Edgar Filing: BOSTON PRIVATE FINANCIAL HOLDINGS INC

2014 Q3 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 September 30, 2014


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: (617) 912-1900

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x		Accelerated filer o
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 October 31, 2014:



Common Stock, Par Value $1.00 Per Share	82,778,032
(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	42
	Executive Summary	43
	Critical Accounting Policies	44
	Financial Condition	44
	Condensed Consolidated Balance Sheets and Discussion	44
	Loan Portfolio and Credit Quality	46
	Liquidity	51
	Capital Resources	53
	Results of Operations	54
	Recent Accounting Pronouncements	60
Item 3	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4	Controls and Procedures	62
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	63
Item 1A	Risk Factors	63
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3	Defaults upon Senior Securities	63
Item 4	Mine Safety Disclosures	63
Item 5	Other Information	63
Item 6	Exhibits	63
	Signature Page	64
	Certifications

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

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)



	September 30, 2014			December 31, 2013
	(In thousands, except share and per share data)
Assets:
Cash and cash equivalents	$	308,912		$	191,881
Investment securities available for sale (amortized cost of $723,299 and $694,832 at September 30, 2014 and December 31, 2013, respectively)	724,638			691,729
Investment securities held to maturity (fair value of $133,141 and $110,917 at September 30, 2014 and December 31, 2013, respectively)	132,467			112,014
Stock in Federal Home Loan Banks	32,534			38,612
Loans held for sale	4,943			6,123
Total loans	5,213,491			5,112,459
Less: Allowance for loan losses	75,283			76,371
Net loans	5,138,208			5,036,088
Other real estate owned (“OREO”)	1,074			776
Premises and equipment, net	29,473			29,158
Goodwill	110,180			110,180
Intangible assets, net	17,475			20,604
Fees receivable	11,439			12,119
Accrued interest receivable	15,018			14,416
Deferred income taxes, net	48,443			55,364
Other assets	114,281			118,045
Total assets	$	6,689,085		$	6,437,109
Liabilities:
Deposits	$	5,334,881		$	5,110,370
Securities sold under agreements to repurchase	73,422			102,353
Federal Home Loan Bank borrowings	371,367			367,254
Junior subordinated debentures	106,363			106,363
Other liabilities	106,024			97,613
Total liabilities	5,992,057			5,783,953
Redeemable Noncontrolling Interests	21,397			19,468
Shareholders’ Equity:
Preferred stock, $1.00 par value; authorized: 2,000,000 shares; Series D, 6.95% Non-Cumulative Perpetual, issued and outstanding: 50,000 shares at September 30, 2014 and December 31, 2013; liquidation preference: $1,000 per share	47,753			47,753
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 80,464,390 shares at September 30, 2014 and 79,837,612 shares at December 31, 2013	80,464			79,838
Additional paid-in capital	598,036			616,334
Accumulated deficit	(49,573		)	(106,211		)
Accumulated other comprehensive income/ (loss)	(1,312		)	(4,197		)
Total Company’s shareholders’ equity	675,368			633,517
Noncontrolling interests	263			171
Total shareholders’ equity	675,631			633,688
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	6,689,085		$	6,437,109

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(In thousands, except share and per share data)
Interest and dividend income:
Loans	$	47,931		$	46,484		$	144,541		$	144,173
Taxable investment securities	876			544			2,242			1,544
Non-taxable investment securities	942			746			2,760			2,363
Mortgage-backed securities	1,605			1,338			5,230			4,080
Federal funds sold and other	379			277			978			635
Total interest and dividend income	51,733			49,389			155,751			152,795
Interest expense:
Deposits	3,603			3,206			10,194			10,112
Federal Home Loan Bank borrowings	2,354			2,750			7,039			8,399
Junior subordinated debentures	976			1,119			2,896			3,429
Repurchase agreements and other short-term borrowings	17			12			49			378
Total interest expense	6,950			7,087			20,178			22,318
Net interest income	44,783			42,302			135,573			130,477
Provision/ (credit) for loan losses	(2,600		)	(6,000		)	(8,800		)	(8,000		)
Net interest income after provision/ (credit) for loan losses	47,383			48,302			144,373			138,477
Fees and other income:
Investment management fees	12,011			10,511			35,226			31,445
Wealth advisory fees	12,278			10,698			35,730			31,083
Private banking wealth management and trust fees	7,251			6,508			21,255			19,780
Other banking fee income	1,835			1,679			5,192			5,183
Gain on sale of loans, net	183			430			1,966			2,363
Gain on repurchase of debt	—			—			—			620
Gain on sale of investments, net	8			7			9			35
Gain/ (loss) on OREO, net	150			—			988			(13		)
Gain on sale of Pacific Northwest offices	—			—			—			10,574
Other	53			418			510			926
Total fees and other income	33,769			30,251			100,876			101,996
Operating expense:
Salaries and employee benefits	35,855			33,102			106,767			104,605
Occupancy and equipment	7,346			7,307			22,492			22,411
Professional services	2,796			3,451			9,165			8,697
Marketing and business development	1,408			1,168			5,564			5,330
Contract services and data processing	1,404			1,462			4,289			4,514
Amortization of intangibles	1,031			1,056			3,129			3,275
FDIC insurance	857			823			2,607			2,817
Other	3,302			3,584			9,356			13,556
Total operating expense	53,999			51,953			163,369			165,205
Income before income taxes	27,153			26,600			81,880			75,268
Income tax expense	8,993			8,714			26,464			25,455
Net income from continuing operations	18,160			17,886			55,416			49,813
Net income from discontinued operations	1,272			1,321			4,650			5,824
Net income before attribution to noncontrolling interests	19,432			19,207			60,066			55,637
(Continued)



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(In thousands, except share and per share data)
Less: Net income attributable to noncontrolling interests	1,167			871			3,428			2,770
Net income attributable to the Company	$	18,265		$	18,336		$	56,638		$	52,867
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders	$	(871	)	$	(825	)	$	(3,380	)	$	(14,968	)
Net income attributable to common shareholders for earnings per share calculation	$	17,394		$	17,511		$	53,258		$	37,899
Basic earnings per share attributable to common shareholders:
From continuing operations:	$	0.20		$	0.21		$	0.62		$	0.42
From discontinued operations:	$	0.02		$	0.02		$	0.06		$	0.07
Total attributable to common shareholders:	$	0.22		$	0.23		$	0.68		$	0.49
Weighted average basic common shares outstanding	78,687,062			77,670,017			78,425,613			77,249,660
Diluted earnings per share attributable to common shareholders:
From continuing operations:	$	0.20		$	0.20		$	0.60		$	0.41
From discontinued operations:	$	0.02		$	0.02		$	0.06		$	0.07
Total attributable to common shareholders:	$	0.22		$	0.22		$	0.66		$	0.48
Weighted average diluted common shares outstanding	80,610,958			79,193,748			80,324,628			78,488,170

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(In thousands)
Net income attributable to the Company	$	18,265		$	18,336		$	56,638		$	52,867
Other comprehensive income/ (loss), net of tax:
Unrealized gain/ (loss) on securities available for sale	(659		)	(550		)	2,692			(6,521		)
Reclassification adjustment for net realized gain/ (loss) included in net income	4			4			5			20
Net unrealized gain/ (loss) on securities available for sale	(663		)	(554		)	2,687			(6,541		)
Unrealized gain/ (loss) on cash flow hedges	390			(964		)	(1,082		)	(280		)
Reclassification adjustment for net realized gain/ (loss) included in net income	(503		)	(316		)	(1,280		)	(856		)
Net unrealized gain/ (loss) on cash flow hedges	893			(648		)	198			576
Net unrealized gain/ (loss) on other	—			—			—			(442		)
Other comprehensive income/ (loss), net of tax	230			(1,202		)	2,885			(6,407		)
Total comprehensive income/ (loss) attributable to the Company, net	$	18,495		$	17,134		$	59,523		$	46,460

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)



	Preferred Stock			Common Stock		Additional Paid-in Capital			Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income/ (Loss)			Non- controlling Interests		Total
	(In thousands, except share data)
Balance, December 31, 2012	$	58,089		$	78,744	$	640,891		$	(176,746	)	$	2,124		$	—	$	603,102
Net income attributable to the Company	—			—		—			52,867			—			—		52,867
Other comprehensive income/ (loss), net	—			—		—			—			(6,407		)	—		(6,407		)
Dividends paid to common shareholders: $0.17 per share	—			—		(13,542		)	—			—			—		(13,542		)
Dividends paid to preferred shareholders	—			—		(1,792		)	—			—			—		(1,792		)
Repurchase of Non-Cumulative Perpetual Contingent Convertible Preferred Stock, Series B	(58,089		)	—		(11,738		)	—			—			—		(69,827		)
Issuance of 6.95% Non-Cumulative Perpetual Preferred Stock, Series D, net of issuance costs	47,753			—		—			—			—			—		47,753
Issuance of noncontrolling interests	—			—		—			—			—			139		139
Net proceeds from issuance of 156,983 shares of common stock	—			157		1,073			—			—			—		1,230
Issuance of 677,620 shares of incentive stock grants, net of 39,912 shares canceled or forfeited	—			638		(638		)	—			—			—		—
Amortization of stock compensation and employee stock purchase plan	—			—		5,282			—			—			—		5,282
Stock options exercised	—			283		1,844			—			—			—		2,127
Tax deficiency from certain stock compensation awards	—			—		(597		)	—			—			—		(597		)
Other equity adjustments	—			—		2,702			—			—			—		2,702
Balance, September 30, 2013	$	47,753		$	79,822	$	623,485		$	(123,879	)	$	(4,283	)	$	139	$	623,037

Balance, December 31, 2013	$	47,753		$	79,838	$	616,334		$	(106,211	)	$	(4,197	)	$	171	$	633,688
Net income attributable to the Company	—			—		—			56,638			—			—		56,638
Other comprehensive income/ (loss), net	—			—		—			—			2,885			—		2,885
Dividends paid to common shareholders: $0.24 per share	—			—		(19,216		)	—			—			—		(19,216		)
Dividends paid to preferred shareholders	—			—		(2,606		)	—			—			—		(2,606		)
Issuance of noncontrolling interests	—			—		—			—			—			92		92
Net proceeds from issuance of 126,219 shares of common stock	—			126		1,130			—			—			—		1,256
Issuance of 493,290 shares of incentive stock grants, net of 75,598 shares canceled or forfeited and 128,003 shares withheld for employee taxes	—			289		(1,899		)	—			—			—		(1,610		)
Amortization of stock compensation and employee stock purchase plan	—			—		4,024			—			—			—		4,024
Stock options exercised	—			211		1,423			—			—			—		1,634
Tax savings from certain stock compensation awards	—			—		1,016			—			—			—		1,016
Other equity adjustments	—			—		(2,170		)	—			—			—		(2,170		)
Balance, September 30, 2014	$	47,753		$	80,464	$	598,036		$	(49,573	)	$	(1,312	)	$	263	$	675,631

See accompanying notes to consolidated financial statements.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Nine months ended September 30,
	2014			2013
	(In thousands)
Cash flows from operating activities:
Net income attributable to the Company	$	56,638		$	52,867
Adjustments to arrive at net income from continuing operations
Net income attributable to noncontrolling interests	3,428			2,770
Less: Net income from discontinued operations	(4,650		)	(5,824		)
Net income from continuing operations	55,416			49,813
Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities:
Depreciation and amortization	13,700			14,715
Net income attributable to noncontrolling interests	(3,428		)	(2,770		)
Equity issued as compensation	4,024			5,282
Provision/ (credit) for loan losses	(8,800		)	(8,000		)
Loans originated for sale	(48,625		)	(205,085		)
Proceeds from sale of loans held for sale	50,171			232,114
Gain on repurchase of debt	—			(620		)
Gain on sale of Pacific Northwest offices	—			(10,574		)
Deferred income tax expense/ (benefit)	4,642			4,931
Net decrease/ (increase) in other operating activities	15,564			9,350
Net cash provided by/ (used in) operating activities of continuing operations	82,664			89,156
Net cash provided by/ (used in) operating activities of discontinued operations	4,650			5,824
Net cash provided by/ (used in) operating activities	87,314			94,980
Cash flows from investing activities:
Investment securities available for sale:
Purchases	(192,350		)	(211,450		)
Sales	5,566			3,472
Maturities, redemptions, and principal payments	153,869			188,100
Investment securities held to maturity:
Purchases	(34,936		)	—
Principal payments	13,847			—
(Investments)/ distributions in trusts, net	(362		)	169
(Purchase)/ redemption of Federal Home Loan Banks stock	6,078			2,266
Net (increase)/ decrease in portfolio loans	(161,145		)	(119,349		)
Proceeds from recoveries of loans previously charged-off	9,771			5,406
Proceeds from sale of OREO	988			2,455
Proceeds from sale of portfolio loans	58,568			9,449
Proceeds from sale of Pacific Northwest offices	—			123,693
Capital expenditures	(5,165		)	(6,895		)
Cash used in other investing activities	(1,602		)	(224		)
Net cash provided by/ (used in) investing activities	(146,873		)	(2,908		)
(Continued)



	Nine months ended September 30,
	2014			2013
	(In thousands)
Cash flows from financing activities:
Net increase/ (decrease) in deposits, including deposits held for sale	224,511			31,776
Net (decrease)/ increase in securities sold under agreements to repurchase	(28,931		)	(23,820		)
Net (decrease)/ increase in short-term Federal Home Loan Bank borrowings	—			(40,000		)
Advances of long-term Federal Home Loan Bank borrowings	20,000			120,000
Repayments of long-term Federal Home Loan Bank borrowings	(15,887		)	(96,655		)
Repurchase of debt	—			(31,536		)
Dividends paid to common shareholders	(19,216		)	(13,542		)
Dividends paid to preferred shareholders	(2,606		)	(1,792		)
Proceeds from issuance of Series D preferred stock, net	—			47,753
Repurchase of Series B preferred stock, including deemed dividend at repurchase	—			(69,827		)
Tax benefit/ (deficiency) from certain stock compensation awards	1,016			(597		)
Proceeds from stock option exercises	1,634			2,127
Proceeds from issuance of common stock, net	(354		)	1,230
Distributions paid to noncontrolling interests	(3,272		)	(2,341		)
Other equity adjustments	(305		)	349
Net cash provided by/ (used in) financing activities	176,590			(76,875		)
Net increase/ (decrease) in cash and cash equivalents	117,031			15,197
Cash and cash equivalents at beginning of year	191,881			308,744
Cash and cash equivalents at end of period	$	308,912		$	323,941
Supplementary schedule of non-cash investing and financing activities:
Cash paid for interest	$	22,894		$	22,533
Cash paid for income taxes, net of (refunds received)	19,999			25,261
Change in unrealized gain/ (loss) on securities available for sale, net of tax	2,687			(6,541		)
Change in unrealized gain/ (loss) on cash flow hedges, net of tax	198			576
Change in unrealized gain/ (loss) on other, net of tax	—			(442		)
Non-cash transactions:
Loans transferred into/ (out of) other real estate owned from/ (to) held for sale or portfolio	298			(372		)
Loans transferred into/ (out of) held for sale from/ (to) portfolio	56,967			5,593
Loans charged-off	(2,059		)	(4,286		)

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 (the “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 currently operates in three geographic markets: New England, San Francisco Bay, and Southern California.

