIC insurance expense for the three months ended March 31, 2013 was $1.0 million, an increase of $0.2 million, or 22%, compared to the same period in 2012. The increase is primarily due to the increase in average assets from 2012 to 2013.

Professional services for the three months ended March 31, 2013 was $2.7 million, a decrease of $0.3 million, or 9%, compared to the same period in 2012. The decrease is primarily due to lower consulting and legal expenses for loan workout matters, as well as decreases in director and audit fees as a result of the Bank merger, partially offset by increased expenses related to legal services for general corporate matters.

Income Tax Expense/ (Benefit). Income tax expense/ (benefit) for continuing operations for the three months ended March 31, 2013 was an expense of $5.9 million. The effective tax rate for continuing operations for the three months ended March 31, 2013 was 32.2%, compared to an effective tax rate of 30.6% for the same period in 2012. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 9: Income Taxes” for further detail.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments to this update require entities to present information about reclassifications out of accumulated other comprehensive income in a single note or on the face of the financial statements. The new guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with early adoption permitted. The Company did not early adopt. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the Interest Rate Sensitivity and Market Risk as described in Part II. Item 7A. “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Sensitivity and Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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

Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of March 31, 2013 in ensuring that material information required to be disclosed by the Company, including its consolidated subsidiaries, was made known to the certifying officers by others within the Company and its consolidated subsidiaries in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reporting within the time periods specified in the SEC rules and forms. On a quarterly basis, the Company evaluates the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

(b) Change in internal controls over financial reporting.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully consider the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC. There have been no material changes to these risk factors since the filing of that report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits



Exhibit No.	Description	Incorporated by Reference			Filed or Furnished with this 10-Q
Exhibit No.	Description	Form	SEC Filing Date	Exhibit Number	Filed or Furnished with this 10-Q
3.1	Articles of Amendment of the Company	8-K	4/22/2013	3.1	Filed
3.2	Articles of Amendment of the Company	8-A12B	4/24/2013	3.1	Filed
4.1	Master Deposit Agreement, dated April 24, 2013, by and among the Registrant, Computershare Trust Company, N.A., and Computershare Inc., collectively, as depositary, and the holders from time to time of the depositary receipts described therein	8-A12B	4/24/2013	4.1	Filed
4.2	Form of Certificate Representing Series D Preferred Stock	8-A12B	4/24/2013	4.2	Filed
10.1	Form of Restricted Stock Award Agreement Under the Boston Private Financial Holdings, Inc. 2009 Stock Option and Incentive Plan (including a Non-Solicitation and Confidentiality Agreement for Non-California Residents and a Non-Solicitation and Confidentiality Agreement for California Residents, as applicable)				Filed
10.2	Form of Restricted Stock Award Agreement Under the Boston Private Financial Holdings, Inc. 2009 Stock Option and Incentive Plan (for employees with existing Employment Agreements)				Filed
31.1	Certification of Chief Executive Officer pursuant to Rule 13a - 14(a)/15d - 14(a) under the Securities Exchange Act of 1934				Filed
31.2	Certification of Chief Financial Officer pursuant to Rule 13a - 14(a)/15d - 14(a) under the Securities Exchange Act of 1934				Filed
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				Furnished
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				Furnished
101.INS	XBRL Instance Document				Furnished
101.SCH	XBRL Taxonomy Extension Schema Document				Furnished
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document				Furnished
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				Furnished
101.LAB	XBRL Taxonomy Extension Label Linkbase Document				Furnished
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document				Furnished

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

	/s/ CLAYTON G. DEUTSCH
May 8, 2013	Clayton G. Deutsch
	President and Chief Executive Officer

	/s/ DAVID J. KAYE
May 8, 2013	David J. Kaye
	Executive Vice President, Treasurer, and Chief Financial Officer