On July 15, 2014, the Company and Boston Private Bank announced an agreement to acquire substantially all of the assets and certain of the liabilities of Banyan Partners, LLC (“Banyan”). Banyan, a registered investment advisory firm, is headquartered in Palm Beach Gardens, Florida with locations in Boston, New York, Miami, Naples, and Atlanta metro regions, as well as Wisconsin, Texas and California. The transaction was subject to regulatory approval and certain closing conditions, and was completed on October 2, 2014.

The transaction was funded with a mixture of cash on hand and stock issued to the sellers. Banyan will also have the opportunity to receive additional consideration over a two year earn-out period. Under the terms of the agreement, Banyan and the Bank’s wealth management business will combine into a new subsidiary of the Bank.

The Investment Management segment has two consolidated affiliates, consisting of Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”) and Anchor Capital Advisors, LLC (“Anchor”), both of which are registered investment advisers (together, the “Investment Managers”).

The Wealth Advisory segment has two consolidated affiliates, consisting of KLS Professional Advisors Group, LLC (“KLS”) and Bingham, Osborn & Scarborough, LLC (“BOS”), both of which are wealth management firms and registered investment advisers (together, the “Wealth Advisors” and, together with the Investment Managers, the “non-banks”).

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, 2013, as filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation.

On January 1, 2014, the Company early adopted Accounting Standards Update (“ASU”) 2014-01 Investments - Equity Methods and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, (“ASU 2014-01”). As a result of adopting ASU 2014-01, amortization expense of these investments, which was previously reported as an operating expense, is now reported with income tax expense and is measured using the proportional amortization method. There was no change to the reporting of the related tax benefits from tax losses and credits, which have always been reported within income tax expense. ASU 2014-01 required retrospective adoption. Therefore, prior periods have been reclassified to conform to current period presentation. Included within income tax expense for the three month periods ended September 30, 2014 and 2013 are $0.3 million and $0.2 million, respectively, of amortization of investments and $0.3 million and $0.2 million, respectively, of related tax benefits from tax losses and credits. Included within income tax expense for the nine months ended September 30, 2014 and 2013 are $0.7 million and $0.4 million, respectively, of amortization of investments and $0.8 million and $0.5 million, respectively, of related tax benefits from tax losses and credits.

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, 2013, as filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies.

2. Earnings Per Share

The two class method of calculating earnings per share (“EPS”) is presented below for the three and nine months ended September 30, 2014 and 2013. The following tables present the computations of basic and diluted EPS:



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(In thousands, except share and per share data)
Basic earnings per share - Numerator:
Net income from continuing operations	$	18,160		$	17,886		$	55,416		$	49,813
Less: Net income attributable to noncontrolling interests	1,167			871			3,428			2,770
Net income from continuing operations attributable to the Company	16,993			17,015			51,988			47,043
Decrease/ (increase) in noncontrolling interests’ redemption values (1)	112			274			(257		)	162
Dividends on participating and preferred securities (2)	(908		)	(939		)	(2,795		)	(13,752		)
Total adjustments to income attributable to common shareholders	(796		)	(665		)	(3,052		)	(13,590		)
Net income from continuing operations attributable to common shareholders, before allocation to participating securities	16,197			16,350			48,936			33,453
Less: Amount allocated to participating securities	(66		)	(143		)	(284		)	(1,069		)
Net income from continuing operations attributable to common shareholders, after allocation to participating securities	$	16,131		$	16,207		$	48,652		$	32,384
Net income from discontinued operations, before allocation to participating securities	$	1,272		$	1,321		$	4,650		$	5,824
Less: Amount allocated to participating securities	(9		)	(17		)	(44		)	(309		)
Net income from discontinued operations, after allocation to participating securities	$	1,263		$	1,304		$	4,606		$	5,515
Net income attributable to common shareholders, before allocation to participating securities	$	17,469		$	17,671		$	53,586		$	39,277
Less: Amount allocated to participating securities	(75		)	(160		)	(328		)	(1,378		)
Net income attributable to common shareholders, after allocation to participating securities	$	17,394		$	17,511		$	53,258		$	37,899

Basic earnings per share - Denominator:
Weighted average basic common shares outstanding	78,687,062			77,670,017			78,425,613			77,249,660
Per share data - Basic earnings per share from:
Continuing operations	$	0.20		$	0.21		$	0.62		$	0.42
Discontinued operations	$	0.02		$	0.02		$	0.06		$	0.07
Total attributable to common shareholders	$	0.22		$	0.23		$	0.68		$	0.49

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(In thousands, except share and per share data)
Diluted earnings per share - Numerator:
Net income from continuing operations attributable to common shareholders, after allocation to participating securities	$	16,131	$	16,207	$	48,652	$	32,384
Add back: income allocated to dilutive securities	—		—		—		—
Net income from continuing operations attributable to common shareholders, after allocation to participating securities, after assumed dilution	16,131		16,207		48,652		32,384
Net income from discontinued operations, after allocation to participating securities	1,263		1,304		4,606		5,515
Net income attributable to common shareholders, after allocation to participating securities, after assumed dilution	$	17,394	$	17,511	$	53,258	$	37,899
Diluted earnings per share - Denominator:
Weighted average basic common shares outstanding	78,687,062		77,670,017		78,425,613		77,249,660
Dilutive effect of:
Stock options and performance-based restricted stock (3)	756,486		708,745		712,889		604,893
Warrants to purchase common stock (3)	1,167,410		814,986		1,186,126		633,617
Dilutive common shares	1,923,896		1,523,731		1,899,015		1,238,510
Weighted average diluted common shares outstanding (3)	80,610,958		79,193,748		80,324,628		78,488,170
Per share data - Diluted earnings per share from:
Continuing operations	$	0.20	$	0.20	$	0.60	$	0.41
Discontinued operations	$	0.02	$	0.02	$	0.06	$	0.07
Total attributable to common shareholders	$	0.22	$	0.22	$	0.66	$	0.48
Dividends per share declared and paid on common stock	$	0.08	$	0.07	$	0.24	$	0.17

_____________________

(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, 2013 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)	Consideration paid in excess of carrying value for the repurchase of the Series B preferred stock of $11.7 million is considered a deemed dividend and, for purposes of calculating EPS, reduces net income attributable to common shareholders for the nine months ended September 30, 2013.


(3)	The diluted EPS computations for the three and nine months ended September 30, 2014 and 2013 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 September 30,		Nine months ended September 30,
	2014	2013	2014	2013
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 or other dilutive securities (a)	767	1,214	834	1,446
Total shares excluded due to exercise price exceeding the average market price of common shares during the period	767	1,214	834	1,446

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)


(a)	Options to purchase shares of common 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 Holding Company (Boston Private Financial Holdings, Inc.). 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, 2013.

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 and nine months ended September 30, 2014 and 2013. Interest expense on junior subordinated debentures is reported at the Holding Company.



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Private Banking	(In thousands)
Net interest income	$	45,720		$	43,371		$	138,361		$	133,738
Fees and other income (1)	9,511			9,030			29,697			38,528
Total revenues	55,231			52,401			168,058			172,266
Provision/ (credit) for loan losses	(2,600		)	(6,000		)	(8,800		)	(8,000		)
Operating expense	32,503			32,718			99,317			103,857
Income before income taxes	25,328			25,683			77,541			76,409
Income tax expense	8,331			8,931			26,436			26,640
Net income from continuing operations	16,997			16,752			51,105			49,769
Net income attributable to the Company	$	16,997		$	16,752		$	51,105		$	49,769

Assets	$	6,506,699		$	6,090,343		$	6,506,699		$	6,090,343
AUM	$	4,701,000		$	4,263,000		$	4,701,000		$	4,263,000
Amortization of intangibles	$	46		$	70		$	173		$	210
Depreciation	$	1,312		$	1,282		$	4,085		$	4,050

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Investment Management	(In thousands)
Net interest income	$	6	$	4	$	17	$	15
Fees and other income	12,021		10,518		35,237		31,480
Total revenues	12,027		10,522		35,254		31,495
Operating expense	8,884		8,376		26,320		24,422
Income before income taxes	3,143		2,146		8,934		7,073
Income tax expense	1,066		714		2,990		2,329
Net income from continuing operations	2,077		1,432		5,944		4,744
Noncontrolling interests	622		438		1,797		1,425
Net income attributable to the Company	$	1,455	$	994	$	4,147	$	3,319

Assets	$	102,881	$	101,981	$	102,881	$	101,981
AUM	$	10,376,000	$	9,697,000	$	10,376,000	$	9,697,000
Amortization of intangibles	$	739	$	739	$	2,217	$	2,319
Depreciation	$	56	$	58	$	178	$	164



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Wealth Advisory	(In thousands)
Net interest income	$	2	$	15	$	6	$	51
Fees and other income	12,209		10,698		35,713		31,081
Total revenues	12,211		10,713		35,719		31,132
Operating expense	8,376		7,341		24,283		21,809
Income before income taxes	3,835		3,372		11,436		9,323
Income tax expense	1,455		1,282		4,356		3,463
Net income from continuing operations	2,380		2,090		7,080		5,860
Noncontrolling interests	544		433		1,589		1,345
Net income attributable to the Company	$	1,836	$	1,657	$	5,491	$	4,515

Assets	$	80,319	$	71,172	$	80,319	$	71,172
AUM	$	9,731,000	$	8,809,000	$	9,731,000	$	8,809,000
Amortization of intangibles	$	246	$	247	$	739	$	746
Depreciation	$	98	$	89	$	252	$	277

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Holding Company and Eliminations	(In thousands)
Net interest income	$	(945	)	$	(1,088	)	$	(2,811	)	$	(3,327	)
Fees and other income	28			5			229			907
Total revenues	(917		)	(1,083		)	(2,582		)	(2,420		)
Operating expense	4,236			3,518			13,449			15,117
Income/ (loss) before income taxes	(5,153		)	(4,601		)	(16,031		)	(17,537		)
Income tax expense/(benefit)	(1,859		)	(2,213		)	(7,318		)	(6,977		)
Net income/(loss) from continuing operations	(3,294		)	(2,388		)	(8,713		)	(10,560		)
Noncontrolling interests	1			—			42			—
Discontinued operations	1,272			1,321			4,650			5,824
Net income/(loss) attributable to the Company	$	(2,023	)	$	(1,067	)	$	(4,105	)	$	(4,736	)

Assets	$	(814	)	$	11,443		$	(814	)	$	11,443
AUM	$	(22,000	)	$	(21,000	)	$	(22,000	)	$	(21,000	)
Depreciation	$	32		$	76		$	173		$	167



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Total Company	(In thousands)
Net interest income	$	44,783		$	42,302		$	135,573		$	130,477
Fees and other income	33,769			30,251			100,876			101,996
Total revenues	78,552			72,553			236,449			232,473
Provision/ (credit) for loan losses	(2,600		)	(6,000		)	(8,800		)	(8,000		)
Operating expense	53,999			51,953			163,369			165,205
Income before income taxes	27,153			26,600			81,880			75,268
Income tax expense	8,993			8,714			26,464			25,455
Net income from continuing operations	18,160			17,886			55,416			49,813
Noncontrolling interests	1,167			871			3,428			2,770
Discontinued operations	1,272			1,321			4,650			5,824
Net income attributable to the Company	$	18,265		$	18,336		$	56,638		$	52,867

Assets	$	6,689,085		$	6,274,939		$	6,689,085		$	6,274,939
AUM	$	24,786,000		$	22,748,000		$	24,786,000		$	22,748,000
Amortization of intangibles	$	1,031		$	1,056		$	3,129		$	3,275
Depreciation	$	1,498		$	1,505		$	4,688		$	4,658

___________________


(1)	Included in Private Bank fees and other income for the nine months ended September 30, 2013 is the $10.6 million gain on sale of the three offices in the Pacific Northwest region.

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 September 30, 2014
Available for sale securities at fair value:
U.S. government and agencies	$	16,937	$	—	$	(128	)	$	16,809
Government-sponsored entities	269,094		418		(540		)	268,972
Municipal bonds	229,508		3,228		(319		)	232,417
Mortgage-backed securities (1)	187,753		2,093		(3,630		)	186,216
Other	20,007		243		(26		)	20,224
Total	$	723,299	$	5,982	$	(4,643	)	$	724,638

Held to maturity securities at amortized cost:
Mortgage-backed securities (1)	$	132,467	$	745	$	(71	)	$	133,141
Total	$	132,467	$	745	$	(71	)	$	133,141

As of December 31, 2013
Available for sale securities at fair value:
U.S. government and agencies	$	2,300	$	15	$	(27	)	$	2,288
Government-sponsored entities	228,670		301		(1,031		)	227,940
Municipal bonds	218,900		1,431		(1,898		)	218,433
Mortgage-backed securities (1)	229,609		2,513		(4,678		)	227,444
Other	15,353		275		(4		)	15,624
Total	$	694,832	$	4,535	$	(7,638	)	$	691,729

Held to maturity securities at amortized cost:
Mortgage-backed securities (1)	$	112,014	$	15	$	(1,112	)	$	110,917
Total	$	112,014	$	15	$	(1,112	)	$	110,917

___________________


(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 September 30, 2014. 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	$	57,204	$	57,664
After one, but within five years	363,433		364,199
After five, but within ten years	107,866		108,640
Greater than ten years	194,796		194,135
Total	$	723,299	$	724,638

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

The following table presents the maturities of investment securities held to maturity, based on contractual maturity, as of September 30, 2014.



	Held to Maturity Securities
	Amortized cost		Fair value
	(In thousands)
Within one year	$	—	$	—
After one, but within five years	—		—
After five, but within ten years	—		—
Greater than ten years	132,467		133,141
Total	$	132,467	$	133,141

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 September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(In thousands)
Proceeds from sales	$	235	$	1,982	$	5,566	$	3,472
Realized gains	8		7		9		35
Realized losses	—		—		—		—

The following table presents information regarding securities as of September 30, 2014 having temporary impairment, due to the fair values having declined below the amortized cost of the individual securities, and the time period that the investments have been temporarily impaired.



	Less than 12 months					12 months or longer					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	$	16,180	$	(77	)	$	629	$	(51	)	$	16,809	$	(128	)	4
Government-sponsored entities	101,895		(252		)	38,838		(287		)	140,733		(539		)	19
Municipal bonds	32,287		(90		)	17,192		(230		)	49,479		(320		)	26
Mortgage-backed securities	25,997		(141		)	96,402		(3,489		)	122,399		(3,630		)	35
Other	107		(16		)	16		(10		)	123		(26		)	13
Total	$	176,466	$	(576	)	$	153,077	$	(4,067	)	$	329,543	$	(4,643	)	97

Held to maturity securities
Mortgage-backed securities (1)	$	33,573	$	(71	)	$	—	$	—		$	33,573	$	(71	)	4
Total	$	33,573	$	(71	)	$	—	$	—		$	33,573	$	(71	)	4

The U.S. government and agencies securities, government-sponsored entities securities and mortgage-backed securities in the table above as of September 30, 2014 had Standard and Poor’s credit ratings of AA+. The municipal bonds in the table above had Moody’s credit ratings of at least Aa3. One of the municipal bonds in the table above was not rated by Standard and Poor’s or Moody’s. The other securities consisted of equity securities.

As of September 30, 2014, the amount of investment securities in an unrealized loss position greater than 12 months, as well as in total, was primarily due to movements in interest rates. The Company has no intent to sell any securities in an unrealized loss position as of September 30, 2014 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.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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 September 30, 2014 or December 31, 2013. The Company’s cost method investments primarily include low income housing partnerships which generate tax credits. The Company also holds partnership interests in venture capital funds formed to provide financing to small businesses and to promote community development. The Company had $25.6 million and $26.2 million in cost method investments included in other assets as of September 30, 2014 and December 31, 2013, respectively.

5. Fair Value Measurements

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

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall:



	As of September 30, 2014		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	$	16,809	$	15,311	$	1,498	$	—
Government-sponsored entities	268,972		—		268,972		—
Municipal bonds	232,417		—		232,417		—
Mortgage-backed securities	186,216		—		186,216		—
Other	20,224		20,224		—		—
Total available for sale securities	724,638		35,535		689,103		—
Derivatives - interest rate customer swaps	3,284		—		3,284		—
Derivatives - interest rate swaps	473		—		473		—
Other investments	5,414		5,414		—		—
Liabilities:
Derivatives - interest rate customer swaps	$	3,355	$	—	$	3,355	$	—
Derivatives - interest rate swaps	1,005		—		1,005		—
Derivatives - junior subordinated debenture interest rate swap	2,189		—		2,189		—

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, 2013		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	$	2,288	$	—	$	2,288	$	—
Government-sponsored entities	227,940		—		227,940		—
Municipal bonds	218,433		—		218,433		—
Mortgage-backed securities	227,444		—		227,444		—
Other	15,624		15,624		—		—
Total available for sale securities	691,729		15,624		676,105		—
Derivatives - interest rate customer swaps	2,045		—		2,045		—
Derivatives - interest rate swaps	921		—		921		—
Other investments	5,482		5,052		430		—
Liabilities:
Derivatives - interest rate customer swaps	$	2,029	$	—	$	2,029	$	—
Derivatives - interest rate swaps	543		—		543		—
Derivatives - junior subordinated debenture interest rate swap	3,469		—		3,469		—

As of September 30, 2014 and December 31, 2013, 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) and, at September 30, 2014, two U.S. Treasury 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 September 30, 2014 or December 31, 2013 were categorized as Level 3.

The Company uses interest rate customer swaps, interest rate 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, if any. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, they have been categorized as a Level 2 measurement as of September 30, 2014 and December 31, 2013. 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 September 30, 2014 and December 31, 2013.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

Other investments, which are not considered available for sale investments, consist of deferred compensation trusts, which consist of publicly traded mutual fund investments that are valued at prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement as of September 30, 2014 and December 31, 2013. The remaining other investments categorized as Level 2 consist of the Company’s cost-method investments as of September 30, 2014 and December 31, 2013.

There were no Level 3 assets at September 30, 2014 or December 31, 2013.

The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis during the periods ended September 30, 2014 and 2013, respectively, aggregated by the level in the fair value hierarchy within which those measurements fall:



	As of September 30, 2014		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	As of September 30, 2014		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended September 30, 2014			Nine months ended September 30, 2014
	(In thousands)
Assets:
Impaired loans (1)	$	3,825	$	—	$	—	$	3,825	$	(1,100	)	$	(1,600	)

___________________


(1)	Collateral-dependent impaired loans held at September 30, 2014 that had write-downs in fair value or whose specific reserve changed during the first nine months of 2014.



	As of September 30, 2013		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	As of September 30, 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 September 30, 2013		Nine months ended September 30, 2013
	(In thousands)
Assets:
Impaired loans (1)	$	9,464	$	—	$	—	$	9,464	$	—	$	(1,845	)

________________


(1)	Collateral-dependent impaired loans held at September 30, 2013 that had write-downs in fair value or whose specific reserve changed during the first nine months of 2013.

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



	As of September 30, 2014
	Fair Value		Valuation technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	3,825	Appraisals of Collateral	Discount for costs to sell	0% - 12%	4%
Impaired Loans	$	3,825	Appraisals of Collateral	Appraisal adjustments	0% - 25%	5%



	As of September 30, 2013
	Fair Value		Valuation technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	9,464	Appraisals of Collateral	Discount for costs to sell	0% - 13%	8%
Impaired Loans	$	9,464	Appraisals of Collateral	Appraisal adjustments	0% - 45%	24%

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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 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):



	As of September 30, 2014
	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	$	308,912	$	308,912	$	308,912	$	—	$	—
Investment securities held to maturity	132,467		133,141		—		133,141		—
Loans, net	5,138,208		5,071,670		—		—		5,071,670
Loans held for sale	4,943		5,374		—		5,374		—
Other financial assets	112,492		112,492		—		112,492		—
FINANCIAL LIABILITIES:
Deposits	5,334,881		5,337,618		—		5,337,618		—
Securities sold under agreements to repurchase	73,422		73,415		—		73,415		—
Federal Home Loan Bank borrowings	371,367		378,697		—		378,697		—
Junior subordinated debentures	106,363		96,363		—		—		96,363
Other financial liabilities	7,515		7,515		—		7,515		—



	As of December 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	$	191,881	$	191,881	$	191,881	$	—	$	—
Investment securities held to maturity	112,014		110,917		—		110,917		—
Loans, net	5,036,088		4,985,555		—		—		4,985,555
Loans held for sale	6,123		6,130		—		6,130		—
Other financial assets	117,840		117,840		—		117,840		—
FINANCIAL LIABILITIES:
Deposits	5,110,370		5,113,224		—		5,113,224		—
Securities sold under agreements to repurchase	102,353		102,343		—		102,343		—
Federal Home Loan Bank borrowings	367,254		377,384		—		377,384		—
Junior subordinated debentures	106,363		96,363		—		—		96,363
Other financial liabilities	9,789		9,789		—		9,789		—

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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.

Investment securities held to maturity

Securities held to maturity currently include mortgage-backed securities. All held to maturity securities are fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities is based on quoted market prices obtained from external pricing services. The principal market for our securities portfolio is the secondary institutional market, with an exit price that is predominantly reflective of bid level pricing in that market. Accordingly, securities held to maturity are included in the Level 2 fair value category.

Loans, net

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

Loans held for sale

Loans held for sale are recorded at the lower of cost or fair value in the aggregate. Fair value estimates are based on actual commitments to sell the loans to investors at an agreed upon price or current market prices if rates have changed since the time the loan closed. Accordingly, loans held for sale are included in the Level 2 fair value category.

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.

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.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

Federal Home Loan Bank borrowings

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

Junior subordinated debentures

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I and Boston Private Capital Trust II were estimated using Level 3 inputs such as the interest rates on these securities, current rates for similar debt, a consideration for illiquidity of trading in the debt, and regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt.

Other financial liabilities

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

Financial instruments with off-balance sheet risk

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

6. Loan Portfolio and Credit Quality

The Bank’s lending activities are conducted principally in the regions of New England, San Francisco Bay, and Southern California.

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 ($4.9) million and ($4.1) million as of September 30, 2014 and December 31, 2013, respectively.

In the second quarter of 2014, the Bank sold $57.0 million of commercial real estate loans for a $1.6 million gain.

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



	September 30, 2014		December 31, 2013
	(In thousands)
Commercial and industrial	$	930,828	$	866,053
Commercial real estate	1,808,041		1,813,394
Construction and land	130,545		153,917
Residential	2,097,527		2,032,294
Home equity	109,227		113,660
Consumer and other	137,323		133,141
Total Loans	$	5,213,491	$	5,112,459

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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



	September 30, 2014		December 31, 2013
	(In thousands)
Commercial and industrial	$	2,156	$	3,484
Commercial real estate	16,820		23,967
Construction and land	3,617		3,489
Residential	8,539		12,777
Home equity	1,323		1,020
Consumer and other	1,086		25
Total	$	33,541	$	44,762

The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, although infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were $0.5 million of loans 90 days or more past due, but still accruing, as of September 30, 2014 and $0.1 million as of December 31, 2013. The Bank’s policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six consecutive months). For troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months in accordance with the restructured loan terms, along with meeting other criteria.

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



	September 30, 2014
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due		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	$	842	$	90	$	430	$	1,362	$	190	$	—	$	1,966	$	2,156	$	927,310	$	930,828
Commercial real estate	1,437		—		53		1,490		12,891		471		3,458		16,820		1,789,731		1,808,041
Construction and land	—		—		—		—		375		90		3,152		3,617		126,928		130,545
Residential	—		1,232		—		1,232		2,666		350		5,523		8,539		2,087,756		2,097,527
Home equity	—		—		—		—		101		—		1,222		1,323		107,904		109,227
Consumer and other	13		9		—		22		29		2		1,055		1,086		136,215		137,323
Total	$	2,292	$	1,331	$	483	$	4,106	$	16,252	$	913	$	16,376	$	33,541	$	5,175,844	$	5,213,491

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	December 31, 2013
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due		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	$	1,075	$	454	$	—	$	1,529	$	1,192	$	—	$	2,292	$	3,484	$	861,040	$	866,053
Commercial real estate	775		—		—		775		13,337		—		10,630		23,967		1,788,652		1,813,394
Construction and land	1,631		21		65		1,717		392		43		3,054		3,489		148,711		153,917
Residential	8,181		226		—		8,407		4,058		1,630		7,089		12,777		2,011,110		2,032,294
Home equity	542		4		—		546		—		1,000		20		1,020		112,094		113,660
Consumer and other	826		7		—		833		17		—		8		25		132,283		133,141
Total	$	13,030	$	712	$	65	$	13,807	$	18,996	$	2,673	$	23,093	$	44,762	$	5,053,890	$	5,112,459

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

Generally, when a collateral dependent loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank will continue to obtain updated appraisals as deemed necessary, especially during periods of declining property values.

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

Credit Quality Indicators

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

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, 2013, follows:

Pass - All loans graded as pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan losses. 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 pass unless there is known information such as delinquency or client requests for modifications which, due to financial difficulty, would then generally result in a risk rating such as special mention or more severe depending on the factors.

Special Mention - Loans rated in this category are defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the Bank’s credit position. These loans are currently protected but have the potential to deteriorate to a substandard rating. For commercial loans, the borrower’s financial performance may be inconsistent or below forecast, creating the possibility of liquidity problems and shrinking debt service coverage. In loans

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

having this rating, the primary source of repayment is still good, but there is increasing reliance on collateral or guarantor support. Collectability of the loan is not yet in jeopardy. In particular, loans in this category are considered more variable than other categories, since they will typically migrate through categories more quickly.

Substandard - Loans rated in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard credit has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans may be either still accruing or nonaccruing depending upon the severity of the risk and other factors such as the value of the collateral, if any, and past due status.

Doubtful - Loans rated in this category indicate that collection or liquidation in full on the basis of currently existing facts, conditions, and values, is highly questionable and improbable. Loans in this category are usually on nonaccrual and classified as impaired.

The following tables present the loan portfolio’s credit risk profile by internally assigned grade and class of receivable as of the dates indicated:



	September 30, 2014
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	903,352	$	13,918	$	11,402	$	2,156	$	930,828
Commercial real estate	1,700,863		71,361		18,997		16,820		1,808,041
Construction and land	109,282		17,646		—		3,617		130,545
Residential	2,078,710		—		10,278		8,539		2,097,527
Home equity	107,382		—		522		1,323		109,227
Consumer and other	134,149		100		1,988		1,086		137,323
Total	$	5,033,738	$	103,025	$	43,187	$	33,541	$	5,213,491



	December 31, 2013
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	849,535	$	4,857	$	8,177	$	3,484	$	866,053
Commercial real estate	1,709,265		60,305		19,857		23,967		1,813,394
Construction and land	128,667		21,172		589		3,489		153,917
Residential	2,006,707		—		12,810		12,777		2,032,294
Home equity	112,065		—		575		1,020		113,660
Consumer and other	132,130		979		7		25		133,141
Total	$	4,938,369	$	87,313	$	42,015	$	44,762	$	5,112,459

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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



	As of and for the three and nine months ended September 30, 2014
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		QTD Average Recorded Investment		YTD Average Recorded Investment		QTD Interest Income Recognized while Impaired		YTD Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	2,028	$	3,134	n/a		$	2,032	$	2,066	$	1	$	5
Commercial real estate	21,446		32,167		n/a		23,396		26,393		435		2,268
Construction and land	1,416		2,421		n/a		1,019		880		—		—
Residential	9,727		10,331		n/a		10,125		9,080		133		331
Home equity	50		50		n/a		50		50		1		2
Consumer and other	1,007		1,007		n/a		1,007		407		—		1
Subtotal	35,674		49,110		n/a		37,629		38,876		570		2,607
With an allowance recorded:
Commercial and industrial	1,019		1,104		$	93	1,041		1,151		36		64
Commercial real estate	7,493		7,921		910		7,529		7,916		96		284
Construction and land	2,200		2,356		172		2,540		2,648		—		—
Residential	6,206		6,206		596		6,640		8,151		43		168
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	16,918		17,587		1,771		17,750		19,866		175		516
Total:
Commercial and industrial	3,047		4,238		93		3,073		3,217		37		69
Commercial real estate	28,939		40,088		910		30,925		34,309		531		2,552
Construction and land	3,616		4,777		172		3,559		3,528		—		—
Residential	15,933		16,537		596		16,765		17,231		176		499
Home equity	50		50		—		50		50		1		2
Consumer and other	1,007		1,007		—		1,007		407		—		1
Total	$	52,592	$	66,697	$	1,771	$	55,379	$	58,742	$	745	$	3,123

___________________


(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 and nine months ended September 30, 2013
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		QTD Average Recorded Investment		YTD Average Recorded Investment		QTD Interest Income Recognized while Impaired		YTD Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	2,068	$	3,299	n/a		$	2,558	$	4,521	$	62	$	332
Commercial real estate	30,965		42,572		n/a		30,847		34,896		247		781
Construction and land	1,078		1,800		n/a		1,083		1,605		6		103
Residential	3,662		5,340		n/a		3,229		4,141		20		106
Home equity	89		89		n/a		89		141		3		4
Consumer and other	7		7		n/a		2		1		—		—
Subtotal	37,869		53,107		n/a		37,808		45,305		338		1,326
With an allowance recorded:
Commercial and industrial	2,558		2,644		$	253	2,496		2,385		1		23
Commercial real estate	13,905		15,197		1,508		17,630		19,909		89		677
Construction and land	4,185		4,405		794		4,185		3,260		—		—
Residential	12,844		12,844		1,746		13,171		12,680		100		389
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	33,492		35,090		4,301		37,482		38,234		190		1,089
Total:
Commercial and industrial	4,626		5,943		253		5,054		6,906		63		355
Commercial real estate	44,870		57,769		1,508		48,477		54,805		336		1,458
Construction and land	5,263		6,205		794		5,268		4,865		6		103
Residential	16,506		18,184		1,746		16,400		16,821		120		495
Home equity	89		89		—		89		141		3		4
Consumer and other	7		7		—		2		1		—		—
Total	$	71,361	$	88,197	$	4,301	$	75,290	$	83,539	$	528	$	2,415

___________________


(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, 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	$	2,084	$	3,222	n/a		$	3,908	$	332
Commercial real estate	31,917		42,493		n/a		33,861		1,265
Construction and land	1,072		1,798		n/a		1,472		109
Residential	5,536		7,818		n/a		4,139		134
Home equity	50		50		n/a		126		5
Consumer and other	7		7		n/a		2		—
Subtotal	40,666		55,388		n/a		43,508		1,845
With an allowance recorded:
Commercial and industrial	1,353		1,453		$	100	2,228		63
Commercial real estate	8,692		9,166		730		17,904		810
Construction and land	2,758		2,982		236		3,415		—
Residential	10,598		10,598		912		12,608		484
Home equity	—		—		—		—		—
Consumer and other	—		—		—		—		—
Subtotal	23,401		24,199		1,978		36,155		1,357
Total:
Commercial and industrial	3,437		4,675		100		6,136		395
Commercial real estate	40,609		51,659		730		51,765		2,075
Construction and land	3,830		4,780		236		4,887		109
Residential	16,134		18,416		912		16,747		618
Home equity	50		50		—		126		5
Consumer and other	7		7		—		2		—
Total	$	64,067	$	79,587	$	1,978	$	79,663	$	3,202

___________________


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

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

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

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

The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal forgiveness. TDRs totaled $39.2 million and $54.5 million as of September 30, 2014 and December 31, 2013, respectively. Of the $39.2 million in TDRs as of September 30, 2014, $24.6 million were on accrual status. Of the $54.5 million in TDRs as of December 31, 2013, $28.4 million were on accrual status.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

Since all TDR loans are considered impaired loans, they are individually evaluated for impairment. The resulting impairment, if any, would have an impact on the allowance for loan losses as a specific reserve or charge-off. If, prior to the classification as a TDR, the loan was not impaired, there would have been a general or allocated reserve on the particular loan. Therefore, depending upon the result of the impairment analysis, there could be an increase or decrease in the related allowance for loan losses. Many loans initially categorized as TDRs are already on nonaccrual status and are already considered impaired. Therefore, there is generally not a material change to the allowance for loan losses when a nonaccruing loan is categorized as a TDR.

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



	As of and for the three months ended September 30, 2014
	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	—	—		—		—	—
Construction and land	—	—		—		—	—
Residential	—	—		—		2	518
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	—	$	—	$	—	2	$	518



	As of and for the nine months ended September 30, 2014
	Restructured Year to Date					TDRs that defaulted Year to Date that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
	(Dollars in thousands)
Commercial and industrial	—	$	—	$	—	—	$	—
Commercial real estate	—	—		—		—	—
Construction and land	—	—		—		—	—
Residential (1)	3	287		296		4	663
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	3	$	287	$	296	4	$	663

___________________


(1)	Represents the following concessions: temporary reduction of interest rate.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	As of and for the three months ended September 30, 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	$	983
Commercial real estate (1)	2	2,198		2,198		2	1,517
Construction and land	—	—		—		—	—
Residential (2)	2	227		227		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	4	$	2,425	$	2,425	3	$	2,500

___________________


(1)	Represents the following concessions: combination of concessions.


(2)	Represents the following concessions: temporary reduction of interest rate.



	As of and for the nine months ended September 30, 2013
	Restructured Current Year to Date					TDRs that defaulted in the Current Year to Date that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
	(Dollars in thousands)
Commercial and industrial (1)	3	$	1,369	$	1,369	1	$	983
Commercial real estate (2)	7	11,361		11,361		5	5,072
Construction and land (3)	4	3,604		3,604		—	—
Residential (4)	10	934		934		1	1,116
Home equity (5)	1	40		40		—	—
Consumer and other	—	—		—		—	—
Total	25	$	17,308	$	17,308	7	$	7,171

___________________


(1)	Represents the following concessions: extension of term (1 loan; post-modification recorded investment of $1.0 million), temporary reduction of interest rate (1 loan; post-modification recorded investment of $0.2 million), and combination of concessions (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 (3 loans; post-modification recorded investment of $2.4 million).


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


(4)	Represents the following concessions: temporary reduction of interest rate.


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

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 $75.3 million and $76.4 million at September 30, 2014 and December 31, 2013, 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 September 30,						As of and for the nine months ended September 30,
	2014			2013			2014			2013
	(In thousands)
Allowance for loan losses, beginning of period:
Commercial and industrial	$	13,141		$	11,883		$	12,837		$	11,825
Commercial real estate	44,086			48,744			44,979			52,497
Construction and land	4,580			4,923			4,465			5,016
Residential	9,569			11,625			10,732			10,892
Home equity	992			1,201			1,020			1,085
Consumer and other	257			412			322			540
Unallocated	1,922			2,012			2,016			2,202
Total allowance for loan losses, beginning of period	74,547			80,800			76,371			84,057
Provision/ (credit) for loan losses:
Commercial and industrial	607			(533		)	37			(1,441		)
Commercial real estate	647			(5,719		)	(2,619		)	(8,266		)
Construction and land	(2,335		)	(427		)	(2,633		)	(1,250		)
Residential	(1,646		)	549			(3,323		)	2,687
Home equity	(44		)	(9		)	(87		)	444
Consumer and other	154			18			(98		)	(105		)
Unallocated	17			121			(77		)	(69		)
Total provision/(credit) for loan losses	(2,600		)	(6,000		)	(8,800		)	(8,000		)
Loans charged-off:
Commercial and industrial	—			(41		)	(334		)	(68		)
Commercial real estate	(900		)	—			(1,400		)	(2,339		)
Construction and land	(200		)	—			(200		)	(100		)
Residential	—			—			(88		)	(1,405		)
Home equity	—			—			—			(360		)
Consumer and other	(15		)	(9		)	(37		)	(14		)
Total charge-offs	(1,115		)	(50		)	(2,059		)	(4,286		)
Recoveries on loans previously charged-off:
Commercial and industrial	249			91			1,457			1,084
Commercial real estate	484			1,958			3,357			3,091
Construction and land	2,168			378			2,581			1,208
Residential	1,550			—			2,152			—
Home equity	—			—			15			23
Consumer and other	—			—			209			—
Total recoveries	4,451			2,427			9,771			5,406

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)



	As of and for the three months ended September 30,				As of and for the nine months ended September 30,
	2014		2013		2014		2013
	(In thousands)
Allowance for loan losses at end of period:
Commercial and industrial	13,997		11,400		13,997		11,400
Commercial real estate	44,317		44,983		44,317		44,983
Construction and land	4,213		4,874		4,213		4,874
Residential	9,473		12,174		9,473		12,174
Home equity	948		1,192		948		1,192
Consumer and other	396		421		396		421
Unallocated	1,939		2,133		1,939		2,133
Total allowance for loan losses at end of period	$	75,283	$	77,177	$	75,283	$	77,177

The following tables present the Company’s allowance for loan losses and loan portfolio at September 30, 2014 and December 31, 2013 by portfolio segment, disaggregated by method of impairment analysis. The Company had no loans acquired with deteriorated credit quality at September 30, 2014 or December 31, 2013.



	Commercial and industrial		Commercial real estate		Construction and land		Residential
	(In thousands)
Allowance for loan losses balance at September 30, 2014 attributable to:
Loans collectively evaluated	$	13,904	$	43,407	$	4,041	$	8,877
Loans individually evaluated	93		910		172		596
Total allowance for loan losses	$	13,997	$	44,317	$	4,213	$	9,473

Recorded investment (loan balance) at September 30, 2014:
Loans collectively evaluated	$	927,781	$	1,779,102	$	126,929	$	2,081,594
Loans individually evaluated	3,047		28,939		3,616		15,933
Total Loans	$	930,828	$	1,808,041	$	130,545	$	2,097,527

	Home equity		Consumer and other		Unallocated		Total
	(In thousands)
Allowance for loan losses balance at September 30, 2014 attributable to:
Loans collectively evaluated	$	948	$	396	$	1,939	$	73,512
Loans individually evaluated	—		—		—		1,771
Total allowance for loan losses	$	948	$	396	$	1,939	$	75,283

Recorded investment (loan balance) at September 30, 2014:
Loans collectively evaluated	$	109,177	$	136,316	$	—	$	5,160,899
Loans individually evaluated	50		1,007		—		52,592
Total Loans	$	109,227	$	137,323	$	—	$	5,213,491

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, 2013 attributable to:
Loans collectively evaluated	$	12,737	$	44,249	$	4,229	$	9,820
Loans individually evaluated	100		730		236		912
Total allowance for loan losses	$	12,837	$	44,979	$	4,465	$	10,732

Recorded investment (loan balance) at December 31, 2013:
Loans collectively evaluated	$	862,616	$	1,772,785	$	150,087	$	2,016,160
Loans individually evaluated	3,437		40,609		3,830		16,134
Total Loans	$	866,053	$	1,813,394	$	153,917	$	2,032,294

	Home equity		Consumer and other		Unallocated		Total
	(In thousands)
Allowance for loan losses balance at December 31, 2013 attributable to:
Loans collectively evaluated	$	1,020	$	322	$	2,016	$	74,393
Loans individually evaluated	—		—		—		1,978
Total allowance for loan losses	$	1,020	$	322	$	2,016	$	76,371

Recorded investment (loan balance) at December 31, 2013:
Loans collectively evaluated	$	113,610	$	133,134	$	—	$	5,048,392
Loans individually evaluated	50		7		—		64,067
Total Loans	$	113,660	$	133,141	$	—	$	5,112,459

8. Derivatives and Hedging Activities

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

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 September 30, 2014 and December 31, 2013:



	September 30, 2014							December 31, 2013
	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	$	473	Other liabilities	$	(3,194	)	Other assets	$	921	Other liabilities	$	(4,012	)
Derivatives not designated as hedging instruments:
Interest rate products	Other assets	3,284		Other liabilities	(3,355		)	Other assets	2,045		Other liabilities	(2,029		)
Total		$	3,757		$	(6,549	)		$	2,966		$	(6,041	)

___________________


(1)	For additional details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements-Note 5: Fair Value Measurements.”

The following tables present the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013:



Derivatives in cash flow hedging relationships	Amount of gain or (loss) recognized in OCI on derivatives (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 September 30,						three months ended September 30,
	2014		2013				2014			2013
(In thousands)
Interest rate products	$	667	$	(1,643	)	Interest expense	$	(869	)	$	(553	)
Total	$	667	$	(1,643	)		$	(869	)	$	(553	)



Derivatives in cash flow hedging relationships	Amount of gain or (loss) recognized in OCI on derivatives (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)
	nine months ended September 30,							nine months ended September 30,
	2014			2013				2014			2013
(In thousands)
Interest rate products	$	(1,847	)	$	(469	)	Interest expense	$	(2,217	)	$	(1,486	)
Total	$	(1,847	)	$	(469	)		$	(2,217	)	$	(1,486	)

The following table presents the components of the Company’s accumulated other comprehensive income/ (loss) related to the derivatives for the three and nine months ended September 30, 2014 and 2013:



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(In thousands)
Accumulated other comprehensive income/ (loss) on cash flow hedges, balance at beginning of period	$	(2,458	)	$	(1,745	)	$	(1,763	)	$	(2,969	)
Net change in unrealized gain/ (loss) on cash flow hedges	893			(648		)	198			576
Accumulated other comprehensive income/ (loss) on cash flow hedges, balance at end of period	$	(1,565	)	$	(2,393	)	$	(1,565	)	$	(2,393	)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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, 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 September 30, 2014 and December 31, 2013.

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, 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 September 30, 2014 and December 31, 2013.

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 September 30, 2014 and December 31, 2013.

As of September 30, 2014 and December 31, 2013, the termination amounts related to collateral determinations of derivatives in a liability position was $6.4 million and $6.1 million, respectively. The Company has minimum collateral posting thresholds with its derivative counterparty and has posted collateral of $4.2 million and $7.3 million as of September 30, 2014 and December 31, 2013, respectively, against its obligation under this agreement.

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 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 Bank entered into a total of six interest rate swaps, five during 2013 with effective dates of August 1, 2013, March 1, 2014, June 1, 2014, September 2, 2014, and December 1, 2014, and one during 2014 with an effective date of June 1, 2014. The six interest rate swaps each have a notional amount of $25 million and have terms ranging from three to six years. The Bank’s risk management objective and strategy for these interest rate swaps is to reduce its exposure to variability in interest-related cash outflows attributable to changes in the LIBOR swap rate associated with borrowing programs for each of the periods, initially expected to be accomplished with LIBOR-indexed brokered deposits, but may also include LIBOR-indexed FHLB advances. The interest rate swaps will effectively fix the Bank’s interest payments on $150 million of its LIBOR-indexed liabilities at rates between 1.17% and 2.32%, and a weighted average rate of 1.85%.

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 Company had no hedge ineffectiveness recognized in earnings during the three and nine months ended September 30, 2014 and 2013. The 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 Company’s interest rate swaps. During the next twelve months, the Company estimates that $3.8 million will be reclassified as an increase in interest expense.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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. As of September 30, 2014 and December 31, 2013, the Bank had 18 and 12 interest rate swaps related to this program with an aggregate notional amount of $219.9 million and $150.8 million, respectively. As of September 30, 2014 and December 31, 2013, the Bank had no foreign currency exchange contracts outstanding related to this program.

The derivative asset and liability values above include an adjustment related to the consideration of credit risk required under ASC 820. The following table presents the effect of the Bank’s derivative financial instruments not designated as hedging instruments in the consolidated statement of operations for the three and nine months ended September 30, 2014 and 2013.



		Amount of gain or (loss), net, recognized in income on derivatives
Derivatives not designated as hedging instruments	Location of gain or (loss) recognized in income on derivative	Three months ended September 30,					Nine months ended September 30,
Derivatives not designated as hedging instruments		2014		2013			2014			2013
		(In thousands)
Interest rate products	Other income/ (expense)	$	19	$	(5	)	$	(87	)	$	14
Foreign exchange contracts	Other income/ (expense)	—		3			—			8
Total		$	19	$	(2	)	$	(87	)	$	22

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

9. Income Taxes

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



	Nine months ended September 30,
	2014			2013
	(In thousands)
Income from continuing operations:
Income before income taxes	$	81,880		$	75,268
Income tax expense	26,464			25,455
Net income from continuing operations	$	55,416		$	49,813
Effective tax rate, continuing operations	32.3		%	33.8		%

Income from discontinued operations:
Income before income taxes	$	8,625		$	10,353
Income tax expense	3,975			4,529
Net income from discontinued operations	$	4,650		$	5,824
Effective tax rate, discontinued operations	46.1		%	43.7		%

Less: Income attributable to noncontrolling interests:
Income before income taxes	$	3,428		$	2,770
Income tax expense	—			—
Net income attributable to noncontrolling interests	$	3,428		$	2,770
Effective tax rate, noncontrolling interests	—		%	—		%

Income attributable to the Company
Income before income taxes	$	87,077		$	82,851
Income tax expense	30,439			29,984
Net income attributable to the Company	$	56,638		$	52,867
Effective tax rate attributable to the Company	35.0		%	36.2		%

The effective tax rate for continuing operations for the nine months ended September 30, 2014 of 32.3%, with related tax expense of $26.5 million, was calculated based on a projected 2014 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 nine months ended September 30, 2013 of 33.8%, with related tax expense of $25.5 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 and an increase in unrecognized tax benefits.

The effective tax rate for continuing operations for the nine months ended September 30, 2014 is lower than the effective tax rate for the same period in 2013 due primarily to an increase in unrecognized tax benefits in 2013 as compared to 2014. The Company’s net amount of unrecognized tax benefits which, if recognized, would affect the effective tax rate increased by $1.0 million during the nine months ended September 30, 2013. This increase related primarily to a change in the interpretation of tax law with respect to certain tax positions taken on previously filed tax returns and was subsequently released due to settlements with taxing authorities during the quarter ended December 31, 2013. The Company’s gross and net amount of unrecognized tax benefits as of September 30, 2014 has not significantly changed since December 31, 2013.

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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 $1.2 million and $0.9 million for the three months ended September 30, 2014 and 2013, respectively, and $3.4 million and $2.8 million for the nine months ended September 30, 2014 and 2013, respectively.

On the consolidated balance sheets, noncontrolling interests are included as the sum of the capital and undistributed profits allocated to the noncontrolling interest owners. Typically, this balance is included in a company’s permanent shareholders’ equity in the consolidated balance sheets. When the noncontrolling interest owners’ rights include certain redemption features, as described in ASC 480, Distinguishing Liabilities from Equity, such redeemable noncontrolling interests are classified as mezzanine equity and are not included in permanent shareholders’ equity. Due to the redemption features of the noncontrolling interests, the Company had redeemable noncontrolling interests held in mezzanine equity in the accompanying consolidated balance sheets of $21.4 million and $19.5 million at September 30, 2014 and December 31, 2013, respectively. The aggregate amount of such redeemable noncontrolling equity interests are recorded at the estimated maximum redemption values. In addition, the Company had $0.3 million and $0.2 million in noncontrolling interests included in permanent shareholder’s equity at September 30, 2014 and December 31, 2013, respectively.

Each non-wholly owned affiliate operating agreement provides the Company and/or the noncontrolling interests with contingent call or put redemption features used for the orderly transfer of noncontrolling equity interests between the affiliate noncontrolling interest owners and the Company at either a contractually predetermined fair value; multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA); or fair value. The Company may liquidate these noncontrolling interests in cash, shares of the Company’s common stock, or other forms of consideration dependent on the operating agreement. These agreements are discussed in Part II. Item 8. “Financial Statements and Supplementary Data – Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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 companies (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 by affiliate at the periods indicated:



	September 30, 2014		December 31, 2013
	(In thousands)
Anchor	$	12,338	$	11,533
BOS	6,033		5,337
DGHM	3,289		2,769
Total	$	21,660	$	19,639
Redeemable noncontrolling interests	$	21,397	$	19,468
Noncontrolling interests	$	263	$	171

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



	Nine months ended September 30,
	2014			2013
	(In thousands)
Redeemable noncontrolling interests at beginning of year	$	19,468		$	19,287
Net income attributable to noncontrolling interests	3,428			2,770
Distributions	(3,272		)	(2,341		)
Adjustments to fair value	1,773			(2,492		)
Redeemable noncontrolling interests at end of period	$	21,397		$	17,224

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

11. Accumulated Other Comprehensive Income

The following table presents a summary of the amounts reclassified from accumulated other comprehensive income/ (loss) for the three and nine months ended September 30, 2014 and 2013:



Description of component of accumulated other comprehensive income/ (loss)	Three months ended September 30,						Nine months ended September 30,						Affected line item in Statement of Operations
	2014			2013			2014			2013			Affected line item in Statement of Operations
	(In thousands)						(In thousands)
Adjustment for realized gains on securities available for sale, net:
Pre-tax	$	7		$	7		$	8		$	35		Gain on sale of investments, net
Tax expense/ (benefit)	3			3			3			15			Income tax expense
Net	$	4		$	4		$	5		$	20		Net income attributable to the Company
Net realized gain/ (loss) on cash flow hedges:
Hedge related to junior subordinated debentures:
Pre-tax	$	(486	)	$	(479	)	$	(1,440	)	$	(1,411	)	Interest expense on junior subordinated debentures
Tax expense/ (benefit)	(209		)	(206		)	(616		)	(598		)	Income tax expense
Net	$	(277	)	$	(273	)	$	(824	)	$	(813	)	Net income attributable to the Company
Hedge related to deposits:
Pre-tax	$	(383	)	$	(75	)	$	(777	)	$	(75	)	Interest expense on deposits
Tax expense/ (benefit)	(157		)	(32		)	(321		)	(32		)	Income tax expense
Net	$	(226	)	$	(43	)	$	(456	)	$	(43	)	Net income attributable to the Company
Total reclassifications for the period, net of tax	$	(499	)	$	(312	)	$	(1,275	)	$	(836	)

12. 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 and 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 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 at the Holding Company and Bank. 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, all during the second half of 2012. 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 and nine months ended September 30, 2014 and 2013:



	Severance Charges			Contract Termination Fees		Professional Expenses			Total
	(In thousands)
Accrued charges at December 31, 2013	$	33		$	—	$	—		$	33
Costs incurred	—			—		—			—
Costs paid	(33		)	—		—			(33		)
Accrued charges at March 31, 2014	—			—		—			—
Costs incurred	—			—		—			—
Costs paid	—			—		—			—
Accrued charges at June 30, 2014	—			—		—			—
Costs incurred	—			—		—			—
Costs paid	—			—		—			—
Accrued charges at September 30, 2014	$	—		$	—	$	—		$	—

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
Costs incurred	—			—		—			—
Costs paid	(976		)	—		—			(976		)
Accrued charges at June 30, 2013	1,805			98		—			1,903
Costs incurred	—			—		—			—
Costs paid	(1,006		)	—		—			(1,006		)
Accrued charges at September 30, 2013	$	799		$	98	$	—		$	897

13. Recent Accounting Pronouncements

In January 2014, the FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments to this update are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015. The Company does not expect this ASU to have a material effect on its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments to this update apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects. The amendments to this update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the consolidated statement of operations as a component of income tax expense (benefit) and should be applied retrospectively to all periods presented. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015. Early adoption is permitted. The Company elected to early adopt this ASU effective January 1, 2014 and adopted the proportional amortization method discussed above. The effect of this retrospective change of accounting policy was not material. Reclassifications as a result of this adoption on

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

the Company’s consolidated financial statements are discussed in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies.”

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. While the Company does not have any outstanding master netting agreements in the current or comparative periods presented, if any are entered into in the future this disclosure will be applied.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of and for the three and nine months ended September 30, 2014

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; changes in the value of securities and other assets; changes in loan default and charge-off rates; the adequacy of loan loss reserves; reductions in deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; the risk that the Company’s deferred tax assets may not be realized; risks related to the identification and implementation of acquisitions, dispositions and restructurings; and changes in assumptions used in making such forward-looking statements, as well as the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K and updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

Executive Summary

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 third quarter of 2014. 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 September 30,
	2014			2013			$ Change			% Change
	(In thousands, except per share data)
Total revenues	$	78,552		$	72,553		$	5,999		8	%
Provision/ (credit) for loan losses	(2,600		)	(6,000		)	3,400			(57	)%
Total operating expense	53,999			51,953			2,046			4	%
Net income from continuing operations	18,160			17,886			274			2	%
Net income attributable to noncontrolling interests	1,167			871			296			34	%
Net income attributable to the Company	18,265			18,336			(71		)	—	%
Diluted earnings per share:
From continuing operations	$	0.20		$	0.20		$	—		—	%
From discontinued operations	$	0.02		$	0.02		$	—		—	%
Total attributable to common shareholders	$	0.22		$	0.22		$	—		—	%

Net income attributable to the Company was $18.3 million for the three months ended September 30, 2014 and 2013. The Company recognized diluted earnings per share of $0.22 for the three months ended September 30, 2014 and 2013.

Key items that affected the Company’s results in the third quarter of 2014 compared to the same period of 2013 include:

▪

The Company recorded a $2.6 million credit to the provision for loan losses for the three months ended September 30, 2014, compared to a credit to the provision for loan losses of $6.0 million for the same period of 2013. The credit to the provision for the three months ended September 30, 2014 was primarily due to net recoveries and a decrease in criticized loans, partially offset by provision for loan growth.

▪

Fees and other income increased 12% to $33.8 million for the three months ended September 30, 2014, compared to $30.3 million for the same period of 2013. This increase was driven by fee-based revenue consisting of a 15% increase in wealth advisory fees, a 14% increase in investment management fees, and an 11% increase in private banking wealth management and trust fees. Total fees and other income represents 43% of total revenue for the three months ended September 30, 2014, compared to 42% of total revenue for the same period of 2013.


▪	Operating expenses increased $2.0 million, or 4%, to $54.0 million for the three months ended September 30, 2014, compared to $52.0 million for the same period of 2013. The increase is primarily related to an increase in compensation expense, partially offset by a decrease in professional fees.

The Company’s Private Banking segment reported net income attributable to the Company of $17.0 million in the third quarter of 2014, compared to net income attributable to the Company of $16.8 million for the same period of 2013. The $0.2 million, or 1%, increase was a result of a 5% increase in revenue and decreased operating expenses, partially offset by the decreased credit to the provision for loan losses for the three months ended September 30, 2014. Private Banking AUM increased $0.4 billion, or 10%, to $4.7 billion at September 30, 2014 from $4.3 billion at September 30, 2013, primarily due to investment performance and also to positive net flows.

The Company’s Investment Management segment reported net income attributable to the Company of $1.5 million in the third quarter of 2014, compared to net income attributable to the Company of $1.0 million for the same period of 2013. The $0.5 million, or 46%, increase was due to increased investment management fees, partially offset by increased operating expenses, primarily due to increased professional services expense. Most fee-based revenue is determined based on beginning-

of-period AUM data. Investment Management AUM increased $0.7 billion, or 7%, to $10.4 billion at September 30, 2014 from $9.7 billion at September 30, 2013, primarily due to investment performance, partially offset by net outflows.

The Company’s Wealth Advisory segment reported net income attributable to the Company of $1.8 million in the third quarter of 2014, compared to net income attributable to the Company of $1.7 million for the same period of 2013. The $0.2 million, or 11%, increase was due to increased wealth advisory fee revenue, partially offset by increased operating expenses, primarily due to increased salaries and employee benefits and increased professional services expenses. Wealth Advisory AUM increased $0.9 billion, or 10%, to $9.7 billion at September 30, 2014 from $8.8 billion at September 30, 2013, primarily due to investment performance and positive net flows.

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, 2013. 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



	September 30, 2014		December 31, 2013		Increase/ (decrease)			% Change
	(In thousands)
Assets:
Total cash and investments	$	1,198,551	$	1,034,236	$	164,315		16	%
Loans held for sale	4,943		6,123		(1,180		)	(19	)%
Total loans	5,213,491		5,112,459		101,032			2	%
Less: Allowance for loan losses	75,283		76,371		(1,088		)	(1	)%
Net loans	5,138,208		5,036,088		102,120			2	%
Goodwill and intangible assets	127,655		130,784		(3,129		)	(2	)%
Other assets	219,728		229,878		(10,150		)	(4	)%
Total assets	$	6,689,085	$	6,437,109	$	251,976		4	%
Liabilities and Equity:
Deposits	$	5,334,881	$	5,110,370	$	224,511		4	%
Total borrowings	551,152		575,970		(24,818		)	(4	)%
Other liabilities	106,024		97,613		8,411			9	%
Total liabilities	5,992,057		5,783,953		208,104			4	%
Redeemable Noncontrolling Interests	21,397		19,468		1,929			10	%
Total shareholders’ equity	675,631		633,688		41,943			7	%
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	6,689,085	$	6,437,109	$	251,976		4	%

Total Assets. Total assets increased $252.0 million, or 4%, to $6.7 billion at September 30, 2014 from $6.4 billion at December 31, 2013. This increase was due primarily to increases in cash and investments and total loans.

Cash and Investments. Total cash and investments (consisting of cash and cash equivalents, investment securities, and stock in the FHLBs) increased $164.3 million, or 16%, to $1.2 billion, or 18% of total assets at September 30, 2014 from $1.03 billion, or 16% of total assets at December 31, 2013. The increase was due to the $117.0 million, or 61%, increase in cash and cash equivalents, the $32.9 million, or 5%, increase in available for sale investment securities, and the $20.5 million, or 18%, increase in investments held to maturity. The change 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, redemptions, principal payments, and sales of the Company’s securities provided $173.3 million of cash proceeds during the nine months ended September 30, 2014. 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 $6.0 million of unrealized gains and $4.6 million of unrealized losses at September 30, 2014, compared to $4.5 million of unrealized gains and $7.6 million of unrealized losses at December 31, 2013.

No impairment losses were recognized through earnings related to investment securities during the nine months ended September 30, 2014 and 2013. The total amount of unrealized losses was not significant and was primarily due to movements in interest rates since the securities were purchased. At September 30, 2014, 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 $1.2 million, or 19%, to $4.9 million at September 30, 2014 from $6.1 million at December 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. As a result of lower activity this year for residential loan refinancing, the balance of loans awaiting sale has been reduced.

Additionally, during the second quarter of 2014, the Company sold $57.0 million of commercial loans from the loan portfolio for a gain on sale of $1.6 million. The portfolio loans sold were either originated in or collateralized by property in Southern California and the San Francisco Bay regions.

Goodwill and intangible assets, net. Goodwill and intangible assets decreased $3.1 million, or 2%, to $127.7 million at September 30, 2014 from $130.8 million at December 31, 2013. The decrease is due to amortization of intangible assets. The Company tests goodwill for impairment on an annual basis in the fourth quarter, 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 September 30, 2014 that there were no triggering events during the nine months then ended. AUM is a significant factor in the assessment of goodwill impairment at the non-banking affiliates. Should net outflows continue or accelerate, and/or the market experiences a significant decline in value, the risk of goodwill impairment at an investment management affiliate would increase.

Other. Other assets, consisting of OREO, premises and equipment, fees receivable, accrued interest receivable, deferred income taxes, net, and other assets, decreased $10.2 million, or 4%, to $219.7 million at September 30, 2014 from $229.9 million at December 31, 2013. Decreases in deferred income taxes, net, and other assets were offset by increases in OREO, and premises and equipment, net.

OREO increased $0.3 million, or 38%, to $1.1 million at September 30, 2014 from $0.8 million at December 31, 2013. One property transferred into OREO during the first quarter of 2014, and one property with a carrying value of zero was sold during the first quarter of 2014. During the third quarter of 2014, one property was transferred into OREO, and one property with a carrying value of zero was sold.

Deferred income taxes, net decreased $6.9 million, or 13%, to $48.4 million at September 30, 2014 from $55.4 million at December 31, 2013. The decrease is primarily due to current year deferred tax expense and the current year tax effect of other comprehensive income. At September 30, 2014, no valuation allowance on the net deferred tax asset was required, other than for capital losses, based upon the ability to generate future taxable income as well as the availability of current and historical 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 $3.8 million, or 3%, to $114.3 million at September 30, 2014 from $118.0 million at December 31, 2013. The decrease is primarily due to a decrease in accounts

receivable and income tax receivables, partially offset by an increase in prepaid expenses and the fair value of interest rate derivatives.

Deposits. Total deposits increased $224.5 million, or 4%, to $5.3 billion, at September 30, 2014 from $5.1 billion at December 31, 2013. Deposit balances increased during the first nine months of 2014 due to higher demand deposits, money market, savings and NOW balances, partially offset by lower time deposits. Deposit levels can fluctuate from quarter to quarter as a result of large short-term transactions by commercial clients. Seasonality can also affect the deposit balances.

The following table presents the composition of the Company’s deposits at September 30, 2014 and December 31, 2013:



	September 30, 2014				December 31, 2013
	Balance		as a % of total		Balance		as a % of total
	(In thousands)
Demand deposits (noninterest-bearing)	$	1,474,730	28	%	$	1,327,752	26	%
NOW (1)	484,057		9	%	473,993		9	%
Savings	73,600		1	%	63,807		1	%
Money market (1)	2,705,299		51	%	2,625,830		51	%
Certificates of deposit under $100,000 (1)	179,142		3	%	190,099		4	%
Certificates of deposit of $100,000 or greater	418,053		8	%	428,889		9	%
Total deposits	$	5,334,881	100	%	$	5,110,370	100	%

____________


(1)	Includes brokered deposits.

Borrowings. Total borrowings, which consist of securities sold under agreements to repurchase, federal funds purchased, if any, FHLB borrowings, and junior subordinated debentures, decreased $24.8 million, or 4%, to $551.2 million at September 30, 2014 from $576.0 million at December 31, 2013. From time to time, the Bank purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position; however, none were outstanding at September 30, 2014 or December 31, 2013. FHLB borrowings increased $4.1 million, or 1%, to $371.4 million at September 30, 2014 from $367.3 million at December 31, 2013. 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 decreased $28.9 million, or 28%, to $73.4 million at September 30, 2014 from $102.4 million at December 31, 2013. Repurchase agreements are generally linked to commercial demand deposit accounts with an overnight sweep feature.

Other. Other liabilities, which consist primarily of accrued interest, accrued bonus, the fair value of interest rate derivatives, and other accrued expenses, increased $8.4 million, or 9%, to $106.0 million at September 30, 2014 from $97.6 million at December 31, 2013. The increase is primarily due to accrued compensation and bonuses and income taxes payable, partially offset by a decrease in accrued interest payable.

Loan Portfolio and Credit Quality

Loans. Total portfolio loans increased to $5.2 billion, or 78%, of total assets as of September 30, 2014, compared to $5.1 billion, or 79%, of total assets as of December 31, 2013. Increases in residential loans of $65.2 million, or 3%, and commercial and industrial loans of $64.8 million, or 7%, were partially offset by decreases in construction and land loans of $23.4 million, or 15%, commercial real estate loans of $5.4 million and home equity and other consumer loans of $0.3 million.The decrease in commercial real estate loans includes the impact of the sale of $57.0 million of these loans during the second quarter of 2014.

Geographic concentration. The following table presents the Bank’s outstanding loan balance concentrations as of September 30, 2014 based on the location of the lender’s regional office.



	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	$	758,728	82	%	$	712,464	39	%	$	82,492	63	%	$	1,273,544	61	%	$	200,591	81	%
San Francisco Bay	124,993		13	%	628,149		35	%	35,668		27	%	456,355		22	%	36,798		15	%
Southern California	47,107		5	%	467,428		26	%	12,385		10	%	367,628		17	%	9,161		4	%
Total	$	930,828	100	%	$	1,808,041	100	%	$	130,545	100	%	$	2,097,527	100	%	$	246,550	100	%

Allowance for loan losses. The allowance for loan losses is reported as a reduction of outstanding loan balances and totaled $75.3 million and $76.4 million as of September 30, 2014 and December 31, 2013, respectively.

The allowance for loan losses as of September 30, 2014 decreased $1.1 million, or 1% from December 31, 2013 due to a provision credit of $8.8 million, partially offset by net recoveries of $7.7 million. The allowance for loan losses as a percentage of total loans decreased 5 basis points to 1.44% as of September 30, 2014 from 1.49% as of December 31, 2013. The decrease in the overall allowance for loan losses, as well as the decline in the ratio of allowance for loan losses to total loans, was primarily the result of improving loan quality and the mix of loans in the portfolio. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses” for an analysis of the Company’s allowance for loan losses.

An analysis of the risk in the loan portfolio as well as management judgment is used to determine the estimated appropriate amount of the allowance for loan losses. The Company’s allowance for loan losses is comprised of three primary components (general reserves, allocated reserves on non-impaired special mention and substandard loans, and allocated reserves on impaired loans). In addition, the unallocated portion of the allowance for loan losses, which is not considered a significant component of the overall allowance for loan losses, primarily relates to the inherent imprecision and potential volatility of the allowance for loan losses calculation and the qualitative judgments involved. 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, 2013 for further information.

The following table presents a summary of loans charged-off, net of recoveries, by geography for the three and nine months ended September 30, 2014 and 2013. The geography assigned to the data is based on the location of the lender’s regional office.



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(In thousands)
Net loans (charged-off)/ recoveries:
New England	$	912	$	22	$	830	$	(2,078	)
San Francisco Bay	465		2,111		3,064		778
Southern California	1,959		244		3,818		2,420
Total net loans (charged-off)/ recoveries	$	3,336	$	2,377	$	7,712	$	1,120

Net recoveries of $3.3 million were recorded in the third quarter of 2014, compared to $2.4 million of net recoveries for the same period of 2013. Despite the current year net recoveries on previously charged-off commercial loans (which include construction and land loans, commercial real estate, and commercial and industrial loans), the Company believes that commercial loans represent the greatest risk of loss due to the size and nature of these loans and the related collateral. Local economic and business conditions in the markets where our offices are located have a significant impact on our commercial loan customers and their ability to service their loans. Of the $7.7 million in net recoveries recorded in the first nine months of 2014, $1.1 million were on commercial and industrial loans, $1.9 million were on commercial real estate loans, $2.4 million were on construction and land loans, $2.1 million were on residential loans, and $0.2 million were on home equity and consumer 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 troubled debt restructured loans (“TDRs”)are generally included in impaired loans. Nonperforming assets decreased $10.9 million, or 24%, to $34.6 million, or 0.52% of total assets, as of September 30, 2014, from $45.5 million, or 0.71% of total assets, as of December 31, 2013.

The following table presents a rollforward of nonaccrual loans for the three and nine months ended September 30, 2014 and 2013:



	As of and for the three months ended September 30,						As of and for the nine months ended September 30,
	2014			2013			2014			2013
	(In thousands)
Nonaccrual loans, beginning of period	$	41,620		$	52,289		$	44,762		$	60,745
Transfers in to nonaccrual status	1,970			9,672			14,878			37,538
Transfers out to OREO	(152		)	—			(297		)	(105		)
Transfers out to accrual status	(2,191		)	(3,245		)	(6,832		)	(9,504		)
Charge-offs	(1,115		)	(50		)	(2,048		)	(4,188		)
Paid off/ paid down	(6,591		)	(7,874		)	(16,922		)	(33,694		)
Nonaccrual loans, end of period	$	33,541		$	50,792		$	33,541		$	50,792

The following table presents a summary of credit quality by geography, based on the location of the regional office:



	September 30, 2014		December 31, 2013
	(In thousands)
Nonaccrual loans:
New England	$	16,205	$	24,838
San Francisco Bay	15,133		14,016
Southern California	2,203		5,908
Total nonaccrual loans	$	33,541	$	44,762
Loans 30-89 days past due and accruing (1):
New England	$	1,825	$	5,029
San Francisco Bay	653		3,029
Southern California	1,145		5,684
Total loans 30-89 days past due	$	3,623	$	13,742
Accruing substandard loans:
New England	$	13,589	$	13,304
San Francisco Bay	24,267		25,171
Southern California	5,331		3,540
Total accruing substandard loans	$	43,187	$	42,015

_____________________


(1)	In addition to loans 30-89 days past due and accruing, the Company had two loans totaling $0.5 million that were more than 90 days past due but still on accrual status as of September 30, 2014 and two loans totaling $0.1 million as of December 31, 2013. These loans originated in the New England region.

Of the $33.5 million of loans on nonaccrual status as of September 30, 2014, $16.2 million, or 48%, had a current payment status, $0.9 million, or 3%, were 30-89 days past due, and $16.4 million, or 49%, were 90 days or more past due. Of the $44.8 million of nonaccrual loans as of December 31, 2013, $19.0 million, or 42%, had a current payment status, $2.7 million, or 6%, were 30-89 days past due, and $23.1 million, or 52%, 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 interest 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 credit quality by loan type. The loan type assigned to the credit quality data is based on the purpose of the loan.



	September 30, 2014		December 31, 2013
	(In thousands)
Nonaccrual loans:
Commercial and industrial	$	2,156	$	3,484
Commercial real estate	16,820		23,967
Construction and land	3,617		3,489
Residential	8,539		12,777
Home equity and other consumer	2,409		1,045
Total nonaccrual loans	$	33,541	$	44,762
Loans 30-89 days past due and accruing (1):
Commercial and industrial	$	932	$	1,529
Commercial real estate	1,437		775
Construction and land	—		1,652
Residential	1,232		8,407
Home equity and other consumer	22		1,379
Total loans 30-89 days past due	$	3,623	$	13,742
Accruing substandard loans:
Commercial and industrial	$	11,402	$	8,177
Commercial real estate	18,997		19,857
Construction and land	—		589
Residential	10,278		12,810
Home equity and other consumer	2,510		582
Total accruing substandard loans	$	43,187	$	42,015

_____________________

(1)

In addition to loans 30-89 days past due and accruing, the Company had one commercial and industrial loan totaling $0.4 million and one commercial real estate loan totaling $0.1 million that were more than 90 days past due but still on accrual status as of September 30, 2014 and two construction and land loans totaling $0.1 million that were more than 90 days past due but still on accrual status as of December 31, 2013.

Nonaccrual and delinquent loans are affected by many factors such as economic and business conditions, interest rates, unemployment levels, and real estate collateral values, among others. In periods of prolonged economic decline, borrowers may become more severely affected over time as liquidity levels decline and the borrower’s ability to continue to make payments deteriorates. With respect to real estate collateral values, the decline from the peak, as well as the value of the real estate at the time of origination versus the current value can impact the level of problem loans. For instance, if the loan to value ratio at the time of renewal has increased due to the decline in the real estate value since origination, the loan may no longer meet the Bank’s underwriting standards and may be considered for classification as a problem loan dependent upon a review of risk factors.

Delinquencies. As of September 30, 2014, accruing loans with an aggregate balance of $3.6 million, or 0.07% of total loans, were 30-89 days past due, a decrease of $10.1 million, or 74%, compared to $13.7 million, or 0.27%, of total loans, as of December 31, 2013. Loan delinquencies can be attributed to many factors, such as continuing weakness in, or deteriorating, economic conditions in the region the collateral is located, the loss of a tenant or lower lease rates for commercial borrowers, or the loss of income for consumers and the resulting liquidity impacts on the borrowers. Further deterioration in the credit condition of these delinquent loans could lead to the loans going to nonaccrual status and/or being downgraded. Downgrades would generally result in additional provision for loan losses. If the loan is put on nonaccrual status, the loan would 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 or interest on a loan in accordance with the original loan terms, the loan is designated as impaired. Certain impaired loans may continue to accrue interest based on factors such as the restructuring terms, if any, the historical payment performance, the value of collateral, and the financial condition of the borrower. Impaired loans totaled $52.6 million as of September 30, 2014, a decrease of $11.5 million, or 18%, compared to $64.1 million as of December 31, 2013. As of September 30, 2014, $16.9 million of the impaired loans had $1.8 million in specific reserve allocations. The remaining $35.7 million of impaired loans did not have specific reserve allocations due to the adequacy of collateral, prior charge-offs taken, interest collected and applied to principal, or a combination of these items. As of December 31, 2013, $23.4 million of impaired loans had $2.0 million in specific reserve allocations, and the remaining $40.7 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 in the analysis of collateral dependent loans would result in the impairment amount being charged-off to the allowance for loan losses. Shortfalls on cash flow dependent loans may be carried as specific allocations to the general reserve unless a known loss is determined to have occurred, in which case such known loss is charged-off.

In certain instances, although very infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were $0.5 million of loans past due 90 days or more and still accruing interest as of September 30, 2014 and $0.1 million as of December 31, 2013.

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 consecutive months). For TDRs, a return to accrual status generally requires timely payments for a period of six months in accordance with restructured terms, along with meeting other criteria.

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

The Bank has identified approximately $43.2 million in potential problem loans as of September 30, 2014, a increase of $1.2 million, or 3%, compared to $42.0 million as of December 31, 2013. This increase was primarily due to potential problem commercial and industrial loans which increased $3.2 million, or 39%, to $11.4 million as of September 30, 2014 from $8.2 million as of December 31, 2013, partially offset by a decrease in potential problem residential loans of $2.5 million, or 20%, to $10.3 million as of September 30, 2014 from $12.8 million as of December 31, 2013. Numerous factors impact the level of potential problem loans including economic conditions and real estate values. These factors affect the borrower’s liquidity and, in some cases, the borrower’s ability to comply with loan covenants such as debt service coverage. When there is a loss of a major tenant in a commercial real estate building, the appraised value of the building generally declines. Loans may be downgraded when this occurs as a result of the additional risk to the borrower in obtaining a new tenant in a timely manner and negotiating a lease with similar or better terms than the previous tenant. In many cases, these loans are still current and paying as agreed, although future performance may be impacted.

The 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 September 30, 2014, the Company’s cash and cash equivalents amounted to $308.9 million. The Holding Company’s cash and cash equivalents amounted to $42.0 million at September 30, 2014. 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 September 30, 2014, consolidated cash and cash equivalents and securities available for sale, less securities pledged against current borrowings and derivatives, amounted to $919.2 million, or 14% of total assets, compared to $771.9 million, or 12% of total assets at December 31, 2013. 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 $1.1 billion as of September 30, 2014 compared to $836.5 million at December 31, 2013. Combined, this liquidity totals $2.0 billion, or 31% of assets and 38% of total deposits, as of September 30, 2014 compared to $1.6 billion, or 25% of assets and 31% of total deposits, as of December 31, 2013.

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

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 September 30, 2014, the estimated maximum redemption value for these affiliates related to outstanding put options was $21.4 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, 2013.

The Holding Company’s primary sources of funds are dividends from its affiliates and access to the capital and debt markets. The Holding Company recognized $4.7 million in net income from discontinued operations during the nine months ended September 30, 2014 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, 2013 for further details.

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

Although the Bank 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 three months of 2014 for the interest payments, including the effect of the cash flow hedge, is approximately $1.0 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, issued in April 2013, at 6.95% per annum. The estimated cash outlay for the remaining three months of 2014 for the Series D preferred stock dividend payments is approximately $0.9 million.

The Company presently plans to pay cash dividends on its common stock on a quarterly basis; however, the declaration of dividends by the board of directors of the Company will depend on consideration of, among other things, profitability, Holding Company liquidity, the Company’s capital levels, recent financial trends and internal forecasts, regulatory limitations, alternative uses of capital deployment, general economic conditions, and regulatory changes to capital requirements. In January 2014, the Company increased its quarterly dividend from $0.07 per share to $0.08 per share. Based on the current dividend rate and estimated shares outstanding, the Company estimates the amount to be paid out in the remaining three months of 2014 for dividends to common shareholders will be approximately $6.4 million.

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 deposits, and federal funds lines. The use of non-core funding sources, including brokered deposits and borrowings, by the Bank may be limited by regulatory agencies. Generally, the regulatory agencies prefer that banks rely on core funding sources for liquidity.

From time to time, the Bank purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. At September 30, 2014, the Bank had federal fund lines of credit totaling $196.0 million with correspondent institutions to provide immediate access to overnight borrowings. At September 30, 2014 and December 31, 2013, the Bank had no outstanding borrowings under these federal fund lines and $196.0 million in unused federal fund lines of credit.

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 deposits. Other borrowing arrangements may have higher rates than the FHLB would typically charge.

Capital Resources

Total shareholders’ equity at September 30, 2014 was $675.6 million, compared to $633.7 million at December 31, 2013, an increase of $41.9 million, or 7%. The increase in shareholders’ equity was primarily the result of net income, 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 September 30, 2014 under the applicable regulations.

The following table presents the Company’s and the Bank’s amount of regulatory capital and related ratios as of September 30, 2014 and December 31, 2013. Also presented are the capital guidelines established by the Federal Reserve, which pertain to the Company, and by the FDIC, which pertain 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 September 30, 2014
Total risk-based capital
Company	$	734,659	15.45	%	$	380,353	8.00	%	$	475,442	10.00	%
Boston Private Bank	663,654		14.05		377,855		8.00		472,318		10.00
Tier I risk-based capital
Company	674,909		14.20		190,177		4.00		285,265		6.00
Boston Private Bank	604,388		12.80		188,927		4.00		283,391		6.00
Tier I leverage capital
Company	674,909		10.31		261,883		4.00		327,354		5.00
Boston Private Bank	604,388		9.32		259,331		4.00		324,164		5.00

As of December 31, 2013
Total risk-based capital
Company	$	689,767	14.77	%	$	373,483	8.00	%	$	466,854	10.00	%
Boston Private Bank	631,510		13.63		354,285		8.00		442,856		10.00
Tier I risk-based capital
Company	631,041		13.52		186,741		4.00		280,112		6.00
Boston Private Bank	573,340		12.37		177,112		4.00		265,714		6.00
Tier I leverage capital
Company	631,041		10.09		250,085		4.00		312,606		5.00
Boston Private Bank	573,340		9.27		239,663		4.00		299,579		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 September 30, 2014, the Company has sponsored the creation of two statutory trusts for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Company. The Company has dissolved three statutory trusts, in August 2013, October 2013, and January 2014, respectively, after the Company repurchased all of the respective trusts’ trust preferred securities.

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 both September 30, 2014 and December 31, 2013, all $100.0 million of the net balance of these trust preferred securities qualified as Tier I capital.

Results of operations for the three and nine months ended September 30, 2014 versus September 30, 2013

Net Income. The Company recorded net income from continuing operations for the three and nine months ended September 30, 2014 of $18.2 million and $55.4 million, respectively, compared to $17.9 million and $49.8 million for the same respective periods in 2013. Net income attributable to the Company, which includes income from both continuing and discontinued operations, for the three and nine months ended September 30, 2014 was $18.3 million and $56.6 million, respectively, compared to $18.3 million and $52.9 million for the same respective periods in 2013.

The Company recognized diluted EPS from continuing operations for the three and nine months ended September 30, 2014 of $0.20 per share and $0.60 per share, respectively, compared to $0.20 per share and $0.41 per share, respectively, for the same periods in 2013. Diluted EPS attributable to common shareholders, which includes both continuing and discontinued operations, for the three and nine months ended September 30, 2014 was $0.22 per share and $0.66 per share, respectively, compared to $0.22 per share and $0.48 per share, respectively, for the same periods in 2013. Earnings per share for the nine months ended September 30, 2013 was impacted by the repurchase of the Series B preferred stock and the gain on sale of the

Pacific Northwest offices. Excluding the impact of these two transactions, diluted EPS attributable to common shareholders for the nine months ended September 30, 2013 would have been $0.55 per share.

Net income from continuing operations in both 2014 and 2013 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 September 30,						% Change		Nine months ended September 30,						% Change
	2014			2013			% Change		2014			2013			% Change
	(In thousands)
Net interest income	$	44,783		$	42,302		6	%	$	135,573		$	130,477		4	%
Fees and other income	33,769			30,251			12	%	100,876			101,996			(1	)%
Total revenue	78,552			72,553			8	%	236,449			232,473			2	%
Provision/ (credit) for loan losses	(2,600		)	(6,000		)	(57	)%	(8,800		)	(8,000		)	10	%
Operating expense	53,999			51,953			4	%	163,369			165,205			(1	)%
Income tax expense	8,993			8,714			3	%	26,464			25,455			4	%
Net income from continuing operations	18,160			17,886			2	%	55,416			49,813			11	%
Net income from discontinued operations	1,272			1,321			(4	)%	4,650			5,824			(20	)%
Less: Net income attributable to noncontrolling interests	1,167			871			34	%	3,428			2,770			24	%
Net income attributable to the Company	$	18,265		$	18,336		—	%	$	56,638		$	52,867		7	%

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 graded as substandard but still accruing interest income totaled $43.2 million at September 30, 2014 and could be placed on nonaccrual status if their credit quality declines further.

Net interest income for the three months ended September 30, 2014 was $44.8 million, an increase of $2.5 million, or 6%, compared to the same period in 2013. For the nine months ended September 30, 2014, net interest income was $135.6 million, an increase of $5.1 million, or 4%, compared to the same period in 2013. The increase for the three and nine months is due to interest recovered on previous nonaccrual loans, higher volume and yields on cash and investments, and lower average rates paid on the Company’s borrowings, partially offset by lower yields on loans. The NIM was 2.93% for the three months ended September 30, 2014, a decrease of six basis points compared to the same period in 2013. For the nine months ended September 30, 2014, the NIM was 3.03%, a decrease of five basis points compared to the same period in 2013.

The following tables present the composition of the Company’s NIM on a FTE basis for the three and nine months ended September 30, 2014 and 2013; however, the discussion following these tables reflects non-FTE data.



	Average Balance				Interest Income/Expense				Average Yield/Rate
	As of and for the three months ended September 30,
AVERAGE BALANCE SHEET:	2014		2013		2014		2013		2014		2013
AVERAGE ASSETS	(In thousands)
Interest-Earning Assets:
Cash and Investments: (1)
Taxable investment securities	$	295,395	$	244,408	$	876	$	544	1.19	%	0.90	%
Non-taxable investment securities (2)	223,499		209,511		1,449		1,148		2.59	%	2.19	%
Mortgage-backed securities	325,913		263,380		1,605		1,338		1.97	%	2.03	%
Federal funds sold and other	359,899		244,622		379		277		0.42	%	0.44	%
Total Cash and Investments	1,204,706		961,921		4,309		3,307		1.43	%	1.37	%
Loans: (3)
Commercial and Construction (2)	2,841,869		2,657,121		31,657		30,435		4.36	%	4.48	%
Residential	2,071,326		1,984,565		16,384		15,782		3.16	%	3.18	%
Home Equity and Other Consumer	244,690		258,579		1,733		2,003		2.81	%	3.07	%
Total Loans	5,157,885		4,900,265		49,774		48,220		3.81	%	3.88	%
Total Earning Assets	6,362,591		5,862,186		54,083		51,527		3.36	%	3.47	%
Less: Allowance for Loan Losses	76,099		81,262
Cash and due from Banks (non-interest bearing)	42,080		40,164
Other Assets	341,953		375,910
TOTAL AVERAGE ASSETS	$	6,670,525	$	6,196,998
AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Savings and NOW	$	583,547	$	492,983	$	110	$	97	0.07	%	0.08	%
Money Market	2,640,762		2,425,333		2,273		1,782		0.34	%	0.29	%
Certificates of Deposits	607,940		627,166		1,220		1,327		0.80	%	0.84	%
Total Interest-Bearing Deposits	3,832,249		3,545,482		3,603		3,206		0.37	%	0.36	%
Junior Subordinated Debentures	106,363		125,729		976		1,119		3.59	%	3.48	%
FHLB Borrowings and Other	534,062		501,263		2,371		2,762		1.74	%	2.16	%
Total Interest-Bearing Liabilities	4,472,674		4,172,474		6,950		7,087		0.61	%	0.67	%
Noninterest Bearing Demand Deposits	1,404,875		1,277,319
Payables and Other Liabilities	100,106		114,588
Total Average Liabilities	5,977,655		5,564,381
Redeemable Noncontrolling Interests	23,584		17,688
Average Shareholders’ Equity	669,286		614,929
TOTAL AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY	$	6,670,525	$	6,196,998
Net Interest Income - on a FTE Basis					$	47,133	$	44,440
FTE Adjustment (2)					2,350		2,138
Net Interest Income (GAAP Basis)					$	44,783	$	42,302
Interest Rate Spread									2.75	%	2.80	%
Net Interest Margin									2.93	%	2.99	%



	Average Balance				Interest Income/Expense				Average Yield/Rate
	As of and for the nine months ended September 30,
AVERAGE BALANCE SHEET:	2014		2013		2014		2013		2014		2013
AVERAGE ASSETS	(In thousands)
Interest-Earning Assets:
Cash and Investments: (1)
Taxable investment securities	$	270,914	$	216,472	$	2,242	$	1,544	1.10	%	0.96	%
Non-taxable investment securities (2)	224,061		206,344		4,246		3,635		2.53	%	2.35	%
Mortgage-backed securities	333,252		291,815		5,230		4,080		2.09	%	1.86	%
Federal funds sold and other	250,942		189,503		978		635		0.52	%	0.44	%
Total Cash and Investments	1,079,169		904,134		12,696		9,894		1.57	%	1.46	%
Loans: (3)
Commercial and Construction (2)	2,844,013		2,721,191		95,975		94,277		4.45	%	4.57	%
Residential	2,048,700		1,983,966		48,537		48,809		3.16	%	3.28	%
Home Equity and Other Consumer	244,421		265,913		5,281		5,974		2.89	%	3.00	%
Total Loans	5,137,134		4,971,070		149,793		149,060		3.86	%	3.97	%
Total Earning Assets	6,216,303		5,875,204		162,489		158,954		3.46	%	3.58	%
Less: Allowance for Loan Losses	77,462		83,090
Cash and due from Banks (non-interest bearing)	38,628		41,780
Other Assets	357,896		391,399
TOTAL AVERAGE ASSETS	$	6,535,365	$	6,225,293
AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY
Interest-Bearing Liabilities:
Interest-Bearing Deposits: (4)
Savings and NOW	$	577,012	$	530,701	$	319	$	336	0.07	%	0.08	%
Money Market	2,547,039		2,365,310		6,112		5,495		0.32	%	0.31	%
Certificates of Deposits	615,903		658,464		3,763		4,281		0.82	%	0.87	%
Total Interest-Bearing Deposits	3,739,954		3,554,475		10,194		10,112		0.36	%	0.38	%
Junior Subordinated Debentures	106,363		132,117		2,896		3,429		3.59	%	3.42	%
FHLB Borrowings and Other	522,881		540,788		7,088		8,777		1.79	%	2.14	%
Total Interest-Bearing Liabilities	4,369,198		4,227,380		20,178		22,318		0.61	%	0.70	%
Noninterest Bearing Demand Deposits	1,385,966		1,251,112
Payables and Other Liabilities	104,556		117,505
Total Average Liabilities	5,859,720		5,595,997
Redeemable Noncontrolling Interests	20,795		18,193
Average Shareholders’ Equity	654,850		611,103
TOTAL AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY	$	6,535,365	$	6,225,293
Net Interest Income - on a FTE Basis					$	142,311	$	136,636
FTE Adjustment (2)					6,738		6,159
Net Interest Income (GAAP Basis)					$	135,573	$	130,477
Interest Rate Spread									2.85	%	2.88	%
Net Interest Margin									3.03	%	3.08	%

________________________


(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 deposits held for sale.

Interest and Dividend Income. Interest and dividend income for the three months ended September 30, 2014 was $51.7 million, an increase of $2.3 million, or 5%, compared to the same period in 2013. Interest and dividend income for the nine months ended September 30, 2014 was $155.8 million, an increase of $3.0 million, or 2%, compared to the same period in 2013. The increase for the three and nine months was primarily due to interest recovered on previous nonaccrual loans, and higher volume and yields on cash and investments, partially offset by lower yields on loans.

The Bank generally has interest income that is either recovered or reversed related to nonaccrual 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 September 30, 2014 was $29.8 million, an increase of $1.1 million, or 4%, compared to the same period in 2013, as a result of a 7% increase in the average balance, partially offset by a 12 basis point decrease in the average yield. For the nine months ended September 30, 2014, commercial interest income was $90.7 million, an increase of $1.3 million, or 1%, compared to the same period in 2013, as a result of a 5% increase in the average balance, partially offset by a 7 basis point decrease in the average yield. The increase in the average balance for the three and nine month periods is related to the organic growth of the commercial loan portfolio at the Bank, as discussed above in “Loan Portfolio and Credit Quality.” The decrease in the average yield for the three and nine month periods 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 September 30, 2014 was $16.4 million, an increase of $0.6 million, or 4%, compared to the same period in 2013, as a result of a 4% increase in the average balance, partially offset by a 2 basis point decrease in the average yield. For the nine months ended September 30, 2014, residential mortgage interest income was $48.5 million, a decrease of $0.3 million, or 1%, compared to the same period in 2013, as a result of a 12 basis point decrease in the average yield, partially offset by a 3% increase in the average balance. The decrease in the average yield for the three and nine month periods 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 increase in the average balances for the three and nine month periods 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 September 30, 2014 was $1.7 million, a decrease of $0.3 million, or 13%, compared to the same period in 2013, as a result of a 5% decrease in the average balance and a 26 basis point decrease in the average yield. For the nine months ended September 30, 2014, home equity and other consumer interest income was $5.3 million, a decrease of $0.7 million, or 12%, compared to the same period in 2013, as a result of an 8% decrease in the average balance and an 11 basis point decrease in the average yield. The decrease in average balance reflects lower client demand. The decrease in average yield is primarily due to lower market rates on consumer loans.

Investment income, on a non-FTE basis, for the three months ended September 30, 2014 was $3.8 million, an increase of $0.9 million, or 31%, compared to the same period in 2013, as a result of a 6 basis point increase in the average yield and a 25% increase in the average balance. For the nine months ended September 30, 2014, investment income was $11.2 million, an increase of $2.6 million, or 30%, compared to the same period in 2013, as a result of a 19% increase in the average balance and an 11 basis point increase in the average yield. The increase 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 September 30, 2014 was $7.0 million, a decrease of $0.1 million, or 2%, compared to the same period in 2013. For the nine months ended September 30, 2014, interest expense on deposits and borrowings was $20.2 million, a decrease of $2.1 million, or 10% compared to the same period in 2013.

Interest expense on interest-bearing deposits for the three months ended September 30, 2014 was $3.6 million, an increase of $0.4 million, or 12%, compared to the same period in 2013, as a result of an 8% increase in the average balance and a one basis point increase in the average rate paid. For the nine months ended September 30, 2014, interest expense on deposits was $10.2 million, an increase of $0.1 million, or 1%, compared to the same period in 2013, as a result of a 5% increase in the average balance, partially offset by a 2 basis point decrease in the average rate paid. Rates on money market, savings, and NOW accounts have been reduced based on market conditions and the low interest rate environment.

Interest paid on borrowings for the three months ended September 30, 2014 was $3.3 million, a decrease of $0.5 million, or 14%, compared to the same period in 2013, as a result of a 42 basis point decrease in the average rate paid, partially offset by a 7% increase in the average balance of FHLB borrowings and other, as well as an 11 basis point decrease in the average rate paid and a 15% decrease in the average balance of junior subordinated debentures. For the nine months ended September 30, 2014, interest paid on borrowings was $10.0 million, a decrease of $2.2 million, or 18%, compared to the same period in 2013, as a result of a 35 basis point decrease in the average rate paid and a 3% decrease in the average balance of FHLB borrowings and other, as well as a 19% decrease in the average balance partially offset by a 17 basis point increase in the average rate paid on junior subordinated debentures. The decrease in the average rate paid is primarily due to the higher-rate FHLB borrowings maturing and being replaced at lower rates, the repurchase of a portion of the Company’s junior subordinated debt in 2013, and the prepayment of repurchase agreements in 2013.

Provision/ (credit) for loan losses. The provision/ (credit) for loan losses for the three months ended September 30, 2014 was a credit of $2.6 million, compared to a credit of $6.0 million for the same period in 2013. For the nine months ended September 30, 2014, the provision/ (credit) for loan losses was a credit of $8.8 million, compared to a credit of $8.0 million for the same period in 2013. The credit to the provision is primarily due to net recoveries, the sale of commercial loans from the loan portfolio during the second quarter of 2014, and continuing credit quality improvement.

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 “Loan Portfolio and Credit Quality” above.

Fees and other income. Fees and other income for the three months ended September 30, 2014 was $33.8 million, an increase of $3.5 million, or 12%, compared to the same period in 2013. For the nine months ended September 30, 2014, fees and other income was $100.9 million, a decrease of $1.1 million, or 1%, compared to the same period in 2013. Excluding the second quarter 2013 $10.6 million gain on sale of the Pacific Northwest banking offices, fees and other income for the nine months ended September 30, 2014 increased 10% compared to the same period in 2013. Excluding the gain on sale of the Pacific Northwest offices, factors affecting the increases in both the three and nine month periods are higher investment management fees, wealth advisory fees, private banking wealth management trust fees, and gain on sale of OREO.

Investment management fees for the three months ended September 30, 2014 was $12.0 million, an increase of $1.5 million, or 14%, compared to the same period in 2013. For the nine months ended September 30, 2014, investment management fee income was $35.2 million, an increase of $3.8 million, or 12%, compared to the same period in 2013. AUM at the Investment Managers was $10.4 billion at September 30, 2014, an increase of $0.7 billion, or 7%, compared to the same period in 2013. The increase is due to market appreciation, partially offset by net outflows of $0.5 billion. Investment management fees from the Investment Managers are typically calculated based on a percentage of AUM, and the majority of the third quarter 2014 investment management fee revenues were earned based upon beginning-of-period (June 30, 2014) AUM for the quarter. Changes in revenue generally lag behind changes in AUM.

Wealth advisory fee income for the three months ended September 30, 2014 was $12.3 million, an increase of $1.6 million, or 15%, compared to the same period in 2013. For the nine months ended September 30, 2014, wealth advisory fee income was $35.7 million, an increase of $4.6 million, or 15%, compared to the same period in 2013. AUM as of September 30, 2014 managed or advised by the Wealth Advisors was $9.7 billion, an increase of $0.9 billion, or 10%, compared to September 30, 2013. The increase is due to market appreciation of $0.6 billion and positive net flows of $0.3 billion.

Private banking wealth management and trust fee income for the three months ended September 30, 2014 was $7.3 million, an increase of $0.7 million, or 11%, compared to the same period in 2013. For the nine months ended September 30, 2014, private banking wealth management and trust fee income was $21.3 million, an increase of $1.5 million, or 7%, compared to the same period in 2013. AUM as of September 30, 2014 managed by the Bank was $4.7 billion, an increase of $0.4 billion, or 10%, compared to September 30, 2013. The increase is due to market appreciation of $0.3 billion and positive net flows of $0.1 billion.

Gain on sale of loans for the three months ended September 30, 2014 was $0.2 million, a decrease of $0.2 million compared to the same period in 2013. For the nine months ended September 30, 2014, gain on sale of loans was $2.0 million, a decrease of $0.4 million, or 17%, compared to the same period in 2013. Gain on sale of loans in 2014 represents gains on sale of loans originated for sale as well as the second quarter 2014 sale of $57.0 million of loans from the Company’s commercial portfolio which resulted in a $1.6 million gain on sale. The gain on sale of loans originated for sale has been negatively impacted in 2014 by the significant decline in volume of residential loan refinancing. The Company expects this trend to continue for the foreseeable future.

Operating Expense. Operating expense for the three months ended September 30, 2014 was $54.0 million, an increase of $2.0 million, or 4%, compared to the same period in 2013. For the nine months ended September 30, 2014, operating expense was $163.4 million, a decrease of $1.8 million, or 1%, compared to the same period in 2013. The increase for the three months ended September 30, 2014 is primarily due to an increase in salaries and employee benefits and marketing and business development, partially offset by decreases in professional fees and other expense. The decrease for the nine months ended September 30, 2014 is primarily due to decreases in other expense and FDIC insurance expense, partially offset by increases in salaries and employee benefits and professional fees.

Salaries and employee benefits expense, the largest component of operating expense, for the three months ended September 30, 2014 was $35.9 million, an increase of $2.8 million, or 8%, compared to the same period in 2013. For the nine months ended September 30, 2014, salaries and employee benefits was $106.8 million, an increase of $2.2 million, or 2%, compared to the same period in 2013. The three-month increase is primarily due to higher performance-based compensation, particularly at the Holding Company and in the Wealth Advisory segment. The increase for the nine months ended September 30, 2014 is primarily due to higher performance-based compensation, particularly in the Investment Management and Wealth Advisory segments, partially offset by lower fixed compensation costs and post-employment benefits.

Professional services for the three months ended September 30, 2014 was $2.8 million, a decrease of $0.7 million, or 19%, compared to the same period in 2013. For the nine months ended September 30, 2014, professional services was $9.2 million, an increase of $0.5 million, or 5%, compared to the same period in 2013. The three-month decrease was due to a decrease in legal and loan workout expenses at the Bank, partially offset by increases due to the acceleration of certain fee-sharing arrangements in the investment management segment. The increase for the nine months ended September 30, 2014 was also due to the acceleration of certain fee-sharing arrangements in the investment management segment, and partially offset by a decrease in legal and audit expenses.

Marketing and business development expense for the three months ended September 30, 2014 was $1.4 million, an increase of $0.2 million, or 21%, compared to the same period in 2013. For the nine months ended September 30, 2014, marketing and business development was $5.6 million, an increase of $0.2 million, or 4%, compared to the same period in 2013. The three-month and nine-month increases are primarily related to the additional marketing programs at the Bank, some of which relate to the acquisition of Banyan.

FDIC insurance for the three months ended September 30, 2014 was $0.9 million, an increase of 4% compared to the same period in 2013. For the nine months ended September 30, 2014, FDIC insurance was $2.6 million, a decrease of $0.2 million, or 7%, compared to the same period in 2013. The nine-month decrease is primarily due to a lower FDIC assessment rate. The rate the FDIC assesses banks is based upon several factors such as profitability, problem loans and capital levels.

Other expense for the three months ended September 30, 2014 was $3.3 million, a decrease of $0.3 million, or 8%, compared to the same period in 2013. For the nine months ended September 30, 2014, other expense was $9.4 million, a decrease of $4.2 million, or 31%, compared to the same period in 2013. The nine-month decrease is primarily due to a liability restructuring charge and a tax related reserve that were accounted for in the second quarter of 2013.

Income Tax Expense. Income tax expense for continuing operations for the three and nine months ended September 30, 2014 was $9.0 million and $26.5 million, respectively. The effective tax rate for continuing operations for the nine months ended September 30, 2014 was 32.3%, compared to an effective tax rate of 33.8% for the same period in 2013. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 9: Income Taxes” for further detail.

Recent Accounting Pronouncements

election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the consolidated statement of operations as a component of income tax expense (benefit) and should be applied retrospectively to all periods presented. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015. Early adoption is permitted. The Company elected to early adopt this ASU effective January 1, 2014 and adopted the proportional amortization method discussed above. The effect of this retrospective change of accounting policy was not material. Reclassifications as a result of this adoption on the Company’s consolidated financial statements are discussed in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies.”

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, 2013.

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 September 30, 2014 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 reported within the time periods specified in the SEC rules and forms. On a quarterly basis, the Company evaluates the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

(b) Change in internal controls over financial reporting.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2014, 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, 2013 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

On October 2, 2014, Boston Private Bank & Trust Company (the “Bank”), the wholly owned subsidiary of Boston Private Financial Holdings, Inc. (the “Company”) closed the acquisition of substantially all of the assets and certain of the liabilities of Banyan Partners, LLC. In connection with the closing, the Company issued 1,675,227 shares of common stock at a price equal to $12.54. The issuance of the shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, based on the manner of the offering and the nature of the oferees.

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
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				Filed
101.SCH	XBRL Taxonomy Extension Schema Document				Filed
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document				Filed
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				Filed
101.LAB	XBRL Taxonomy Extension Label Linkbase Document				Filed
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document				Filed

SIGNATURES

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




	BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

	/s/ CLAYTON G. DEUTSCH
November 5, 2014	Clayton G. Deutsch
	Chief Executive Officer and President

	/s/ DAVID J. KAYE
November 5, 2014	David J. Kaye
	Executive Vice President, Treasurer, and Chief Financial Officer